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

Saturday, January 29, 2011

week ending Jan 29

U.S. Fed balance sheet resumes growth in week -  The U.S. Federal Reserve's balance sheet resumed its expansion in the latest week on the central bank's bond purchases and was within striking distance of its record size, Fed data released on Thursday showed.  The balance sheet expanded to $2.426 trillion in the week ended Jan. 26 from $2.407 trillion the prior week.  It hit a record size of $2.451 trillion two weeks ago, fueled by the Fed's buying of Treasuries linked to its second round of quantitative easing designed to stimulate investments and hold down borrowing costs.  On Wednesday, the Fed signaled that it is on track to complete its $600 billion bond-buying program at the end of June.  The Fed's balance sheet growth was interrupted last week when U.S. insurer American International Group (AIG.N) completed a repayment of its emergency borrowing from the central bank during the global financial crisis, which had been worth up to $85 billion.  The central bank's holding of U.S. government securities totaled $1.114 trillion on Wednesday, up from $1.080 trillion last week. For balance sheet graphic:

US Fed Total Discount Window Borrowings Wed $23.26 Billion‎ --(Dow Jones)- The U.S. Federal Reserve's balance sheet expanded in the latest week as the central bank continued with a plan to buy billions of dollars worth of government debt to boost the economy. The Fed's asset holdings in the week ended Jan. 26 climbed to $2.447 trillion, from $2.428 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.114 trillion Wednesday from $1.080 trillion. Much of the increase stems from purchases of securities set to mature over one to 10 years. The Fed's balance sheet has been growing as the central bank expands Treasury holdings as part of a controversial effort to buy up $600 billion in U.S. government bonds in the coming months to try and drive near rock-bottom interest rates even lower and encourage economic growth. Meanwhile, Thursday's report showed total borrowing from the Fed's discount lending window slipped to $23.26 billion Wednesday from $23.69 billion a week earlier. Borrowing by commercial banks grew to $54 million Wednesday from $24 million a week earlier. Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts grew to $3.353 trillion, from $3.348 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts grew to $2.604 trillion from $2.602 trillion in the previous week.

The FOMC Keeps the Federal Funds Rate and QEII Unchanged - The Federal Open Market Committee met to discuss the course of monetary policy, and, as expected, the Committee decided to keep the federal funds rate unchanged and to keep QE2 — the $600 billion dollar asset purchase plan — unchanged as well. The press release indicates that the committee does see the economy as being on firmer footing than it did in the last few meetings, but the improvement wasn’t anywhere near enough to cause the Fed to seriously consider changing course. In addition, the recent rise in commodity prices is noted, but the stability of the general price level, the stability of inflation expectations, and the general state of the economy led the Fed to conclude that inflation is not yet a worry. But they clearly have their eyes on this, but the Committee notes that current conditions indicate “exceptionally low levels for the federal funds rate for an extended period.”. This is the first meeting of the new year, and as happens every year, the voting members of the FOMC change. In particular, Thomas Hoenig — the lone dissenter in recent meetings — is now a non-voting member and three district bank presidents known to be relatively hawkish, Charles Plosser of the Federal Reserve Bank of Philadelphia, Richard Fisher of the Dallas Fed, Narayana Kocherlakota of the Minneapolis Fed are now eligible to vote (only 5 of the 12 district bank presidents vote in a given year; the NY Fed president is always a member, and the other 4 positions rotate annually — see here for more details).  I was at least slightly surprised that there were no dissents at all.

FOMC Statement: No change

  • • The target range for the federal funds rate remains at 0 to 1/4 percent
    • The policy of reinvestment of principal payments remains
    • no change to the plan to purchase an additional $600 billion of longer-term Treasury securities by the end of June 2011.
    • the key sentence "likely to warrant exceptionally low levels for the federal funds rate for an extended period" remains

Fed Statement Following January Meeting - The following is the full Fed statement following the January meeting:

Parsing the Fed: How the Statement Changed - The Fed’s statement following the January meeting was little changed from the previous month as a united group decided to leave previously announced policy unchanged. (Read the full December statement.)

Redacted Version of the January 2011 FOMC Statement

Slate and NPR's "Planet Money" translate the Fed's latest statement on the economy. The Federal Reserve just released its periodic statement explaining how the Fed's leaders view the economy and how they plan to act in the coming weeks and months. These statements come out every six weeks, and they affect stock markets and government policies around the world. But they're full of jargon and code, and the language is nearly inpenetrable to the lay reader.  To help you read the Fed's latest statement, published this afternoon, Slate and NPR's "Planet Money" have collaborated to translate it into plain English, a tool developed by Slate Labs to toggle between official text and our natural-language translation. Click on the highlighted sentences to toggle between their words and ours:

The Fed's new policy tools - We had to throw out our textbook descriptions of how monetary policy is implemented after the fall of 2008, as the Fed turned from its traditional tools to active use of large-scale asset purchases. A number of studies have now been conducted of the potential efficacy of these new policy tools. I surveyed some of the new studies last October. Today I'd like to discuss three new papers that have come out since then. Let me begin with a little background. Prior to the fall of 2008, the focus of monetary policy was to choose a target for the fed funds rate, which is the interest rate banks charge each other for overnight loans of Federal Reserve deposits. In normal times, this rate was extremely sensitive to the quantity of those deposits created by the Fed, enabling the Fed to achieve its target for the fed funds rate with relatively modest additions or withdrawals of reserves. But by the end of 2008, the Fed had driven the fed funds rate essentially to zero and began paying interest on reserves. Since then, banks have been content to hold an arbitrarily large amount of excess reserves, and the overnight rate has been as low as it could go. In other words, the traditional tools of monetary policy have become completely irrelevant in the current setting.

John Taylor Advocates Narrowing Fed Mandate - Former U.S. Treasury Department undersecretary John Taylor on Wednesday called for overhauling the Federal Reserve’s dual mandate of ensuring stable prices and maximum employment, saying that the central bank should focus on prices. “It would be better for economic growth and job creation if the Fed focused on the goal of “long run price stability within a clear framework of economic stability,’” Taylor told the House Financial Services Committee. The proposal is one of dozens that were offered at the hearing, part of the Republican-led House’s effort this week to blame U.S. economic weakness on government policies. It is also a proposal with support among some Republican lawmakers who are concerned that the Fed is stoking inflation and who want to narrow the Fed’s mandate to solely price stability.

The 4 new voting members on Fed policymaking panel - Four regional Federal Reserve Bank presidents are rotating onto the Fed's main policymaking group this week for the first meeting of 2011. Two of the four have been critics of the Fed's $600 billion Treasury bond-buying program.Here are snapshots of the four new voting members who will help shape Fed policy this year.

Accounting Tweak Could Save Fed From Losses - Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely.  The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.  But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.  "Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" . "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

The FOMC is Right to Stay the Course on QE2 -   The Fed has come in for a surprising amount of criticism since its decision in the fall of 2010 to launch a new round of monetary easing — Quantitative Easing 2.  Ben Bernanke and his colleagues are right not to give in to these attacks.  Critiques seem to be of four sorts. (Some are mutually exclusive.)

  •        1)  “QE is weird.”    Quantitative Easing entails the Fed buying a somewhat wider range of securities than the traditional short-term Treasury bills that are the usual focus of US open market operations.    This has been a bold strategy, which nobody would have predicted 3 or 4 years ago.  
  •        2)   “Monetary easing under current circumstances has no effect.”  It is true that, with short-term interest rates already near zero for the last two years, monetary expansion can be of only limited help.   Seven such mechanisms are: long-term interest rates, expected inflation, the exchange rate, equity prices, real estate prices, commodity prices, and the credit channel.  
  •        3)  “Monetary ease will lead to inflation.   What we need now, if anything, is monetary tightening.”   This is the view, for example, expressed recently by some conservative economists, including John Taylor.  
  •        4)  “The Fed is firing a volley in a destructive international currency war.”   This is the criticism that has come from some of our trading partners:  in particular, China, Germany and Brazil.  

The inertia of monetary policy: Implications for the Fed’s exit strategy - As the US economy recovers in fits and starts, market and policymaker attention is turning to the exit strategy. How will the Fed exit from its loose monetary policy? In particular, how will it winding down its second bout of quantitative easing, known universally as QE2?. How will the Fed unwind its quantitative easing? This column presents evidence of substantial levels of policy inertia in monetary policy. It says that we should not expect rapid policy changes in the near future – barring clear signs of economic distress.

Operation Twist (.pdf) - This paper undertakes a modern event-study analysis of Operation Twist and compares its effects to those that should be expected for the recent quantitative policy announced by the Federal Reserve, dubbed “QE2”. We first show that Operation Twist and QE2 are similar in magnitude. We identify five significant, discrete announcements in the course of Operation Twist that potentially could have had a major effect on financial markets, and show that three did have statistically significant effects. The cumulative effect of these five announcements on longer-term Treasury yields is highly statistically significant but moderate, amounting to about 15 basis points. This estimate is consistent both with Modigliani and Sutch’s (1966) time series analysis and with the lower end of empirical estimates of Treasury supply effects in the literature.

Shell game: Zero-interest policies as hidden subsidies to banks - The two pioneers of modern monetary economics – Irving Fisher and Knut Wicksell – were passionately concerned to find monetary arrangements that would insure against arbitrary redistributions of income and wealth. They thought that price level stability was a sufficient condition for avoiding distributive effects. In this they were in error. A hundred years later, the motivating concern for their work has long since disappeared from monetary economics. But the error survives. For example:

  • The Fed is supplying the banks with reserves at a near-zero rate. Not much results in bank lending to business, but banks can buy Treasuries that pay 3% to 4%.
  • This hefty subsidy to the banking system is ultimately borne by taxpayers. Neither the subsidy, nor the tax liability has been voted for by Congress.

The Fed policy drives down the interest rates paid to savers to some small fraction of 1%. At the same time, banks leverage their capital by a factor of 15 or so, thus earning a truly outstanding return from buying Treasuries with costless Fed money or very nearly costless deposits.

Are Low Rates A Subsidy to Banks?  - Krugman - Mark Thoma sends us to Axel Leijonhfvud, who declares that The Fed is supplying the banks with reserves at a near-zero rate. Not much results in bank lending to business, but banks can buy Treasuries that pay 3% to 4%.This hefty subsidy to the banking system is ultimately borne by taxpayers. Neither the subsidy, nor the tax liability has been voted for by CongressThis is a common view. But it misses the key point, which is maturity: short-term rates are near zero, while those 3-4 percent Treasuries are long-term. Here’s a stylized picture: Short rates will (and should) remain low until the economy recovers substantially; thereafter, they’ll rise as we get closer to full employment. So what can we say about a bank that gets short-term deposits or loans and puts the money into long-term Treasuries? Yes, it’s earning more interest now than it’s paying. But it’s also tying up funds in long-term assets; if and when short rates rise, it will either find itself paying more interest than it receives, or have to sell those long-term bonds at a capital loss. There’s no subsidy here.

Rand and Ron Paul Introduce Twin Fed-Audit Bills -  Sen. Rand Paul (R., Ky.) introduced U.S. Senate legislation Wednesday to audit the Federal Reserve while his father, long-time Fed critic Rep. Ron Paul (R., Texas), re-introduced similar legislation in the U.S. House.“We must take a critical look at the Fed’s monetary policy decisions, discount window operations, and a host of other things, with a real audit–and not just pay lip-service to the idea of an audit,” Sen. Paul said in a statement. “It is more crucial than ever that we have real transparency at our own central bank.” Sen. Paul said the bill would eliminate the current audit restrictions placed on the Government Accountability Office and mandate a complete audit of the Federal Reserve by a deadline.  Rep. Paul introduced legislation calling for the same audit of the Fed on the House side, which is similar to legislation that he has pushed for as a House lawmaker. As part of the financial regulatory overhaul, Rep. Paul wanted to give congress the power to audit the fed’s interest rate decisions. But the measure never made it in the final version of the bill.

Fed Speak & the WSJ - It doesn’t seem so long ago that every Thursday at 4 pm I would be strapped in seat hoping for the best and fearing for the worst. Thursday afternoon was when the money supply numbers used to come out. The numbers moved prices, big. Think of how the market reacts to monthly Non-Farm Payroll number today.  Days both pre and post 1st Friday it influences talk and markets. It was the same back then with the Ms. People made/lost fortunes on this. An outfit called Salomon Brothers had a guy named Henry Kaufman. He was good with numbers, and had a real handle on calling the headline. “Henry the K” would whisper in someone's ear and the Brothers made a bundle playing both sides of the casino.  It got so out of hand that they changed the rules. They moved the numbers to a Friday 4pm release. This of course was the worst possible choice for guys like me.  I lost a few weekends worrying about Monday. Here’s the joke. These numbers mean next to nothing today. They actually stopped keeping track of M3. Money supply is still discussed, but the weekly numbers are a ho-mummer. Think of what a stupid fixation the market had at that time. We might do it again.

New Push at Fed for Official Inflation Target - Federal Reserve officials last year, prodded by Chairman Ben Bernanke, seriously considered adopting an explicit target for inflation of 2%, but Mr. Bernanke failed to forge a consensus and backed away. The issue could resurface in 2011.The Fed informally has said its goal is inflation of around 2%. But after years of internal debate on the subject, it hasn't adopted an official target.Proponents say adopting a formal objective would blunt criticism of the Fed that current easy-money policies could lead to an upward spiral in consumer prices and could reinforce the Fed's commitment to avoiding deflation, or falling prices. Skeptics, however, wonder if an inflation target is needed and worry it could distract the Fed from its congressionally set mandate of maximum employment. "An explicit inflation target would help us immensely," says Charles Plosser, president of the Federal Reserve Bank of Philadelphia and a longtime proponent.

Will There Be an Explicit Inflation Target in 2011? - Jon Hilsenrath says the Fed is closer to adopting an explicit inflation target.  Inside the Fed, the idea resurfaced in the fall as the Fed debated the merits of initiating a $600 billion bond-buying program known as quantitative easing. In an Oct. 15 speech in Boston, Mr. Bernanke took another step, saying that Fed officials "generally judge the mandate-consistent inflation rate to be about 2% or a bit below." With inflation running at around 1%, he said there was a case for more Fed easing. An inflation target might be an easier sell when inflation is low; if it were adopted when rates were high, it would be seen as a reason for higher interest rates, which are never popular. [...]  New challenges this year could put the inflation target back on the agenda. Several Republican lawmakers, concerned that the Fed is stoking inflation, have proposed narrowing the Fed's mandate to price stability, eliminating the employment part.

Inevitable Inflation Fears - If inflation abroad is a problem, it is not because the Federal Reserve has set rates too low, but because emerging markets been unwilling to allow their currencies to appreciate sufficiently against the Dollar. See, for example, recent Dollar buying on the part of Brazil. See also Paul Krugman, who illustrates the clear difference in emerging and developed nation industrial production trends. Again, if inflation abroad is a problem, it is one that emerging markets need to tackle themselves.Expect global tensions to continue building as emerging markets fight the Fed. While the Fed may identify higher commodity prices as a potential concern, policymakers are not likely to reverse course and tighten policy unless higher commodity prices push through to core inflation. Such an outcome appears unlikely given persistently high unemployment. Consider too that the likely outcome of rising commodity prices is to slow US growth, thereby decreasing the odds of pass-through to core.I have said this before – I do not see how this ends well. Given that the Fed is not likely to back down from this fight, emerging markets need to put the brakes on their internal inflation issues, the sooner the better. Otherwise they will be facing pain of a real inflation crisis, one that requires stepping on the brakes even harder. How this story unfolds this year will determine of the global economy can transition to a sustainable, balanced growth trajectory, or plunges into yet another of the seemingly all-too-frequent crises.

Inflation is coming – just not yet - Investors are as naturally paranoid as any race of small furry creatures; the moment they acquire a pile of nuts and berries is the moment others will seek to take it from them. I’ve noticed, watching their scurrying around the cage of the monetary system, that they get more worried about inflation than anything else. In the end, they believe, their money is more likely to be taken away by runaway increases in the general price level.  That may be true, just not, in dollar terms, right now. For all the real risks that investors face over the next year, US dollar inflation is probably not the most serious. Yes, in years to come the political class will use inflation to redistribute goods, services, and power in their direction, but not now.Why not?

Why Fairly Sensible People Are Worried About Deflation - In his podcast last week Russ Robert’s asked why fairly sensible people are concerned about deflation. I want to answer that. Simply put deflation or even very low rates of inflation matter because when nominal interest rates hit zero they fail to communicate the proper signals to savers and borrowers. When interest rates are above zero, higher interest rates tell potential savers that if they refrain from consuming today that more real resources can be produced tomorrow. Higher interest rates tell potential borrowers that there is a high demand for using real resources today. Lower interest rates do the exact opposite. There is a problem, however, when the nominal interest rate hits zero. The fact that nominal interest rates can’t get any lower destroys the power of the market to convey the right signals. To see this its important to see why interest rates might need to go below zero to send the correct signals.

Inflation? No Problem ... If You Avoid Food - Great news! There is no inflation to speak of -- unless you fancy a burger, cup of Joe or candy bar every now and then. Yes, inflation may not technically be a problem just yet if you look at the latest consumer price index figures. But agricultural commodities like wheat, corn, coffee and cocoa have all surged in recent months. Assuming you are a carbon-based life form that actually needs to eat --no offense to IBM -- this is not good news. Some food and beverage companies have already reacted to higher commodity costs with price hikes while others are discussing the possibility of raising prices.  Starbucks, for example, has boosted the price of some drinks. And the chief financial officer of McDonald's (MCD, Fortune 500) hinted in an earnings conference call with analysts Monday that the company may "raise prices where it makes sense" in reaction to higher prices of beef and other commodities. So the spike in commodity prices bears watching even if inflation doves can point to the fact that the cost of food is up just 1.5% in the past 12 months according to the December CPI report.

Inflation Is So Much Worse Than We're Told - cmartenson - Inflation is actually much higher than what the BLS claims it is; something that purchasers of college tuition, pharmaceuticals, or health insurance know all too well. To give the BLS some credit, they must try and estimate a single rate of inflation that applies to everyone equally.  But that is a completely impossible task. An octogenarian living in Seattle on a meager pension and taking lots of prescription medications will have a totally different inflation experience than an 18 year old living in their parent's basement eating Ramen noodles.  But even after spotting the BLS some slack, there are some enormous and glaring errors in their methods that render the official inflation measure hopelessly - and dangerously - inaccurate.  In this article, I am going to reveal how US inflation numbers are badly understated, how this practice short-changes institutions and fixed-income individuals alike, and why this means fiscal and inflationary train-wrecks are the most probable outcome for the US -- and, by extension, the globe.

Blood on Bernanke's Hands; Riots in Egypt over Food Prices and Unemployment; Protests Spread to Algeria, Morocco and Yemen; Twitter in the Spotlight - Violence in Egypt continues unabated in spite of President Hosni Mubarak's plea for calm. Demonstrators threw firebombs and chanted "Down with Hosni Mubarak, down with the tyrant." Police responded with teargas and bullets. Protesters are angry over poverty, rising food prices, state food subsidies, unemployment, and social conditions. Social media outlets, especially Twitter have played a leading role in organizing protests. The Obama administration and the US state department have also resorted to Twitter and Facebook. Here are a number of stories I have been following, with references to Twitter and Facebook highlighted.

Food, fuel prices unlikely to shake Fed from path (Reuters) - The Federal Reserve will continue to focus on low underlying inflation in pushing aggressive measures to support the U.S. recovery, even as European authorities fret about rising energy and food prices. With the U.S. economy only now emerging from a period of inflation so low that policy makers were worried about the risk of a damaging downward spiral of falling prices, the Fed, which opens a two-day meeting on Tuesday, is on a different track than the European Central Bank.Comments by ECB President Jean-Claude Trichet over the weekend urging central banks to pay attention to inflationary threats from rising commodity prices led many to believe the ECB may be moving toward rate hikes.Trichet emphasized overall inflation, rather than the "core" measures favored by the Fed that strip out volatile food and energy costs.

The Global Inflation Debate - Tim Duy and Paul Krugman both note the tale of two inflationary regimes. Slow growth and careful monetary policy in the industrialized countries is contributing to low core rates of inflation, while rapid growth and loose money in the developing world is contributing high rates of inflation and pressure on international commodity prices. First, we should stop and note that this further bolsters the case that inflation is not just a monetary phenomenon but is actively controlled by monetary policy. I know that virtually all economists and most of my readers already believe that. Second, in a world without flexible exchange rates we have to think carefully about what monetary policy means and the inflation measures we look at. As long as other nations beg their currency to the dollar, those nation’s central bank will have some control over the dollar price of certain goods.

A Potent Brew for a Tall Glass of Regret - While it is clear economic data has improved, we must be conscious of the risks that remain. For starters, our recent economic growth has required unconventional and unprecedented monetary policy. The purchase of trillions of dollars of securities by the Fed in the hopes that “higher stock prices will boost consumer wealth and help increase confidence” has thus far worked wonders in bolstering equity markets. But such involvement with a seemingly tepid growth response should cause one to ponder the economy’s stand-alone strength and growth sustainability. As Bill McBride of Calculated Risk noted, the December figure was “the largest year-over-year increase in [housing] inventory since January 2008 and … is something to watch closely over the next few months.” Rising inventories would likely lead to additional price declines that would affect consumer sentiment, consumer spending, and ultimately bank balance sheets. Other concerns are more exogenous, but no less real, and include European sovereign funding troubles, rising commodity prices, and tightening requirements in emerging economies to tame inflation.

The Fed remains worried about growth - YESTERDAY, the Federal Reserve released its first policy statement of the new year, and observers learned a few things. First, the Federal Open Market Committee remains wary about the weakness of the American economy: I think the economic data that was coming in through December moved expectations from too pessimistic to perhaps a little too optimistic. Recent datapoints have been a little off—jobless claims have yet to hit the sub-400,000 level touched in late December, durable goods orders have softened a bit, and home prices are disappointing (though the housing figures should be treated with caution). The underlying trend in the numbers is clearly toward an accelerating recovery, but even a 4% real growth rate in 2011, which is possible, implies a long period of economic slack ahead.

Economic Recovery With No Growth Strategy - I should begin with where we stand with the economy today. Stand is not the right way to put it. We are falling. We are down on our rears and I am not at all optimistic about where we are headed. Perhaps the biggest danger out there is the political danger of ongoing backlash. I think of the tea party’s successful rise as an economic backlash. Worrying and thinking about economics makes me something of an economic determinist, but I do not think I am totally with economics as the main causal principle. I am very worried about what’s going to happen. I am very worried about the Democratic response to the current state of the economy. I was at a mainstream conference recently, put together by a Nobelist. There was a rather grand UN General Assembly-like setting. They asked me to make a presentation, and I was considerably left of everybody else in the political sense. Robert Rubin was there and he said, point blank, that he is opposed to further fiscal stimulus. He believes increasing the deficit now, increasing the deficit in the future, means higher interest rates in the future. As a journalist since the 70’s, I have known Rubin for many years. He is not an economist. It was disheartening to hear him speak because I sensed it represented the Obama point of view.

Uncertainty Over Economy Clouds Obama Speech - A year ago, the economy looked as if it were speeding down the runway, only to stall out in the spring.  Now tentative signs of a pickup are emerging across the country again. Factory production, retail sales and existing-home sales are rising, while unemployment claims are trending down. Companies like General Motors and Macy’s have recently announced hiring plans, and bank lending to businesses is starting to expand. Investor sentiment is strengthening, as major stock market indexes climb to their highest levels since mid-2008.  This time, though, economists and business leaders are more measured in their optimism about the recovery. Growth is real, they say, though they remain unconvinced it will accelerate all that much.

GDI shows faster growth and an oversized profit contribution - Rebecca Wilder - There are two measures of income: the spending side (Gross Domestic Product, or GDP) and the income side (Gross Domestic Income, GDI). I'd like to see what GDI is telling us about the Y/Y recovery, since it's a better predictor of turning points, according to FRB economist Jeremy J. Nalewaik. The Y/Y growth rate of GDI surpassed that of GDP in Q2 2010, continuing into Q3 2010. In Q3 2010, GDI grew at a 3.6% annual clip, while GDP marked a lesser 3.2% rate. Don't know what this means, exactly; but it could imply that the economy is expanding more rapidly than the GDP measure would suggest. Overall, the GDI report implies that the economy may be improving more quickly than the GDP report suggests. There's plenty of room for improvement in this picture, however, as the labor wages remain stuck in the mud with corporate profits strong.

Advance Report: Real Annualized GDP Grew at 3.2% in Q4 - From the BEA: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.2 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.  This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the median growth rate of 3.05%. Growth in Q4 at 3.2% annualized was slightly above trend growth - weak for a recovery, especially with all the slack in the system. The change in real private inventories subtracted 3.70 percentage points from the fourth-quarter change in real GDP after adding 1.61 percentage points to the third-quarter change. GDP would have been very strong without this change in private inventories.

A modestly brighter GDP report - The Bureau of Economic Analysis reported today that U.S. real GDP grew at an annual rate of 3.2% during the fourth quarter of 2010. That's about the historically average growth rate. But we expect much better than average at this point in the cycle, and need much better than average to make real progress with the unemployment rate. The latest GDP numbers bring our Econbrowser Recession Indicator Index for 2010:Q3 down to 5.3%. There's no question that we're in the expansion phase of the business cycle, and have been for some time, though it's only with this new report that the level of real GDP is back to making a new all-time high.

Speeding up - FIRST, the good news. According to preliminary estimates from the Bureau of Economic Analysis, American economic growth continued to accelerate as expected in the fourth quarter of 2010. Real GDP expanded at a 3.2% annual pace, up from 2.6% in the third quarter and the fastest pace since the first three months of the year. This was the sixth consecutive monthly expansion, and it pushed the American economy above an important psychological threshold: real output is finally, at long last, above the pre-recession peak. It only took three years to regain that ground. The 3.2% rate was a little less than the 3.5% economists had forecast, but this is the preliminary release; two further revisions will occur in the months to come. The biggest boost to growth came from accelerating growth in personal consumption, the lion's share of which was from purchases of durable goods. Consumer spending was up at a 4.4% annual pace (compared to 2.4% in the third quarter). Of the 3.2% total growth pace, 3.02 percentage points were contributed by personal consumption.

Suddenly, the GOP loves the economy - The news that Republicans are taking credit for the recent upturn in the economy is annoying, but hardly surprising. When you win an election, you get to say whatever you want, and there's no denying the truth of the following two statements: The Republicans won the midterm elections, and the economy has been improving for the last several months. The Republican argument, as explained by Arizona Sen. Jon Kyl, is that the election results combined with the tax cut deal injected a new sense of "certainty" into the economy, which immediately translated into job creation. How you evaluate that thesis depends in part on whether you think companies make their hiring plans according to their future expectation of what taxes will be like or on the much more pressing question of whether they need more workers to satisfy current demand. But a closer look at the numbers also undermines the GOP thesis. In 2010, new jobless claims benefits peaked in August, and then started a more or less steady decline, long before the election or any tax deal. A score of other economic indicators started flashing the green light around the same time. It all came too late to help Democrats in the midterm elections, but the change was there to see nonetheless.

Thank GDP It’s Friday! - Nothing can stop it.  A 12.5% increase in unemployment claims - BUY!  A 2.5% drop in durable goods orders - BUY!  Japan's credit rating downgraded - BUY!  Amazon missing revenues - BUY!  Gold falling $35 from Wednesday's close - BUY!  Oil at the lowest level since November - BUY!  Thousands of protesters rioting (video of the police shooting a man dead) in Egypt this morning - BUY!  Not only are the markets being bought (albeit on very low volume by TradeBots) under any and all conditions but they are being bought with little or no downside protection - as indicated by the VIX, which has fallen to 16 again, back at the 2008 pre-crash lows, when Bush's Economic Stimulus Act of 2008 "saved" us by sending everyone in America $300 (which we ended up using to buy 2 barrels of oil as it raced to $140 per barrel that June).  At the time (February 14th, Dow 12,400. S&P 1,350, Nas 2,332), I thought it was a very bad idea..

Fourth quarter growth data sends mixed message about economy’s health - Gross domestic product, the broadest measure of economic activity, grew by 3.2% at an annualized rate in the last quarter of 2010, an improvement over the 2.6% growth rate registered in the third quarter. The 3.2% growth in the fourth quarter finally pushed GDP to a level not seen since before the Great Recession. The three-year lag between the previous business-cycle peak and a return to prerecession output levels is the longest since World War II. On average, the U.S. economy has been 9.4% larger three years after a recession’s beginning. The long lag time highlights not only the depth of the economic plunge in the Great Recession, but also the very slow recovery from the recession.

Unpleasant GDP Arithmetic -  Krugman - GDP growth at a 3.2 percent annual rate in the 4th quarter. Hurray! Or, actually, not. Today’s GDP report puts real GDP basically back where it was in the 4th quarter of 2007 (1/10th of a percent higher, but who’s counting?) Based on the trend between the previous two business cycle peaks, the economy should have grown — had the capacity to grow — around 2.3 or 2.4 percent per year over that period, so we’re actually around 7 percent below where we should be. And growth is chasing a moving target: growth at 3.2 percent closes less than 1 percentage point of that gap each year. So, yippee: we’re on track to restore full employment circa 4th quarter 2018. Why am I not happy?

Really Nominal GDP - Released by the BEA this morning: the advance reading of real GDP came in at 3.2% for the 4Q of 2010 (actually, it was 3.17%, but who’s counting?) versus expectations of 3.5%. There was a lot of internal noise, with large positive contributions from personal consumption and net exports, offset by negative contributions from inventories and government spending. However, the line item that jumped off the page was the GDP deflator, the measure of inflation that turns nominal GDP into real GDP. The GDP deflator was very light at only 0.3%. If it had come in as estimated (1.6% according to Bloomberg), and all other inputs remained constant, real GDP growth would have been cut in half. A smaller deflator pads real growth by subtracting a smaller number from nominal growth. We read one possible explanation for the light deflator: oil is an import, and imports subtract from GDP, therefore higher oil prices subtracted from the GDP price index. What we do know is that the core PCE price index (a preferred Fed measure of inflation) also declined, and the GDP deflator tends to track Core PCE over time despite the quirkiness of GDP accounting. The current level of Core PCE, 0.4%, is the lowest on record since 1959.

CNNMoney survey: Economists see strong personal consumption… -- American consumers are finally opening their wallets again, according to an exclusive CNNMoney survey, raising hopes that the long-suffering economy could get a boost. The survey of 27 leading economists forecasts that personal consumption, a measure of consumer spending, jumped by 4% in the fourth quarter. If that forecast is correct, it will be the strongest increase in that key reading since 2006."Those who were employed during the recession were often afraid of spending due to fears of losing their jobs," said Jharonne Martis-Olivo, director of consumer research for Thomson Reuters. "I do think they opened up during the fourth quarter."The bullish outlook for consumer spending is the reason why economists now forecast that Friday's reading on gross domestic product, the government's main measure of the economy's strength, grew at a 3.5% annual rate in the fourth quarter -- a significant increase from a 2.6% rise in the previous quarter.

The NYT’s Hallucinations of a Business Investment Led Recovery - The New York Times was touting the prospect of renewed spending by business leading the recovery. There are two major problems with this story. First investment in equipment and software has already been growing rapidly. Over the last four quarters it has grown at almost a 20 percent annual rate. People who have access to the Commerce Department's data on GDP (a group that apparently excludes employees of the NYT) are aware of this fact. The other important fact known to people with access to this data is equipment and software spending is actually a relatively small share of GDP. (There was huge overbuilding of non-residential structures, so it is not plausible to imagine a big pick-up in this sector any time soon.) Equipment and software spending were equal to 7.1 percent of GDP in the third quarter of 2010. This means that even if the growth rate doubles to 40 percent, it would only add 1.4 percentage points to GDP growth. This would have less impact than reducing imports by 10 percent..

China Investment Head Gao Says Quantitative Easing Devaluing Paper Money - China Investment Corp. Vice Chairman Gao Xiqing said that central banks’ quantitative easing policies are hurting the value of money just one day after the Federal Reserve maintained plans to buy $600 billion of Treasuries.  “You know money is gradually becoming not worth the paper it’s printed on,” Gao said at an event sponsored by HSBC Holdings Plc at the World Economic Forum in Davos, Switzerland today. Recent gains in commodity and food prices reflect the “long-term view” of investors that prices will accelerate, he said.  The Fed and the European Central Bank have kept their benchmark interest rates at record lows to spur their economic recoveries, triggering concern in emerging markets that the resulting flood of capital will undermine currencies such as the dollar and spark inflation.  “We’ve started collecting Zimbabwe notes,”

Why China hates loving the dollar - “The current international currency system is the product of the past.” Thus did Hu Jintao, China’s president, raise doubts about the role of the US dollar in the global monetary system on the eve of last week’s state visit to Washington. Moreover, he added, “the monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level.” He is right on both points. In criticising US fiscal and monetary policies and, in particular, the Federal Reserve’s policy of “quantitative easing”, Mr Hu was following a well-trodden path. In the 1960s, Valéry Giscard d’Estaing, then French finance minister, complained about the dollar’s “exorbitant privilege”. John Connally, US Treasury secretary under Richard Nixon, answered when he described the dollar as “our currency, but your problem”. The French and now the Chinese desire exchange rate stability but detest the inevitable result: an open-ended commitment to buying as many dollars as the US creates. Both want to discipline US policies. Both have failed. Are things likely to be different this time? No.

Simon Johnson: "The age of America is over; (Reuters) - To hear a number of prominent economists tell it, it doesn't look good for the U.S. economy, not this year, not in 10 years. In the long run, the United States must face up to inevitably being overtaken by China as the world's largest economy. And it may have missed a chance to rein in its largest financial institutions, many of whom remain too big to fail and are getting bigger.The United States will need to come to terms with the fact that its prevalence in the world is fated to come to an end, Jorgenson said.  This will be difficult for many Americans to swallow and the United States should brace for social unrest amid blame over who was responsible for squandering global primacy, he said. MIT's Simon Johnson put it more bluntly, saying the damage from the financial crisis and its aftermath have dealt U.S. prominence a permanent blow. "The age of American predominance is over," he told a panel. "The (Chinese) Yuan will be the world's reserve currency within two decades."

Yuan soon to be currency of choice - China's recent moves to internationalise the yuan are expected to result in a huge demand for fund-raising through yuan denominated debts or the so called ‘dim sum bonds'. Analysts say the rising yuan liquidity through Hong Kong will see yuan emerging as the currency of choice for fund-raising for both Chinese and International firms that have business interests in China. Following China's announcement earlier this month that the country's qualified enterprises could conduct direct investment overseas using yuan, bankers said it will open flood gates of yuan liquidity making it an important currency as the dollar in the international trade and investment. Until now, companies have had to exchange the yuan into foreign currencies in China before undertaking such transactions.

Return to the gold standard? It's just crazy enough for some state legislators to propose it. - Imagine it's April 15 a few years from now. You need to pay your state taxes, and fast. So, you check out the latest official state exchange rate, and then reweigh your bars. You're over—thank goodness—so you hope the tax office has some ingots to change out. It's such a pain when they run out of ingots. After you pay your taxes, you need to pick up a few groceries. Luckily, you have some spare silver ore on hand and decide to use the home mint in the basement to pop out a few coins. Voilà—restocked pantry! It sounds ridiculous. It is ridiculous. But in the past few months, a few state legislators have considered letting you do something like that: Trade in gold and silver in addition to dollars. The country as a whole is not moving closer to adopting a gold or commodity-price standard, though there are some national-level proposals. And state legislatures have a long and honorable history of proposing, debating, and sometimes even passing silly laws.

An Economic Forecasting Fiasco: What Pro Economists Predicted For QE2 And Treasury Yields - Earlier today I analyzed the Wall Street Journal survey of economist forecasts for Q4 GDP. How accurate are economists' forecasts in general? It varies, of course, but sometimes they miss by a long shot. Consider, for example, the forecasts for 10-year Treasury yields in the October 2010 WSJ survey (Excel file here). The survey took place several weeks after Ben Bernanke's August 27th speech at the Jackson Hole Fed symposium, which sent a clear message of accommodation. In fact, the WSJ survey specifically asked 'Will the Fed resume a program of expanding its securities portfolio, also known as quantitative easing, most likely through purchases of Treasuries, at its Nov. 2-3 meetings?' Ninety-five percent of the economists said yes. So, what did they predict for the 2010 year-end 10-year yield? Here is a chart showing the distribution of forecasts. Actually the low year-end forecasts were probably a reasonable assumption based on the expectation of expanded Fed treasury purchases. But 10-year rates began a significant rise immediately after the Fed's November announcement of QE2 — obviously not what the economists expected (and probably not what the Fed had in mind either). The actual year-end 10-year yield was 31% higher than the average of the economists' estimates made less than three months earlier.

Here It Comes: US Suspends New Issuance Under Supplementary Financing Program, $200 Billion Liquidity Gusher Imminent - Earlier this week we predicted that the US Treasury would wind down its SFP program, unleashing $200 billion in 56-day non-rollable "Fed bonds" on the market. We predicted this would occur by mid-February. As of a few minutes ago, the Treasury has just confirmed that starting February 3, this will be precisely the case. Per the Treasury, supplementary financing account to fall to USD 5bln, with the reason being the traditional explanation: decreasing funds in account as country nears debt ceiling. As the revised table below shows, each Thursday beginning February 3 we will now see an incremental $25 billion in extra liquidity as the maturing 56-Day CMB is not rolled.

Treasury to Cut Fed Program as Debt Ceiling Nears - The Treasury Department Thursday said it will allow holdings in a special account at the Federal Reserve to fall to $5 billion from $200 billion as it looks for more flexibility as the U.S. approaches its debt limit. “Beginning on Feb. 3, 2011, the balance in the Treasury’s Supplementary Financing Account will gradually decrease to $5 billion, as outstanding Supplementary Financing Program bills mature and are not rolled over,” said Treasury Assistant Secretary for Financial Markets Mary Miller. The account now holds $200 billion. Under the supplementary financing program, Treasury sells short-term bills and moves the proceeds into the Federal Reserve’s accounts. The money raised by Treasury and transferred to the Fed drains reserves from the banking system. The program was established in September 2008. “This action is being taken to preserve flexibility in the conduct of debt management policy,”

Treasury to Adjust Borrowing as Debt Limit Nears - The government said Thursday it will alter its borrowing strategy to buy some time before hitting the $14.3 trillion debt ceiling. Treasury officials said that starting next week they will gradually decrease the $200 billion the government has borrowed in a special program conducted for the Federal Reserve, lowering that amount to around $5 billion. That will provide the government with an extra $195 billion that it can devote to its regular borrowing needs. Treasury Secretary Timothy Geithner said in a Jan. 6 letter that the government will reach its current borrowing limit between March 31 and May 16, and that it was critical for Congress to raise that limit. But Republicans are demanding cuts in spending before they will agree to raising the debt limit.

The GOP Is Going To Play A Pretty Brilliant Move In The Debt Ceiling Fight - The fundamental problem with the GOP position on the debt ceiling is that most of them can't possibly want to win. In other words, they want to use the debt ceiling as 'leverage' to force spending cuts, and yet if they actually went through with the treat not to raise the debt ceiling, it could trigger a catastrophic default. There's a certain untenability to that position. But they have a plan. Prior to the debt ceiling fight, certain GOPers are pushing for a bill that would force the Treasury to prioritize debt payments ahead of all other forms of spending. Under such a scenario, the debt ceiling could be held steady, and the Treasury could easily pay its debts, by virtue of the fact that tax revenues are way larger than interest payments. Of course, domestic spending would be curtailed sharply, but it wouldn't imperil the credit rating of the United States. Now the question is... would Democrats support this bill? If they do, they'll make the GOP's job much easier in the fight, because they'll no longer be on the side risking a default. Very shrewd.

The Great Debt Shift - Two of the world's largest economies, the EU ($16 trillion) and the US ($14 trillion), have become the leading practitioners of private-to-public debt shifting. The US has assumed the debts of banks, insurers, mortgage holders, and even entire industrial sectors. The European Union has done the same for entire states. The resulting public debt levels are, predictably, placing strains on both the dollar and the euro.  Already, the credit ratings of the United States and some of the EU's core countries, such as France and the UK, are being questioned. While this socialization of private debt has created deep citizen resentment, it remains to be seen whether political pressure is enough to hold back the tide. In the US, the forces of fiscal restraint appear to have the upper hand at present; but, this late in the game, it is far from certain that the newly elected fiscal hawks will be able to avert civil unrest and debt default. It is worth noting that the debt shift has offered some near-term benefits. Relieved of repayment anxiety, many companies have posted very promising earnings reports in recent months (one needs to only glance at Detroit). Despite continued demand weakness, these companies have worked hard to improve their balance sheets and raise operating margins. The resulting rally in share prices has given rise to a belief that recovery is at hand.

Mystery solved: the difference between the deficit and the increase in national debt -The ex-Wall Street types at ZeroHedge chewed on this but couldn't come up with a good explanation. Karl Denninger called it crooked accounting, but couldn't pinpoint the fraud. B-Daddy at the Liberator Today noticed the same thing and didn't have an answer. Then I threw the question over to the academics at EconbrowserIf it's such a simple accounting identity, would you please reconcile the $1.9 trillion and $1.65 trillion debt increases in FY 09 and FY 10 with the alleged deficits of $1.4 trillion and $1.3 trillion for the same fiscal years? And before you answer that it's the Social Security Trust Fund, intragovernmental holdings increased by just $320 billion over the two years. So where's the other $530 billion? I and many others suspected the answer was in some off-budget shenanigans like Fannie/Freddie, GMAC, etc. It turns out we were right in general but missed the biggest specific off-budget item: student loans.

The Contribution of Student Loans to the U.S. National Debt - W.C. Varones solved a math problem with the U.S. national debt that had been troubling the econoblogosphere since September 2010. At the end of the U.S. federal government's fiscal year in 2008, the total public debt outstanding for the United States was $10,024,724,896,912 (or more simply, over 10 trillion dollars). In 2009 and 2010, the U.S. government ran annual budget deficits of $1.416 trillion and $1.294 trillion respectively. During that time, the amount of money the government "borrowed" from itself (mainly from Social Security) rose by $141.9 billion (in 2009) and $180.8 billion (in 2010).  If you add those numbers together then, the amount of the full U.S. public debt outstanding at the end of the government's 2010 fiscal year should total $13,057,320,272,842. Instead, the total public debt outstanding for the United States was $13,561,623,030,892, over $504 billion more than what the combination of the federal government's annual budget deficits and "intragovernmental" borrowing should put it.  Finally getting to the bottom of the matter with Econbrowser's Menzie Chinn's assistance, W.C. discovered that much of the 504 billion dollar disparity could be accounted for by the government's direct loan financing activities, where the U.S. Treasury directs money it borrows for the purpose of loaning it out to individuals and organizations in support of government-backed or subsidized loan programs operated by other government agencies.

Deficit to hit new record this year: CBO - The U.S. budget deficit will hit a record $1.48 trillion in fiscal 2011, the Congressional Budget Office said Wednesday, in a fresh estimate of the country’s fiscal situation that is sparking more calls to stanch the flow of government red ink. CBO’s budget and economic outlook for fiscal years 2011 to 2021 also sees the U.S. economy growing by 3.1% in 2011, and unemployment falling to 9.2% by the fourth quarter from its current 9.4%.  “CBO expects that economic growth will remain moderate this year and next,” the report said. Read the CBO report.  The deficit projection assumes current laws will remain unchanged. It’s bigger than last year’s estimate due to the package of tax-cut extensions signed by President Barack Obama in December.

View from Davos: How Bad is a $1.5 Trillion Deficit? - Now that we have the recovery, we will have to pay for it. The question is did we take the appropriate measures or did we overspend. On Thursday, the CBO estimated that the federal deficit in 2011 will reach nearly $1.5 trillion. That's up from nearly $1.3 trillion last year. Three years after the financial crisis many had hoped what were supposed to be temporary budget deficits would be shrinking by now. That's especially true because early bailout measures like TARP ended up mostly paying for itself. So why is the deficit still rising? It's because the recession has turned out to be weaker than many expected, and unemployment has stayed high. The tax cut passed late last year, which some called a second stimulus, will alone add $400 billion to the debt this year. Here in Davos, where business and political leaders are meeting for the World Economic Forum, there are two views on debt that are being expressed. And at least one of them seems to suggest the recent run up in US deficits aren't that bad.

Moody's Signals Risk of Negative Outlook for US Rating - Moody’s Investors Service said its time frame for possibly placing a negative outlook on the Aaa rating of U.S. Treasury bonds is shortening as the country’s deficit widens.  The outcome of the November elections, the extension of tax cuts and the chance that Congress will not address deficit reduction have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said today in a report.  “Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” “Because of the financial crisis and events following the financial crisis, the trajectory is worse than it was before,”

IMF Chides Us For Fiscal Folly - The International Monetary Fund (IMF) has issued its clearest warning to date that the latest US fiscal stimulus is ill-judged, unlikely to do much for growth and raises the risk of a bond crisis over the medium term.  The IMF said the US economy was enjoying a short-term spike as a result of quantitative easing by the US Federal Reserve and the fiscal package agreed by Congress and the White House late last year, but expressed reservations about the side-effects of these policies.  The IMF said the deficit would remain stuck at 10.75pc of GDP in 2011, with public debt exceeding 110pc of GDP in 2016. "The absence of a credible, medium-term fiscal strategy would eventually drive up US interest rates, which could prove disruptive for global financial markets and for the world economy," it said. The report called for an assault on America's entitlements behemoth, and caps on discretionary spending.... While the US has been the most complacent about fiscal slippage, the Fund called for "urgent" action to rein in spending across the industrial world. "Problems in Greece, and now Ireland, have reignited questions about sovereign debt sustainability and banking sector health in a broader set of euro area countries and possibly beyond. Market pressures could result in serious funding pressures for major banks and sovereigns, increasing the likelihood that problems spill over to core countries."

Roubini Says US Risks 'Train Wreck' From Bond Vigilante Wrath - The U.S. will suffer a “train wreck” at the hands of bond investors if it fails to solve its budget problems, said Nouriel Roubini, the economist who predicted the financial crisis.  “The fiscal problem is very serious,” he said in a Bloomberg Television interview today with Tom Keene at the World Economic Forum in Davos, Switzerland. “The bond vigilantes have not yet woken up in the U.S. in the way they have in the euro zone. Unless the U.S. addresses this fiscal problem, we’re going to see a train wreck.”  President Barack Obama yesterday pledged a freeze on non- defense discretionary government spending to rein in a deficit he described as “not sustainable.” U.S. Treasuries fell today before an auction of $35 billion of five-year bonds. Roubini suggested that the U.S.’s commitment on the deficit may still not be enough to placate investors.  “We’re not doing much about the budget deficit,” “The public debt in the U.S. next year may go from 60 percent to 90 percent” of gross domestic product.

Soros Says US Recovery Temporary, Deficit a 'Serious' Threat - Billionaire investor George Soros said the U.S. economy is experiencing a temporary recovery and that the nation’s deficit poses a “very serious” threat to growth in the future.  “It is temporary,” Soros, 80, said today in a television interview with Bloomberg at the World Economic Forum in Davos, Switzerland. “Once the economy picks up a little momentum, interest rates will go up and choke of the recovery. We are destined for stop, go, which is better than no go at all.”  A “big issue” that hasn’t been dealt with is the U.S.’s $1.2 trillion deficit, which may be the “most serious risk” facing the nation’s financial stability in coming years, Soros said.

U.S. Budget Deficit to Pass $1.5 Trillion This Year - "Grim" doesn't seem to be a terrifying enough word to describe the budget outlook that the CBO released today.  Oh, sure, we sort of knew this was coming--tax cuts are expensive if you don't find spending cuts to match.  And yet the numbers still hit one like a punch to the gut.  From a guy wearing brass knuckles.  Wrapped around a roll of  quarters.  Shiny new quarters that you can't really afford to use for punching people, because you've got a $1.5 trillion budget deficit this year.  What is there to say?  This has got to stop?  At this point, saying so feels sort of Job-like.  It seems clearer and clearer that short of a near-death experience, no one is going to do anything about this problem. Our president spent over 5,000 words last night kind of noting, offhand, that we might have a problem, and then studiously avoiding proposing any serious solutions to the problem

Yeah Big Borrower - Megan McArdle is upset over the deficit numbers. Naturally, I’m thrilled. This is exactly what I intended when I suggested, as early as 2008, that the government slash the payroll tax and allow immediate depreciation on capital expenditures. Since I wasn’t calling for huge cuts in government expenditure but I was calling for huge cuts in government revenue the natural result was a huge deficit. Its only mechanical. However, that’s a good thing. We are moving liabilities off the household and business balance sheets – which are credit constrained and in some cases overloaded. We are putting those same liabilities on the government balance sheet which has no constraints on its credit what so ever. 5-years auctioned off yesterday with a super strong bid-cover of just under 3. That means 3 times as many people submitted bids to buy Treasuries as there were Treasuries for sale.

CBO Report Fuels Budget Debate - A new report from the Congressional Budget Office Wednesday provided ammunition to both sides of the emerging spending debate between President Barack Obama and House Republicans. But it also bolstered a critique that both sides are preoccupied with a sideshow, not the main event in any serious drive to tackle the deficit problem. House Republicans said that the report’s enormous deficit estimate adds momentum to their efforts to cuts domestic discretionary spending more deeply and quickly that Mr. Obama wants. The CBO found that, thanks largely to enactment of the big tax cut at the end of 2010, the 2011 deficit would be nearly $1.5 trillion – up from 2010’s deficit of $1.3 trillion.“It should drive the spending debate in our direction,’’ said GOP Rep. Jeff Flake of Arizona. But Democrats cited the report’s news that unemployment would remain stubbornly high for years, and they said that was an argument against cutting spending too deeply too quickly.

Obama Deficit Cuts Dismissed at Davos as Not Deep Enough -- President Barack Obama’s State of the Union address failed to convince executives and economists at the World Economic Forum’s annual meeting that he’s serious about taming the U.S. budget deficit. Hours after Obama used his State of the Union address to propose a partial freeze on government spending, delegates at the conference in Davos, Switzerland, said the U.S. is lagging foreign counterparts in cutting a budget deficit of more than $1.2 trillion. “There is an unwillingness to deal with the real gorilla in the room,” said Martin Sorrell, chief executive officer of advertiser WPP Plc. James Turley, CEO of Ernst & Young LLP, said, “we need a heck of a lot more action on it” and that Obama’s speech “lacked details.” Obama is trying to cut a budget deficit that is almost double the average in the euro-region, which has been buffeted by a surge in borrowing costs over the past year. Failure by the U.S. to control a deficit that Obama called unsustainable was one of the biggest risks to global economic growth, said Nouriel Roubini, chairman and founder of New York-based Roubini Global Economics LLC and a Davos veteran.

The "exorbitant privilege" of the US - What's going to happen first - sensible US fiscal policy, or a global revolt against the dollar? In all my discussions about the global economy so far here in Davos, that's the question we keep coming back to.  In my earlier post I spoke about the "new economic reality". The first thing you notice about this new landscape is that the successful developing countries are doing much better than the old, developed ones. The second thing you notice is the extraordinary fiscal position of the US.  America's exceptional approach to the public finances comes out starkly in today's new budget forecasts from the Congressional Budget Office. These show the federal deficit rising to nearly $1.5 trillion in 2011, the highest on record. At 9.8% of GDP, it will be only very slightly higher than it was in the depths of the financial crisis, in 2009.  In every other major advanced economy, public borrowing is going to fall in 2011. America is the only country in which both the headline deficit and the structural deficit are going up.

GOP Senators Push Tying Balanced-Budget Measure to Debt Ceiling Vote - Sens. Orrin Hatch (R., Utah) and John Cornyn (R., Texas) are pushing for a balanced-budget amendment as part of any negotiations to raise the federal debt ceiling. Their proposal has gained support within the Republican caucus, but Senate Democrats have not yet signaled they would include it in any package that raises the debt ceiling above the $14.3 trillion level set by Congress last year. The Obama administration has said the U.S. could hit the $14.3 trillion debt level as soon as March 31, and they are pushing Congress to raise the limit soon. As of Friday, federal debt subject to the limit stood at $14.008 trillion. The Hatch/Cornyn plan would, among other things, mandate total budgetary outlays for any fiscal year not exceed revenues; cap federal spending at 20% of GDP; prohibit revenue raising moves that aren’t approved by two-thirds of the House and Senate.

Treasury May Shrink Fed Borrowing by 98% as Debt Limit Bumps Into Ceiling - The Treasury Department will probably reduce its borrowing on behalf of the Federal Reserve as the Obama administration and Congress battle over raising the U.S. debt limit, according to Wrightson ICAP LLC.  Treasury officials may shrink the Supplementary Financing Program, currently at $200 billion, to as little as $5 billion while the government’s debt approaches its $14.29 trillion threshold, said Lou Crandall, chief economist at Wrightson, a Jersey City, New Jersey-based research firm that specializes in U.S. government finance. Treasury Secretary Timothy F. Geithner said Jan. 6 that lawmakers must raise the federal borrowing ceiling in the first quarter or risk a default on U.S. debt and a loss of access to credit markets.

Welcome to Paul Ryan’s House – and budget - Ryan’s plan, “A Roadmap for America’s Future,” was first released in January 2010 and outlines his vision for raising taxes on the middle class, privatizing Social Security, voucherizing Medicare, and allowing the national debt to explode in coming decades.. Embedded in the new rules passed at the beginning of the 112th Congress was a substantial empowerment of Ryan in his role as House Budget Committee Chairman. On Tuesday, House Republicans will vote to instruct Ryan to cut non-security discretionary spending back to fiscal year 2008 levels or less. The symbolic vote is meant to confer legitimacy; new House rules approved earlier this month gave Ryan “interim” authority to set committee allocations and revenue and spending levels for the remainder of FY2011 without any vote of approval. Using this power, Chairman Ryan is expected to slash the non-security discretionary budget for the remainder of this fiscal year by more than 20% relative to the president’s budget request (the Departments of Defense, Veterans Affairs, and Homeland Security will be exempted). How is that for transparent budgeting? No debate, no floor vote, no conference between the chambers – just a unilateral decision from one member of one chamber of Congress. For all intents and purposes, the new rules approved a numberless budget resolution that had not been written.  Senate appropriations bills exceeding the levels set by Ryan could be ruled out of order in the House, essentially allowing the House Budget Committee chairman to hold the government’s operating budget hostage to his preferences or face a government shutdown

SOTU - Paul Krugman -  So, I’ve read the text, and find it hard to extract any theme. We’re going to invest in the future — but we’re also going to freeze domestic spending. So mixed signals — and although there were no numbers, given the further assurance that the freeze won’t affect anything important, this has to mean that the investment plans are small change.  He did say the right things about tax cuts for the rich; on the other hand, that domestic spending freeze amounts to endorsing Republican arguments — plus it’s both trivial in fiscal terms and likely to inflict some real harm on government effectiveness. Considering the rumors a few weeks ago, which suggested a cave on Social Security, this wasn’t too bad. Obama said that we’re going to do something about Social Security, but unclear what. Overall, however, I have no idea what the vision here was. We care about the future! But we don’t want to spend!  Meh.

The Ryan Response - Paul Krugman - was as bad as you might expect. Lots of breast-beating about deficits; you’d never know that no leading Republican, Ryan very much included, has offered a serious proposal to cut the deficit. Some cooked statistics about federal spending. And then there was this curious assertion: Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn’t act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody.  Greece maybe fits that description. But if you’d read anything about the euro crisis — like this article — you’d know that Ireland was running a budget surplus on the eve of the crisis, and had quite low debt. Its problems now have nothing to do with fiscal irresponsibility in the past; they’re the consequence of weak financial regulation and the government’s too-generous bank bailout. Oh, and the UK: was it “forced to impose painful austerity”? Here’s the interest rate on 10-year UK bonds:

Their Own Private Europe, by Paul Krugman - Mr. Ryan made highly dubious assertions about employment, health care and more. But what caught my eye, when I read the transcript, was what he said about other countries: “Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn’t act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody.”  It’s a good story: Europeans dithered on deficits, and that led to crisis. Unfortunately, while that’s more or less true for Greece, it isn’t at all what happened either in Ireland or in Britain, whose experience actually refutes the current Republican narrative.  But then, American conservatives have long had their own private Europe of the imagination — a place of economic stagnation and terrible health care, a collapsing society groaning under the weight of Big Government. The fact that Europe isn’t actually like that — did you know that adults in their prime working years are more likely to be employed in Europe than they are in the United States? — hasn’t deterred them. So we shouldn’t be surprised by similar tall tales about European debt problems.  Let’s talk about what really happened in Ireland and Britain.

Where was Ryan's roadmap? - Paul Ryan was tapped to give the GOP's response to the State of the Union last night because his fiscal “Roadmap” -- which gets specific on the way he would save money by reducing the benefits paid out by Medicare and Social Security -- made him a star within the party. But as Ross Douthat notes, Ryan managed to get through the speech without mentioning, or even alluding to, his Roadmap. Nor did the words "Medicare" or "Social Security" pass his lips. It was like watching Colonel Sanders give a speech that never mentioned chicken.That was predictable, though. Ryan and the Republicans have an increasingly odd relationship: They need him as protection against the claim that they're a party of objections, not solutions. But his solution is much too radical for them, particularly now that they're in power. So they've embraced him and his reputation for tough choices and fiscal real talk, but not the plan that reputation is built on. And he's going along with it. But that's meant spending down a lot of the credibility the Roadmap gave him. As the Economist's Greg Ip lamented, it increasingly seems that as Ryan's "prominence in the party has risen, he has morphed from a principled fiscal hawk to an old-school ‘starve the beast’ Republican for whom lower taxes always trump deficit reduction."

Eliminate Energy, HUD and most of Education department - In his first major legislative proposal, U.S. Sen. Rand Paul has proposed cutting government spending by $500 billion in a year, including eliminating the Departments of Energy and Housing and Urban Development and most of the Department of Education. Paul, R-Ky., said the plan he rolled out Tuesday would cut almost 40 percent of the country's projected deficit by abolishing programs that he said are outside the government's constitutional scope. The Courier-Journal reports the proposal would make deep cuts to the budgets of the Food and Drug Administration, the Centers for Disease Control and Prevention, the National Park Service and the federal court system.

In the GOP’s budget, a surplus of spite - Despite what you might have heard, the coming battle on Capitol Hill is not really about "government spending" in the abstract. It's about two radically different visions of how money should be spent.  Republicans who feign attacks of the vapors and fainting spells over the big, scary deficit would be more convincing if they didn't begin with the insane premise that defense spending should be sacrosanct. Majority Leader Eric Cantor said Sunday that "every dollar should be on the table" - meaning that the Pentagon, which consumes nearly one-fourth of the entire federal budget, should be open to scrutiny as well. But this is a departure from last year's Republican campaign pledge to solve the nation's budget woes by cutting "discretionary" spending only, but still leaving intact the defense spending needed to "keep America strong." The Republican "Pledge to America" promised to cut "at least $100 billion in the first year alone," notwithstanding "exceptions for seniors, veterans and our troops." This was never a serious proposal, given that defense, plus entitlements and other mandatory spending, consume about four-fifths of the budget. But it was a nice round number that sounded good.

There Are Still No Fiscal Conservatives In The United States - Simon Johnson - Following President Obama’s State of the Union address, there is a great deal of discussion about whether we might now be edging our way towards fiscal responsibility. Unfortunately, most of our political elite – both left and right – is still living in a land of illusions.  They cannot even seriously discuss what would be required to bring our true fiscal position under control – remember that most of the recent damage to our collective balance sheet was done by big banks blowing themselves up.  No one who refuses to confront the power of those banks can be taken seriously as a fiscal conservative. Even those interest groups that prominently espouse fiscal responsibility refuse to confront this reality.  There are no fiscal conservatives in the United States; at this stage it is all pretence. Pretence is apparently all we are likely to get, as long as the money keeps rolling in (see Argentina for details).

Medicare and SS as Biggest Drivers of the Deficits? - Why does the NYT have to lump Medicare and Social Security together when everyone knows their stories are fundamentally different? According to the Congressional Budget Office, over the next quarter century annual spending on Social Security is projected to increase by an amount equal to 1.4 percentage points of GDP. This is considerably less than the increase in annual defense spending of 1.7 percentage points of GDP between 2001 and 2010. And, Social Security expenditures over this period are fully paid for by past and future Social Security taxes. In contrast, the cost of Medicare is projected to rise by 2.3 percentage points of GDP over this period, starting from a considerably lower base. The annual cost of Medicaid and other health care programs is projected to rise by 1.9 percentage points. As everyone recognizes, the story of long-term budget deficits is the story of our broken health care system. Why is this so hard to tell the public?

Create Jobs Not Deficits - Alice Rivlin - PRESIDENT OBAMA must make clear his commitment to two economic imperatives: accelerating job growth and controlling the federal deficit. He must persuade Americans that we do not have a choice between the two. We have to do both, and we have to get the timing right.  That means pushing hard for faster job creation, but also warning about looming federal deficits and their threat to prosperity. It means promising to work actively with Congress to control the rising debt.  Drastically cutting spending right now, as some Republicans advocate, would destroy jobs. But continued borrowing at projected rates will lead to a debt crisis, soaring interest rates and a plummeting dollar that could precipitate a deeper recession and destroy even more jobs. The president must get this danger across.

Tea party open to cutting military budget – Back home, tea partiers clamoring for the debt-ridden government to slash spending say nothing should be off limits. That demand is creating hard choices for the newest members of Congress, especially Republicans who owe their elections and solid House majority to the influential grass-roots movement. Cutting defense and canceling weapons could mean deep spending reductions and high marks from tea partiers as the nation wrestles with a $1.3 trillion deficit. Yet it also could jeopardize thousands of jobs when unemployment is running high.Proponents of the cuts could face criticism that they're trying to weaken national security in a post-Sept. 11 world. House Republican leaders specifically exempted defense, homeland security and veterans' programs from spending cuts in their party's "Pledge to America" campaign manifesto last fall. But the House's new majority leader, Rep. Eric Cantor, R-Va., has said defense programs could join others on the cutting board.

Pentagon Budget Cuts Split G.O.P. - To hear the Republican leadership tell it, the once-sacred Pentagon budget, protected by the party for generations, is suddenly on the table. But a closer look shows that even as Speaker John A. Boehner and Representative Eric Cantor, the House majority leader, insist on the need for military cuts, divisions have opened among Republicans about whether, and how much, to chop Pentagon spending that comes to more than a half trillion dollars a year. Those differences were on display Wednesday on Capitol Hill, where the traditional Republican who now leads the House Armed Services Committee, Representative Howard P. McKeon, fought back against proposed cuts in the Pentagon budget even as fledgling committee members supported by the Tea Party said that the nation’s debts amounted to a national security risk.

Searching for the Elusive $78 billion: Are the Defense "Cuts" Real - Ever since Secretary Gates announced ( his "cuts" in the defense budget - $78 billion over the next six years - people have been confused.  Last summer he said he was going to find more than $100 b. in savings over five years, through management "efficiencies in the DOD, but he was going to give the services back all that money for priority investments and forces.  When he announces his "cuts," did that mean the White House stepped in and took most of his savings away, leaving the services empty-handed? Not really, but welcome to the wonderful world of defense accounting.

Cut Waste or Invest? Try Both -President Obama wants to be sure that the United States keeps making the investments that help the economy grow. Congressional Republicans want the government to stop wasting so much money. Education — particularly higher education — offers a great opportunity for a compromise that would let both sides claim victory and, even more important, help the economy. Why? Education is the single best investment a society can make. High school became universal in the United States in the early 20th century, when other countries viewed universal schooling as wasteful, which goes a long way toward explaining our economy’s 20th-century success. Likewise, the slowing increase in the number of new college graduates in the 1980s and ’90s helped contribute to the slow economic growth of the last decade. So protecting higher education from across-the-board budget cuts, as Mr. Obama is urging, makes sense.

President, GOP lawmakers agree on austerity, but will it create jobs?, For the first time in his annual address to the American people, President Obama did not hail a newly passed "recovery act" or call for a "new jobs bill." Instead, he called for a five-year freeze in domestic spending, except for "investments" in education, infrastructure and research.  Republicans went much further, calling for an immediate and unprecedented reduction in non-defense programs that could take more than $100 billion out of the economy over the next few months. Both sides are casting their proposals as the best course for deepening the economic recovery and improving U.S. competitiveness abroad.  But with the unemployment rate still hovering at 9.4 percent, neither the president nor congressional Republicans are offering a clear strategy to create jobs in the short run, economists said, and that is the most critical challenge in the minds of voters heading into the 2012 presidential election. The one initiative likely to have immediate impact is the GOP's plan for sharp spending cuts, and some economists fear that could push the economy in the wrong direction.

GOP’s State of the Union Responder Would Set Higher Taxes on Middle-Class Than Millionaires -  House Budget Committee Chairman Paul Ryan (R-WI) was announced today as the Republican who will be responding to President Obama’s State of the Union address next week. Ryan has gained a (largely unearned) reputation as a fiscal hawk due to his radical Roadmap for America’s Future, under which the U.S. budget will eventually be balanced (after federal debt surpasses 100 percent of GDP), mostly via privatizing Social Security and Medicare. According to an analysis by Citizens for Tax Justice, the Roadmap would raise taxes on 90 percent of Americans, while dramatically lowering them for millionaires. In fact, a new analysis from the Economic Policy Institute found that Ryan’s plan would ultimately translate into middle-class tax rates being higher than those for millionaires:

New Voodoo Economics Crowding Out Clear Thinking - George H.W. Bush had it right in 1980 when he labeled the claim that cutting taxes would reduce the budget deficit “voodoo economic policy.”  That didn’t stop Senate Minority Leader Mitch McConnell (R-KY) from claiming last summer that the George W. Bush-era tax cuts caused no net revenue loss — a claim that even mainstream Republican economists have thoroughly debunked. Senator McConnell has now doubled down on his upside-down economics with his claim yesterday that “the excessive government spending of the last two years is one of the reasons the private sector is not doing any better than it is” and that reducing spending “is what we really need to do and do it quickly.”

The failure of voodoo economics in pictures - Rachel Maddow had to STAND UP on Real Time in order to get a word in edgewise to challenge one more repetition of the conservative myth that Reaganomics worked miracles with the American economy--that his tax cuts were "the greatest economic policy of the last 30 years".  (Repeated here by the Wall Street Journal's Steve Moore.)  She has to battle Moore's attempt to ignore what Reagan did to the deficit, and she has to refute the notion that Reagan produced a boom of economic growth for all, distinguishing between what happened for the top 1%, who really did experience happy times, and rest of the economy, for whom average wages barely budged. Maddow later got an assist from Reagan budget director David Stockman, who, after all, was there.  There was also a pretty cool discussion of gun control, with Stockman--tying into what Keynes said about gold--saying that guns were a barbarous relic and should be banned! But I wanted to just underscore the enormous magnitude of Steve Moore's pathological big lies, so I put together a few charts, and resurrected an oldie.  We simply can't let up on calling them on their endless lies. First the clip:

How Tax Rates Affect Investment and Consumption - A Look at the Data - This post looks at how changes in the top marginal tax rates affect peoples’ decisions on how much to consume and invest. Ask a libertarian or conservative economist and the answer is obvious – raising tax rates on high income individuals dissuades them from doing productive things – that is to say, it causes them to cut back on working and investing. In the interest of avoiding strawmen at all costs, many libertarians and conservatives might assume that a hike in the tax rates on such individuals can also cause them to cut back on consumption. After all, if tax rates are raised high enough, perhaps people won’t have enough left over to consume as much as they otherwise would. However, the reduction in voluntary activities that take effort (i.e., work, investment) should easily swamp the reduction in consumption, some amount of which is needed for simple survival. Put another way, as tax rates rise the ratio of investment to consumption should fall.  That right there is what’s known as a testable implication, and there’s data aplenty for that purpose.

Tax Rates v. Real GDP Growth Rates, a Scatter Plot - In this post, I will look at the relationship between top marginal income tax rates and real GDP growth using a scatter plot.  I am inordinately fond of scatter plots. The nice thing about a scatter plot is that you can present a lot of data in a fairly small space, so rather than just comparing tax rates at time period t against real GDP growth rates from period t to t+1, I can also show real GDP growth rates from period t to t+2, from t to t+3, and from t to t+4. (I.e., the scatter plot shows tax rates at any given time, and the growth rates over one year, two years, three years, and four years.)  The vertical axis is the GDP growth rate, the geometric average for multiple years. The horizontal average is the top marginal tax rate. The one year comparison is shown in dark blue, and each subsequent year is shown with a paler color and a smaller marker.

The Antidote to Deficit Hysteria – the Financial Transactions Tax - We’re headed into the deficit debate, and one attractive idea has been left on the sidelines – the notion of a financial transactions tax. Most of our stock transactions these days come out of a computer. They offer nothing of value to the public, enhance risk and feed a desire for more dangerous bets that could (and often do) cause financial crashes. As a society, even if we had no need for more revenue, we would do well to limit this growing financialization in the economy, and that goes hand-in-hand with limiting stock transactions. And one great way to use market forces to reach that goal is through a small tax on each transaction. CNN Money explains. The Center for Economic and Policy Research, a left leaning group, said Monday that a tax on trades of stocks, options, futures and other financial instruments could generate $150 billion this year, or over 1% of U.S. gross domestic product. While the idea of taxing financial transactions is not new, it has gained some traction overseas in the wake of the global financial crisis. The CEPR study looks at a 0.25% tax on stock trades in the United Kingdom and estimates that an equivalent tax in the United States could raise $40 billion a year for the Treasury.

President Obama Urges Tax Reform in State of the Union - In his State of the Union address last night, President Obama called both for reforming the corporate and individual income tax codes. On the corporate income tax: But to help our companies compete, we also have to knock down barriers that stand in the way of their success. For example, over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years –- without adding to our deficit. It can be done.

So if We Win the Future, Who Loses? - The trouble with the State of the Union address is that it is a good 20-minute speech that drags on for about an hour.  Whatever is useful about it is drowned out by the rest, which is typically a poor combination for cheerleading and inconsistent policy suggestions.  What did I like about the speech?

  1. I would rather spend money on green energy than oil.  But green to me does not include clean coal (which doesn't really exist), biofuels (which are presently a terrible waste of fertile soil), natural gas (hello?), or nuclear (until we dispose of all the waste).  Let's harness the sun, water, and wind.
  2. I would rather have the federal government involved in education through a Race to the Top than No Child Left Behind. 
  3. I have been a consistent voice for more and more intentional infrastructure spending, regarding it as one of the few things worth funding through debt.  There was some of this in the speech, but it is still too little.
  4. I think ROTC should be welcomed on college campuses, particularly now that the ostensible reason for its exclusion (Don't Ask, Don't Tell) has been eliminated.

SOTU -  A couple of thoughts on the "State of the Union"- As an economist, I don't find the rhetoric of "competitiveness" very appealing (see Paul Krugman's classic on this).  International trade is mutually beneficial* - not a zero sum struggle to beat other countries to the "good jobs."  From an economist's point of view, the rapid growth in China is a great story about an dramatic increase in human welfare.  However, while competitiveness rhetoric can be used to justify bad policies like subsidies and tariffs, Obama is employing it to promote policies like investment in infrastructure, basic research and education that are beneficial regardless of what is going on in other countries.  Though it is a mistake to feel threatened by the success of other countries, Obama seems to be exploiting this sentiment to embarrass us into getting our act together. Unfortunately, President Obama appears to have conceded the rhetorical war on two important fronts: global warming and the budget deficit. On global warming, which is the most important policy issue we face, the President chose not to even mention it directly.  So much for having "adult conversations" in our politics... 

One Reaction to the Obama State of the Union Address That Made Sense - It amazes me that the discussion on change centers on 'improving competitiveness' when the crisis was caused by a massive financial fraud and political and regulatory failure that goes largely unresolved and unrepaired, sucking the life out of the real economy and spreading corruption of thought and action. Slogans and code words are the substance of the public policy discussion in the US and Europe, and I think with the intent to deceive, a propaganda campaign. The mainstream media in the States is owned by a handful of powerful corporations. But fewer and fewer turn to the mainstream media anymore. "In addition, any economist will tell you that when the free market fails a black market emerges. The blogs are the black market of information."

Republicans’ 2010 election triumph will fuel civilization’s demise, Chomsky says - The Republican Party's triumph in the 2010 congressional elections, coupled with the rapid depletion of the earth's natural resources, signaled the impending collapse of human civilization, according to a world-renowned scholar known for his left-wing politics.“You could almost interpret [the election] as a kind of a death knell for the species," Noam Chomsky, professor emeritus of linguistics at the Massachusetts Institute of Technology, said in a recent interview. But he's not the only one worried; the US business press is, too. Chomsky continued, "There was an article in Bloomberg BusinessWeek, you know – not a radical rag exactly. They’re running through the new Republicans coming to Congress, and they’re worried about them.” The cause for concern is that these newly-elected conservative members that now comprise the majority in Congress believe that global climate change is not the result of human industrial activities.

Jeff Immelt’s GE: The Too Biggest To Fail - In my first post on how stupid it was for Obama to pick Jeff Immelt for his election season commission to appear focused on jobs, I looked mostly at how much GE has been outsourcing manufacturing and technology. Though I mentioned GE’s status as another TBTF finance company, I didn’t explain that in depth. Mike Konczal has a post in which he corrects Joe Klein’s misperception that GE is not another big finance company, and in the process shows how GE was one of the biggest beneficiaries of the government’s bailout of shadow banking in 2008-09.In it, he shows how GE received the second biggest FDIC debt guarantees of any of the big finance firms, after only Citi. He borrows the graphic at the left from a Raj Date paper that also explains how GE leveraged (heh!) its teeny FDIC insured deposits to get a big debt guarantee.

Is a Multinational C.E.O. the Best Jobs Czar? - In the wake of Jeffrey Immelt’s ascent to the chairmanship of President Obama’s jobs council, some commentators have questioned whether the leader of General Electric, a company that has sharply reduced its United States payrolls over the years, is the best person to be orchestrating a jobs revival. Among executives of multinational companies, Mr. Immelt is hardly alone in having presided over a major reduction in domestic jobs amid a major increase in foreign jobs. Witness the following chart, which shows changes in domestic and foreign employment at American multinational companies from 1998 through 2008 (that is, the decade leading up to the financial crisis): The chart is taken from testimony by Martin Sullivan, an economist and contributing editor with Tax Analysts, in a discussion of how international tax rules favor foreign, rather than domestic, job creation, especially by United States multinationals.

Senate rules reform won't happen - A reasonable and popular measure with the support of a majority of senators has quietly died for no good reason, and the Senate's very first official legislative "day" of the new Congress has not even finished yet. (Did you know that the Senate's been in the middle of this one legislative day since Jan. 5? It's true!) This time, the victim was Senate rules reform, because an attempt to deal with the unintended consequences of the previous stab at rules reform was deemed to be a violation of the rights of the minority as not at all enshrined in the Constitution, which doesn't mention filibusters. It is actually amazing how quickly this collapsed. One month ago every single Senate Democrat signed a letter in support of reforms of the cloture rule. Tom Udall's proposal would not have even killed the filibuster; it would've just forced 40 members to stay on the floor to sustain it, instead of one guy declaring filibuster and everyone pacing for 30 hours.

We Have A (Fascist) Command Economy  - I mean that in a precise sense. The economic definition of fascism, which is roughly synonymous with corporatism, is a command economy which maintains private rent extractions. (This is separate from other aspects of classical fascism – political authoritarianism, ideological obscurantism, censorship, destruction of civil liberties, tribalism, racism, military aggression. But as we’re seeing, most of these definitely follow from the economic aspect, and all are likely to follow in the end.) . Given that necessary part of the definition, there can be two manifestations of this command economy. It may be corporatized toward an ideological goal, as in the case of Nazism. In this case the rentiers are kept because they’re judged to be the most effective vehicle to achieve certain practical goals, e.g. fast rearmament in Hitler’s case. Or, the corporatization may be done for the sake of maximizing the extractions themselves. The already classic case is modern neoliberalism. In this case, the rentiers prefer to dispense with the full fascist phenomenon for as long as they can, since classical fascism generally means the thugs take over the operation, while the “legitimate businessmen” become the junior partners. Today’s corporatists want to maintain control of their thugs, and anyway there’s no need to go all the way to full fascism in the absence of any real leftist movement

The Empire And The Boiling Frog - As I was writing The Deluded And The Insane, I was reminded of the Boiling Frog. Paul Krugman referred to the famous amphibian on July 12, 2009—Is America on its way to becoming a boiled frog? I’m referring, of course, to the proverbial frog that, placed in a pot of cold water that is gradually heated, never realizes the danger it’s in and is boiled alive.  The hypothetical boiled frog is a useful metaphor for a very real problem: the difficulty of responding to disasters that creep up on you a bit at a time. And creeping disasters are what we mostly face these days... It doesn't matter that real frogs don't sit in the gradually heated water until they are boiled alive. What matters is that human beings do. That's what makes it useful as a metaphor.  The American Empire has been in decline for almost 30 years now. Yet it is only in the last few years—specifically, since the financial meltdown in October, 2008—that a few Americans have figured out that the United States is not what it used to be. Therein lies the truth of the boiling frog story as it applies to us.

Warren nimble in building Consumer Financial Protection Bureau…The pieces are quietly falling into place to create a Consumer Financial Protection Bureau, designed to prevent the sorts of renegade lending practices that crippled the housing market and nearly brought down the U.S. financial system.  The idea for the bureau was the brainchild of Harvard University law professor Elizabeth Warren, who was named a special adviser to Treasury Secretary Timothy Geithner last year to help build the new agency from scratch. The agency was created as part of last year's Dodd-Frank act, the broadest revamp of financial regulation since the Great Depression. The new bureau, which consolidates powers that were spread among several bank and consumer regulators, must be up and running by July.  Warren has shown herself to be a shrewd tactician, bringing aboard big names and neutralizing opposition to the panel from Republicans who'd vowed to defund and defang it.

"Major Swap Participants" — Taking Apart the CFTC's Proposed Rule - One of the most important issues in the derivatives title of Dodd-Frank is who qualifies as a “major swap participant” (MSP). These are supposed to be entities that aren’t swap dealers, but are still big enough players in the swap markets that their failure could cause serious problems. In other words, the major buy-side players (AIG, Blackrock, etc.). The reason this is so important is that MSPs are subject to much more stringent regulation by the CFTC, including — significantly — capital and margin requirements. The CFTC has now published a proposed rule (pdf) defining “major swap participant,” and it’s safe to say that I’m not a fan. It’s a mess: not well drafted, and way too easy to evade (i.e., underinclusive). Or, I should say, it’s probably too easy to evade — it’s not entirely clear, due to the serious drafting issues. I know this isn’t a very sexy issue, but this is the important stuff, so bear with me. Dodd-Frank creates three tests for determining whether an entity qualifies as a MSP, though only the first two are important for our purposes. The first test states that a MSP is anyone who isn’t a swap dealer and who: (i) “maintains a substantial position in swaps for any of the major swap categories,” excluding “positions held for hedging or mitigating commercial risk” and certain employee benefit plans. The second test states that a MSP is anyone who isn’t a swap dealer and:(ii) “whose outstanding swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets.”

Number of the Week: Banks Should Hold More Capital - 52%:

Optimal bank capital-to-assets ratio, according to a new study. Not long ago, U.S. Treasury Secretary Timothy Geithner summed up what is required to protect the global financial system from another disaster in three words: “Capital, capital, capital.” Contrary to bankers’ protestations, a growing body of research suggests that the world would be much better off if banks had a lot more of it. Bankers typically present capital requirements as a sort of zero-sum game, or worse. If banks have more capital — that is, finance their activities with more of their own shareholders’ money, or equity, as opposed to debt — they’ll be less likely to go bankrupt and exacerbate crises. But, the logic goes, capital is expensive: If they can’t use as much cheap, borrowed money, banks will have to charge more for loans, an outcome that could hobble the economy and make us all poorer. That logic, though, contradicts an insight that financial economists had more than 50 years ago: Any firm’s financing costs shouldn’t depend on the mix of debt and equity it chooses.

Bill Black: Why our Fundamental Approach to Banking Regulation is Inherently Unsound - Our current approach to banking regulation exposes us to recurrent, intensifying financial crises. The good news is that because we reached an all time low in Basel II, Basel III almost has to be an improvement. The bad news is that Basel III has not reexamined the fundamental assumptions underlying the Basel process. As a result, Basel III will be a variant on the common ineffective theme of banking regulation designed by economists and the industry. The Basel process is built upon three flawed assumptions.

1. Capital requirements are the ideal form of banking regulation.
2. Capital requirements can be set without establishing sound accounting.
3. Accounting control fraud is not a serious concern.

Davos: Two Worlds, Ready Or Not - Simon Johnson - On the fringes of the World Economic Forum meeting in Davos this week, there was plenty of substantive discussion – including about the dangers posed by our “too big to fail”/”too big to save” banks, the consequences of widening inequality (reinforced by persistent unemployment in some countries), and why the jobs picture in the U.S. looks so bad. But in the core keynote events and more generally around any kind of CEO-related interaction, such themes completely failed to resonate.  There is, of course, variation in views across CEOs and the people work intellectual agendas on their behalf, but still the mood among this group was uniformly positive – it was hard to detect any note of serious concern. Many of the people who control the world’s largest corporations are quite comfortable with the status quo post-financial crisis.  This makes sense for them – and poses a major problem for the rest of us.The thinking here is fairly obvious.  The CEOs who provide the bedrock of financial support for Davos have mostly done well in the past few years.  For the nonfinancial sector, there was a major scare in 2008-09; the disruption of credit was a big shock and dire consequences were feared.  And for leaders of the financial sector this was more than an awkward moment – they stood accused, including by fellow CEOs at Davos in previous years, of incompetence, greed, and excessively capturing the state.

MHLAMF in Davos - Krugman - From the FT: Governments around the world must stop banker-bashing and create the right environment for lenders to support economic growth, some of the world’s most powerful bankers will tell finance ministers on Saturday. So “Ma! He’s looking at me funny!” is now at the core of the financial sector’s complaints. And the world’s top bankers feel that after bringing on a gigantic crisis that has left millions unemployed, being bailed out, and receiving huge paychecks all the while, they now have the right to demand that people stop saying critical things about them. Oh, and substantively, they want interest rates to rise despite the persistence of high unemployment.

Tavakoli: No Need to Qualify - This IS a Massive Cover-up of a Control Fraud: Hard to top this for straight talk and right to the heart of the matter from someone who knows the financial markets, and especially derivatives, better than most. From this afternoon's mailbag (with permission): 'Loved your commentary: 'The American government is acting as if it is involved in a massive cover-up of a control fraud and corruption that could perhaps be the worst in its history.' There's no need to qualify. The government IS involved in a massive cover-up of control fraud and corruption, and it is the worst in U.S. history. We let the servants quietly steal from the wine cellar and larder (for more than a century), and after discovering that no one would check their behavior—in fact, we handed the keys to our consumables to all the servants and let them bribe the overseers—they have watered down all the wine, and they backed up the truck to the larder and replaced most of the food with jars of peanut butter. The bad guys have won, it's almost too late to find our food and wine (5 year statute of limitations for securities fraud). As you rightly point out, those who speak up like William K. Black are marginalized.

Roger Ehrenberg’s Prescription for Robbing a Bank (the TBTF Variety) -- Yves Smith - One of the continued frustrations of the post-crisis period is the lack of discussion of looting, which as described in a seminal paper by George Akerlof and Paul Romer, is when executives find it more profitable to gamble on bankruptcy, as in lever up their companies, pull out too much in cash (usually with the help of overly flattering accounting) and leave failed businesses in their wake. Akerlof and Romer noted that businesses with explicit or implicit guarantees were particularly well suited to this sort of extractive behavior, and they argued the savings and loan crisis was a prototypical example. In ECONNED, we argued that the producers and management of major capital markets players were engaged in a looting 2.0 in the runup to the crisis. Roger Ehrenberg, who had a long career in derivatives and now runs an early stage venture firm. He describes how easy it is to, as he puts it, “rob a bank” or loot. His formula:

State Banks, or, If You Can’t Regulate TBTF Banks, Why Not Compete Instead? - Once in a while, you’ll see stories pop up about state governments looking into setting up a state bank, Washington being the latest sighting, along the lines of the only state bank in the US, the Bank of North Dakota. And there’s good reason. The Bank of North Dakota has an enviable track record, having remained profitable during the credit crisis. Moreover, in the ten years prior, the bank returned roughly half its profits, or roughly a third of a billion dollars, to the state government. That is a substantial amount in a state with only 600,000 people. The bank was also able to pay a special dividend to the state the last time it was on the verge of having a budget deficit, during the dot-bomb era, thus keeping state finances in the black. But the good financial performance is simply an important side benefit. The bank’s real raison d’etre is to assist the local economy. And it has done so for a very long time. It was established in 1919 as part of a multi-pronged effort by farmers to wield more power against entrenched interests in the East.  And the most important potential use of this type of bank in our era could again be to level the playing field with powerful interests, in this case, the TBTF banks.

Failure to end "too big to fail" could trigger next financial crisis: SIGTARP - Institutions and their leaders that survived the financial crisis through government bailouts are encouraged to pursue the same sort of behavior that could trigger the next financial crisis, the Special Inspector General for the Troubled Asset Relief Program said in a report due to Congress Wednesday. But even if regulators can successfully implement strong enough provisions under the Dodd-Frank Act to thwart companies growing "too big to fail," the ultimate success of the legislation will ultimately hinge on market perception, according to the report. "As long as the relevant actors (executives, rating agencies, creditors and counterparties) believe there will be a bailout, the problems of “too big to fail” will almost certainly persist," SIGTARP said. TARP, which was created under the Bush administration in 2008, was thought to cost taxpayers as much as $341 billion in August 2009, according to the estimates from the Office of Management and Budget.

The Making of a 'Liar's Loan,' With Help From the Loan Officer - Liar's loans were mortgages that didn't require the wannabe borrower to prove she could repay the loan. They came in various flavors, allowing the borrower to state without proving her income, or assets, or both. These loans violated all the basic principles of underwriting, the process banks abandoned during the housing bubble. And it's no wonder most are ending in foreclosure. And as a fax-email exchange first posted by the blog Foreclosure Fraud shows, the fraudulent nature of these loans was not only no secret at the banks, but bank staff steered applicants into filling out mortgage applications with false information. While I realize what follows is a single exchange, keep in mind when reading it that: It involves a 'Senior Loan Officer' -- how rogue can the behavior be? The tone and details indicate this was a normal activity for at least this employee. While it involves a JPMorgan Chase (JPM) loan, it cannot be true that Chase was the only mortgage lender behaving this way. Nothing that's come out to date about housing-bubble loans suggests Chase was unusually irresponsible. To the extent a big mortgage lender has gotten that rep, it's been Countrywide, which Bank of America (BAC) swallowed. The borrower was sent documents and apparently was asked to sign them. Rather than sign them, the borrower asked questions. When reading the questions, think about the idea that the borrower was asked to sign these papers. Finally, the borrower seems pretty sophisticated. Imagine how the process would work with a less sophisticated one. would they ask any of the questions?

Vampire Squid? Big Government? U.S. crisis reports murky (Reuters) - Three competing, politically charged tales of the financial crisis will emerge this week when a U.S. congressional panel finally concludes its 20-month investigation. The Financial Crisis Inquiry Commission has failed to produce a consensus explanation of the 2007-2009 banking debacle, as it was asked to do in May 2009. Instead, the 10-member panel has fractured along the same ideological fault lines that divide much of political Washington. Three reports will be issued by commission members on Thursday, each conforming with a familiar political slant. The divisiveness that split the commission is also in evidence in the rollout of financial reforms that followed the crisis. The setting of position limits for commodity markets has been delayed, for instance, and Republicans are threatening to withhold funding for agencies implementing the reforms.

Goldman Sachs Got Billions From AIG For Its Own Account, Crisis Panel Finds  - Goldman Sachs collected $2.9 billion from the American International Group as payout on a speculative trade it placed for the benefit of its own account, receiving the bulk of those funds after AIG received an enormous taxpayer rescue, according to the final report of an investigative panel appointed by Congress. The fact that a significant slice of the proceeds secured by Goldman through the AIG bailout landed in its own account--as opposed to those of its clients or business partners-- has not been previously disclosed. These details about the workings of the controversial AIG bailout, which eventually swelled to $182 billion, are among the more eye-catching revelations in the report to be released Thursday by the bipartisan Financial Crisis Inquiry Commission.  The details underscore the degree to which Goldman--the most profitable securities firm in Wall Street history--benefited directly from the massive emergency bailout of the nation's financial system, a deal crafted on the watch of then-Treasury Secretary Henry Paulson, who had previously headed the bank.

Quelle Surprise! Goldman Profited From AIG Bailout Via Abacus Trades (You Read It Here First) - - Yves Smith - Shahien Narisipour at Huffington Post revealed that the FCIC report, due to be released officially tomorrow, shows that contrary to its pious assertions to the contrary, Goldman received funds for its own account from the AIG bailout, to the tune of $2.9 billion. Why is this significant? Because Goldman maintained that the monies it received from the rescue were for customer trades, not for its own account.  And while this may seem to be news, it isn’t, except for putting a firm dollar value on what Goldman received for its own account. We posted on Goldman’s AIG exposures both as principal and agent on February 7, 2010 , and specifically flagged that the Abacus trades that Goldman insured with AIG were principal positions, not client trades. We caught some flack for it by the time from various commentators who seemed more persuaded by Goldman’s PR that the extensive work done by Tom Adams, which we presented in a series of posts in early 2010 (see here, here and here for some examples).

Zombie IPO: Is American International Group the “Blood Doll” of Wall Street? - In this issue of The Institutional Risk Analyst, we return to the zombie dance party to check in on the queen of the prom, American International Group ("AIG"). First a question: Vampires are all the rage now in popular culture, so allow us to offer a macabre metaphor for AIG. Do you know what a "blood doll" is? A girl who craves to be the regular victim of or willing donor to a vampire. But hold that thought.  The Treasury just announced an offering to sell part of its stake in AIG, the troubled insurance giant that has been propped up at public expense since the Fed under Geithner bailed out Goldman Sachs,  Deutsche Bank and a number of other OTC derivatives dealers who were habitually sucking the insurers blood. News reports indicate that AIG chose BAC,�DB, GS, and JPM to manage the sale of the government's 92 percent stake in the insurer -- many of the same firms that caused AIG's failure.

AIG `Shouldn't Exist,' Ex-Chairman Says, Urging Breakup - Harvey Golub, the former chairman of American International Group Inc., said the bailed-out U.S. insurer should be broken up eventually because the firm’s two main businesses have “no strategic fit between them.”  “Longer-term, AIG shouldn’t exist,” Golub said in an interview airing today on Bloomberg Television’s “In the Loop with Betty Liu.” The New York-based company should be split, making independent firms of its Chartis property-casualty unit and SunAmerica Financial Group life insurer, Golub said. Chief Executive Officer Robert Benmosche is reshaping AIG, once the world’s biggest insurer, to repay a $182.3 billion government rescue. He’s enticing investors to purchase the U.S. Treasury Department’s 92 percent stake by presenting the firm as a global property-casualty carrier and a U.S. seller of life insurance. That strategy probably won’t last, Golub said.

JP Morgan Sold Investors MBS Covered By "SACK OF SHIT" Loans: A Goldman-AIG Redux - Today's mortgage fraud stunner comes from Bloomberg's Jody Shenn who reports on the ongoing lawsuit between Ambac and former Bear Stearns mortgage unit EMC, now part of JP Morgan. In what can only be classified as fraud-cum-double dipping-cum-AIG/Goldman, "JPMorgan Chase & Co. demanded that a lender repurchase bad mortgages even as it resisted calls to buy back the loans from bonds created by Bear Stearns. “That would be pretty bad” if true, said Joshua Rosner, an analyst at New York-based research firm Graham Fisher & Co. He said such allegations show why “investors and consumers have a right to be distrustful of the banks’ statements." The bottom line is that JPM, which has so far been able to escape largely unscathed from the fraudclosure scandal, is about to take front and center. The reason: the very first line of the just released Exhibit 1 to the Ambac lawsuit: "In mid-2006, Bear Stearns induced investors to purchase, and Ambac as a financial guarantor to insure, securities that were backed by a pool of mortgage loans that - in the words of the Bear Stearns deal manager - was a "SACK OF SHIT." But the stunner, and nothing short of a full-blown scandal if proven true, is that Bear Stearns (aka JPM) after funneling misrepresented loans with Ambac's insurance, "implemented a trading strategy to profit from Ambac’s potential demise by “shorting” banks with large exposure to Ambac-insured securities." This needs its own congressional hearing right now, followed by a few wristslaps.

E-mails Suggest Bear Stearns Cheated Clients Out of Billions - Former Bear Stearns mortgage executives who now run mortgage divisions of Goldman Sachs, Bank of America, and Ally Financial have been accused of cheating and defrauding investors through the mortgage securities they created and sold while at Bear. According to e-mails and internal audits, JPMorgan had known about this fraud since the spring of 2008, but hid it from the public eye through legal maneuvering. Last week a lawsuit filed in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and JPMorgan was unsealed. The lawsuit's supporting e-mails, going back as far as 2005, highlight Bear traders telling their superiors they were selling investors like Ambac a "sack of shit."News of internal whistleblowers coming forward from Bear's mortgage servicing division, EMC, was first reported by The Atlantic in May of last year. Ex-EMC analysts admitted they were sometimes told to falsify loan-level performance data provided to the ratings agencies who blessed Bear's billion-dollar deals. But according to depositions and documents in the Ambac lawsuit, Bear's misdeeds went even deeper.

Ambac Accues JP Morgan of Fraud in Ongoing Mortgage Suit -  One of the big reasons there have been so few fraud charges leveled against what looks like clear and widespread banking industry is that under the law, “fraud” is pretty difficult to prove. Needless to say, that puts commentators in a bit of a bind, because they can be depicted as being hysterical if they use the “f” words, since behavior that is often fraud by any common sense standard may be hard or impossible to prove in court. The hurdle in litigation and prosecution is proving intent. Basically, the party who is being accused has to not only have done something bad, he has to have been demonstrably aware that he was up to no good. Thus po-faced claims of “I had no idea this was improper, my accountants/lawyers knew about it and didn’t say anything” or “everyone in the industry was doing it, so I had not reason to think this was irregular” is a “get out of jail free” card. Similarly, even if lower level employees knew that their company was up to stuff that stank, if the decision-makers can plausibly claim ignorance, again they can probably get away with it.  So it is gratifying in a perverse way to see a case in which the perp not only looks to have engaged in chicanery, but the facts make it pretty hard for him to say he didn’t know he was pulling a fast one. And even more fun, it involves JP Morgan, which has somehow managed to create the impression that it was better than all the other TARP banks, when on the mortgage front, there is plenty evidence to suggest that all the major banks have been up to their eyeballs in bad practices.

Banks Accepted And Bundled ‘Deficient’ Loans — Big banks accepted substandard loans to package into securities during the buildup to the financial crisis, even though a due-diligence service they hired to examine the loans rejected many of them as “deficient,” according to a crisis fact-finding panel. The Financial Crisis Inquiry Commission on Thursday released a widely anticipated report on the causes of the 2008 economic meltdown. The panel focused a section of its study on a sample of 911,039 mortgages analyzed by Clayton Holdings — a provider of due-diligence services for large financial institutions based in Connecticut — during the 18 months ending June 30, 2007. Read about the broader findings of the crisis panel. The panel’s study found that Clayton rejected 28% of the loans in the sample as “deficient” for failing to meet originator underwriting standards, yet nine big banks accepted, on average, 11% of those loans anyway.

Financial Crisis Was Avoidable, Inquiry Concludes - The commission’s report finds fault with two Fed chairmen: Alan Greenspan, a skeptic of regulation who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but then played a crucial role in the response to it.  The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a federal inquiry.  The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

Financial Crisis Was Avoidable, Inquiry Concludes - The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a federal inquiry.  The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.  “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions, which were read by The New York Times. “If we accept this notion, it will happen again.”  While the panel, the Financial Crisis Inquiry Commission, accuses several financial institutions of greed, ineptitude or both, some of its gravest conclusions concern government failings, with embarrassing implications for both parties. But the panel was itself divided along partisan lines, which could blunt the impact of its findings.

Government report blames regulators and financial institutions for economic crisis - The official U.S. government report on what caused the financial crisis casts blame on Goldman Sachs for fueling the subprime mortgage bubble, Merrill Lynch for not telling investors about the true state of its financial condition and the Federal Reserve for failing to stop dangerous lending practices.  The report released Thursday by the Financial Crisis Inquiry Commission, a congressionally appointed panel that has spent the past 18 months investigating the causes of the worst financial calamity in generations, spares virtually no one in assigning culpability.  Released to the public online and in the form of a 633-page paperback, the report does not contain any major revelation that would fundamentally alter popular perceptions of the crisis. But it weaves together many different strains of information, garnered with subpoena powers that allowed the commission to collect testimony from dozens of insiders and review the internal documents of federal regulators and banks.  "This report exposes facts, identifies responsibility, unravels myths and helps us understand how this crisis could have been avoided. It is our best attempt to record history, not to rewrite it, nor allow it to be rewritten,"

Financial Crisis Commission Finds Cause For Prosecution Of Wall Street - The bipartisan panel appointed by Congress to investigate the financial crisis has concluded that several financial industry figures appear to have broken the law and has referred multiple cases to state or federal authorities for potential prosecution, according to two sources directly involved in the deliberations. The sources, who spoke on condition they not be named, declined to identify the people implicated or the names of their institutions. But they characterized the panel's decision to make referrals to prosecutors as a significant escalation in the government's response to the financial crisis.

Financial Crisis Inquiry Commission Makes Criminal Prosecution Referrals - - Yves Smith - Given that the Financial Crisis Inquiry Commission has found what it sees as ground for criminal prosecution, apparently extending to several yet to be named Wall Street executives, what are we to make of the exodus of its Republican members? That they prefer rule by banksters to rule of law? I must confess I had little hope for the FCIC having any impact. The unduly short time allotted to it, its composition (not enough representation of individuals at the commissioner level with meaningful expertise) and its restrictions on issuing subpoenas (which effectively required sign off from members of both parties) seemed intended to hamstring it. The fact that they’ve gotten this far, and may make more waves with the issuance of their report, which is due out later this week, is an unexpected positive development.  Shahien Narsiripour of the Huffington Post broke this story but juicy details appear thin at this juncture:

Crisis May Seem Criminal, but Try Making a Case - The findings of the Financial Crisis Inquiry Commission have pretty much wiped away the already dwindling chances that federal prosecutors will try to hold a prominent Wall Street executive criminally responsible for the crisis. Both the majority and dissenting reports describe a wide range of serious problems in the financial system that led to the downfall of firms like Lehman Brothers and the American International Group, setting off a deep recession when the credit markets seized up in 2008.  The commission’s various conclusions provide a plausible defense for almost any executive who might be accused of securities fraud or misleading investors: it was all the fault of uncontrollable market forces and regulatory laxity.

FCIC Insiders Say Report Gives Wall Street a Free Pass, Simply Sought to Validate Conventional Wisdom About Crisis - - Yves Smith - From the very outset, the Financial Crisis Inquiry Commission was set up to fail. Its leadership, particularly its chairman, Phil Angelides, was seen as insufficiently experienced in sophisticated finance. The timetable was unrealistic for a thorough investigation of a crisis this complex, let alone one international in scope. Its budget and staffing were too small. The investigations were further hampered by the requirement that subpoenas have bi-partisan approval along with Its decision to hold hearings with high profile individuals, including top Wall Street executives, before much in the way of lower-level investigation had been completed. The usual way to get meaningful disclosure from a top executive is to confront him with hard-to-defend material or actions; interrogations under bright lights, while a fun bit of theater, generally yield little in the absence of adequate prep. So with expectations for the FCIC low, recent reports that the panel urged various prosecutors to launch criminal probes were a hopeful sign that the commission might nevertheless come out with some important findings. But correspondence from insiders in the last few days suggests otherwise.

FCIC Insider: “I Can’t Believe They Suborned Brooksley Born” - Yves Smith - The Financial Crisis Inquiry Commission released its report yesterday and went into PR overdrive. Journalists and the public are still digesting the weighty document, and various tidbits, like the report that Goldman did indeed profit from the AIG rescue, are touted as news when the basic facts were already in the public domain. What is troubling about the report is the manner in which it hews to conventional wisdom. Its ten major findings are hardly controversial, yet they are still insufficient to explain why the financial system seized up and appeared close to failure. And telling a familiar-sounding story assures that the status quo will remain unchallenged, and serves to validate the inadequate reforms now underway. After all, they are premised on the very same superficial beliefs. I participated in a blogger conference call with FCIC commissioners Phil Angelides and Brooksley Born. I’m clearly not cut out for public life. It was disconcerting to hear them thumping their talking points. For instance, Angelides began by saying that the purpose of the report was to explain why we faced the choice in 2008 of spending billions of dollars to bail out the financial system or let it fail.

The FCIC, in Lockstep with the Officialdom, Refuses to Use the “C” Word - Yves Smith - The Financial Crisis Inquiry Commission report increasingly looks like a whitewash. Even though the commission has made referrals for criminal prosecution, you’d never know that reading its end product. The references to “fraud” and “crime” are sparing, and ex mention of the SEC’s fraud investigation of Goldman, consist almost entirely of mortgage fraud, which is the FBI’s notion of “fraud for profit” or “fraud for housing”, meaning borrower fraud. The book also acknowledges the fraudulent lending by firms that were prosecuted like Ameriquest. In other words, the notion that the TBTF firms might have engaged in less than savory activity is remarkably absent from the report.  The FCIC has also been unduly close-lipped about their criminal referrals, refusing to say how many they made or giving a high-level description of the type of activities they encouraged prosecutors to investigate. By contrast, the Valukas report on the Lehman bankruptcy discussed in some detail whether it thought civil or criminal charges could be brought against Lehman CEO Richard Fuld and chief financial officers chiefs Chris O’Meara, Erin Callan and Ian I Lowitt, and accounting firm Ernst & Young. If a report prepared in a private sector action can discuss liability and name names, why is the public not entitled to at least some general disclosure on possible criminal actions coming out of a taxpayer funded effort? Or is it that the referrals were merely to burnish the image of the report, and are expected to die a speedy death?

The FCIC archive: A nearly complete listing - Unbelievably, or not, there's no complete listing or inventory of all the source material in the FCIC's Resource Library. They make you go through their lousy search tool for onesies and twosies. So, to find as many documents as possible, I searched on the word "a," which is a very common word in the English language, with a date range ending in January 2011, then saved out the HTML pages from the search results. Then I processed the hits into the list you see below, in search result order. Izvestia:The commission also released 1,200 supporting documents on its Web site, and it plans to post another 700 documents and about 300 transcripts of audio interviews before it formally terminates its work on Feb. 13.  Here are links to 1147 [I had hoped to put these documents online -- in fact, to use them to auto-generate a data-driven and interlinked Drupal site -- so that readers could search the FCIC resources with better tools than those supplied by the FCIC, add tags and comments, and analyze the material in a community setting. But sadly, see below. There are still ways to make this list easier to use, though; if you're interested or have thoughts on that, again, mail me.]

New York Times’ Joe Nocera Blames Crisis on “Mania”, Meaning Victims - Yves Smith - I often enjoy Joe Nocera’s take on Wall Street, but like some other well known financial writers, he has become overly close to his subjects. No where is this more evident than in a stunning little aside in an otherwise not bad piece on the Financial Crisis Inquiry Commision’s report, which points out that it is long on potentially helpful detail, short on analysis. Here is the offending section:But I wonder. Had there been a Dutch Tulip Inquiry Commission nearly four centuries ago, it would no doubt have found tulip salesmen who fraudulently persuaded people to borrow money they could never pay back to buy tulips. It would have criticized the regulators who looked the other way at the sleazy practices of tulip growers. It would have found speculators trying to corner the tulip market. But centuries later, we all understand that the roots of tulipmania were less the actions of particular Dutchmen than the fact that the entire society was suffering under the delusion that tulip prices could only go up. That’s what bubbles are: they’re examples of mass delusions.Was it really any different this time? In truth, it wasn’t. To have so many people acting so foolishly required the same kind of delusion, only this time around, it was about housing prices. Getting to the bottom of that requires less the skills of an investigator than the talents of a psychologist. This verges on counterfactual as far as both the tulip mania and our crisis just past are concerned.

How can the Architects of the Crisis Investigate it? - The Financial Crisis Inquiry Commission (FCIC) issued its report today on the causes of the crisis. The Commissioners were chosen along partisan lines and the Republicans, one-upping the Republicans’ dual responses to President Obama’s State of the Union address, have issued three rebuttals. The rebuttals follow a failed preemptive effort by the Republicans to censor the report – they insisted on banning the use of the terms “shadow banking system” (the virtually unregulated financial sector that conducts most financial transactions), “Wall Street,” and “deregulation.” The Republicans then issued their first rebuttal last month, their “primer.” The primer, following the lead of the censorship effort, ignored the contributions that the shadow banking system, Wall Street, and deregulation made to the crisis. The combination of the demand that the report be censored and the primer’s crude apologia critical role that the unmentionable Wall Street, particularly its back alleys (the unmentionable “shadow banking system”), and the unmentionable deregulators played in causing the crisis was derided by neutrals. The failure of their preemptive primer has now led the Republican commissioners to release two additional rebuttals to the Commission report. Again, they issued their rebuttals before the Commission issued its report in an attempt to discredit it.

The Blind Men & The Elephant—The Totally Bullshit FCIC Commission Report and Dissents - The Financial Crisis Inquiry Commission came out with its report—and two dissents! Lots to read! Lots of bullshit to wade through! Lots of finger pointing! Lots of skewed analysis that justify a political agenda! Whoo-hoo! Actually, cynical glee is the only emotion that keeps major depression at bay: The FCIC was set up in May of 2009, with the goal of getting to the root causes of the Global Financial Crisis, and find what policies and which actors were responsible for the melt-down. In a very real sense, the FCIC was supposed to be the modern day version of the Pecora Commission— —but it wasn’t. Not by a country mile. The bipartisan Commission members cleaved along party lines: The six members of the Democratic majority wrote the report, the four Republican minority members wrote two separate dissents.

New York Prosecutor Vance Seeks Mandatory Prison Terms in Securities Fraud -  Manhattan District Attorney Cyrus Vance Jr. said he wants harsher penalties, including mandatory prison time, for people convicted of major securities fraud in New York. Vance said in a speech at New York City Bar Association in midtown Manhattan yesterday that he will call on the legislature to change the Martin Act, New York’s securities fraud statute. He said he will seek prison sentences of as long as 8 1/3 years to 25 years for frauds involving more than $1 million. The crime now carries no minimum prison sentence, regardless of the money involved. “The flexibility of the Martin Act and its utility in the battle against criminal fraud is marred by its overly lenient penalties,” Vance said in the speech, titled “White Collar Crime in 2011: The Martin Act, Cybercrime and Beyond.

For Stockbrokers, S.E.C. Study Urges More Oversight - Investment advisers and stockbrokers should be subject to the same fiduciary standard of conduct — putting a customer’s interests above their own — rather than the different governance regimes that currently apply to the two groups, the Securities and Exchange Commission recommended on Saturday. In a report closely watched by Wall Street, the commission’s staff said retail investors “generally are not aware” that stockbrokers and their firms are subject to a lesser legal standard, one that requires brokers to make sure the products that they sell are suitable for their clients. Investment advisers are already subject to the higher fiduciary standard. The recommendation that the higher standard of fiduciary duty apply to both groups is intended to “increase investor protection and decrease investor confusion in the most practicable, least burdensome way for investors, broker-dealers and investment advisers,” the report said.

Why Is Warren Buffett Keeping $34 Billion In Cash? -  Improving market conditions have been a major benefit for Warren Buffett, who has famously remained bullish throughout this long, arduous global economic recovery. Now, as we head further into the year, the Omaha native is sitting on a mountain of cash, leading many analysts, commentators, and fans to speculate what the world's third richest man plans to do with it. According to a Sept. 30, 2010 filing, Berkshire Hathaway(BRK.A) has $34.46 billion in cash. While it is possible, the chance that Buffett would be satisfied simply standing by and watching his money pile continue grow in size is slim. In the past, he has clearly expressed his negative feelings towards the idea of holding cash as a long term investment. In an interview on the Charlie Rose Show, Buffett insisted that although Berkshire Hathaway always has enough cash around, he sees cash as always being a bad long-term investment. He went on to say that he is typically unhappy when he finds that there is excess cash available. Likening cash to oxygen, the legendary investor said it is important to know that it is around but unnecessary to have it in excess. Rather than have hoards of excessive cash on hand, he would rather own a strong business.

Bad Asset Purchase Program Turning a Profit - Wall Street’s trash has become a treasure for select asset managers, and perhaps even taxpayers.  The Treasury Department’s equity investment in bad mortgage assets – a federal program that combined capital from the government and private asset managers — has grown 27 percent since it was created in 2009, according to new data released Monday. The gains have come as the mortgage bond market has staged a comeback, producing generous returns over the last year.  The government’s returns are the latest indication that the so-called Public-Private Investment Program will not drain taxpayer funds, as many originally expected. Still, some skeptics question the numbers and note that roughly $9 billion remains at risk.  “It’s too early to celebrate,”

Don't Bank on It - Disappointing earnings, shrinking revenues and optimism that somehow the economy is improving despite an ongoing housing hangover -- this is what America's biggest banks offered as they released year-end financial results last week."Last year was a necessary repair and rebuilding year," Bank of America CEO Brian Moynihan said Friday. Yes, we know. The shards of our broken economy remain scattered on the ground and we're gluing them back together. What else could Mr. Moynihan say as he announced a 2010 loss of $2.2 billion? "We enter 2011...against a backdrop of an improving economy," he said. But then he qualified: "Full economic recovery depends on housing-market stability." And until we can return to housing-market stability, banks can borrow for next to nothing and lend at rates once charged only by Mafia loan sharks.

BofA’s Countrywide sued, accused of massive fraud - (Reuters) - Bank of America Corp's Countrywide mortgage unit has been sued by investors claiming they were victimized in a "massive fraud" when they bought mortgage-backed securities. The lawsuit was filed on Monday in a New York state court by 12 plaintiffs including the TIAA-CREF fund family, New York Life Insurance Co and Dexia Holdings Inc. According to the complaint, the investors bought hundreds of millions of dollars of Countrywide securities from 2005 to 2007 that they thought were "conservative, low-risk investments." The investors said Countrywide misrepresented the securities' safety in offering documents and elsewhere, and compromised their investments by ignoring its underwriting guidelines. As a result, the complaint said, most of the securities now carry "junk" credit ratings rather than the "triple-A" ratings they once had, resulting in "significant losses." The plaintiffs want compensatory and punitive damages.

This is gonna hurt..Bank of America that is. - A group of Investors for BofA are highly pissed and to that end, they sued Bank of America. From Jurist: Twelve plaintiffs on Monday combined to file a lawsuit [complaint, PDF] in the New York State Supreme Court [official website] against Countrywide Financial Corporation[NYT backgrounder] alleging widespread fraud that resulted in substantial financial losses. The plaintiffs invested hundreds of millions of dollars with the Bank of America (BOA) [corporate website] subsidiary between 2005 and 2007, believing the purchases of mortgage-backed securities to be "conservative, low-risk investments." The suit claims that Countrywide "recklessly" misrepresented the stability of the investments and failed to adhere to its stated underwriting and credit analysis procedures, leading the credit ratings of many of the securities to fall significantly. The complaint also names several former Countrywide executives as defendants, and seeks compensatory and punitive damages.

Clash of the Titans: RMBS Edition - And so it begins. We're about to witness the main event in financial institution internecine warefare: investment funds (MBS buyers) vs. banks (MBS sellers).  There have already been some opening skirmishes. The monoline bond insurers (MBIA, Syncora, FGIC, Ambac (and here), CIFG (and here), and--I haven't found any litigation with them on this, but there's gotta be some--ACA) have been litigating against some of the banks whose securitizations they insured for various fraud, negligent misrepresentation, and breach of warranty claims. Many of the Federal Home Loan Banks (Chicago, Indianapolis, Pittsburgh, San Francisco, Seattle, maybe others that I don't recall of the top of my head), which slurped up RMBS during the bubble, only to find them toxic, have brought (separate) suits mainly on securities fraud charges, but also on common law fraud and negligent misrepresentation claims. (See here for a totally dated, August 2010 estimation of the liabilities in these suits.) Then last fall the financial world was shaken by the New York Fed, BlackRock, and PIMCO's demand letter to Bank of New York Mellon and Countrywide. That showed that A-list financial institutions were taking the range of problems with RMBS, from representation and warranty breaches to servicer malfeasance, seriously.

Unofficial Problem Bank list increases to 949 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Jan 28, 2011. Changes and comments from surferdude808:  Not the safest week in banking as the FDIC released its formal enforcement actions for December 2010 and closed four institutions including the largest bank headquartered in New Mexico. This week there were 15 additions and three removals. The changes leave the Unofficial Problem Bank list at 949 institutions with assets of $410.9 billion, up from 937 institutions with assets of $409.4 billion.

Secret to Bank's Comeback: A Rich Uncle Named Sam —Before BankUnited FSB collapsed in May 2009, employees lit candles and prayed that Florida's biggest bank would survive the bad loans it made before the housing bubble burst. The miracle came in the form of Uncle Sam, or more precisely, the Federal Deposit Insurance Corp., which sold the failed BankUnited to a group of Wall Street financiers led by a longtime New York banker. The FDIC agreed to reimburse as much as $10.5 billion in future loan losses—and gave the new owners $2.2 billion in cash. The buyers paid $945 million. Since then, BankUnited has become one of the most profitable, highly capitalized financial institutions in the U.S. Deposits are pouring in, loans are flowing to businesses, and executives are itching to buy banks in Florida and New York City.

BankUnited's resurrection illustrates everything that went wrong in the housing bubble.-  Not quite two years earlier BankUnited had filed for bankruptcy, brought down by bad residential real estate loans concentrated in its home state of Florida. Subsequently BankUnited had been taken over by a consortium of investors—including big-name private equity firms Blackstone, Carlyle, W.L. Ross, and Centerbridge—that put in $945 million to recapitalize the bank. Now BankUnited and its investors are having their moment of triumph. The IPO is supposed to raise some $630 million, almost $500 million of which will go directly into the pockets of the private-equity firms—a stunning windfall, especially in these days of more meager returns for private equity.  If you took BankUnited's rebirth to be a parable about the private market's ingenuity and its capacity for renewal you would be missing the point. What it really illustrates is private equity's ability to make a fortune off a government guarantee. Most of the risk in the deal is borne not by the private equity firms, but by the Federal Deposit Insurance Corporation's deposit insurance fund. The FDIC expects to take a $5.7 billion loss on BankUnited, making this the second most costly bank failure ever, right behind the notorious IndyMac. Nor are BankUnited's customers getting any government handouts. Even as the FDIC shields investors from too much downside risk, one way the private equity firms can collect from the FDIC is by kicking people out of their homes. If you were searching for an example of what went wrong in the bubble years, you couldn't do much better than BankUnited.

American Lose Faith in Pretty Much All Big Organizations, Especially Banks and Corporations - Yves Smith - The Financial Times reports on an international poll by the consulting firm Edelman to be presented at Davos on Wednesday on public trust in various types of institutions. The interesting finding is that Americans are becoming less confident in all types of organizations, which is contrary to the trend in most other nations, where perceptions are rising. And perhaps most important, the poll was of people most likely to have a favorable view of the current power structure, namely, 5000 well schooled, wealthy and “well informed” participants (does “well informed” mean they read the oracles of orthodox opinion, like the Economist and the New York Times?). If the people who are likely to be beneficiaries of the status quo aren’t too happy with it, imagine what the average Joe thinks. From the Financial Times: Just 46 per cent of Americans last year said they trusted business, down eight points from 2009, according to research by Edelman, a communications consultancy, which will be presented on Wednesday. Global trust in business was up two points to 56 per cent, by contrast.

Overinvestment in housing: Was the bankruptcy code to blame? - The US subprime crisis erupted because US households had borrowed too much, and had invested too much in housing. In the aftermath of the crisis, the US financial system is being revamped to prevent a recurrence of too much risky borrowing – for instance, by adopting tougher capital adequacy standards for banks. Little is being done, however, to correct the other side of the problem, namely the tendency of US households to invest too much in housing. For many, the US housing market was the epicentre of the global crisis. This column suggests that the US bankruptcy code, which in some cases protects a large section of the individual’s house, leads to overinvestment in housing – a bias that may have helped massage the US housing bubble in the decade preceding the global crisis.

The Exemptions Howler Again - Every so often I read something in a field I know something about that seems so wildly, flatly, gobsmackingly wrong that I figure I must be missing something.  Today is one of these days.Here's a paper over at Vox EU, a website which calls itself "Research-based policy analysis and commentary from leading economists."  The title of the post is "Is the US bankruptcy code to blame for overinvestment in housing by US households?"  You can tell where this one is going--the answer to the question posed will be "yes."  But are you ready for this: At the same time, the legal system favours homeowners who experience financial difficulties by making investments in home equity partially exempt from personal bankruptcy.  People--especially my bankruptcy buddies--help me out here.  Isn't this just a dumb-as-pig-iron schoolboy howler?  When they say "investments in home equity," I assume they are talking about mortgage debt, secured debt, yes? But repeat after me: the homestead exemption is not good against mortgage debt.   You can't claim it, you can't rely on it, 

Fannie Mae & Freddie Mac Hold $24 Billion in Foreclosed Properties - Fannie Mae & Freddie Mac now hold $24 billion in foreclosure inventory: Fannie Mae and Freddie Mac’s combined inventory of foreclosed residential property has quadrupled in just three years and now stands at a record $24 billion. The number of properties on their rolls -- now at nearly 242,000 -- has increased fivefold. That’s roughly a third of the total U.S. portfolio of repossessed homes.  So far, Fannie & Freddie have been holding those foreclosures to not flood the real estate market. With foreclosures projected to increase 20% in 2011, eventually they are going to have to sell those foreclosed properties, which will cause home prices fall. On top of Fannie & Freddie there is a glut of shadow inventory, all being held back to avoid the inevitable foreclosure dump. Bottom line, housing prices must fall and you can't pay for a house when don't have a paycheck or a shrinking one.  Now, Banks want to securitize mortgages held by the GSEs, yes those derivatives which caused the financial crisis, plus have the government guarantee them.  The Banks have set their lobbyists upon this socialize the risk, privatize the gain Freddie and Fannie agenda and notice how lobbyists write white papers full of spin to met their objective of more taxpayer subsidies.

Legal Bills for Fannie and Freddie Abuses Cost Taxpayers $160 Million…Since the government took over Fannie Mae and Freddie Mac, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in civil lawsuits accusing them of fraud. The cost was a closely guarded secret until last week, when the companies and their regulator produced an accounting at the request of Congress. The bulk of those expenditures — $132 million — went to defend Fannie Mae and its officials in various securities suits and government investigations into accounting irregularities that occurred years before the subprime lending crisis erupted. The legal payments show no sign of abating.  Documents reviewed by The New York Times indicate that taxpayers have paid $24.2 million to law firms defending three of Fannie’s former top executives: Franklin D. Raines, its former chief executive; Timothy Howard, its former chief financial officer; and Leanne Spencer, the former controller.

Moody's says keeping Fannie, Freddie intact is lose-lose - The Treasury Department is delaying a report on the future of the government-sponsored enterprises from the end of January until mid-February. Meanwhile, Moody's Investors Service is throwing its hat into the ring, arguing that the current model is not only unsustainable, but against government vision. Residential mortgage analysts at the rating agency say that keeping Fannie Mae and Freddie Mac in the current manifestation would create two scenarios. And both are not good."If the GSE model is to be preserved, the companies would require far more capital and the risk premia on their debt would likely be much higher," write the analysts in a report Tuesday.

What to do with Fannie and Freddie - There are a bunch of ideologues out there with solutions to the Fannie and Freddie situation.  They argue that government intervention has to end and then propose a system with a permanent role for government.  It is not just nonsensical - it is usually in the interest of some large financial institution.  All they want is Frannie out of their part of the business.  They like government subsidies in the rest of their business.  Anyway I have the free market solution to the Fannie and Freddie situation - and - I hate to say it - it is dead obvious. Answer:  raise Frannie’s pricing. At the moment there is nobody doing conforming mortgages except Fannie and Freddie.  Indeed there is almost nobody doing mortgages of any kind except Fannie and Freddie.  If the free market wants the business they can have it.  All the government need to do is tell Frannie to raise their price a little each quarter.

Should Big Banks Take Over for Fannie and Freddie? - The new year is not even a month old, but we may already have a contender for the very worst idea of 2011. Big banks are lobbying to take over where government-sponsored enterprises Fannie Mae and Freddie Mac left off, reports Louise Story in the New York Times. They want to be the ones to issue government guarantees going forward. This terrible proposal would essentially create a new housing policy framework just as toxic as it was under Fannie and Freddie.  What precisely does Story say banks are suggesting? First, banks assume that the government will continue to stand behind most mortgages in the U.S., as it has in the past. They think this because they've said that they won't stand for anything else. They have threatened to stop originating 30-year mortgages without a government guarantee in place.

For Housing, A Quick Fix Or Less Risk - What can be done with Frannie? We love her and we need her. But we have to get along without her, or at least learn to live without relying on her so much.  Frannie is an amalgam of Fannie Mae and Freddie Mac, the two government-sponsored enterprises that became government-run operations after the financial crisis left them insolvent.  The two mortgage giants were managed differently, but the distinctions did not turn out to be very important. So I’ll combine their names and call them Frannie.  The name rhymes with Grannie, which seems appropriate for the role she now plays. Whatever the sins of her younger years, now she represents loving stability, particularly to the younger members of the family. It is not at all clear that the American mortgage market could function without her.  But it needs to learn how to do so. It is not just a matter of ideology to say that the country needs a privately financed system of home finance. There are clearly roles for the government to play, as regulator and perhaps as backup financier for those deemed worthy of special treatment, such as veterans or disadvantaged workers who need a helping hand. There can and should be debates on how large that role should be, but just now it is clearly too large.

Property: Overarching problems - Today, what started as a seizure in the subprime mortgage market in 2007 is increasingly focused on commercial property. According to the Institute of International Finance, a leading industry body, $1,400bn of loans to the sector worldwide mature between now and 2014, of which nearly half exceed the value of the underlying assets. “Given that lending standards have tightened considerably, it is clear that many borrowers may not be able to refinance,” says IIF deputy managing director Hung Tran. Nor has the problem in US residential property diminished. An estimated 30 per cent of mortgages exceed the value of the underlying homes, giving rise to a $700bn shortfall. The likelihood of a rash of defaults is of growing concern to policy­makers, bankers and investors, as well as to heavily indebted property companies. Central to the future of both the finance industry and the global economy, therefore, is the question of why property repeatedly torpedoes the banking system, prompting deep recessions, and what can be done to prevent this.

Churches Find End Is Nigh - Residential and commercial real-estate owners aren't the only ones losing their properties to foreclosure. The past few years have seen a rapid acceleration in the number of churches losing their sanctuaries because they can't pay the mortgage. Just as homeowners borrowed too much or built too big during boom times, many churches did the same and now are struggling as their congregations shrink and collections fall owing to rising unemployment and a weak economy. Since 2008, nearly 200 religious facilities have been foreclosed on by banks, up from eight during the previous two years and virtually none in the decade before that, according to real-estate services firm CoStar Group, Inc. Analysts and bankers say hundreds of additional churches face financial struggles so severe they could face foreclosure or bankruptcy in the near future.

Moody's: Commercial Real Estate Prices increased 0.6% in November - Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index increased 0.6% in November. Note: Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales and there are a large percentage of distressed sales - and that can impact prices and make the index very volatile. Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Beware of the "Real" in the title - this index is not inflation adjusted.  CRE prices only go back to December 2000. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).  According to Moody's, CRE prices are up 2.8% from a year ago and down about 42% from the peak in 2007. CoStar reported that CRE prices declined in November, and that the commercial market is bifurcated (even trifurcated) with trophy properties doing well, but prices for other properties still declining.

Mass Hysteria – The Ibanez Decision by the Massachusetts Supreme Court  This is a fine layperson’s summary of Ibanez, if you have friends or colleagues that you’d like to bring up to speed. Last week, the Massachusetts Supreme Court ruled against two banks, Wells Fargo and US Bancorp, who had each foreclosed on homes and were now asking a judge to declare that they held clear title to the properties in fee simple.The decision surprised quite a few, and represented a major landmark for those on the foreclosure defense side of the fight.  Bank stocks got pretty much creamed after the decision was announced.  Foreclosure defense blogs went into sheer elation mode, and it’s easy to understand why… finally, a decision by a top court had gone their way, establishing that the rules of foreclosure weren’t some trivial set of technicalities. But, what was so amazing about the decision was not that it went against the banks.  It should have and it did.  What was amazing was how the banks attempted to defend their positions.Here’s an overview of what happened…

Mortgage Lenders Seeking Court Permission To Destroy 22,100 Boxes Of Original Loan Documents- The solution to the ongoing fraudclosure fiasco is so simply and yet so brilliant (in a way that benefits the banks naturally) is so brilliant, that it has to date evaded most... but not all. The solution: just shred it all. That is what insolvent mortgage lenders Mortgage Lenders Network USA and American Home Mortgage are pushing hard to get permission from their respectively bankruptcy judges in their chapter 7 liquidation cases. Says Reuters: 'Federal bankruptcy judges in Delaware are due to hold separate hearings Monday on requests by two defunct subprime mortgage lenders to destroy thousands of boxes of original loan documents. The requests, by trustees liquidating Mortgage Lenders Network USA and American Home Mortgage, come despite intense concerns that paperwork critical to foreclosures and securitized investments may be lost.' With servicer banks increasingly unable and unwilling to provide the original lender docs (since they don't have access to them) to parties curious in seeing if there is a legal case to continue paying their mortgage, what better solution than to have the banks retort that the original document was sadly destroyed in a court-appointed shredding. In that way all the fraud canaries are killed with one stone, and the party responsible is none other than some bankruptcy judge who had given the go ahead for the wholesale destruction.

Judges to weigh mortgage document destruction (Reuters) - Federal bankruptcy judges in Delaware are due to hold separate hearings Monday on requests by two defunct subprime mortgage lenders to destroy thousands of boxes or original loan documents. The requests, by trustees liquidating Mortgage Lenders Network USA and American Home Mortgage, come despite intense concerns that paperwork critical to foreclosures and securitized investments may be lost. A series of recent court rulings have increased the importance of original loan documents, holding that they are essential for investors to prove ownership of mortgages and to have the right to foreclose. In the Mortgage Lenders case, the U.S. Attorney in Delaware has formally objected to the requested destruction because loss of the records "threatens to impair federal law enforcement efforts."

MERS Exposed I: Process Expert Catalogues Fundamental Flaws -- Yves Smith - Proposed legislation in Virginia, House Bill 1506, which if passed would eliminate the role of the electronic registry system MERS in that state by requiring every mortgage transfer to be recorded in the local courthouse, is having the salutary effect of exposing more information about this generally less than forthcoming company. Various interested parties offered testimony about the bill. One particularly interesting presentation came from a process and systems expert, Daniel Pennell, who was operating in a private capacity as a concerned citizen. His presentation raises numerous red flags about MERS.  We’ve pointed out troubling weakness in MERS’s operational controls and systems in past posts. Our Richard Smith, a capital markets IT specialist who has worked in high transaction volume environments, provided comments on statements made by MERS officers in various depositions about how various procedures worked. He found serious shortcomings in their “electronic handshake” process and authentication, as well as troubling open questions about access control and an audit trail:

MERS Exposed II: General Counsel Tells Whoppers in Testimony Before Virginia House - Yves Smith - It has become so common for members of the securitization industry to play fast and loose with the truth that nothing should surprise me any more. Nevertheless, I am taken aback by a rough transcript of the remarks by William Hultman, the general counsel of MERS (formally “senior vice president and corporate division manager“), before members of the Virginia House of Representatives last week. The overwhelming majority of statements he made about matters that can be verified are either untrue or at best disingenuous. Here is the transcript. Transcript of VA House Presentation HB 1506 We’ll parse the troubling bits more or less in order, starting here:We’re the beneficiary, but we’re an agent of the lender. So instead of having two — one party be both the payee on the note and the beneficiary in deed of trust, we’re the beneficiary as their agent. In other words, we’re holding title to the mortgage lien on their behalf. Law professor Chris Peterson in his legal analysis of MERS said “it is axiomatic that a company cannot be both an agent and a principal with respect to the same right”. Being a beneficiary is tantamount to being a principal. The necessity under the law of playing one role or the other renders Hultman’s statement, which reflects ongoing MERS’s contention that it really can have its cake and eat it too, incorrect.

The MERS Wave Function (2 of 3) For a long time to come, the curve of protest against the banks is likely to be longer and more ponderous than the exhilarating street protests in Egypt. But protest in the form of subversion and rejection of the land model enforced by the banksters, including relentless educational work and exposure of the Land Scandal, will eventually bring us by strange paths toward the same end goal. The real goal in both cases, however consciously conceived at the outset, has to be economic transformation. Otherwise nothing avails, and we end up right back where we started, having wasted energy and lost time. In the case of the banks, we should be fully aware by now of their worthlessness and incorrigible criminality and will to tyranny. They cannot be rehabilitated. They’re tyrannically insane and can only be eradicated completely and permanently. In the first part of this post I described an intellectual framework for social counteraction. Just as the banks, through devices like MERS, have set up a process whereby they exercise the prerogative to exist only in whatever time, place, and form they unilaterally choose, so we must turn this right side up and impose existence, and eventually non-existence, upon them in a time, place, and form of our choosing. They want their word to become flesh at whatever point is convenient for the corporate interest. We must declare and then enforce whatever reality achieves the public interest outcome.

MERS’ R.K. Abandons Sinking Ship - Rumors were rampant Friday that R.K. Arnold, the CEO of the embattled MERS, would resign. Today, MERS made the announcement. The MERS system, which Arnold helped develop, has come under fire in courts on the role it has, if any, in home foreclosures. It’s an electronic database of more than half of all the outstanding residential mortgages in the U.S. Merscorp has said it was created by the mortgage industry in 1995 to improve servicing after county offices couldn’t deal with the flood of mortgage assignments.Let me just correct that last paragraph. MERS was created by the mortgage industry to avoid recording fees at county offices. This notion that the county offices couldn’t handle it is just not true. The banks didn’t like that they were charged for the transfer. Throughout the foreclosure fraud crisis, MERS has been exposed, not only as a tax avoidance scheme, but as a registry which introduced tremendous complexity into the securitization process, and led to a breakdown in the mortgage assignment process.

Virginia Legislature Proves Who Really Rules: Pro Consumer Mortgage Bills Sent to Siberia - - Yves Smith - What is it going to take to end rule by banksters? If Virginia is any sign, voters may need to adopt a policy of “Leave No Incumbent Standing” until legislators get the message. The Virginia House effectively sidetracked several pro-consumer mortgage bills, including one that would have given borrowers more time to mount defenses in light of Virginia’s unusually fast foreclosure process, as well as an bill that would have ended the economic justification for MERS by requiring all mortgage transfers to be registered at the local courthouse. The mechanism for deep-sixing the bills was relegating them to an obscure panel for further study. From the Associated Press: A state House subcommittee voted Monday to effectively kill legislation that would have slowed the pace of home mortgage foreclosures in Virginia that is among the fastest in the nation. With one dissent on an unrecorded show-of-hands vote as the powerful banking lobby looked on, a Commerce and Labor subcommittee sent the bills for more study by an obscure gubernatorial task force.

Iowa Attorney General Tom Miller, Head of 50 State Investigation, Retreats From “Tough With Banks” Stance - Yves Smith - We were early to warn readers that Iowa Attorney General Tom Miller, who is heading the 50 state probe into mortgage abuses, was unlikely to take as tough a stand with banks as his early sabre-rattling suggested. Now other close observers of the 50 state AG probe, like Marcy Wheeler of FireDogLake, have pointed out that expectations for this group were probably too high, given that some of the AGs had been opposed to the effort before, and they’d hobble the effort from the inside. But even though true, that observation still gives Miller more of an out than he deserves.  The fact is that Miller had decided, before any investigation was undertaken, that his group was not going to take any action that might allow investors to recover for losses. Why? Some of the parties in a position to recover would not be Americans. This came by e-mail before the December meeting at which Miller promised to “put people in jail” as well as obtain deep principal mods and compensation for defrauded homeowners:

Mortgage Shenanigans in Virginia (The Wall Street – Washington – Richmond Axes) - By Daniel Pennell, a systems expert who has testified before the Virginia House of Representatives on MERS . This week demonstrated how financial special interests have created an obscene and incestuous relationship with the leadership in the state legislature and the Governor’s office in Virginia. This cabal managed to kill off a bill (HB-1506) proposed by Delegate Bob Marshall, a bill designed to protect the integrity of the county property records and preserve the integrity of home owner’s title to their property. Simultaneously they attempted to alter the Uniform Commercial Code (UCC) with HB-1718, such that any “record” (the previous version said document) signed or unsigned by a person they claim owed a debt would be good enough for the banks to win a legal judgment against a person. In other words a spreadsheet from a bank would be good enough to take someone’s home or report someone to a credit bureau. This was in direct response to a Supreme Judicial Court decision in Massachusetts, Ibanez, where the court said that a bank had to have proof it owned a mortgage before it could foreclose.

Missing From The State Of The Union Speeches: Foreclosures And Housing Policy - While there were plenty of noteworthy ideas in President Obama’s State of the Union last night about boosting economic growth and international competitiveness, he did not mention one of the important drags on the current economy: the ongoing housing crisis. In the Republican response, Rep. Paul Ryan (WI) also neglected to mention housing or foreclosures.  Meanwhile, things are only getting worse on the housing front:A new slide in housing prices has begun in earnest, with averages in major cities across the country falling to their lowest point in many years…Nine of the 20 cities in the index sank in November to new lows for this economic cycle: Chicago; Las Vegas; Detroit; Atlanta; Seattle; Charlotte, N.C.; Miami; Tampa; Fla.; and Portland, Ore.And the Obama administration’s signature foreclosure prevention program — the Home Affordable Modification Program (HAMP) — continues to underwhelm:Troubled borrowers continue to fail out of the program at a faster rate than they join. A total of 58,020 loan modifications have been canceled, a nearly 30 percent increase from the 44,972 reported in November, the Treasury report said

US Bankruptcy Trustee Takes Interest in “Ta Dah” Documents Mysteriously Appearing in Foreclosures (aka Probable Fabrications) - Yves Smith - One of the sorry reminders of the decline of the rule of law in the United States is the frequency with which incidents of what look like document forgeries take place in foreclosure cases. The fact that a now-shuttered subsidiary of Lender Processing Services, a vendor to the servicing industry, had a price list for creating mortgage-related documents out of whole cloth attests to the long-standing demand for this sort of product.  The reason for this activity is simple. As we’ve stressed in various posts, in so-called private label securitizations (the non-Fannie/Freddie type), a great deal of evidence indicates that the originators and packagers of these deals did not bother complying with the contracts they created to govern these transactions on a widespread, perhaps pervasive basis sometime after 2003. And their shortcomings only come to light in foreclosures, and then (possibly) if the foreclosure is contested. Given how low foreclosure rates were historically, this was a risk the securitization industry seemed willing to take, and it is now reaping the fruit of this short-sighted bet.

BofA unit ordered to halt foreclosures - A Nye County district judge has ordered ReconTrust Co., a unit of Bank of America Corp., to stop most of its foreclosures in Nevada, based on allegations made by a Pahrump woman. The order signed by Nye County District Judge Robert Lane on Jan. 20 restrains ReconTrust from foreclosing on "any real or personal property situated in the State of Nevada." The bank holding company is also named in the lawsuit. Suzanne North, who operates a children's day care center out of her home, originally alleged that ReconTrust was operating without a state business license. In an amended complaint, she claimed that ReconTrust served her with a foreclosure notice before Bank of America appointed ReconTrust as trustee. The Las Vegas Review-Journal was unable to obtain a copy of the amended complaint. In a statement, Bank of America said: "ReconTrust previously faced a nearly identical order in Utah, and it recently prevailed in challenging that order in federal court. Until the current situation is resolved, ReconTrust intends to comply with the order." ReconTrust had about 7,500 foreclosure sales scheduled in the Reno and Las Vegas metropolitan areas when the order was signed.

Bank of America Fighting to Reverse Foreclosure Freeze in Nevada – Yves Smith -  Peculiarly (and I’ll have to admit I’m among the guilty), a state-wide halt of foreclosures by a Bank of America unit in Nevada earlier in the week attracted remarkably little notice. The number of foreclosures in involved is meaningful, over 8000. The reason may seem somewhat technical, and presumably would not apply to other BofA units, namely, that the entity, ReconTrust Co, is operating without a proper business license. But then it gets interesting.  First, we get Bank of America’s position, per the Las Vegas Review Journal In a statement, Bank of America said: “ReconTrust previously faced a nearly identical order in Utah, and it recently prevailed in challenging that order in federal court. Until the current situation is resolved, ReconTrust intends to comply with the order.” However, the judge believes ReconTrust’s problems may go much deeper than licensing: In the order, however, the judge said there is a “substantial likelihood that (North) will establish that ReconTrust does not have any contractual privities with respect to the contract between (North) and the other defendants regarding the promissory note and deed of trust.”

Bank of America not happy: judge blocks 8,900 NV foreclosures – Dusty - Bet this news didn't go down too well with the execs at BofA. With all the news about robosigning and foreclosure fraud in the news, this recent story is important. From WaPo: Bank of America is aggressively moving to appeal a Nevada county judge's order halting more than 8,900 foreclosures. In one of a growing number of foreclosure cases across the country in which judges are questioning whether notices and documents were improperly prepared, Nye County District Court Judge Robert Lane issued a preliminary injunction against BofA's ReconTrust subsidiary, blocking it from proceeding with non-judicial foreclosures statewide until a Feb. 28 hearing. Suzanne North uses the word FRAUD in her filing and brotha..I wouldn't doubt you? From the VegasSun writeup on this bizarro world of fuckery in foreclosure: While North complained that ReconTrust filed foreclosure papers at a time when it was not the trustee, Bank of America said in Thursday's filing that ReconTrust -- a B of A subsidiary -- was acting as its agent and that procedure has been found in other cases to be proper.

Nearly 1 in 4 Nevadans who were foreclosed on could’ve made payments but chose to walk away - Twenty-three percent of those foreclosed upon in Nevada could've made their payments but chose to make a "strategic default," according to a report released this week by the Nevada Association of Realtors. Men and those 65 or older were most likely to walk away. These are just some of the key findings giving a better picture of the state's foreclosure crisis. The report says that few who were foreclosed upon knew about federal or state programs to help them. Sixty-one percent had never heard of the Home Affordable Foreclosure Program, and only about 10 percent used it. Only 3% said they used and were helped by the Nevada Foreclosure Mediation program. Fifty-eight percent of respondents in the group's survey said their lender was "unwilling" to work with them and only 4% said their lender was "very willing" to work with them.

States May Require Redocumenting Loans in Foreclosure - Certain states — including California and Virginia — are contemplating changing their laws to require any company pursuing a foreclosure to recreate all the transfers and assignments of a loan, say real estate lawyers. Such a change would negate Mers assignments and pave the way for states and local jurisdictions to collect millions of dollars in recording fees. "They are arguing you must have recorded assignments showing intermediate assignments, that Mers doesn’t show, as a condition to foreclose," Platt said at a recent Mortgage Bankers Association servicing conference.  "Many state legislatures are trying to jump on the foreclosure reform bandwagon. All kinds of ideas are being floated," It is unclear whose ideas will be acted on, he said. "It is difficult to redo the entire chain of title," Lampe said, noting that some previous assignees have gone out of business. "It is the type of proposal that could severally impair people’s ability to foreclose.'

Foreclosure Rates Slow In Hardest-Hit Areas - Foreclosures became more widespread "as high unemployment drove activity up in 72% of the nation's metro areas--many of which were relatively insulated from the initial foreclosure tsunami," said James J. Saccacio, chief executive officer of RealtyTrac, in a news release. Houston, Seattle and Atlanta saw the biggest increases among the 20 largest metro areas. Foreclosures jumped 26% in the Houston area in 2010, compared with 2009, according to RealtyTrac. In Seattle, foreclosures rose 23% and in Atlanta, they were up 21%. But fewer homes in hard-hit areas--including Las Vegas, California, Arizona and Florida--received foreclosure filings in 2010 compared with the year before. Even though the areas are improving, they still remain some of the most problematic.

Foreclosure flood spreads beyond hardest hit markets: RealtyTrac - Metro areas with the 10 highest foreclosure rates saw filings decrease in 2010, but for nearly everywhere else activity was on the rise, according to RealtyTrac, which tracked activity in 206 cities across the country. For the year, more than 2.8 million properties in the U.S. received at least one foreclosure filing from notice of default to repossession. While the hardest hit areas – 19 of the top 20 in California, Florida, Nevada and Arizona – saw filings drop, 149 of the metro areas studied saw activity actually increase from 2009. RealtyTrac CEO James Saccacio said widespread unemployment has pushed foreclosures in areas previously insulated from the "initial foreclosure tsunami." "Foreclosure floodwaters receded somewhat in 2010 in the nation’s hardest-hit housing markets," Saccacio said. "Even so, foreclosure levels remained five to 10 times higher than historic norms in most of those hard-hit markets, where deep faultlines of risk remain and could potentially trigger more waves of foreclosure activity in 2011 and beyond."

Home Prices in U.S. Declined 1.6% From Year Earlier - Residential real-estate prices dropped in November by the most in a year, signaling housing has yet to join the U.S. rebound.  The S&P/Case-Shiller index of home values in 20 cities fell 1.6 percent from November the prior year, the biggest 12-month decrease since December 2009, the group said today in New York. The decline matched the median forecast of economists surveyed by Bloomberg News. Mounting foreclosures will probably throw more properties on the market this year, further depressing prices, homeowners’ equity and construction. The lack of a sustained housing rebound and unemployment above 9 percent are among reasons the Federal Reserve may announce this week it’ll complete a second round of stimulus that will pump $600 billion into the economy by June.

Your monthly Case-Shiller PSA - THIS morning, the latest data on American home prices from the S&P/Case-Shiller index have come out, which means that it's once again time to remind everyone what the Case-Shiller data are actually telling us. The new figures show a drop in prices of 0.5% in November, for a year-on-year dip of 1.6%. And this is generating headlines. But recall, first, that these figures are from November, while it is very nearly February. Then remember that the Case-Shiller figures are a three-month moving average, which means that the latest numbers include sales from September, October, and November. And then think back to the fact that the data are for closed sales, and are included in the dataset at the time they're made available to the public. That means that buyers may have submitted contracts for these sales as early as June. What the latest figures capture is a general sense of the housing market in the early autumn, at which point the American economy was looking fairly soft. That doesn't mean these numbers are illegitimate; it simply means that they should be understood in the appropriate context.

A Look at Case-Shiller, by Metro Area (January Update) The S&P/Case-Shiller Composite 20-city home price index, a broad gauge of U.S. home prices, posted a 1% drop in November from a month earlier and fell 1.6% from a year earlier, as the housing market faced a new round of trouble. Nineteen of 20 cities in the index posted month-to-month declines in November — just San Diego notched an increase. Only four areas of the U.S. — Los Angeles, San Diego, San Francisco and Washington, D.C. — posted year-over-year gains. Nine markets — Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, Portland, Ore., Seattle and Tampa — hit their lowest points since home values started dropping four years ago, pushing prices in those areas below the lows seen in most regions in spring 2009. “The price action is surely going to lead many to speculate as to whether the housing market is double dipping but we repeat our long held position; housing can only double dip if you believed it was bouncing in the first place,”

Case-Shiller: U.S. Home Prices Keep Weakening as Eight Cities Reach New Lows in November - S&P/Case-Shiller released the monthly Home Price Indices for November (actually a 3 month average of September, October and November). This includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities). . From S&P: U.S. Home Prices Keep Weakening as Eight Cities Reach New Lows. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 31.0% from the peak, and down 0.4% in November(SA). The Composite 20 index is off 30.9% from the peak, and down 0.5% in November (SA).  The second graph shows the Year over year change in both indices. The Composite 10 SA is down 0.4% compared to November 2009. This is the first year-over-year decline since 2009. The Composite 20 SA is down 1.6% compared to November 2009.  The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.  Prices increased (SA) in only 3 of the 20 Case-Shiller cities in November seasonally adjusted.

Home prices fall in major US cities -- Home prices are falling across most of America's largest cities, and average prices in eight major markets have hit their lowest point since the housing bust. The Standard & Poor's/Case-Shiller 20-city home price index released Tuesday fell 1 percent in November from October. All but one city, San Diego, recorded monthly price declines.Eight others sank to their lowest levels since prices peaked in 2006 and 2007: Atlanta, Charlotte, N.C., Las Vegas, Miami, Portland, Ore., Seattle, Tampa, Fla., and Detroit, which saw the largest drop at 2.7 percent from the previous month. Millions of foreclosures are forcing prices down, and many people are holding off making purchases because they fear the market hasn't hit bottom yet. Many analysts expect home prices to keep falling through the first six months of this year,

S&P Case-Shiller Index Points to Double-Dip in Home Prices - The latest Case-Shiller figures released by Standard & Poor’s (S&P) Tuesday signal home prices across the United States continue to weaken. Based on data through November 2010, the 10-city composite of the closely watched gauge was down 0.4 percent and the 20-city composite fell 1.6 percent from their November 2009 levels. November was the sixth consecutive month where the annual growth rates moderated from their prior month’s pace, S&P noted. Only four of the 20 metropolitan areas included in the study – Los Angeles, San Diego, San Francisco, and Washington D.C. – showed year-over-year gains in November. Home prices fell in 19 of 20 major metros on a month-to-month basis. The only city with a gain in November was San Diego, up a scant 0.1 percent. Thirteen of the metropolitan statistical areas saw average home prices drop by 1.0 percent or more. S&P’s analysts say a double-dip in home prices could hit the market by spring.

U.S. Home Prices Slump Again, Hitting New Lows - The long-predicted double-dip in housing has begun, with cities across the country falling to their lowest point in many years, data released Tuesday showed. Prices in 20 major metropolitan areas fell 1 percent in November from October, according to the Standard & Poor’s Case-Shiller Home Price Index. The index is only 3.3 percent above the low it reached in April 2009 and has fallen fell 1.6 percent from a year ago.“A double-dip could be confirmed before spring,” the chairman of S.&P.’s index committee, David M. Blitzer, said. Eight of the 20 cities in the index fell to new lows for this cycle, including Atlanta; Charlotte, N.C.; Portland, Ore.; Miami, Seattle; and Tampa, Fla. Only a handful of places — essentially California and Washington — saw prices rise.

CHART OF THE DAY: The Housing Double Dip Is Accelerating - This chart is pretty clear. From the just-released Case-Shiller, it's clear that the year-over-year decline accelerated in November. If you assume that housing has to be part of a recovery, this obviously isn't good.

House Prices and Months-of-Supply - This morning S&P/Case-Shiller released the monthly Home Price indexes for November (a three month average). Here is a look at house prices and existing home months-of-supply, and also real house prices (2nd graph). This graph shows existing home months-of-supply (left axis), and the annualized change in the Case-Shiller composite 20 house price index (right axis, inverted). House prices are through November using the composite 20 index. Months-of-supply is through December.  The months-of-supply declined to 8.1 months in December, but I think there is a good chance that the months-of-supply will increase again in the spring of 2011. The months-of-supply uses the seasonally adjusted sales rate, but the not seasonally adjusted inventory - even though there is a clear seasonal pattern for inventory (low in December and January and higher during the summer). We will need to watch inventory and months-of-supply very closely over the next few months for hints about house prices.

New Home Inventory by Stage of Construction - The Census Bureau reported that new home inventory declined to 190,000 new houses for sale at the end of December. A common questions is: What inventory is included? According to the Census Bureau"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted." Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale fell to 80,000 units in December. And the combined total of completed and under construction is at the lowest level since this series started.  In most areas the 'completed' and 'under construction' inventory of new homes is fairly lean.

Home Sales: Distressing Gap - Here is an update to a graph I've been posting for several years (most of the text is a repeat).  This graph shows existing home sales (left axis) and new home sales (right axis) through December. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due mostly to distressed sales). Initially the gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.  The two spikes in existing home sales were due primarily to the homebuyer tax credits (the initial credit in 2009, followed by the 2nd credit in 2010). There were also two smaller bumps for new home sales related to the tax credits.

Survey: Sales of Distressed Homes increased in December - From Campbell/Inside Mortgage Finance HousingPulse: Distressed Property Index Surged in DecemberOne of the biggest developments in December was a sharp jump in the HousingPulse Distressed Property Index or DPI ... Last month’s DPI was 47.2% and reflected the share of total home sale transactions that involved distressed properties. December’s level was up from 44.5% in November and nearly matched the 47.5% peak in the index reached in September ... Distressed property sales were not distributed evenly around the country. In California, a state hit hard by the foreclosure crisis, an incredible 66% of all transactions tracked in December involved distressed properties. The combined area of Arizona and Nevada similarly suffered, with 62% of transactions being distressed. However, in the oil-producing states of Texas, Oklahoma, and Louisiana, only 29% of transactions were distressed. The NAR reported an increase in distressed sales in December too: Distressed homes rose to a 36 percent market share in December from 33 percent in November, and 32 percent in December 2009.

HousingPulse Distressed Property Index Surged in December While First-Time Homebuyers Rushed to Close Transactions - Sales of distressed properties surged in December as many banks resumed foreclosures following stoppages in late fall. At the same time, first-time homebuyer activity remained strong as purchasers rushed to close transactions before interest rates rise further. These are two of the major findings of the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. One of the biggest developments in December was a sharp jump in the HousingPulse Distressed Property Index or DPI, a key indicator of the health of the housing market. Last month’s DPI was 47.2% and reflected the share of total home sale transactions that involved distressed properties. December’s level was up from 44.5% in November and nearly matched the 47.5% peak in the index reached in September, right before the so-called “robo-signing” controversy forced major servicers to temporarily halt foreclosures.

How ‘Distressed’ Home Sales Are Fuzzing the Numbers - A new report today from Campbell/Inside Mortgage Finance shows distressed sales, that is bank-owned properties (REO's) and short sales, where the home is sold for less than the value of the mortgage, made up 47 percent of all home sales in December. That's up from 44.5 percent in November. The National Association of Realtors put out a lower percentage last week (36 percent), but after speaking with the number crunchers at Campbell, I'm thinking the higher share is more accurate. We also just got numbers from DataQuick out West, showing 38 percent of California sales in December were REOs, and that doesn't include short sales, so you see the evidence.

New home sales at 8-month high - (Reuters) – Sales of U.S. new homes raced to their highest level in eight months in December, but gains were driven by a surge in the West that economists were reluctant to call a sign of the market's recovery.Single-family home sales jumped 17.5 percent to a seasonally adjusted 329,000-unit annual rate, the Commerce Department said on Wednesday. Economists had expected an increase to only a 300,000-unit pace.Even with last month's gain, new-home sales are down 75 percent from their peak of 1.283 million-unit pace in 2005. December's new-home sales were boosted by a 71.9 percent surge in the West that confounded economists, who viewed the strength as fleeting. And in a sign that the housing recovery was still a long way off, an industry group on Wednesday reported an 8.7 percent drop in applications for new home loans last week.

Sales of New Homes in U.S. Rise More Than Forecast - Purchases of new houses in the U.S. rose more than forecast in December, propelled by a record surge in the West as buyers in California may have rushed to qualify for a state tax credit before it expired. Sales climbed 18 percent to a 329,000 annual pace, figures from the Commerce Department showed today in Washington. The percentage gain was the biggest since 1992, and was led by a record 72 percent jump in the West.  “The increase being driven by the West definitely looks suspicious,” said Daniel Silver, an economist at JPMorgan Chase & Co. in New York. “New-home sales are definitely lagging behind other economic indicators. As we see job growth and signs of economic stability, the housing market will improve, but when that will happen is hard to say.”

New Home Sales Skyrocket 17.5% - NOT Listening to the US Census talk about new home sales for December 2010 would give an impression that the economy is turning a major corner. Sales of new single-family houses in December 2010 were at a seasonally adjusted annual rate of 329,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.  This is 17.5 percent (±17.7%)* above the revised November rate of 280,000, but is 7.6 percent (±17.0%)* below the December 2009 estimate of 356,000. ,The median sales price of new houses sold in December 2010 was $241,500; the average sales price was $291,400.  The seasonally adjusted estimate of new houses for sale at the end of December was 190,000.  This represents a supply of 6.9 months at the current sales rate.An estimated 321,000 new homes were sold in 2010. This is 14.2 percent (±4.2%) below the 2009 figure of 375,000. One graph looking at the unadjusted data shows the depth of the hole we are in.

New-home sales in 2010 fall to lowest in 47 years-  Buyers purchased the fewest number of new homes last year on records going back 47 years.Sales for all of 2010 totaled 321,000, a drop of 14.4 percent from the 375,000 homes sold in 2009, the Commerce Department said Wednesday. It was the fifth consecutive year that sales have declined after hitting record highs for the five previous years when the housing market was booming. The year ended on a stronger note. Buyers purchased new homes at a seasonally adjusted annual rate of 329,000 units in December, a 17.5 percent increase from the November pace.Still, economists say it could be years before sales rise to a healthy rate of 600,000 units a year. Builders of new homes are struggling to compete in markets saturated foreclosures. High unemployment and uncertainty over home prices have kept many potential buyers from making purchases.

Lawler: Downward Revisions Coming to Existing Home Sales? - As many readers may recall, over the last year and a half I have noted numerous times that the NAR’s estimates for existing home sales appear to have understated the decline in existing home sales since 2006, with the “gap” increasing from 2007 through 2009. The basis for that assertion was that existing home sales based on property records in some key states declined materially more than did the NAR’s estimate of existing home sales in those states. In addition, CoreLogic’s estimates of existing home sales based on property records in its database (which covers “over 80%”of the US housing market) show materially larger declines since 2006 than do the NAR’s estimates. The NAR is aware of these “discrepancies” and has been since at least 2009, but changing its methodology is not a trivial task. However, reportedly the NAR (working with others) has been looking into this issue, and is exploring whether it needs to change its methodology to get better estimates of “actual” existing home sales.

Why Are Home Prices Still Falling? - Employment is rising again. Consumers spent more in December than they have ever done before. And perhaps most importantly, for the first time in three years there seems to be a broad confidence that the economy will recover in 2011. So why are housing prices still falling? On Tuesday, one of the most reliable readings of the housing market, the Standard & Poor's/Case-Shiller 20-city home price index, showed that the housing market is still headed in the wrong direction. Overall, the index showed that home prices dropped 1.6% in November in major US cities. More depressing was that in eight of the cities house prices are at their lowest level since the start of the recession. It seems clear that whatever momentum the housing market got from the home buyer tax credit stimulus spending is long gone. What is also clear is that housing prices don't seem to be getting much of a lift from the emerging economic recovery. Here's why:

Residential Investment near record low as Percent of GDP - A couple more graphs from the GDP report, and the final consumer sentiment for January ... Residential Investment (RI) increased slightly in Q4, but as a percent of GDP, RI is near a post-war low at 2.24% - essentially unchanged from Q3. Some people have asked how a sector that only accounts for 2.2% of GDP could be so important? The answer is that usually RI accounts for a large percentage of the employment and GDP growth in the first year or so of a recovery (and increases in RI have a positive impact on other areas like furniture, etc). Not this time because of the huge overhang of existing vacant units. I expect RI to increase in 2011 and add to both GDP and employment growth - for the first time since 2005!The second graph shows non-residential investment in structures and equipment and software. Equipment and software investment has been increasing sharply, although investment growth slowed in Q4 to a 5.8% annualized rate. Non-residential investment in structures is near a record low and will probably stayed depressed for some time. I expect non-residential investment in structures to bottom later this year, but the recovery will be very sluggish for some time with the high vacancy rates for offices and malls.

Housing Woes Fuel Apartment Surge - Falling home prices and lethargic sales have been bad news for homeowners, but a boost for one group of real-estate investors: apartment-building landlords. With millions of families switching from being homeowners to renters, apartment-building values have soared. Investor demand is so intense, prices of some properties are approaching values last seen in mid-2007. That isn't good for renters, who enjoyed falling rents, landlord concessions and even offers of incentives such as flat-screen televisions to sign leases after the recession hit the housing market. Now rents are rising and vacancies are falling in many markets, making it harder to find a place.

Why Affordable Housing Matters - Economists, planners and the media often focus on the extremes of real estate — the high-end properties or the foreclosed deserts, particularly in the suburban fringe. Yet to a large extent, they ignore what is arguably the most critical issue: affordability. This problem is the focus of an important new study by Demographia. The study, which focuses largely on English-speaking countries, looks at the price of housing relative to household income. It essentially benchmarks the number of years of a region’s household income required to purchase a median-priced house. Overall, the results are rather dismal in terms of affordability, particularly in what Wharton’s Joe Gyourko dubs “superstar cities.” These places — such as London, New York, Sydney, Toronto and Los Angeles — generally tend to be more expensive than second-tier regions commonly found in the American South and heartland.

Housing Bust and Mobility - Here is topic we've been discussing for several years ... From the Miami Herald: S. Florida job-market mobility stuck at home [Joe] Farkas, 53, sees his underwater mortgage as something of a career anchor, too. He would pursue jobs across the country if it weren't for the financial hit he'd take by selling the house for a loss.  ``There would be a lot more for me to choose from, a lot more for me to pursue,'' said Farkas ... As I wrote several years ago, less worker mobility is kind of like arteriosclerosis of the economy. It lowers the overall growth potential. And how about this comment:  ``I've had discussions with people who say, I'm willing to [relocate],'' said Berger, senior vice president of client relations for Octagon Technology Staffing. The first question I ask is: `How long have you owned your home?' If it's since '99, great. If it's 2005, that's a problem.'' This mobility problem will be with us for years.

I Don't Want to Read Too Much Into This Gallup Poll, But...  It is highly suggestive of an excess money demand problem. This poll finds that concerns about a "lack of money/low wages" is the most important financial problem American face.  This concern trumps healthcare costs and too much debt.  Now, the respondents may be thinking more in terms of not having enough income rather than not having enough medium of exchange, but still given all the talk about balance sheet recessions it is interesting that this "lack of money/low wage" concern is more important than too much debt. Here is a summary figure of these concerns since March, 2009: (Click on figure to enlarge.) Between the findings from this Gallup poll and the data shown in this post, you can forgive me for thinking that maybe, just maybe there still is an excess money demand problem.

January Consumer Confidence Jumps  -- An index of U.S. consumer confidence jumped in January, reaching the highest level since May, with more consumers optimistic about income and jobs, as well as current business conditions, the Conference Board reported Tuesday.  Confidence rose to 60.6 in January, above expectations of economists polled by MarketWatch, who had expected a reading of 54.8. “Consumers rated business and labor-market conditions more favorably and expressed greater confidence that the economy will continue to expand and generate more jobs in the months ahead,” said Lynn Franco, director of Conference Board’s consumer research center, in a statement. “Although pessimists still outnumber optimists, the gap has narrowed.”

CNNMoney: Credit card rates at record highs near 15% -- Interest rates are now hovering near record highs, at an average rate of 14.72%. And if your credit is bad enough, you could even end up with a rate as high as 59.9% APR. That's because while the CARD Act helped crack down on certain fees and requires more disclosures, it didn't cap every credit card holder's worst enemy: interest rates. Sure, the new rules prevent banks from raising most interest rates retroactively, but there's no limit on the rates they can charge new customers. "Rates are going up because card issuers know that once you get a card they can't raise the rates, so they're raising rates on the front end to ensure they get the revenue from that interest," APRs have climbed more than 20% over the past two years and hit an all-time high of an average 14.78% in mid-November, based on weekly data collects from 100 of the nation's top credit card issuers.

Obama and Business May Get On Well, but When Will That Produce Jobs? - President Obama is embarked on a major charm offensive with the business sector, as seen, for example, in the appointments of William M. Daley (formerly of JPMorgan Chase, now White House chief of staff) and Jeffrey R. Immelt (chairman and chief executive of General Electric and now also the president’s top outside economic adviser).This should not be an uphill struggle – much of the corporate sector, particularly bigger and more global businesses, is doing well in terms of profits and presumably, at the highest levels, compensation. But when exactly will this approach deliver jobs and reduce unemployment? And does it increase risks for the future? Republican rhetoric over the last two years was relentless in its assertion that the Obama administration was antibusiness. Supposedly, this White House attitude undermined private sector confidence and limited investment. In reality, the opposite was the case. Relative to any postwar recession, the rebound in profits during the Obama administration has been dramatic.

More Hiring Expected as Gloom Starts to Lift - U.S. companies optimistic about the economy plan to hire more workers in coming months, a quarterly survey released Monday found, another signal that the jobs market is turning up. The fourth-quarter poll of 84 companies by the National Association for Business Economics found 42% expected to increase jobs in the next six months. That is up from 29% in the first quarter of 2010. Only 7% of companies in the latest survey predict they will shed jobs in the coming six months, down from 23% at the start of last year.  "It looks like the opening melody of a true recovery in the labor market," said Shawn DuBravac,   chairman of the NABE committee that conducts the survey.

U.S. Jobs Outlook Rises to Decade High, Survey Says - U.S. companies’ employment outlook improved to a 12-year high this quarter after sales strengthened and economic growth picked up, a survey showed. The percentage of businesses expecting to increase payrolls in the next six months exceeded the share projecting more firings by 35 points, the most since the question was first asked in 1998, according to a survey by the National Association for Business Economics issued today in Washington. Sixty-two percent of respondents planned to boost spending on new equipment this year, up from 48 percent in the October survey.  “Things are headed in the right direction,” Shawn DuBravac, chief economist at the Consumer Electronics Association in Arlington, Virginia, who analyzed the results, said in an interview. “Topping everything is the high number of firms suggesting they will increase their headcount in the future.”

Misc: State Unemployment Rates, Richmond Fed Manufacturing Survey, Consumer Confidence - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally little changed in December. ... Nevada continued to register the highest unemployment rate among the states, 14.5 percent in December. The states with the next highest rates were California, 12.5 percent, and Florida, 12.0 percent. The Nevada rate was the highest in its series. This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate). Ten states now have double digit unemployment rates. From the Richmond Fed: Manufacturing Activity Continues to Expand in January; Expectations Remain Upbeat ... The Conference Board reported their consumer confidence index was at 60.6 (1985=100), up from 52.5 in December. This was above expectations of an increase to 54.2. Confidence is a coincident indicator and this suggests improvement in January.

Hearty Growth in U.S. Demand Could Translate to Jobs - The mantra has been that companies won’t hire until demand picks up. How about sales growing at a 7.1% annual rate? Is that picked-up enough? Barring spillover impacts from the Egypt crisis, the U.S. economy is set for solid growth in the first half. Those gains in output should translate to better hiring. Friday’s top-line gross domestic product was slightly disappointing since growth came in at a 3.2% annual rate in the fourth quarter, less than the 3.5% expected. The reason for the shortfall, however, was a dramatic shift in inventory management. Businesses held their stockpiles virtually flat in the fourth quarter, after adding an annualized $121.4 billion to real GDP in third quarter. The swing resulted in the inventory sector subtracting a large 3.7 percentage points from GDP growth.

Weekly Initial Unemployment Claims increase sharply to 454,000 - The DOL reports on weekly unemployment insurance claimsIn the week ending Jan. 22, the advance figure for seasonally adjusted initial claims was 454,000, an increase of 51,000 from the previous week's revised figure of 403,000. The 4-week moving average was 428,750, an increase of 15,750 from the previous week's revised average of 413,000.  This graph shows the 4-week moving average of weekly claims for the last 10 years. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week by 15,750 to 428,750. This was much higher than consensus expectations. The recent decline in the four week average has been good news - and this large increase (just one week) is concerning.

Only 47% of working age Americans have full time jobs - VK, roving reporter for The Automatic Earth, has been playing with the numbers from the January 7 employment report issued by the U.S. Bureau of Labor Statistics. It seems valuable to look at unemployment from this, a different, angle. Some of it may even surprise you. The total non institutional civilian labor force (Americans 16 years and older who are not in a institution -criminal, mental, or other types of facilities- or an active military duty) is reported as 238.889 million. Of these, we see:

  • Employed: 139.206 million people (58.3% of labor force)
  • Unemployed: 14.485 million people (6.1% of labor force)
Obviously, that can't be the total picture, we're only at 64.4%. This is why:
  • Part time employed for economic reasons: 8.931 million people. This concerns people who want a full-time job but can't get one.
  • Part time employed for non-economic reasons: 18.184 million people. Non-economic reasons include school or training, retirement or Social Security limits on earnings, but also childcare problems and family or personal obligations.

But the by far largest category "missing" from both the Employed and Unemployed statistics is the "Not In Labor Force": 85.2 Million people. The BLS definition states: "Not in the labor force (NILF). A person who did not work last week, was not temporarily absent from a job, did not actively look for work in the previous 4 weeks, or looked but was unavailable for work during the reference week; in other words, a person who was neither employed nor unemployed." (Clearly, this does include lot of unemployed people).\

Gallup Poll: 41% of Unemployed Think a Job Offer Will Come Within 4 Weeks; 57% Would Accept a Job Under $24,000 - Here are some highlights from Unemployed Americans Face Challenging Job Search

  • Despite today's nearly double-digit unemployment rate, 41% of unemployed Americans expect to get a job in the next four weeks.
  • 34% of underemployed have the same expectations with respect to obtaining a full-time job.
  • On average, unemployed workers report that they have spent 27 weeks actively looking for a job.
  • On average, unemployed workers say they have applied for 45 different jobs, while the underemployed, on average, report applying for 19 different full-time jobs.
  • On average, unemployed workers report that they have spent 27 weeks actively looking for a job
  • In their previous job, 48% said they were making less than $24,000 a year. An additional 25% were making $24,000-$60,000 a year. 20% did not offer an opinion.
  • For their next job, 57% of unemployed would accept a job paying less than $24,000 a year. An additional 20% would accept a job paying $24,000-$60,000 a year. 20% did not offer an opinion.

For Older, Out-Of-Work Residents, The Future Looks Grim - A burgeoning group of older, jobless people — here and nationwide — have found everything they worked for over the decades snatched away by the sharp downturn and slow recovery. Laid-off workers in their 50s, 60s and older are facing grim prospects of finding a new job, the worst for any age group in at least five recessions, at a time when hardly anyone is finding re-employment easy or quick. Baltimore's homeless-services agencies saw a 15 percent jump last year in the number of clients ages 50 and up. Calls for help to the United Way of Central Maryland's 211 line rose almost 9 percent among those older than 45 last year, compared with a 1 percent increase among all ages. And food pantries served by the Maryland Food Bank have noticed an influx of baby boomers, including some who were donors before job loss struck.

Too young not to work, too old to get a job - Pew's new report on long-term unemployment is sobering stuff: Thirty percent of those who are jobless have been unemployed a year or more (long-term unemployment) as of December 2010. Equaling 4.2 million people -- roughly the population of Kentucky -- this is 25 percent more people affected by long-term unemployment than a year prior (December 2009, 3.4 million)....Using the CPS data, Pew calculated that the persistent problem of long-term unemployment is occurring across education and age groups but those who are older than 55 are most likely to remain jobless for a year or more. Additionally, a high level of education only provides limited protection against long-term unemployment -- the rates are similar across degree attainment: 31 percent of unemployed workers with a bachelor’s degree have been out of work for a year or more, compared to 36 percent of high school graduates and 33 percent of high school drop-outs.  The interplay between age and unemployment really worries me. On some level, we have a rosy view of "structural unemployment": It's a guy in Reno, Nev., who has skills better suited to the job market in Boulder, Colo. That's not an easy problem to fix -- our Reno resident doesn't scan Boulder's "help wanted" ads -- but it at least points toward a way the problem can be fixed. But a lot of older workers have found that employers just don't want to hire them.

Obama and Competitiveness - If I heard only that President Obama had created a "Council on Jobs and Competitiveness," this would seem fine. This is politically marketable (who could be against jobs or competitiveness?) and it's possible to actually use this as a vehicle to accomplish something useful. If Barack were to, in a foolish moment, appoint me to such a Council, what would I want to do? Competitiveness is about productivity, and all good economists know that our standard of living flows from total factor productivity (TFP). In turn, TFP is determined by our technological capabilities, educational attainment and skill at organizing production in individual firms, and the efficiency with which available resources (labor and capital) are allocated across those firms.

The Competition Myth, by Paul Krugman - The President’s Economic Recovery Advisory Board has been renamed the President’s Council on Jobs and Competitiveness. And in his Saturday radio address, the president declared that “We can out-compete any other nation on Earth.”  This may be smart politics. Arguably, Mr. Obama has enlisted an old cliché on behalf of a good cause, as a way to sell a much-needed increase in public investment to a public thoroughly indoctrinated in the view that government spending is a bad thing.  But let’s not kid ourselves: talking about “competitiveness” as a goal is fundamentally misleading.  At worst, it could lead to policies based on the false idea that what’s good for corporations is good for America.  About that misdiagnosis: What sense does it make to view our current woes as stemming from lack of competitiveness?  It’s true that we’d have more jobs if we exported more and imported less. But the same is true of Europe and Japan, which also have depressed economies.  Yes, we could demand that China shrink its trade surplus — but if confronting China is what Mr. Obama is proposing, he should say that plainly.

The End of the Mancession - Between December 2007 and June 2009—the recession's official timeframe, according to the National Bureau of Economic Research—jobs held by men accounted for more than 70 percent of all those lost.The past year has seen an upswing, although the gains have been too tepid to make a dent in the unemployment rate. Here, too, the trajectory has been different for men and women—but now it's women who are the losers. For the full year of 2010, the private sector added jobs every month, and for the past three months it averaged 128,000 per month. In 10 of these 12 months of gain, however, the growth in jobs for men outpaced the growth for women. Last summer, women actually lost jobs while men saw small increases. And in total throughout 2010, men gained slightly more than a million jobs, while women gained a paltry 149,000. Did the relative strength of women's employment in the downturn signal that their jobs are recession-proof? That's not what it looks like now.

The President Ignored the Elephant in the Room - Robert Reich - The President’s new emphasis on the importance of investing in education, infrastructure, and basic research in order to build the nation’s long-term competitive capacities is appropriate. For the last three decades the federal government’s spending on these three essentials has declined as a percentage of its total spending, arguably threatening America’s technological and economic leadership.  But the new theme also poses a danger of appearing to ignore the elephant in the room – the nation’s continuing scourge of high unemployment that shows little sign of abating any time soon.  It’s one thing to challenge the nation to re-embark on the equivalent of a race to the moon when most people feel confident about their own family finances, but quite another when economic security is as endemic as now.

Norway and Ireland Surpass U.S. in Productivity - There are enough different definitions of productivity that President Obama can claim, as he did last night, that American workers are the most productive in the world. But the best measure of productivity is probably output per hour, not output per person. By that measure, our own Bureau of Labor Statistics reports that the United States trails at least two other countries, Norway and Ireland.  Norway and Ireland have something else in common. A decade and a half ago, they both trailed the United States in education attainment.Since the mid-1990s, though, Norway and Ireland have passed us. By 2008, the United States had increased its college graduation rate to merely 37 percent, while Norway was at 41 percent and Ireland at 46 percent.

Can we get unemployment below 4%? Do we need to? - I share Robert Pollin’s view that the U.S. should strive for full employment — by which I mean, following his lead, an unemployment rate below 4%. Can we do it? Pollin points to two historical precedents as grounds for optimism. The first is Sweden from 1960 to 1989. Sweden succeeded in keeping unemployment below 4% throughout those three decades by coupling employment-oriented monetary and fiscal policy with wage restraint. But Sweden’s central bank at that time was subordinate to the government.  What about Pollin’s second precedent, the United States in the late 1990s? During those years the Fed, under Alan Greenspan, did keep interest rates low enough for the unemployment rate to drop below 4%. . Greenspan took this stance in part because his belief in the self-correcting nature of markets led him to worry less than others about the bubble. In light of the painful consequences of the 2000s real estate bubble, I doubt we’ll see the Fed take that approach again for some time.Do we need below-4% unemployment? Here a cross-national perspective might shed some light. The following charts show indicators of Pollin’s desired outcomes — a healthy economy, decent pay, low poverty, good working conditions, absence of discrimination — in twenty rich democratic nations.

Job-Killing Hypocrisy - This week the House of Representatives passed a bill instructively titled “Repealing the Job-Killing Health Care Law Act.” Neither platitudes nor hypocrisy are new in Washington, but the “job-killing” rhetoric has reached overkill. In recent weeks, the “job-killing” bromide has been tacked to the front of government spending, stimulus, tax hikes, deficits, and government regulation. Thoughtful discourse has given way to meaningless and misleading talking points, with many policymakers simply ignoring economic theory and analysis. The irony is that many of the conservatives raving about “job-killing” legislation have repeatedly stood in the way of job-saving economic stimulus and instead proposed spending cuts that would result in steep job loss. For all its misuse, the job-killing rhetoric underscores a very real anxiety felt by the American people: that there aren’t enough jobs. If unemployment were down around 5%, the “job-killing” accusations would hold little traction. Instead, employment remains 5.2% below pre-recession levels, and the unemployment rate has been stuck above 9% for 20 months. So what were the “job killers” that got us here? Look to the financial crisis and the Great Recession, which lowered private-sector employment by 8.5 million, peak to trough. Better oversight of Wall Street could have averted much of the economic pain inflicted, but that didn’t prevent many of the “job-killing” firebrands from opposing financial reform legislation that will hopefully prevent more devastating financial meltdowns. Patchy financial regulation risks recessions and job loss.

Unemployment Rate To Remain Above 9 Percent Through 2011, Will Remain Above 'Natural Rate' Until 2016: CBO - The jobs crisis isn't going anywhere, according to the latest forecast from the nonpartisan Congressional Budget Office, which puts the national unemployment rate above 9 percent through 2011 and 8 percent through 2012. Unemployment will fall to a more "natural rate" only in 2016, when CBO estimates it will reach 5.3 percent -- a projection roughly in line with private-sector figures. "The recovery in employment has been slowed not only by the moderate growth in output in the past year and a half but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers, that have hindered the reemployment of workers who have lost their job," CBO's report says.  The degree to which the unemployment crisis is structural, as opposed to cyclical, is hotly debated by economists, with progressives like Paul Krugman arguing that structural unemployment is a fake problem "which mainly serves as an excuse for not pursuing real solutions." Many argue that the even drop in employment across industries shows that lack of overall demand is the problem, with stimulus spending the answer. Others have said pay disparities between workers with different levels of education show the problem is at least partly structural.

Is the American economy recalculating? - THE economics blogosphere continues to debate the nature of the American recession and why it seems to have crippled the country's job creation machine. In the latest go-round, those arguing that monetary mismanagement allowed the recession to take place are fending off critics on two fronts: those favouring an Austrian, "recalculation" version of the downturn, and those arguing that it was a balance-sheet recession. Let's begin with the recalculation story. Its proponents, including Arnold Kling and Robert Murphy, seem to be suggesting that as the housing bubble popped, the economy faced a moment in which it needed to reallocate a substantial number of resources, and that manifested as a pause to "recalculate", like your GPS system does when you make a wrong turn. But as Scott Sumner and David Beckworth argue, the timing doesn't particularly work out. Construction employment falls well before recession begins, and non-construction employment continues to rise at the same time—suggesting a healthy economy is reabsorbing workers elsewhere—until financial crisis leads to falling growth expectations in the summer of 2008, at which point things go downhill in a hurry. Here is the key chart, from Mr Beckworth

The “Recalculating” Debate, by Tim Duy: The fundamental nature of the recession continues to be debated – a debate with important policy consequences. Is the recession the consequence of a general aggregate demand deficiency, or is it a structural consequence of the housing bubble? If the former, the policy approach should be to support aggregate demand via a combination of fiscal and monetary policy. If the latter, only time will resolve the challenge, and aggressive policy will only lead to inflation. David Beckworth and Ryan Avent provide nice summaries of the nature of the debate. Paul Krugman argues that the answer is obviously a demand shortfall, and bemoans: Now, however, we’re seeing a much more widespread attack on demand-side economics. More than that, it’s becoming clear that many people don’t so much disagree with the idea that demand matters as find it abhorrent, incomprehensible, or both. Nick Rowe offers an alternative explanation:

The War on Demand - Krugman -  Something really strange has happened to the debate over economic policy in the face of the Great Recession and its aftermath — or maybe the real point is that events have revealed the true nature of the debate, stripping away some of the illusions. It’s a bigger story than any one point of dispute — say, over the size of the multiplier, or the effects of quantitative easing — might suggest. Basically, in the face of what I would have said is obviously a massive shortfall of aggregate demand, we’re seeing on all-out attack on the very notion that the demand side matters. This isn’t entirely new, of course. Real business cycle theory has been a powerful force within academic economics for three decades.  Now, however... it’s becoming clear that many people don’t so much disagree with the idea that demand matters as find it abhorrent, incomprehensible, or both. I fairly often get comments to the effect that I can’t possibly believe what I’m saying about monetary or fiscal policy, that no sensible person could believe that printing money or engaging in deficit spending will increase output and employment — never mind that all I’m saying is what Econ 101 textbooks have been saying for the last 62 years. So what’s going on here?

The War on Demand, and the short-side rule - Paul Krugman thinks the War on Demand is strange. I think it's weird. But I've got a different take on what's happening. Let's start with some very basic theory. It takes two to trade. A buyer and a seller. If the buyer is willing and the seller is willing, there's a trade. If the buyer is not willing there's no trade. If the seller is not willing there's no trade. Quantity actually bought and sold is whichever is less: quantity demanded; or quantity supplied. Q=min{Qd,Qs}. That's the short side rule. The short side of the market determines the quantity traded. Most people figure this out.  Everywhere you look you see people trying to sell more. If you want to buy something, and are willing to hand over the money, you can nearly always buy it. The seller is almost always able and willing to sell you one. Very willing.  The short side of the market is nearly always the demand side. Quantity supplied is nearly always more than quantity demanded. It's easy to buy, and hard to sell. Any fool can be a buyer. Put theory and observation together. If you increase quantity supplied, without increasing quantity demanded, nothing will happen. But if you increase quantity demanded, even if you don't increase quantity supplied, the quantity bought and sold will increase.

The Demand-Side Temptation - Krugman - Nick Rowe makes a good point: most of the time, in market economies, sellers feel constrained while buyers don’t. I’m somewhat surprised that he doesn’t mention why: it’s because perfect competition is actually rare, because oligopoly or monopolistic competition — in which prices exceed marginal cost — is actually the norm. And that, by the way, is how most New Keynesian models set things up: the classic NK model is one in which a number of little monopolists sell differentiated products, at prices they set and revise only occasionally.  Furthermore, in these models more demand actually is good for everyone: if you could keep the economy running a bit hot all the time, that would be a positive thing. The problem is that you can’t: a monetary policy that tries to keep unemployment below the “natural” rate may initially be welfare-enhancing, but only at the cost of ever-accelerating inflation. Rowe goes on to suggest that demand-side logic is dangerous, because it appeals to our sense that more demand is always better, and could lead to irresponsible policies.  But what I think Nick misses is the power of the contrary narrative, of the notion of the government as being like a family that must tighten its belt when the rest of us do, of the evils of printing money.

Back To Full Employment, Losing the Demand Thing - Whatever happened to the goal of Full Employment?  Boston Review has a forum on the topic of Full Employment. It’s kicked off with a lead essay by economist Robert Pollin – Back to Full Employment – which also gives a history of the term and how it has been used.  Contributors are Reihan Salam, James K. Galbraith, Ruy Teixeira, Lane Kenworthy and many others. Highly recommended. Two additional things.

  • 1. Reihan Salam’s essay – Open the Labor Market – shows the problem of using supply-side arguments to understanding this crisis. Salam doesn’t mention any kind of demand-side concepts, be they monetary or fiscal. Instead Salam wants us to focus on incarceration blocking the supply of labor, which I think is a great idea.
  • 2. Jamie Galbraith has a piece – Policies for Today’s World – that includes a history of the 1978 Humphrey-Hawkins Full Employment and Balanced Growth Act as well as arguments on infrastructure

Explaining Aggregate Demand and Aggregate Supply - Non-economists think of demand and supply as separate and fixed. There is no mechanism to regulate them. Instead, if there is a shortage (of oil, or nurses, or what have you), there is no notion that the price system will change this. Non-economists have no problem talking about a "shortage" of jobs ("we're not creating enough jobs!"), as if jobs are something that are "demanded" by households and "supplied" by businesses or government.  To economists, supply and demand are regulated by price. When market conditions change to increase the demand for oil, the price of oil goes up, until demand is curbed and supply is induced sufficiently to eliminate any incipient shortage.When it comes to aggregate supply and demand, the regulating mechanism is what is called the real wage rate, which means the wage rate adjusted for the general level of prices (or the cost of living). When prices go up, the real wage rate falls, and vice-versa. When the real wage rate falls, firms hire more workers, raising output and employment. That is the aggregate supply that goes along with aggregate demand.  . This aggregate supply mechanism assumes that wages stay fixed while prices move. This sticky wage hypothesis is at the center of the whole mechanism. But it raises all sorts of questions. Why are wages sticky? For how long do they remain sticky? How is it that the same workers who refuse to take lower nominal wages at a fixed level of prices are happy to see the same nominal wages at higher prices? Thousands of journal articles have dealt with these questions.

The Wal-Mart Decade - Paul Krugman - I’ve been putting some material together for textbook revision, and found myself looking at European versus US productivity performance over the past couple of decades. I sort of knew the facts here, but this recent paper by Bart van Ark (pdf) seemed to me to make the points especially clearly, and I found myself rolling my own versions of some of his numbers. To get some sense of productivity trends, van Ark uses a fairly fancy statistical technique (Hodrick-Prescott filter). But a simple 5-year moving average, to smooth out the business cycle, does about the same thing. Here’s productivity growth in the US and in “Europe” defined as the average of the 4 big economies since 1970:European productivity grew faster than the US until the 1990s, mainly reflecting catchup; but America moved ahead in the late 1990s; the data suggest that the differential has leveled out since, so this may have been a one-time bulge. And what was it about? Van Ark’s data point to a huge surge between 1995 and 2004 in US productivity, not so much in producing goods as in distributing them. And we know what that’s about: Wal-Mart and other big box stores.

Recover Our Spending Power - Robert Reich - The Great Recession accelerated trends that started three decades ago: outsourcing abroad, automating work, converting full-time employees to temps and contractors, undermining unions and getting wage and benefit concessions from remaining workers.  Mr. Obama should point out that the United States economy is now more than twice the size it was in 1980, but the real median wage has barely budged; that in the late 1970s, the richest 1 percent of Americans got about 9 percent of total income, while by the start of the Great Recession the richest received more than 23 percent; that wealth is now even more concentrated. And the economy is bogged down because most Americans, unable to borrow as before, no longer have the purchasing power to get it moving again.  The president should stress that a future with no jobs or lousy jobs for most Americans is not sustainable — not even for American corporations, whose long-term profitability depends on broad-based domestic demand.

In U.S., One in Four Unemployed Adults in Financial Distress - About one in four unemployed adults in the United States today, 26%, reports they are either falling behind on their bills or facing more serious financial difficulties such as bankruptcy or foreclosure. This compares with 21% of underemployed Americans and 8% of adults who are neither unemployed nor underemployed. Although most unemployed Americans are not sinking financially, relatively few are worry free: fewer than 3 in 10 say they are having no difficulty whatsoever meeting expenses. An additional 40% are having trouble paying their bills, but managing to do so. These results are based on a USA Today/Gallup poll conducted as part of Gallup Daily tracking between Dec. 21, 2010 and Jan. 9, 2011. The USA Today/Gallup survey defines unemployed Americans as adults aged 18 and older who are currently out of work but say they are able to work and are actively looking. The unemployed group also includes out-of-work adults who are not currently looking for a job, but who plan to look in the future. The latter constitute so-called "discouraged workers" who are commonly considered out of the workforce and therefore not included in standard government or Gallup unemployment figures.

The Market and Inequality - Dean Baker - Paul Krugman joined a debate on the morality of markets, arguing that the United States has not met the fundamental condition of equality of opportunity that libertarian conservatives agree is necessary for fairness. While this is true (only in loon tune land does a kid growing up in Anacostia have the same opportunity as a kid growing up in Chevy Chase), this argument wrongly cedes the main point to the right. It is ridiculous to argue that the inequality in the U.S. is simply the result of free markets. Markets are structured by governments, and the rich have used their control of the government to structure the market in ways to make themselves richer.  The mechanisms for upward redistribution can be seen everywhere. Most recently the government bailouts of too big to fail banks meant that the top executives of Citigroup, Goldman, and the rest could continue to draw paychecks in the tens of millions of dollars. The implicit government guarantee enjoyed by these institutions amounts to a subsidy of tens of billions each year that is divided among their higher paid employees and their shareholders.

Robert Shiller Argues That Rising Inequality In The US Was A Major Cause Of The Recent Crisis, And Little Is Being Done To Address It – Yves Smith - I have previously argued at some length that rising inequality is one of the main causes of the economic crisis. Famed Yale economist Robert Shiller agrees. As the Browser reports: Yale economist Robert Shiller argues that rising inequality in the US was a major cause of the recent crisis, and little is being done to address it. Shiller gave The Browser a reading list of books which explain the economic crisis, including former IMF chief economist Raghuram G. Rajan’s book Fault Lines, which gives several causes for the current crisis, explaining: The first of them is political, and the politics that lead to rising inequality. That’s been a trend in recent years in most nations of the world. Inequality has been getting worse, particularly in the US, but also in Europe and Asia and many other places. One thing that this has done is it has encouraged governments, who are aware of the resentment caused by the rising inequality, to try to take some kind of steps to make it more politically acceptable...instead of fixing the problems of the poor, lending money to them. He has a chapter entitled ‘Let them eat credit’.

Inequality and debt: the soft bigotry of low expectations - "The poor don't have enough income to save, and can't help going into debt to the rich. Debt is caused by inequality". That statement is wrong on many levels. It's wrong theoretically. It's wrong empirically. But most of all, it's wrong because it might make inequality worse. It's the soft bigotry of low expectations. Providence is especially important to the poor. Saying that the poor can't help but be improvident is the last thing they need to hear. If we want a policy that will promote equality of income we should do it because it's a good policy in its own right; not because of some spurious argument about reducing debt.

Why Does Inequality Matter? - The Economist asks:What's the correct way to think about the rise of the global super-rich? Is there any reason to be concerned about recent changes in the income distribution, in America, across rich countries, or globally? Is there reason to believe that inequality contributes to financial or economic instability? Lead Articles:  The rich and the rest, Does rising inequality matter—and if so why?, and Did inequality cause the financial crisis?.Here's is my response, which echoes some of my comments in a recent column, along with others (all responses, more are likely to follow):

Why Income Inequality Matters - The Economist complements this week’s print issue on rising income inequality with an online forum on the subject.  Daron Acemoglu explains why we care about income inequality: “First, people’s well-being may directly depend on inequality, for example, because they view a highly unequal society as unfair or because the utility loss due to low status of the have-nots may be greater than the utility gain due to the higher status of the haves. Second and more importantly, equality of opportunity may be harder to achieve in an unequal society … Third and most importantly, inequality impacts politics. Economic power tends to beget political power even in democratic and pluralistic societies.”  Meanwhile, Mark Thoma argues that inequality may soon restrict growth: “We may be near or even past the level of inequality where growth begins falling. The evidence on this is highly uncertain, so it’s difficult to say. But a few more decades like the last few could make the difference, so why take a chance?”

Why business is stuck on income inequality - Martin Sorrell, the CEO of advertising and public relations giant WPP, was just at the Sundance Film Festival, where he saw a documentary called The Flaw. The title comes from Alan Greenspan's now-famous admission to a Congressional committee in 2008 — "I have found a flaw in the model that defines how the world works" — and as best I can tell it posits that extreme income inequality was a precipitating factor behind the financial crisis. It certainly left an impression on Sorrell. "Wealthy people invest in financial assets; they create asset bubbles," he said this morning. When wealth is distributed more equally, he went on, you get more sustainable growth. Sorrell is a wealthy man, and he said all this while at the front of the room at one of the opening events of the World Economic Forum's annual meeting in Davos, one of the world's great gatherings of those near the top of the wealth pyramid. It seemed like a significant moment.

The Big Squeeze: Predicting the Effects of Savings Extortion and Abuse of the Middle Class - By now it should be clear even to the most optimistic observer that the global financial system has given itself over to systemic lawlessness. Once international banks were effectively allowed to print their own money in an unregulated “shadow” system and have it redeemed full value by national taxpayers, the charade was over. The only thing left, at this point, given the full cooperation of governments and an eerie world-wide non-enforcement of law, is for banks, like a cancer to savage and consume every concrete store of non-counterfeit productivity and asset value.  Not only have governments from China to the United States committed themselves to a chess game meant to eke out relative advantages on a sinking ship, but they have positively rewarded those who are speeding the collapse. A simple, cannibalistic economic rule now persists until a new system emerges: Economic manipulation, destruction, and extortion are simply more profitable, far more profitable, than good old fashion value creation. Disaster capitalism will be pursued full force.

Seeing across the income divide - OF ALL the developments to take place in America's economy in recent decades, none may be as puzzling or troubling to the American psyche as the rise in income inequality. Pundits bitterly debate the meaning of the shift, while economists struggle to tease out the factors behind it. And many wonder what it means. Those used to defending America inequality on the grounds that it provides the incentive to strive that defines a dynamic economy now question how healthy the divisions really are. American mobility seems to be waning, not growing, and the crisis seems to have reinforced the gap between haves and have-nots. The subject has been a frequent topic of discussion on The Economist's blogs, and this week the print paper uses the opportunity of a special report on the global elite to weigh in on the issue, concluding that: First, governments need to keep their focus on pushing up the bottom and middle rather than dragging down the top: investing in (and removing barriers to) education, abolishing rules that prevent the able from getting ahead and refocusing government spending on those that need it most.

The decade of inequality: Workers fell behind, wealthy continued to rise in aughts The past three decades have been 30 years of stagnating incomes and falling living standards for the American middle class. But the aughts were particularly brutal: working families ended 2010 worse off than they began 2001 on almost every measure. Wages fell, health care premiums rose, foreclosures skyrocketed, and more.   Instead of sharing the pain, America's wealthiest saw record bonuses, profits, and tax cuts.  As we begin a new decade, it's time for corporate America to do its part to create millions of good jobs with a living wage and benefits--instead of sitting on trillions of dollars of cash or spending billions on CEO bonuses. Instead of a Decade of Inequality, let's make the teens a Decade of Shared Prosperity. Download a PDF of these charts

Is America growing more slowly? - YESTERDAY, Matt Yglesias wrote: I think the specific fate of the very poor can become pretty unmoored from overall economic conditions, but certainly as a historical matter middle class incomes have risen the most at the same times America’s has had the most rapid economic growth—the 30 years after World War II and the late 1990s. You can construct some models in which this isn’t the case, but in practice the basic mechanisms for faster economic growth lead to rising middle class incomes, though not necessarily rising incomes for each individual middle class household. Kevin Drum responded: This is a surprisingly hardy myth, and I'd like to help it die the grisly death it deserves. Here's a chart showing real per capita GDP growth in the United States over the past century. I've helpfully added a straight red line for the period from 1950 to the present day...Here's his chart: And he continued: The past 30 years simply haven't been a low-growth period. In fact, economic growth has been about the same as it was in the 30 years before that. Our problem isn't growth, our problem is that the returns to growth have increasingly been skewed in favor of the very rich. So, true or not?

Only 35% of Americans Have Emergency Savings - As usual, the truth about the financial condition of Americans is hidden in plain sight. All that's missing is some widespread coverage of the news and some serious reflection about what it means. The Wall Street Journal reported the story in Number of the Week: Americans Dipping Into Savings Over the two years ending September 2010, Americans withdrew a net $311 billion — or about 1.4% of their disposable income — from their savings and investment accounts, according to the Federal Reserve . That’s a sharp divergence from the previous 57 years, during which they never made a net quarterly withdrawal. Rather, they added an average of 12% of disposable income to their holdings of financial assets — including bank accounts, money-market funds, stocks, bonds and other investments — each year.

Discretionary Spending Cuts Would Reduce Jobs, Hurt Social Programs - House of Representatives will vote on a resolution to cut non-security discretionary spending back to fiscal year 2008 levels for the last seven months of this fiscal year. What will this accomplish? If spread over an entire year’s worth of discretionary spending, reverting to 2008 spending levels would result in a cut of about 13% to all non-defense programs, totaling around $60 billion in cuts. But if the cut is instead squeezed into the remaining seven months of fiscal year 2011, then it grows to around 22%. . Focusing on deficits now is not only a distraction, but actually undermines the goal of generating more jobs. In fact, making these cuts to the discretionary budget would reduce the number of jobs available significantly. Okun’s rule of thumb states that when gross domestic product (GDP) declines, there is a correlating increase in unemployment. A $60 billion cut, when assigned a fiscal multiplier of 1.5, would impact GDP by roughly $90 billion for the rest of this fiscal year alone. This would result in a decline in output by a little more than one-half of a percentage point of GDP, resulting in a loss of around 590,000 jobs.'

Guest Post: Inequality In America Is Worse Than In Egypt, Tunisia Or Yemen - Egyptian, Tunisian and Yemeni protesters all say that inequality is one of the main reasons they’re protesting. However, the U.S. actually has much greater inequality than in any of those countries. Specifically, the “Gini Coefficient” – the figure economists use to measure inequality – is higher in the U.S. Gini Coefficients are like golf – the lower the score, the better (i.e. the more equality). According to the CIA World Fact Book, the U.S. is ranked as the 42nd most unequal country in the world, with a Gini Coefficient of 45. In contrast:

  • Tunisia is ranked the 62nd most unequal country, with a Gini Coefficient of 40.
  • Yemen is ranked 76th most unequal, with a Gini Coefficient of 37.7.
  • And Egypt is ranked as the 90th most unequal country, with a Gini Coefficient of around 34.4.

And inequality in the U.S. has soared in the last couple of years, since the Gini Coefficient was last calculated, so it is undoubtedly currently much higher.

The safety net in the short run and the long run -Tyler Cowen responds to my post on gaps in America’s safety net: These questions could and should be debated with thousands of pages.  But, in the meantime, may I offer my little squib/splat of doubt? At what wealth level are these protections supposed to arrive?  Now?  One also wonders which risks are considered to be insurable at the individual and family level, either through insurance proper or through social norms, savings, and other voluntary institutions.  What will be the implicit marginal rate of taxation on earning additional income in this new arrangement?  Has it been estimated?  What will happen to the savings rate?  What coercions will accompany these protections?  What will the pressures be, legal or otherwise, to send your kid away at one year of age?  Will job creation for women go down if there is mandatory paid parental leave?  Probably so. Will women end up better off?  Quite possibly not.  How many people would count as falling under these disabilities?  Is this all to be financed by higher taxes on the rich?  We probably can’t even pay for our current bills in that manner.  If it is all done by VAT, how many people would prefer to have the government spend the money for them, as opposed to spending it themselves?  Just asking.  What is the likelihood that such benefits will, in the longer run, discourage our willingness to take in immigrants, the most effective form of aid we know? Let me sidestep some of the specifics for the moment and say something about the big picture.

How Can the Richest 1 Percent Be Winning This Brutal Class War Against 99% of Us? - Who are they? The richest 1 percent. And maybe the next 9 percent. Who are we? All the rest. Which poses an interesting question. How has a tiny fraction of the population – which is diverse in many ways – arranged for their narrowest economic interests to dominate the economic interests of the vast majority? And, while they’re at it, endanger the economic well-being of our nation, and bring the financial system of the whole world to the brink of collapse. They have money. We have votes. Theoretically, that means we should have the government. Theoretically, government should be a countervailing force against the excesses of big money, take the long view for the good of the nation, and watch out for the majority. Let alone for the poor and downtrodden. What we actually have is one political party that is flat out the party of big money and another party that sells out to big money. 

One in Six Seniors Lives in Poverty, New Analysis Finds - – One in six older Americans lives below the federal poverty line, according to a new government analysis which almost doubles the number of very poor seniors compared to the standard estimate. At 16%, the proportion of seniors living in poverty is also higher than the proportion of all Americans in poverty. The plight of poor women is particularly striking: 43% of Hispanic women who live alone, and 34% of black women who live alone, live in poverty, according to Supplemental Poverty Measure Research, an alternative calculation from the U.S. Census Bureau. The Supplemental Poverty Measure is a U.S. Census research tool that considers previously overlooked costs like out-of-pocket medical expenses and taxes that can create economic stress for seniors on fixed incomes.

Defining poverty: Measure by measure | The Economist - Poverty means different things in different countries. In Europe, the poor are those whose income falls below 60% of the median. Britain uses three measures: one relative, one absolute and a broader indicator of material deprivation, such as whether a child can celebrate his birthday. The concept of poverty becomes even more slippery when attempting international comparisons. The United Nations’ “human- development index” assesses countries across a range of indicators, such as schooling and life expectancy.  America’s official poverty measure is far simpler. Developed in the 1960s, the poverty threshold represents the basic cost of food for a household, multiplied by three. A family is judged to be poor if its pre-tax income falls below this threshold. But the official measure provides only a blurry picture. Food spending has become a flimsy reference point—in 2009 groceries accounted for just 7.8% of Americans’ spending. The poverty indicator does not account for programmes that help the poor, such as the earned-income tax credit, nor does it adjust for regional variations in the cost of living. In 1995 the National Academy of Sciences recommended changing the measure, but only now is a new one close to being established.  The “supplemental poverty measure” (SPM) will not replace the official one, which is used to determine eligibility for government programmes. Rather, census officials hope the new indicator will provide a better understanding of America’s poor, by measuring both the needs of families and the effect of government help.

Even in Death, Budget Cuts Take a Toll - Squeezed Governments Look at Cremation, Other Ways to Trim Cost of Simple Burials for the Indigent and Unidentified. —Government budget cuts have reached the potter's field. Communities have long provided simple burials for the indigent or unidentified, but cash-strapped jurisdictions from North Dakota to Arizona are trimming subsidies, raising fees or switching to cremation. The deliberations over such changes underscore that in an era of austerity, governments have to face issues that touch on both the economic and the moral. Toledo, Ohio, is running out of burial funds and space in city-owned Forest Cemetery, Parks Commissioner Dennis Garvin told the City Council this month. So city leaders have proposed adopting cremation as the default option for indigent people, unless their religion bars it. The remains would then be commingled and poured into a double-deep vault. City Councilman Steve Steele asked Mr. Garvin whether the vault was like a "mass grave." In Wayne County, Mich., which includes Detroit, state budget cuts have allowed the medical examiner's office to bury only half the number of bodies that need to be buried each year, according to Albert Samuels, chief investigator for the office. Mr. Samuels said he has about 185 bodies in storage.

How Poverty Hurts Young Children and, Why Rich Parents Don't Matter - When it came to the mental ability of 10-month-olds, the home environment was the key variable, across every socioeconomic class. But results for the 2-year-olds were dramatically different. In children from poorer households, the choices of parents still mattered. In fact, the researchers estimated that the home environment accounted for approximately 80% of the individual variance in mental ability among poor 2-year-olds. The effect of genetics was negligible. The opposite pattern appeared in 2-year-olds from wealthy households. For these kids, genetics primarily determined performance, accounting for nearly 50% of all variation in mental ability. (The scientists made this conclusion based on the fact that identical twins performed much more similarly than fraternal twins.) The home environment was a distant second. For parents, the correlation appears to be clear: As wealth increases, the choices of adults play a much smaller role in determining the mental ability of their children.

Recession Begets Kids' Depression - Adults aren't the only ones feeling emotionally wounded by the economy. Last week, the David Lawrence Center in Naples added another outpatient group for youth ages 12 to 17. Called "Tough Times," it's another way the mental health and substance abuse center is trying to meet an increasing need for help among Southwest Florida adolescents. "The trend now, as it has been in the last several years, is for us to see co-occurring things." said Bonnie Fredeen, the center's chief operating officer. With the economy, we see things such as adjustment disorders, some anger issues, and kids may be dabbling with substances," "We're seeing so many teens with anxiety and depression." The center saw about 1,300 minors in 2007; that number climbed to 2,500 in 2010.

What if Obama had talked about prisons? Watching the State of the Union address is often an exercise in low expectations. When it comes to criminal justice reform, those expectations are absent entirely. We are not a country that talks about the millions of people living (and dying) behind bars.For those of us who are labeled “single issue” folks, it’s generally pointless to wax predictable about what the president should and should not have said. But thinking about Obama’s speech, with its focus on domestic policy and the economy, I can’t help but feel that it was a wasted opportunity. If there was ever a moment to acknowledge the need for prison reform—as well as its viability—it could have been now. The feds are already behind the curve. States across the country are figuring out that mass incarceration is not a solution to crime.

TheEconomist: Et in Arcadia ego - THE statistics are worthy of Detroit or Newark: almost half the children in the local schools are from families poor enough to be eligible for free or cut-price lunches; a tenth of households qualify for food stamps; one in eight residents gets free meals from soup kitchens or food banks; perhaps one in 12 has suffered a recent spell of homelessness. Yet the spot in question is not a benighted rust-belt city, but Sarasota, Florida—a balmy, palm-studded resort town on the shores of the Gulf of Mexico. The Sarasota-Bradenton metropolitan area, a two-county sprawl of condominiums, marinas and retirement homes, saw the proportion of people living below the poverty line rise by more between 2007 and 2009 than any other big city in America, from 9.2% to 13.7%, according to the Census Bureau. Nor is Sarasota an aberration. All the other metropolitan areas that saw jumps of four points or more are also formerly fast-growing southern and western cities: Bakersfield, California; Boise, Idaho; Greenville, South Carolina; Lakeland, Florida and Tucson, Arizona. Arizona now has the second highest poverty rate in the nation, after Mississippi. The especially severe housing bust that ended the breakneck growth of these sunbelt cities has brought with it deprivation on a scale they have never previously encountered and are struggling to address.

State Unemployment Rates: The Decline from Recession Maximum - Earlier today I posted the usual graph of the state unemployment rate (with highs and lows since 1976).  Reader picosec suggested comparing the current state unemployment rates against the peak unemployment rates for each state during the recent recession. He writes: "This would indicate the relative rate that each state is recovering and might inspire discussion about why certain states are recovering faster/slower than others." The following graph shows the current unemployment rate for each state (blue), and the max during the recession (red). If there is no red, the state is currently at the maximum during the recession.The states are ranked by the largest percentage decline from the peak. New Hampshire's unemployment rate has declined from 7.1% to 5.5% currently (the largest percentage decline). Michigan's rate has declined from 14.5% to 11.7%, the largest percentage point decline, but less as percentage than New Hampshire or Vermont.

United States of Unemployment - interactive - Nevada once again had the highest unemployment rate in the country, at 14.5 percent in December, according to the Bureau of Labor Statistics. Michigan — which had long held the record for the highest state unemployment rate — was not even in the top three, having been surpassed by California (12.5 percent) and Florida (12 percent). North Dakota reported the lowest jobless rate, 3.8 percent, followed by Nebraska and South Dakota, 4.4 and 4.6 percent. North Dakota has had the lowest state unemployment rate every month since November 2008.

Some States Saw Significant Jobs Progress - The unemployment rate fell significantly in a handful of states last year, though most closed out 2010 with similar jobless rates to those they’d seen a year earlier. Nevada had the highest unemployment rate in December, at 14.5%, the Labor Department said Tuesday, as the state continues to struggle in the aftermath of the housing bust. California and Florida had the next highest unemployment rates at 12.5% and 12%, respectively. North Dakota reported the lowest jobless rate: 3.8% in December. The job market continued to deteriorate in Colorado and Utah last year, where the jobless rate jumped significantly from December 2009. But in 13 states the unemployment rate fell significantly in December, compared to a year earlier. The declines were led by a 2.8 percentage point drop in Michigan, which was hit particularly hard during the recession. The jobless rate stood at 11.7% in Michigan in December. Washington, D.C. also saw its unemployment rate decline by 2.2 percentage points to 9.7%. The other 35 states closed out 2010 with unemployment rates not vastly different from the ones they had reported at the end of 2009. See the full interactive graphic.

Michigan Unemployment Rate Drop Doesn’t Mean Jobs Growth - While Michigan’s jobless rate fell at the fastest pace in the nation in December, the state isn’t celebrating yet. December joblessness in the state dropped to 11.7% from 14.5% a year earlier. That is the lowest unemployment rate in nearly two years (since January 2009). The number of unemployed in Michigan fell 20.6% over the year to 555,000 at the end of December. The state’s annual unemployment rate fell in 2010 for the first time since 2005 to 13.1% from 13.6% in 2009. But, according to the state agency that monitors employment, the December decline “primarily reflected a reduction in the number of unemployed individuals seeking jobs.”  Long-term unemployment in Michigan rose last year, the department said. People out of work for longer than six months accounted for about 50% of the unemployed at the end of 2010, compared with 41% a year earlier. Meanwhile, the average duration of unemployment rose to 40 weeks last year from 30 weeks in 2009, the department said.

27.6% Teen Jobless Rate For 2010 An Illinois Record - More than a quarter of Illinois teenagers looking for jobs last year could not find one, according to preliminary data by the Employment Policies Institute, a think-tank that focuses on entry-level employment issues. Illinois’ rate climbed to a record high of 27.6 percent, up from 25.8 percent in 2009 and well above the national average of 25.9 percent. “Unfortunately, in Illinois as in other states, teens still have it really rough,” said Michael Saltsman, a research fellow at the institute. Illinois was among 15 states with the highest unemployment rate for teens age 16 to 19. Georgia had the highest rate at 36.3 percent, up 7.3 percent from 2009.

Mauldin: The Unsustainable Meets the Irresistible - State and local spending is the second biggest component of the economy. The chart below, from David's letter this week, gives us a visual image of just how large it is. Note that budget deficits at the state and local levels total more than 1% of GDP. Revenues, though, are still off 10% (on average) from where they were at the peak. The "fiscal stimulus" from the US government has run out and states and local communities are having to balance their budgets the old-fashioned way - through spending cuts and increased taxes. As this budget cutting works its way through the economy, and as inventories are no longer being built (they are already at adequate levels), the growth from the current stimulus (both QE2 and payroll and federal government expenditures) the economy will have to stand on its own in terms of organic growth. And as the year wears on it will become apparent there is less true organic growth than currently meets the eye.

Bondholders, Unions In High-Stakes Battle Over State Bankruptcy - The oddly passive headline on the New York Times Page One story today ("A Path Is Sought For States To Escape Their Debt Burdens") obscures a very active behind-the-scenes battle in Washington. On one side are representatives of the municipal bond community, who fret about being second in line behind unionized employees when states have to choose between paying debt interest or their ballooning retirement-benefit bills.  On the other side are union reps, who have fought hard to win legislation in all 50 states granting them special protection from raids on their retirement funds. According to this GAO report, nine states including Illinois and New York, even provide constitutional guarantees of vested benefits. Congress could monkey with that scheme through bankruptcy law, however, something it has done repeatedly to protect the interest of other special creditors including student lenders and landlords.

Where the Union Members Still Are -As my colleague Steven Greenhouse wrote on Friday, union membership rates reached a record low in 2010, dipping to 11.9 percent of the American labor force. So where exactly are those remaining union members? For a second consecutive year, most are working for the government, even though the total number of workers in the public sector, unionized or not, is dwarfed by the total number employed by private industry. That’s because of the differing unionization rates in the two sectors: The union membership rate for government workers (36.2 percent) was more than five times the rate for private sector workers (6.9 percent).Here’s a pie chart, courtesy of the Bureau of Labor Statistics, showing the breakdown of members:

Why State Bankruptcies May Be a Bad Idea - Some Congressional officials reportedly are mulling changes to federal law to allow U.S. states to file for bankruptcy protection in order to shed unmanageable debts and obligations such as public-employee pensions. Bad idea, says E.J. McMahon, in an opinion piece in today’s Wall Street Journal. McMahon is a senior fellow at the Manhattan Institute and at the Empire Center for New York State Policy, both conservative think tanks. McMahon says state officials already have enough tools at their disposal to cut costs, including by restricting terms of future contract talks with state workers. McMahon says: “[S]tate officials committed to cutting costs already have options for putting the squeeze on their unions. One is the threat of mass layoffs, which most governors can impose unilaterally. Governors and legislators also can prospectively freeze wages or even cut them through involuntary furloughs, as California and several other states did over the past two years.” McMahon says even the option of the B word for states would not only rattle the bond market but also raise borrowing costs for all state and local governments seeking to tap debt markets for public projects.

More On Why The "State Bankruptcy" Idea Is Dangerous Nonsense -- In the New York Post Nicole Gelinas of the free-market oriented Manhattan Institute cuts through the nonsense. She quickly identifies what Newt & Co. ignore Take New York, with its $78.4 billion in outstanding bond debt and estimated $81 billion in unfunded obligations for state-employee pensions and retiree health care. The idea seems to be that the Empire State would go "bankrupt," figure that it can afford only, say, 80 percent of this number -- and get a judge to lop off 20 percent. Ha. The complications of the municipal-bond markets make this plan hopelessly naive. For starters, states like New York run up "their" debt indirectly. They issue bonds through tens of thousands of separate legal entities. New York "state" doesn't owe all of that $78.4 billion in debt -- it owes only $3.5 billion in "general-obligation" debt. Who owes the rest? The MTA, the Dormitory Authority, the Triborough Bridge & Tunnel Authority and so on. Legally, each is not a government but a "public-benefit corporation." Each has its own board, its own rules and its own contractual agreements with creditors, from bondholders to unions. Each of those agreements offers creditors different protections. In other words, the idea that things could just be solved if New York State declared bankruptcy is naive.

Could my state declare bankruptcy? It's not likely.- You might not have noticed, but an investment panic swept through Wall Street last week. According to Bond Buyer, investors set a new record for weekly withdrawals from municipal mutual funds last week, taking out about $4 billion. Over the past 10 weeks, they have redeemed $29.3 billion, also a record, roiling the normally staid $2.8-trillion municipal debt market. What's scaring investors off? One answer is that they are worried about the short-term gaps and long-term structural problems in state and local budgets. A more likely explanation, however, is that investors are reacting to a spate of panicked media reports about the effect of all that red ink—not just service cuts and tax hikes, but looming defaults and even state bankruptcies, something that has not happened since the Great Depression.  Yet the idea that states might need the option to declare bankruptcy is in vogue—and it is freaking out muni investors. The pro-bankruptcy argument goes something like this: At some point, states won't be able to make ends meet. They simply won't be able to raise taxes and cut services enough to pay back their bond holders and their pension and health care obligations. Some cash-strapped "beggar states" might in that case seek federal dollars—and Washington should refuse, for moral-hazard and budgetary reasons. Rather, the states should negotiate with pensioners and unions to reduce their billions in unfunded liabilities. If they cannot do that, they should have a bankruptcy judge do it for them.

The Cheerleading For State Bankruptcies And Municipal Defaults Is Downright Ghoulish -This week the buzz was all about state bankruptcies, and the latest is that a bill to allow them wil be introduced as early as next month. One weird thing is that no state has expressed any interest in having this obligation available to them, but what's really odd is to see policymakers and pundits cheerlead the insolvency of the states. Of course, since we're all adults here, we can talk about the real motivation behind this cheerleading. First of all, the GOP wouldn't mind seeing economic turmoil into the ru nup of 2012. And the second is that public sector unions (or maybe just workers in general?) are hated right now and there's a great opportunity to exploit that (as we put it yesterday, states are the new banks). Felix Salmon made a good argument yesterday that the existence of a state bankruptcy law would pretty much instantly shut some states out of the market, and would likely spill over. Remember, one of the best reasons for investing in munis is that they're frequently loaded with all kinds of clauses guaranteeing their priority in terms of when they get paid.

Treasurer: Calif. Bankruptcy Senseless - Allowing California to declare bankruptcy "doesn't make any sense," according to State Treasurer Bill Lockyer. Lockyer said he believes Republican leaders in Congress are serious about introducing legislation that would allow states, for the first time, to enter bankruptcy court. The move would allow states to pull back on their pension obligations to retired state workers. "There's no need. No state wants to declare bankruptcy. No state would do it. It hurts your economy, hurts your taxpayers," Lockyer told KCRA 3 during a wide-ranging interview in his Capitol-area office. Public employee unions are gearing up to fight the idea.

State Bankruptcies? 'Ludicrous,' He Says - California’s state treasurer, Bill Lockyer, denounced on Monday continuing efforts to establish a new framework for states to restructure their debts, saying no state wanted or needed to declare bankruptcy.  “It’s a cynical proposal, intended to incite a panic in response to a phony crisis,” Mr. Lockyer said on a conference call with journalists. “Killer bees, space aliens, and now it’s the invasion of the bankrupt states.”  As reported, a number of members of Congress have been quietly looking into possible amendments to the federal bankruptcy code to accommodate the states, which cannot now declare bankruptcy.  Mr. Lockyer, a Democrat, said he thought this “ludicrous” idea had been cooked up by politically ambitious Republicans. “Their allies,” he said, naming them as big insurance companies, banks and hedge funds, would torpedo the idea, because “even the faint odor of bankruptcy hurts the values of the bonds that they hold.”

Conn. gov calls state bankruptcy idea "crazy talk" - Gov. Dannel P. Malloy is ruling out any thought of Connecticut declaring bankruptcy, despite the state's deficit problems, saying the idea is wrong-minded and would endanger the municipal bond market. Malloy told reporters on Monday that it's "crazy talk" to float the idea of states seeking bankruptcy protection. While states are prevented from taking such an action, some like Illinois and California are facing fiscal situations so dire that bankruptcy has been discussed as a possible way to break union contracts and reconstitute their financial situations. Malloy says the marketplace for state and local bonds would disappear if states began filing for bankruptcy.

Texas' love/hate relationship with D.C.-- Texas Gov. Rick Perry likes to tell Washington to stop meddling in state affairs. He vocally opposed the Obama administration's 2009 stimulus program to spur the economy and assist cash-strapped states. Perry also likes to trumpet that his state balanced its budget in 2009, while keeping billions in its rainy day fund. But he couldn't have done that without a lot of help from ... guess where? Washington. Turns out Texas was the state that depended the most on those very stimulus funds to plug nearly 97% of its shortfall for fiscal 2010, according to the National Conference of State Legislatures. Texas, which crafts a budget every two years, was facing a $6.6 billion shortfall for its 2010-2011 fiscal years. It plugged nearly all of that deficit with $6.4 billion in Recovery Act money, allowing it to leave its $9.1 billion rainy day fund untouched.

Texas governor railed against ‘bailouts’ on same day he requested one - Texas Governor Rick Perry, the Democrat-turned-Republican who served as George W. Bush's lieutenant and won his third term last year, wants you to think he's not a fan of federal bailouts. Yet, on the same day "Texans for Rick Perry" launched their "No Government Bailouts" campaign, Perry himself was lining up with the rest of the states asking for billions in federal funding from President Barack Obama's Recovery Act. Despite . The day after President Obama signed the Recovery Act, Perry published an op-ed in The Washington Times, railing against "unparalleled growth in government." On his blog, he urged supporters to sign his petition against "irresponsible spending that threatens our future." Rick Perry's future, however, was not the one at risk. On that same day, CNN noted, Perry applied for funds from the Recovery Act, slamming shut the state's budget deficit and plugging holes in Texans' Medicare and public education.

The Budget Deficit from Hell - For months the estimates of Texas’ budget deficit kept rising—$11 billion, $18 billion, $20 billion, $24 billion. Each seemed more unfathomable than the one before.  The high-end estimates were in the $22 billion to $24 billion range. Surely, it couldn’t be worse than that. Well, yesterday, it officially got worse.  The Comptroller’s office released its official revenue estimate, and the news must have made jaws hit the floor (at least mine did): $27 billion. And with that, Texas became one of those states—the kind of place that makes national news for its budget woes, the place that closes state parks, that doesn’t just cut public programs, but wipes them out entirely, that combines school districts and lays off thousands of public employees. My friends, we’ve entered California territory.   In fact, Texas now has one of the worst budget outlooks in the country—worse than California’s, in fact.

"Newswatch In-Depth" to focus on Ohio budget crisis - An $8 billion budget deficit is expected for Ohio for fiscal year 2011. While final budget figures won’t be available until March, lawmakers and state officials are bracing for the inevitable budget cuts they will be facing.  The state budget pays for numerous services used by the residents of Ohio. Public schools, police, firefighters and emergency response are some of the vital resources supported by the state budget. It also supports programs for disabled and unemployed residents who desperately need help to survive.  WOUB’s “Newswatch: In-Depth: The Ohio Budget Crisis” will bring lawmakers, officials from state agencies and economic experts together to discuss how state agencies, including Ohio University, will deal with one of the worst budget crisis’ in history and how it will affect the citizens of Ohio.

Ohio Officials Look at Estate Tax Repeal - From the Columbus Dispatch: Elimination of the estate tax, which hits estates valued at more than $338,333 when a person dies, was among the first 18 bills rolled out yesterday by House Republican leaders, who officially regained control of the chamber last week. The estate tax brings in about $245 million a year to local governments and about $60 million a year to the state. Some cities, villages and townships rely on it more heavily than others.[...]John Mahoney of the Ohio Municipal League has fought for a decade to preserve the estate tax, which hits about 7 percent of estates, according to state estimates.[...] It's important to note that while only a small number of estates pay an estate tax, the compliance costs of it are much more widespread. Many individuals engage in complex estate planning and/or buy insurance policies to avoid the estate tax.

Hawaii's debt burden highest in the nation - Hawaii's debt burden, including future pension obligations for state and county workers, is highest in the nation as a percentage of the state gross domestic product, Moody's Investors Service reported yesterday. Total debt issuance and unfunded pension liabilities amount to 16.2 percent of state GDP, Moody's reported. Hawaii ranked second on a per capita basis with debt of $7,987 for every man, woman and child, according to the report. The joint figures released yesterday make it easier to compare fixed costs among states and with corporate-bond issuers, Moody's said. Hawaii's Employees' Retirement System, which pays pension benefits for state and county employees, was underfunded by $6.24 billion in 2009. The problem has worsened in the past decade, and the fund is now in the bottom 20 nationally in terms of its funded ratio.

Californians Among Highest Taxed in U.S. - As California debates tax levels, Dan Walters at the Sacramento Bee reminds us that Californians are among the highest taxed in the United States at present: The Tax Foundation calculated Californians' state-local taxes in 2008 at 10.5 percent of personal income. That translated into about $170 billion in revenue and the nation's sixth-highest percentage. New Jersey was highest at 11.8 percent, followed by New York, Connecticut, Maryland and Hawaii. That was in 2008. In 2009, however, then-Gov. Arnold Schwarzenegger and the Legislature enacted about $9 billion a year in temporary income, sales and car taxes. Those taxes are now expiring and Brown is seeking a five-year extension.

Oakland Grapples With Depleted Force - The Oakland Police Department is down to 650 officers from 800 a year ago. With the cutbacks, the department says it is struggling to maintain law and order in high-crime neighborhoods like East Oakland.  A year ago, about eight officers patrolled the area near the eastern border of the city, a roughly 10-square-mile zone. Today, during most shifts, just three officers walk the beat in the neighborhood, which is known for its drug problems and prostitution. On some days, there are so few officers that none visits some beats in East Oakland at all, says the police department.

Jerry Brown to big-city mayors: Redevelopment 'money is not there' - As California’s big-city mayors rallied in Sacramento to save their redevelopment agencies from the fiscal chopping block, Gov. Jerry Brown pushed back Wednesday with a simple and direct message: “The money’s not there.” Striking a strident tone in an afternoon press conference, Brown called the redevelopment agencies a “piggy bank” that the state needs to crack open to fund education and local services as California grapples with a $25-billion deficit. He said shutting down the state’s nearly 400 municipal redevelopment agencies is a crucial part of his budget proposal and will save $1.7 billion. Cities across the state have angrily denounced the idea as they rush to squirrel away redevelopment dollars in ways that would shield the funds from any state raids.

Moody's sees more Illinois challenges despite tax hike (Reuters) - Moody's Investors Service said on Monday that Illinois' recent income tax increase is a "major step" toward fixing budget imbalances, but that the state still has a tough road ahead fixing its finances.Earlier this month, Illinois hiked personal income taxes 67 percent and lifted corporate taxes 46 percent in its first real move to work off a potential $15 billion budget gap.The credit rating agency praised the additional $6.8 billion a year of new funds, but kept its negative outlook on the A1 rating attached to Illinois' $30 billion of general obligation bonds and related debt.Illinois is one of many U.S. states grappling with record budget deficits after the deep recession stunted tax revenue.It is considered one of the weakest states after years of what critics say was mismanagement of state finances and shares the lowest credit rating of any U.S. state with California.

Quinn Calls for Borrowing Plan - Governor Pat Quinn says he backs a plan to borrow money to pay the state's bills.  The state's plan involves creating general obligation restructuring bonds, which would allow the state to pay off its current obligations to health and human service providers and schools.  Quinn says the bonds would ultimately save the state money on interest.  "We owe in some cases 12 percent interest on the debt that Illinois over the last 28 years has accumulated, debt where it hasn't paid its bills on time," Quinn said. "I think that anybody who has common sense when it comes to public finance would see it's much better to borrow money at a lower interest rate, 4 or 5 percent than paying 12 percent."  Illinois has over $8 billion in unpaid bills.

Christie Says He’ll Go to Illinois to Lure Jobs to New Jersey (Bloomberg) -- New Jersey Governor Chris Christie said he intends to go to Illinois next week to lure jobs from business executives angered about personal income and corporate tax increases enacted this month. The trip coincides with advertisements that his administration began running today in publications including the Chicago Tribune and the State Journal-Register of Springfield, the state capital, encouraging businesses to relocate and invest in New Jersey, Christie said. The ads cost $300,000, said Kevin Roberts, a Christie spokesman. The first-term Republican said he sees opportunity in Illinois Governor Pat Quinn’s decision to increase the income tax to 5 percent from 3 percent and corporate taxes to 7 percent from 4.8 percent to help reduce a deficit of at least $13 billion in a budget of about $37 billion

NY Gov. Threatens To Mothball More Prisons - New York Gov. Andrew Cuomo will unveil a plan Tuesday to cut his state's budget deficit, which now stands at more than $11 billion. Cuomo is considering massive layoffs that could hit as many as 10,000 state workers. And the state's prison system could face the deepest cuts. But prisons are a major source of jobs in upstate New York, where unemployment tops 10 percent. When the state announced it wanted to close the Lyon Mountain prison, which sits just south of the U.S.-Canada border, locals like Karen Linney were devastated. "There's no jobs anywhere!" she said. "So we need to fight to keep this prison open or there's nothing." Lyon Mountain used to be a mining town. But as factories and mines in this region closed in the 1960s and '70s, the state replaced them one by one with prisons.

NY MTA: Soaring debt service could cause fare hikes (Reuters) - The New York Metropolitan Transportation Authority might have to raise subway and bus fares by approximately four-and-a-half times the last fare increase to cope with a jump in debt service that kicks in as soon as 2016, Bob Foran, the MTA's chief financial officer, said on Monday. The MTA, the nation's biggest mass transit agency, has a balloon-type borrowing program in which the amount repaid rises sharply in later years. Monday was the first time officials spelled out the impact the rising debt service could have on fares if no additional state or federal aid is received.

Potholes Gape From Detroit to New York as Funds Fade - The U.S. transportation network for cars and trucks may be the next victim of the fiscal crisis sweeping the country. The longest recession since World War II and the slow-paced recovery have left states facing deficits that may surpass $140 billion in the next fiscal year, with only $6 billion in federal Recovery Act funds remaining to help close the gaps, the Center on Budget and Policy Priorities said last week in a report. From Congress to state capitals, politicians elected amid a Republican surge in November are preaching fiscal restraint to rein in spending and keep higher taxes at bay. Federal economic- stimulus programs, which provided $26.6 billion for roads, are ending. Fuel taxes, a main funding source, are down as drivers travel less or switch to more efficient cars. The combination is expected to deal a blow to public spending on roads, a setback for an industry still trying to emerge from the housing market collapse, said Ken Simonson, the chief economist for Associated General Contractors of America. The Arlington, Virginia-based organization lobbies the U.S. government on behalf of construction companies.

DC budget gap likely over $545 million - The timing is awful for the new D.C. mayor and chief lawmaker. D.C. budget officials and elected leaders have been finessing or ducking questions about how big a budget deficit they really have to close in the wake of reports that the gap could widen again, to as much as $600 million. The official estimates from the city’s chief financial office are expected in late February. On Feb. 10, city officials will visit Wall Street to reassure the money men on the city’s financial status, making current talk of an even-higher budget gap potentially embarrassing and costly to the city. “We just haven’t any confirmation of $600 million,”

Cities on the Brink (Forbes) Most of these cities aren't in imminent danger of bankruptcy or default, but fiscal irresponsibility, a deteriorating tax base, soaring pension costs or a combination of all three means residents may want to consider moving before they get stuck with the bill.

U.S. Muni Funds Lose $5.75 Billion in 11th Consecutive Week of Withdrawals - U.S. municipal-bond funds had withdrawals for the 11th straight week amid investor concern that financially strapped states and cities may default, according to estimates by the Investment Company Institute.  Investors pulled $5.75 billion from the funds in the week ending Jan. 19, bringing withdrawals since early November to $30.8 billion, the ICI said today in an e-mailed statement from Washington. Taxable-bond funds attracted $3.58 billion in deposits in the week.  Banking analyst Meredith Whitney stirred debate in the $2.86 trillion muni-debt market last month by predicting as many as 100 “significant” defaults reaching “hundreds of billions” of dollars this year. Pacific Investment Management Co.’s Bill Gross, who runs the world’s largest bond fund, said he doubted there would be so many failures.  U.S. municipal-bond funds have fallen an average 5.1 percent since the end of October, according to data compiled by Bloomberg.

Warning From S&P on Munis - Downgrades of bonds issued by state and local governments could increase this year, according to a report to be issued Monday by credit-rating agency Standard & Poor's. The $2.9 trillion municipal-bond market has been thrown into tumult in recent months, in part because of growing fears that some state and local governments will default on their debt. Investors have pulled out record amounts from muni-bond mutual funds, while the yields on muni bonds, which move inversely to price, have hit their highest levels since the depths of the financial crisis. A downgrade of a government borrower would likely put downward pressure on the price of its bonds, resulting in higher borrowing costs and potential losses for investors."

Sandoval Speech Focuses on Budget Crisis, Education - Governor Brian Sandoval says Nevadans are being confronted on all sides by bad news. The governor gave his State of the State Address in Carson City Monday night, and the outlook was grim. Sandoval focused on several key issues facing the state, including the budget crisis and education. The governor focused on the $1.2 billion budget hole he inherited. Sandoval has submitted a budget to the legislature with 8 percent in spending cuts. He has also proposed the consolidation, elimination or centralization of 20 agencies and departments. He says there will be layoffs at the state level, but "not on the scale seen in other states." Turning to education, the governor said the system is broken. Sandoval outlined several proposals he says will fix the system, including ending teacher tenure, holding back students who fall behind and reforming how K through 12 schools are governed.

Detroit's deepening education deficit - It seems that every time there is a financial crunch in federal, state and local government coffers, every politician looks first to cut education funding. So, what do you do when your public school system has racked up a $327m deficit in an economy that shows little hope for resuscitation? If you are Robert C Bobb, the emergency financial manager for the Detroit Public Schools, you look to closing and abandoning half the city schools within the next two years. Such a drastic move would increase classroom size from 35 students per class to 62 in high school, and 45 for middle grades. K-3 would see an increase from 17 students to 31 by the year 2012. This measure would save the district some $33m dollars by the fiscal years of 2012-2014. Bobb also contends that the district would net an additional $12m in savings by abandoning vacant school buildings altogether.

Dallas ISD now preparing for $260 million funding cut  - Dallas school officials are now bracing to lose as much as $260 million each of the next school years as lawmakers slash education funding to close a multibillion-dollar deficit. The numbers keep getting worse. A month ago, Superintendent Michael Hinojosa thought Dallas ISD might be out $120 million each of the next two school years. Under the Texas House draft budget, Hinojosa said last week, DISD could lose $200 million a year.  Now Hinojosa has revised that numbers and pegs the district's possible funding dip at $260 million, he told WFAA yesterday. He has advocated for school districts to gain the authority to enact furloughs. The city of Dallas had two mandatory furlough days in 2009, which saved the city $2.6 million. Trustee Nancy Bingham said this afternoon she favors furloughs because employees wouldn't lose their jobs.

Pension costs to hurt Dearborn Schools next year - Increased pension costs could hit Dearborn Public Schools hard next year, even if the state does not cut school funding. State officials estimate retirement costs could jump almost 31 percent next school year, or an additional $7.9 million for Dearborn, Director of Business Services Bob Cipriano told school board members Monday. The district’s total budget this year is about $225 million. The amount of the pension increase is tentative and could drop if the state can keep a new law that school employees contribute 3 percent of their income toward retirees’ health insurance, Cipriano said. A lawsuit from employees seeks to block the contribution. But even if employees do start contributing, the pension rate is expected to climb about 15 percent.

Think $113 Million AISD Deficit Is Bad? Consider This Armageddon Scenario --Austin School Trustees acknowledged they were left with no easy choices last night as they voted 9-0 to approve a plan that would eliminate 485 jobs next school year, mostly teachers. The decision was based on a plan to reduce the $113 million projected budget gap without cutting full day pre-K. But all those plans could go out the window depending on how the legislature decides to distribute cuts to education funding. At issue is how lawmakers go about defunding education.  They could opt to go with an across-the-board, 15 percent cut to school districts, or they choose to implement the spending reductions on through an existing funding formula known as the additional state aid for tax reduction (ASATR) program. Another possibility is the state could eliminate ASATR entirely and reduce the basic cash allotment per student.

Report Card Day Could Include Grades for Parents Under Proposed Florida Bill - ParentDish: "Ever feel like your kid's teacher is judging you based on how many field trips you've chaperoned, what you pack in his lunch box or the state of Junior's homework? Well, in one Florida school district, teachers may soon be officially scoring parents who make the grade and failing those who don't. Forget earning an 'E' for effort. Skip a parent-teacher conference or drop your kid off late to school and you flunk. Florida state lawmakers have introduced a bill that would evaluate grade school parents on 'the quality' of their involvement in their children's schools, the Orlando Sentinel reports. And the parents' grade will appear right alongside their child's on the report card. Parents with children in pre-K through third grade would get 'satisfactory,' 'needs improvement' or 'unsatisfactory' ratings in categories including their responses to requests for meetings; communication with the teacher and administrators; their children's completion of homework and readiness for tests; their kid's attendance and tardy rates; and the student's 'physical preparation for school,' such as a good night's sleep and appropriate meals."

Wyoming Representatives Introduce Legislation To Videotape Teacher Performance Statewide - From the release of 12,000 teacher scores in New York, to California's educational overhaul that hopes to see payoff by 2025, schools are scrambling to find a way to gauge teacher performance with accuracy and accountability.  The Casper Star-Tribune reported on two pieces of legislature presented to Wyoming's senate that present a new way to view educators in action: through the lens of a video camera.  Wyoming Rep. Steve Harshman understands that the idea sounds a bit "Big Brother", but defended his position to the Christian Science Monitor: "It isn't an Orwellian thing."

Universities Concerned About Budget Cuts - Budget concerns are hitting the colleges and universities in Michigan. University employees are asked to take some salary and benefit cuts as republican senators try to reduce the state deficit through savings in the 2 billion dollar higher education system. The idea isn't sitting well with everyone. University presidents showed up in town the other day not knowing that senate republicans have them in their sights, they are targeting higher education for employee give backs.  Sen. Mark Jansen, (R) west Michigan: "They don't like being told what to do." Senate republicans want university employees to cough up 25% for health care costs, give back 5% of their paycheck and a third bill will slap a cap on any tuition increases.

Is College Tuition Too Low? - My column this week looks at ways to cut wasteful spending on higher education and redirect the money more productively. Another way to keep colleges in decent financial shape during tough economic times, of course, is to raise tuition. Gary Becker, the Nobel laureate economist, and Richard Posner, the federal judge and author, argued on their shared blog last week that tuition should increase. They said it was too low at many public colleges. I imagine many readers will find this argument ludicrous, at least initially, but it’s worth considering. As Mr. Becker writes, average tuition for in-state students at public colleges is $7,500 a year. For many families with students at flagship state universities, $7,500 is not all that much money. At the University of Virginia only 8 percent of undergraduates receive Pell Grants, according to U.S. News, which means that only about 8 percent of undergraduates are in the lower half of the income distribution. In the freshman class at the University of Michigan several years ago, more students had parents making at least $200,000 a year than had parents making less than the national median of about $53,000.

Adults With College Degrees in the United States, by County. interactive map

President Obama: “We do big things” - President Obama’s State of the Union address stressed how we should be training future scientists and engineers.  And over the next ten years, with so many Baby Boomers retiring from our classrooms, we want to prepare 100,000 new teachers in the fields of science, technology, engineering, and math.  In fact, to every young person listening tonight who's contemplating their career choice: If you want to make a difference in the life of our nation; if you want to make a difference in the life of a child – become a teacher. Your country needs you. Obama correctly identified a critical need and stated that we must make dramatic changes to meet the need. Are we acting to add 100,000 (net) new teachers in those fields? Obama emphasized in his address that we need to respect teachers. So let’s ask the teachers what is happening. On May 27, 2010, the National Education Association warned. Without $23 billion from Congress to keep public schools running next fall, 300,000 teachers … and support professionals will lose their jobs.

Moody's to Include Unfunded State Pension Liabilities, NYT Says - Moody’s Investgors Service plans to include unfunded pension liabilities into its credit rating for U.S. states’ debt, the New York Times reported, citing Robert Kurtter, managing director for public finance at Moody’s.  States haven’t included those liabilities until now, prompting growing unease among investors in municipal bonds, the newspaper said.  The new system will be comparable to the way Moody’s now rates corporate and sovereign debt, the newspaper said. States with the highest total indebtedness include Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island, as well as Puerto Rico, the Times reported.

Pension Costs Add to US States' Debt, Moody's Finds - Connecticut, Illinois and Hawaii are among the states with the highest combined debt and pension liabilities, according to a study to be released on Thursday by Moody’s Investors Service. In a bid to give a broader picture of state finances, Moody’s combined their net tax supported debt and unfunded pension liabilities to assess how leveraged states are. “These costs are serious and they are growing,” said Robert Kurtter, managing director of the state and local government finance group at Moody’s. “If they are addressed [by the states] they are manageable.”  Moody’s research comes amid concern about the strain that pensions will place on US states, which have faced severe budget deficits since the economic recession.  Republican lawmakers are studying ways for states to go bankrupt, a move that could enable them to renegotiate their pensions, but one that will be met with fierce opposition in Congress and the financial markets.

Pension issues may hurt US state ratings - Moody's (Reuters) - Some U.S. states face so much pressure to fund pensions for public employees that it could hurt their credit ratings, Moody's Investors Service said on Thursday. As concerns grow over the financial health of many states after the 2007-2009 recession and how they will cut spending to cope, the ratings agency said its report combined pension and debt data to rank the liabilities of each state. Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island, along with Puerto Rico, have the largest debt-and-pension loads, Moody's found. Nebraska and South Dakota have the lowest. "Large and growing debt and pension burdens have been, and will continue to be, contributing factors in rating changes," Moody's said.

Space, time and public pension black holes - Mad, bad, and dangerous to know — the response from states to the idea of Congress pre-emptively legislating for their bankruptcy. In Monday’s Wall Street Journal, EJ McMahon of the Manhattan Institute adds to the criticism, arguing that it could distract states from the essential task of pension reform. But — dare we ask — how big a problem are underfunded pension funds? Massive, according to the Economist’s survey of the “gold-plated burden.” It cites estimates that the states’ pension shortfall may be as much as $3.4trn, even after making some potentially optimistic assumptions about expected returns (Kid Dynamite has written in detail about these). But in a report issued on Thursday, the Center on Budget and Policy Priorities argues that pension fears — like those of municipal default — are misconceived and overblown. This is a contrarian position that’s worth considering even though most of the Economist’s points remain spot on.

SEC probes statements on Illinois pension: report - (Reuters) - The U.S. Securities and Exchange Commission launched an inquiry into statements put out by the state of Illinois regarding the potential long-term savings from a pension reform law, a spokeswoman for Governor Pat Quinn said on Tuesday."We feel our disclosures have always been accurate and complete," spokeswoman Kelly Kraft said. An offering document for the upcoming sale of $3.7 billion of taxable Illinois pension bonds said the SEC contacted the state in September about "communications relating to the potential savings or reductions in contributions by the state to the Illinois public pensions." "The SEC has informed the state that the inquiry should not be construed as an adverse reflection on any entity or individual involved, nor should it be interpreted as an indication by the SEC or its staff that any violation of the federal securities laws has occurred," the document said.

Understanding the President’s SOTU Social Security Language - President Obama’s language on Social Security, as delivered with the State of the Union address, is bound to perplex many observers. After a year of work by his own commission on every aspect of fiscal reform -- including the release of a comprehensive Social Security reform plan -- the President tucked Social Security far down into his speech.The fate of America’s largest and most important federal program was mentioned only after energy research, education, immigration, transportation infrastructure, expanded wireless coverage, tax reform, trade agreements, regulatory review, health care, appropriations spending, and several other subjects. Even then, specific Social Security fixes were discussed exclusively in terms of what the President would not do, not in terms of the reforms he would support.Clearly this is not how one paves the way for a bipartisan Social Security accord. Listing only the outcomes to be avoided naturally leads the listener back to embrace the status quo. It leaves unanswered the question, “Why do anything at all?” To achieve progress, elected leaders must join in explaining the necessity of changes rather than what should stay the same.

In Social Security Debate, Today's Democrats Worse Than Yesterday's Republicans - Having “retooled’’ his Presidency for a more open accommodation of the center right, Obama will soon be overseeing the battle to launch a dismantling of the Social Security system. His government has, from the start, been reminiscent of the Clinton years, so it’s safe to say that we can expect more triangulation. Clinton’s adoption of Republican tropes led him to fulfill some of the conservatives’ fondest dreams: His administration countenanced the demise of the banking regulations originally established by the Depression-era Glass Steagall Act, and the destruction of the welfare system established in the 1930s and expanded in the 1960s. Obama will provide much the same function on Social Security. Without entirely destroying the popular program, he will support cuts that go beyond anything that should rightly happen during a Democratic administration.

Obama won't endorse raising retirement age or reducing Social Security benefits -  President Obama has decided not to endorse his deficit commission's recommendation to raise the retirement age, and otherwise reduce Social Security benefits, in Tuesday's State of the Union address, cheering liberals and drawing a stark line between the White House and key Republicans in Congress. Administration officials said Obama is unlikely to specifically endorse any of the deficit commission's recommendations in the speech, but cautioned that he is unlikely to rule them off the table, either. On Social Security, for example, he is likely to urge lawmakers to work together to make the program solvent, without going into details, according to congressional sources.

Raising False Alarms - If there’s a better government program than Social Security, I’d like to know what it is.  It has gone a long way toward eliminating poverty among the elderly. Great numbers of them used to live and die in ghastly, Dickensian conditions of extreme want. Without Social Security today, nearly half of all Americans aged 65 or older would be poor. With it, fewer than 10 percent live in poverty.  The Center on Budget and Policy Priorities tells us that close to 90 percent of people 65 and older get at least some of their family income from Social Security. For more than half of the elderly, it provides the majority of their income. For many, it is the only income they have.  When you see surveillance videos of some creep mugging an elderly person in an elevator or apartment lobby, the universal reaction is outrage. But when the fat cats and the ideologues want to hack away at the lifeline of Social Security, they are treated somehow as respectable, even enlightened members of the society.  We need a reality check. Attacking Social Security is both cruel and unnecessary. It needs to stop.

CBO: Social Security To Run Permanent Deficits - New congressional projections show Social Security running permanent annual deficits unless lawmakers act to shore up the massive retirement and disability program. The Congressional Budget Office said Wednesday that Social Security will pay out $45 billion more in benefits this year than it will collect in payroll taxes, further straining the nation's finances. The deficits will continue until the Social Security trust funds are eventually drained, in about 2037. Previously, CBO said Social Security would start running permanent deficits in 2016. In the short term, Social Security is suffering from a weak economy that has payroll taxes lagging and applications for benefits rising. In the long term, Social Security will be strained by the growing number of baby boomers retiring and applying for benefits.

Social Security fund will be drained by 2037 — Social Security's finances are getting worse as the economy struggles to recover and millions of baby boomers stand at the brink of retirement. New congressional projections show Social Security running deficits every year until its trust funds are eventually drained in about 2037.This year alone, Social Security is projected to collect $45 billion less in payroll taxes than it pays out in retirement, disability and survivor benefits, the nonpartisan Congressional Budget Office said Wednesday. That figure swells to $130 billion when a new one-year cut in payroll taxes is included, though Congress has promised to repay any lost revenue from the tax cut.The massive retirement program has been feeling the effects of a struggling economy for several years. The program first went into deficit last year, but the CBO said at the time that Social Security would post surpluses for a few more years before permanently slipping into deficits in 2016.

Social Security Posting $600B Deficit Over 10years (NPR) Social Security will post nearly $600 billion in deficits over the next decade as the economy struggles to recover and millions of baby boomers stand at the brink of retirement, according to new congressional projections. This year alone, Social Security is projected to collect $45 billion less in payroll taxes than it pays out in retirement, disability and survivor benefits, the nonpartisan Congressional Budget Office said Wednesday. That figure swells to $130 billion when a new one-year cut in payroll taxes is included, though Congress has promised to repay any lost revenue from the tax cut. Last year, Social Security posted its first deficit since the program was last overhauled in the 1980s. The CBO said at the time that Social Security would post surpluses for a few more years before permanently slipping into deficits in 2016.

Conserving Doomed Systems (Or, Why We're Staying On The Titanic) - It seems few readers of my series on the fiscal shipwreck known as Social Security grasped my primary point, which was the need for immediate triage. The vast majority of commentary in the U.S. is focused not on the sinking ship, but on critiquing the triage--which is firmly rejected for one principled (or crass self-service packaged as principle) reason or another.  The essence of armchair quarterbacking is no actual experience on the football field. From 20,000 feet, so to speak, it's easy to look down on the field in the fourth quarter and reckon that a "double-tight end, single-back, wide receiver runs a post pattern" play might succeed against the opponent's linebacker configuration and the reasons the armchair quarterback might offer fit right into the easy banter from Eddie, Frank, Joe and all the experts in the booth.

CBO Budget Report Shows Little Change to Social Security Outlook - Yesterday’s Congressional Budget Office budget report showed that the weak economy continues to be a drag on Social Security’s short-term finances as payroll tax receipts lag pre-recession projections. Outlays are also higher than anticipated before the downturn, as Social Security has helped cushion the blow for older workers who have lost their jobs. This will have little impact on Social Security’s long-term finances, however, in part because workers who take early retirement receive reduced benefits. Social Security is still projected to run an $868 billion surplus over the next decade, building up a trust fund sufficient to last through the peak baby boomer retirement years.   Nevertheless, gloomy news reports—in particular an Associated Press story by Stephen Ohlemacher—show that when it comes to Social Security, no news is bad news.  The story misrepresents the trust fund’s solvency by excluding interest earnings, a major source of revenue for Social Security. The article also fails to mention that even if nothing is done to shore up the system’s finances, current tax receipts will be sufficient to cover most benefits in 2037, which will still be higher in inflation-adjusted terms than benefits are today.  Social Security is not in crisis.

Social Security and Medicare: A Teachable Moment for Robert Samuelson? - Washington Post columnist Robert Samuelson told readers that this is a teachable moment when it comes to Social Security and Medicare. Let's see if he is right.In his column he takes issue with the idea that people pay for their Social Security and Medicare benefits:"Consider a man who turned 65 in 2010 and earned an average wage ($43,100). Over his expected lifetime, he will receive an inflation-adjusted $417,000 in Social Security and Medicare benefits, compared with taxes paid of $345,000, estimates an Urban Institute study." However if we look at this Urban Institute we study that this man will have paid $290,000 for his Social Security benefits. According to the study, he will only get $256,000 back. In other words, he will have paid $34,000 more in taxes than he will get back in benefits. (This calculation assumes that the taxes earn an interest rate that is 2 percentage points above the inflation rate.) So, contrary to what Samuelson implies, the Urban Institute study shows that this middle income person will have more than paid for the Social Security benefits that he is scheduled to receive under current law.

Mo. Medicaid spending projected to rise by 5.5 percent during the next fiscal yearMissouri's Medicaid budget is likely to rise by hundreds of millions of dollars next year. But state officials say there is little they can do about it. The budget outlined by Gov. Jay Nixon calls for $8.4 billion for the health care program for the poor during the 2012 fiscal year that starts July 1. That's an increase of 5.5 percent, or about $444 million, over what is expected to be spent this year. The growth in Medicaid comes as Nixon is recommending cuts to public colleges and universities, the elimination of hundreds of state employee positions, and flat funding for public K-12 schools. But much of Missouri's Medicaid spending is considered mandatory, if the state wants to continue receiving federal money for the program.

Christie Says Medicaid to Be Biggest Budget Challenge -- New Jersey Governor Chris Christie said Medicaid costs will be the largest challenge in the state's next budget, which he will propose in less than a month. The state's Medicaid program, which provides health care for the poor, faces a $1.4 billion deficit because of the loss of assistance from the federal government and the requirement to maintain services at levels mandated by the U.S., Christie said. "The biggest problem in the budget is Medicaid," said Christie. "We're in a situation this year where we lose $900 million in federal funding for Medicaid but are being told that we can't reduce benefits. In times of flat or declining revenue you run out of options quickly."

Majority of Shelters Could Close with Proposed Budget - Domestic violence shelters will face major state cuts if the Georgia Department of Human Resources' proposed budget gets approved. Shelter advocates say a majority of state shelters could close if this happens.  The state currently spends about $4.5 million on family violence services. In the DHR's proposed budget they're either looking to slash funding by nearly 70 percent or getting rid of funding entirely.  Nicole Lesser is the executive director of the Georgia Coalition Against Domestic Violence. Her group recently asked shelters how they'd be affected by one of the budget proposals. "The question was would your program be at risk of shutting down, and 68 percent said 'yes,' and 12 percent said 'maybe," she says. The state plans to replace the state dollars with federal dollars. But that funding, Lesser says, is less flexible. Lesser says shelters have been facing cuts over the years, but their needs are greater.

Arizona's Brewer Seeks to Cut 280000 From Medicaid -- Arizona Governor Jan Brewer asked for U.S. permission to tighten Medicaid eligibility to drop coverage for 280,000 people and slash $541.5 million in spending, a move other states may follow. The 16th-largest state by population faces a $1.2 billion deficit in the coming fiscal year, more than 80 percent of which is from Medicaid costs, Brewer wrote in a letter to U.S. Health and Human Services Secretary Kathleen Sebelius yesterday. "We are in a crisis unlike any we have seen," said Brewer, a 66-year-old Republican. "We are in a struggle for our state's survival." Mary Kahn, a spokeswoman for Sebelius, declined to comment, saying she hadn't received the letter. President Barack Obama's health-care overhaul requires states to maintain Medicaid eligibility for the same people they did before the legislation was signed in March, according to a fact sheet from Brewer's office. The rule is designed to prevent states from dropping people as a result of the law. States that fail to comply can lose federal Medicaid reimbursements, the fact sheet says.

Arizona Seeks Waiver To Cut 280K From Medicaid Rolls - Confronting a $1.1 billion budget shortfall, the Arizona Legislature has given the go-ahead to apply for a federal waiver to drop 280,000 residents from the Medicaid rolls, reports Healthcare Finance News. If approved, the waiver would save Arizona about $540 million per year, but would also drastically reduce the Grand Canyon State's opportunity to receive federal matching funds. Altogether, the waiver proposal would reduce Arizona's Medicaid rolls by about 20 percent. Those dropped would include all non-pregnant and non-disabled childless adults, along with all parents whose incomes exceeded 50 percent of the federal poverty level, notes the Associated Press. Under the 2010 guidelines, the cutoff would be a household income of $9,150 for a family of three.

Arizona hospital group wants to assess $300 million bed tax - Arizona hospitals want to assess a $300 million bed tax on themselves rather than lose out on Medicaid payments that would be eliminated by proposed state budget cuts. The Arizona Hospital and Healthcare Association's proposal calls for a one-year assessment on hospitals that is based on the number of days patients spend in hospitals. The hospital association said the proposal would represent a partial fix to the state's budget gap while preserving health insurance through the state's Medicaid program for childless adults. These adults would lose coverage under budget plans now being considered.

State budget cuts may mean hundreds of nursing homes close, industry warns — Hundreds of nursing homes, including dozens in Dallas-Fort Worth, may close if lawmakers cut Medicaid as leaders propose, industry officials said Thursday. Since last week, GOP leaders have introduced budgets in both chambers that would reduce by one-third the state’s budget for its 56,000 nursing home residents on Medicaid. Two-year spending would sink to $2.8 billion, from $4.2 billion. “We are not crying wolf. Pieces of the sky are falling,” said Tim Graves, head of the Texas Health Care Association, a trade group that represents 500 nursing homes, most of them for-profit operations. He said the cuts would jeopardize about half of the state’s 1,100 nursing homes: those with 70 percent or more of patients on the Medicaid rolls.

Texas nursing home operators fear Medicaid cuts three times deeper than expected - The Texas House of Representatives' budget proposal for fiscal 2012-2013 includes cuts to Medicare providers of 34%, which is three times higher than nursing home advocates expected.  Nursing home operators, who say nursing facilities are already losing money at Medicaid's current reimbursement rate, worry that a cut like this would put non-profit nursing homes out of business, the San Antonio Express-News reported. Medicaid provider rates were cut by 1% in September and an additional 2% cut will go into effect in February. Advocates with the Texas Association of Homes and Services for the Aging contend that current Medicaid reimbursement rate for nursing homes is less than $125 per day. The proposed cut would lower it to $80.

Ten New York City Hospitals May Close Over Governor Cuomo's Proposed Medicaid Cuts; Need for a New Approach - New York Governor Andrew Cuomo has a $10 billion budget gap to fill. Unlike Illinois Governor Pat Quinn, Cuomo does not seek tax hikes. Instead he want to cut graft and untenable spending, especially state agencies and Medicaid spending. Please consider a few snips from Cuomo's State of the State Address.My friends I believe this state is at a crossroads and I believe there are two very different paths this state may down. Certain factors are pushing us down one path - the national economic pressure; the costs of state government that we’re currently expending; the dysfunction that the state government has been manifesting and the fact that the people have lost trust in our government. What is the state of the state? This is a time of crisis for our state, a time when we must transform our government to once again become the progressive capital of our nation, and to seize the moment of opportunity that is before us."We want to try a new approach" said Cuomo. What he should have said is "We need to try a new approach, and we will."

Cutting Billions From Defense Won't Save Medicare -- U.S. citizens about 45 to 50 years old and contemplating retirement should know this: In 2029 primary Medicare benefits will be 15 percent less than what they might expect. Eighteen years from now, the fund that pays for hospitalization expenses -- Part A benefits, if you’re up on the jargon -- will be exhausted, according to estimates in the 2010 report from Medicare’s trustees. To keep paying benefits, Medicare would then have to depend entirely on revenue from payroll taxes and income taxes, which the trustees estimate will cover 85 percent of estimated outlays in 2029. By 2050, those revenue sources might cover only 77 percent of benefits. Imagine the uproar today if President Barack Obama or any of the 435 members of Congress would say aloud that Medicare benefits for current workers might be 23 percent less than what senior citizens now get -- and which today’s workers help pay for.This is why the talk among Democrats and Republicans about cutting costs never focuses on the plight of Medicare and or the equally worrisome future of Social Security.

Republicans look to privatize Medicare - House Republicans would support a plan to privatize Medicare in their annual budget, a member of the GOP leadership said. Texas Rep. Jeb Hensarling, the House Republican Conference Chairman and second-ranked GOP member of the budget committee, made the revelation during a panel discussion, according to the National Journal. "Unless you deal with Medicare, unless you go into Medicaid, unless you deal with Social Security for future generations—programs that were a great comfort to my grandparents and parents are morphing into a cruel Ponzi scheme for my 8-year-old daughter and my 7-year-old son," Hensarling said. Social Security and Medicare are self-financed retirement security programs that taxpayers are required to pay into throughout their working lives.

Adding Clarity to Health Care Reform - Perhaps the most unpopular feature of the health care legislation now in place is a provision that requires nearly everyone to buy insurance. It is known as the mandate, and it is the aspect of the bill that could end up before the Supreme Court. In contrast, nearly everyone seems to approve of the provision ensuring that pre-existing medical conditions won’t prevent you from finding affordable insurance, as well as the rule that prevents insurers from dropping you if you get sick.  Unfortunately, it is hard to have the popular features without some version of the mandate. A health insurance system cannot work unless most healthy people participate.  The major source of uncertainty arises not from the bill itself, but rather from the lawsuits filed by states that object to the mandate.

Is support for repeal vastly overstated - As you regulars know, I've been arguing here for days that overly simplistic polling has been exaggerating the support for blowing up the Affordable Care Act. When pollsters drill down with fine-grained questions, support for full repeal plummets. The internals of today's New York Times/CBS poll dramatize this in perhaps the clearest terms yet.  The poll first asked people a straight-up question -- should we do away with the law completely, or let it stand -- and found that 40 percent favor repeal, versus 48 percent who want to leave it as is. That near-split mirrors virtually all other polls that asked the question this way -- they all find some solid support for repeal. But here's where it gets interesting. The NYT/CBS poll then asked the pro-repeal camp whether they want to "repeal all of the health care law, or only certain parts of it." Suddenly the number who favor full repeal drops to 20 percent -- one-fifth -- while 18 percent peel off and say they want to repeal "certain parts."

The Chamber of Commerce's Health Reform Heretics - In October 2009, the US Chamber of Commerce had a full-scale revolt on its hands. Angry about the lobbying behemoth's full-bore opposition to Democratic climate-change legislation, Apple, Nike, Johnson & Johnson, and a handful of other blue-chip corporations quit the Chamber. A few months later, about a dozen local Chambers of Commerce publicly broke away from the group, arguing that the national organization had swung too far to the right and no longer represented its members' views. Now, some of the same questions are beginning to surface over the Chamber's hard-line stance on health care. Since the new Congress has begun, the group has come out swinging against "Obamacare," boosting conservative claims that reform is killing businesses and the economy. "It's time to go back to the drawing board," said Tom Donohue, the Chamber's chief executive officer, at his annual address last week. "The Chamber was a leader in the fight against this particular bill—and thus we support legislation in the House to repeal it."

Is America finished with major expansions of the safety net? - That’s the message from Jim Kessler, endorsed here, here, and here. Kessler urges President Obama to say, in his State of the Union address, that “with the passage of health care reform, America’s 85-year quest to weave a strong safety net is now complete.” We have a safety net, but I wouldn’t call it “strong” by 21st-century standards. Some elements that are inadequate or altogether absent:The 2010 health care reform, even if fully implemented, likely will leave millions of Americans uninsured. Early education (preschool, child care), beginning at age one, is a very good idea. Not all states have full-day kindergarten; few have preschool for four-year-olds; none have much in the way of public funding of education for kids age one to three. Paid parental leave is available in only a few states and covers a relatively short period. Sickness insurance: ditto. Unemployment insurance covers too few of us. Unemployment insurance should be supplemented by or folded into a new wage insurance program.

Why Don't Americans Live Longer? -The National Academy of Sciences has just released a fascinating report on life expectancy in rich countries around the world. The researchers who wrote the report — public-health experts, demographers, economists and others, from around the world — have tried to figure out why Americans don’t live as long as people in many other countries. From a summary of the report: Over the last 25 years, life expectancy at age 50 in the U.S. has been rising, but at a slower pace than in many other high-income countries, such as Japan and Australia. This difference is particularly notable given that the U.S. spends more on health care than any other nation…. Three to five decades ago, smoking was much more widespread in the U.S. than in Europe or Japan, and the health consequences are still playing out in today’s mortality rates, the report says. Smoking appears to be responsible for a good deal of the differences in life expectancy, especially for women…. Obesity’s contribution to lagging life expectancies in the U.S. also appears to be significant, it may account for a fifth to a third of the shortfall in longevity in the U.S. compared to other nations, the report says….

Pick Your Poison: The American Drinking Water Quality Crisis - The United States of America is perceived by many of its resident citizens to be a developed and highly advanced nation, and as such, these same citizens often make the mistake of assuming that their homeland is not susceptible to foundational, or "basic" infrastructural flaws such as those related to drinking water quality issues that might be more often associated with still-developing or otherwise less-developed nations.  However, our country is one that is in fact plagued by this very scourge, and it is a formidable problem with massive health and environmental implications.  Unfortunately, our government's failures to address the array of drinking water quality concerns are largely indiscriminate; for we have not been sufficiently protected from possible contamination by either the Environmental Protection Agency, which regulates tap sources, or the Food and Drug Administration, which oversees bottled ones

"Big Sugar" Cartel Cost Consumers $4.5B Last Year - In a recent Wall Street Journal letter titled “The Sugar Program Makes Sense,” the American Sugar Alliance’s chief economist claimed that “sugar policy operates at no cost to the government and is projected to do so for the next decade.” While it’s true that U.S. sugar producers haven’t tapped American taxpayers directly since the beet sugar farmers raked in more than $240 million in farm subsidy payments from 2000 to 2005, U.S. sugar policy did force American consumers to pay out $4.5 billion last year in higher sugar prices to support the “Big Sugar” cartel. Read more here of my Enterprise Blog post today "Sugar Policy: Sweet Deal for Producers, Sour Deal for Consumers."

Chocolate set for price rise as cocoa soars - Cocoa prices shot forward yesterday after the Ivory Coast said it was contemplating an export ban. The internationally recognised leader of the war-torn African nation, Alassane Ouattara, wants to use the ban as a move to choke off funding for the incumbent, Laurent Gbagbo, who has refused to concede defeat after elections last year. It is not clear whether such a ban would be heeded by growers and whether it could be enforced if it weren't. But the political turbulence that continues to dog the country has caused a spike in prices of cocoa on international markets anyway. Prices are up 12 per cent this year and yesterday surged to new highs. May cocoa futures on the London Futures Exchange jumped more than 7 per cent to a six-month peak of £2,269 per ton after the opening, and later eased back, but still closed ahead at £2,187.

Quantitative Easing Is Causing Food Prices to Skyrocket - As I've previously noted, interest rates have risen both times after the Fed implemented quantitative easing. Graham Summers points out that food prices have also skyrocketed both times: In case you’ve missed it, food riots are spreading throughout the developing world Already Tunisia, Algeria, Oman, and even Laos are experiencing riots and protests due to soaring food prices. As Abdolreza Abbassian, chief economist at the UN’s Food and Agriculture Organization (FAO), put it, “We are entering a danger territory.” Indeed, these situations left people literally starving… AND dead from the riots. And why is this happening? A perfect storm of increased demand, bad harvests from key exporters (Argentina, Russia, Australia and Canada, but most of all, the Fed’s money pumping. If you don’t believe me, have a look at the below chart:

Food Prices Rise Around The World (NPR audio) The United Nations' food agency warns the world is nearing a food crisis. Prices are going up, and the U.N. is calling for rules to curb speculation in grain and other commodity markets.

McDonald's Will Raise Prices In 2011 - McDonald's is raising its prices in spite of earning $5 billion in profit last year. The company has blamed the price hike on the rising prices of some of the ingredients it uses. Extreme weather around the world has created problems for farmers and contributed to shortages. There has been heavy rain in Canada, floods in Australia and drought in Russia. These conditions sharply raised prices for corn and wheat in 2010. The prices of cattle, hog and chicken also went up. Rising prices are also being seen at grocery stores and are hurting restaurants everywhere, meaning that other eateries could soon follow McDonald's lead.

‘Bug Mac’ and lovely ‘grub’: food of the future - Dutch student Walinka van Tol inspects the worm protruding from a half-eaten chocolate praline she's holding, steels herself with a shrug, then pops it into her mouth.  "Tasty ... kind of nutty!" the 20-year-old assures her companions clutching an array of creepy crawly pastries at a seminar, which forecast that larvae and locusts will invade Western menus as the price of steak and chops skyrocket.   Van Tol and about 200 other tasters were guinea pigs for a group of Dutch scientists doing groundbreaking research into insects replacing animal meat as a healthier, more environmentally friendly source of protein.  "There will come a day when a Big Mac costs 120 euros ($163) and a Bug Mac 12 euros, when more people will eat insects than other meat," head researcher Arnold van Huis told a disbelieving audience at Wageningen University in the central Netherlands.

Food Price Rise May Be Lasting-Nestle Chairman (Reuters) - A "worrisome" rise in world food prices may be long-lived, the chairman of Nestle, the world's biggest food group, told a German newspaper. "The financial and economic crisis in 2008 put an abrupt end to price rises. I am afraid that this time the rise could be lasting," Peter Brabeck told the Frankfurter Allgemeine Zeitung in an interview released on the paper's Internet site ahead of publication on Wednesday. Brabeck said it was "madness" to turn agricultural areas over to the production of biodiesel, even if targets for production of the fuel had been trimmed. Food prices, which shot to record highs in December, have also moved to the top of the global policy agenda. "No food for fuel" was one answer to the food inflation problem, Brabeck said. A second was greater investment in agricultural production. "With current techniques, including gene technology, one could feed up to 9.5 billion people," Brabeck said.

Business must be a part of the solution for global food security - The rise of commodity prices and its impact on food security has been an important topic of discussion in Davos this week. Increased volatility in food markets poses both humanitarian and political risks.   Today in Davos, the World Economic Forum launched a strategy that can help provide long-term solutions to the food security challenge. Titled "Realizing a New Vision for Agriculture: A Roadmap for Stakeholders," the strategy outlines the contributions the private sector can make to implement sustainable agriculture systems that meet our global needs.  The Roadmap was developed through the Forum's New Vision for Agriculture initiative - an alliance of 17 global companies, national governments, international organizations and farmer leaders to accelerate sustainable agricultural development through market-based approaches. The initiative works to develop a shared agenda for sustainable agricultural growth among stakeholders, based on a vision of agriculture as a positive driver of food security, environmental sustainability, and economic opportunity.  Over the last year, we’ve worked with a broad array of stakeholders from around the world to develop and implement this strategy. We catalyzed working partnerships with the governments of Tanzania and Vietnam to bring business-led solutions to help meet their national agricultural goals.

Food Inflation Stays Above 15% for Fourth Week as Subbarao Increases Rates - India’s food inflation remained above 15 percent for a fourth straight week as the central bank raised interest rates to damp price expectations. An index measuring wholesale prices of agricultural products rose 15.57 percent in the week ended Jan. 15 from a year earlier, the commerce ministry said in a statement in New Delhi today. The gauge gained 15.52 percent the previous week.  High food prices may “spillover” and stoke inflation in the wider economy, the Reserve Bank of India said Jan. 25 after it raised rates to a two-year high. Prime Minister Manmohan Singh’s government is importing onions from Pakistan and has kept a ban on exports of lentils and edible oils.  “If the food prices do not come down in the coming weeks, it will keep inflation expectations elevated,”

Rice Imports by Bangladesh to Double on `Panic-Buying,' Prices, Hasan Says - Bangladesh, South Asia’s biggest rice buyer, doubled its import target for this year to cool domestic prices that surged to a record in December as consumers and farmers hoarded supplies, a government official said.  The import target was raised to 1.2 million metric tons for the year ending June 30, from 600,000 tons set in November, said Badrul Hasan, director for procurement at the nation’s Directorate General of Food. That’s triple the U.S. Department of Agriculture’s estimate of 400,000 tons.  “The reason for the increase is panic-buying,” Hasan said in a phone interview from Dhaka yesterday. “There’s a sense of insecurity among the public. People who usually need 10 kilos buy more than 20 kilos. When farmers need to sell, they withhold their stocks” expecting a windfall as prices advance, he said.

Governments stockpile food staples - Governments across the developing world are stockpiling food staples in an attempt to contain panic buying, inflation and social unrest. But the hoarding is driving agricultural commodity prices even higher. The cost of wheat, the world’s most important staple, reached a fresh two-and-a-half-year high on Thursday, after countries from Algeria to Saudi Arabia announced extraordinary purchases. More FT video High food prices have been a contributing factor to the recent wave of social unrest across North Africa and the Middle East. In Algeria earlier this month, young rioters chanted “Bring us sugar!” The cost of the sweetener in the wholesale market is at its highest in 30 years.  Earlier this week, Algeria bought 800,000 tonnes of wheat – much more than usual – and Saudi Arabia announced plans to double the size of its wheat stockpile. Bangladesh and Indonesia joined the rush on Thursday, placing extraordinary on rice orders. Traders said that Jakarta, which usually buys rice in 200,000-tonne allotments, tendered for more than 800,000 tonnes. Bangladesh said it would double rice purchases this year.

New World Order: Food Price Inflation; House Price Deflation - You can tell by my bleary, bloodshot eyes, my rumpled appearance, my musky aromas and my overtly hostile attitude that I have been holed up in the Mogambo Armageddon Bunker (MAB), scared out of my mind about the inflation in prices that is surely going to consume us, thanks to the unholy Federal Reserve creating so incredibly much, so stupendously much, so astoundingly much, So Freaking Much Money (SFMM). Naturally, as a lunatic-fringe Austrian Business Cycle Theory kind of guy, and one who has also seen the terrifying 4,500-year historical record of fiat currencies, and being an ordinary guy who is also paranoid and scared enough as it is without the added terror of this inflation thing, I am furiously buying gold, silver and guns, the latter item to protect the two former items, which will be so valuable in the collapse that I can buy anything I want, any time I want, anywhere I want, which you have to agree is a really nice way to get through a hyperinflationary collapse! Of course, it won’t be inflation in the prices of all things, but more inflation in things that foreigners want, too (food, energy, pornography), but deflation in things that foreigners do not want (your house, your car, your job).

The threat of rising food prices - The uneven recovery in advanced countries is hiding an issue that, while off the agenda in the last G20 meeting back in November, is arguably no less urgent for the global economy – namely, the rise in food prices.  Rising food prices once again pose central banks a tricky question. How far should they ignore food price inflation? This column suggests that food tends to have stronger predictive power on global inflation cycles than oil. The problem is more severe in emerging markets where consumption basket weights for food are two or three times larger than in rich nations. Central banks should pay close attention.

The Growing International Commodity Crises - Even with the meltdown of the global economy in 2008 due to unregulated banking, the financial industry has remained largely untouched. Even with the devastation of New Orleans, Nashville, Pakistan, Russia, Australia, and points all over the world by climate disasters, with repeated oil and coal disasters, the fossil fuel industry has remained ascendant. Professor Michael Klare, writing at the Tom Dispatch, warns that “2011 could be the year of living dangerously“:It’s not surprising then that food and energy experts are beginning to warn that 2011 could be the year of living dangerously — and so could 2012, 2013, and on into the future. Add to the soaring cost of the grains that keep so many impoverished people alive a comparable rise in oil prices — again nearing levels not seen since the peak months of 2008 — and you can already hear the first rumblings about the tenuous economic recovery being in danger of imminent collapse. Think of those rising energy prices as adding further fuel to global discontent.

Food and Oil Prices Compared - Kalpa - This graph plots the ten most recent years of world Food Price Index data from the UN Food and Agriculture Organization (FAO) and the monthly average oil price from the US Energy Information Agency (EIA). [source] Note that graph shows data through November 2010. [Current FAO food basket is 215.] Until I saw this graph, I would have expected the food price index to lag oil prices. The other surprise was how very closely the two matched each other when plotted together. How I'd love to see a graph of these values spanning several decades. I find the divergences in the prices between the FAO food basket and oil especially interesting. Oil speculation comes into play, for example, for its higher price in 2006. Note that food has become more expensive than oil since the financial crisis as compared to the earlier part of the decade. In part, this would be due to the demand destruction and oversupply of oil which lasted for some time following the crisis although there was also demand destruction going on in the agricultural commodities at the same time. Though both sectors are affected by the dynamics of supply and demand, the fact that OPEC production exceeds its goals during difficult economic periods may also account for some of the divergence.

End of cheap food era as grain prices stay high (Reuters) - U.S. grain prices should stay unrelentingly high this year, according to a Reuters poll, the latest sign that the era of cheap food has come to an end. U.S. corn, soybeans and wheat prices -- which surged by as much has 50 percent last year and hit their highest levels since mid-2008 -- will dip by at most 5 percent by the end of 2011, according to the poll of 16 analysts. The forecasts suggest no quick relief for nations bedeviled by record high food costs that have stoked civil unrest. It means any extreme weather event in a grains-producing part of the world could send prices soaring further. The expectations may also strengthen importers' resolve to build bigger inventories after a year in which stocks of corn and soybeans in the United States -- the world's top exporter -- dwindled to their lowest level in decades.

Russia Imposes Inflation-Driven Price Controls: Will Use Price Caps On "Socially Important" Commodities - Russia has just announced it would proceed with price caps on a variety of foodstuffs, from buckwheat, to potatoes, assorted fruits and vegetables and all other commodities it deems 'socially important' accoding to Russian newspaper And so the big margin crunch goes up several orders of magnitude, as companies, desperate to pass through surging input costs, but prohibited from raising selling prices, are forced to eliminate any and all overhead, most certainly including such trivialities as labor, in order to stay in business. More importantly, experts now predict that full year inflation in Russia will hit double digits. Just in the first 17 days of January, inflation hit 1.4%, or 9% annualized (according to gazeta... our calculation indicates a notably higher number but readers get the idea). Luckily, Russia does realize just how futile this task of price controls is: 'as soon as we introduce price controls, once a deficit, the product disappears from the market, followed by an even higher rise in prices on the shadow, not covered by official supervision, market.' And so a vicious circle in which high prices beget even higher prices begins. But don't worry - this could never happen in the US.

North African Unrest May Spread as Davos Delegates Warn on Food Inflation - Record food prices may fan social unrest and fuel inflation beyond North Africa as thousands of people take to the streets of Cairo to denounce President Hosni Mubarak, delegates at the World Economic Forum said. “This protest won’t end in North Africa; it will spread in many countries because of high unemployment and increasing food prices,” Hamza Alkholi, chairman and chief executive of Saudi Alkholi Group, a holding company investing in industrials and real estate, said in an interview in Davos, Switzerland. Risks of global instability are rising as governments facing budget crunches cut subsidies that help the poor cope with surging food and fuel costs, the head of the United Nations’ World Food Program said two days ago. World food costs rose to a record in December on higher costs for sugar, grain and oilseeds, the UN reported Jan. 4, contributing to the uprising that ousted Tunisia’s Zine El Abidine Ben Ali on Jan. 14. Protests have spread to Egypt, Algeria, Morocco and Yemen.

Guest Post: America’s Middle Eastern Puppet Regimes Are Falling Like Dominoes - The images from the protests in Cairo, Egypt today are stunning. See this, this and this. President Mubarak’s family has already fled the country. As Raw Story notes: Demonstrators calling for economic and political reforms broke through police barriers and began marching in Cairo’s streets. Protesters gathered outside the Supreme Court in downtown Cairo and held large signs that read “Tunisia is the solution” amid massive police deployment, an AFP correspondent said. Chanting “Down with Mubarak” — in reference to Egyptian President Hosni Mubarak who has been in power for three decades — they broke through several police cordons and began marching towards Tahrir Square, in scenes seldom witnessed in Egypt. Others shouted “Tunisia is not better than Egypt” as the crowds began to swell.

A Quick Guide To The Riots Happening Around The World - A wave of anti-government protests is sweeping the world.  Inspired by the revolt that toppled Tunisia's dictatorial president, thousands of protestors in Egypt and Yemen took to the streets this weekend to take a stand against high food prices, chronic unemployment and government corruption. Riots also broke out in Algeria, according to the Associated Press. In Lebanon, political tensions erupted on Monday and Tuesday with supporters of former prime minister Saad Hariri protesting the appointment of a new, Hezbollah-backed prime minister. And anti-government demonstrations turned violent in Albania, where protests have been a frequent occurrence since a contested 2009 election. Another rally has been planned for Friday, according to the New York Times.

Thousands demand ouster of Yemen's ruler… Drawing inspiration from the revolt in Tunisia, thousands of Yemenis fed up with their president's 32-year rule demanded his ouster Saturday in a noisy demonstration that appeared to be the first large-scale public challenge to the strongman. Clashes also broke out Saturday in Algeria, as opposition activists there tried to copy the tactics of their Tunisian neighbors, who forced their longtime leader to flee the country more than a week ago. The protests in Yemen appeared to be the first of their kind. The nation's 23 million citizens have many grievances: they are the poorest people in the Arab world, the government is widely seen as corrupt and is reviled for its alliance with the United States in fighting al-Qaida, there are few political freedoms and the country is rapidly running out of water.

The end of the Arab exception? - Most obviously, the Mubarak regime is finished in its role as the key US ally in the Arab world. If the regime survives at all, it will be through brutal repression which makes it clear once and for all that the dictatorship is held in place solely by military force. That in turn will make the provision of substantial economic or military aid politically untenable (the Republicans were already keen to cut aid to Egypt). But without continuing aid, there is little reason for any Egyptian government to support US foreign policy in the region. The bigger casualty is the ‘Arab exception’: the idea that the concept of democracy is not really applicable in Arab countries and that foreign policy therefore amounts to a choice of which dictator to support. [1][2] The autonomous emergence of democratic governments in Tunisia and Egypt would fatally undermine this exception, and leave the remaining dictatorships and monarchies in the region as anomalies, for which the question about the end of the regime would be “when?” rather than “if?”. A traditional foreign policy based on the presumed continuance of the status quo would become highly problematic, with high potential costs when the crash came[3]

How land grabs in Africa could herald a new dystopian age of hunger - Land grabs have grabbed global attention. It's on the agenda at the World Economic Forum this week, and as the trend for large land acquisitions accelerates, it has moved from being primarily a story about Middle Eastern petrodollars pouring into Africa, to a much more widely spread phenomenon affecting many parts of south-east Asia, such as the Phillipines, as well as Latin America. In Cambodia, 15% of land has been signed over to private companies since 2005, a third of which are foreign. A new set of research studies from the International Land Coalition find the competition for land increasingly global and unequal.Many of the deals are shrouded in secrecy, so the scale of what is happening is not clear, nor is it clear who is benefiting from these deals; a number of new reports try to tease these issues out, such as the International Institute for Environment and Development's analysis of legal contract, which is published on Monday. It's not hard to see why the subject generates so much attention. It's partly the secrecy element, partly the fear: who is buying up the future? Large-scale land acquisition prompts all too vividly visions of a dystopian future in which millions of the hungry are excluded from the land of their forefathers by barbed wire fences and security guards as food is exported to feed the rich world.

Food speculation - 'People die from hunger while banks make a killing on food' - Oddly, there had been no drought, the usual cause of malnutrition and hunger in southern Africa, and there was plenty of food in the markets. For no obvious reason the price of staple foods such as maize and rice nearly doubled in a few months. Unusually, too, there was no evidence that the local merchants were hoarding food. It was the same story in 100 other developing countries. There were food riots in more than 20 countries and governments had to ban food exports and subsidise staples heavily. The explanation offered by the UN and food experts was that a "perfect storm" of natural and human factors had combined to hyper-inflate prices. US farmers, UN agencies said, had taken millions of acres of land out of production to grow biofuels for vehicles, oil and fertiliser prices had risen steeply, the Chinese were shifting to meat-eating from a vegetarian diet, and climate-change linked droughts were affecting major crop-growing areas. The UN said that an extra 75m people became malnourished because of the price rises. But a new theory is emerging among traders and economists. The same banks, hedge funds and financiers whose speculation on the global money markets caused the sub-prime mortgage crisis are thought to be causing food prices to yo-yo and inflate. The charge against them is that by taking advantage of the deregulation of global commodity markets they are making billions from speculating on food and causing misery around the world

The Global Revolution Is Accelerating - Mike Krieger Explains - With this as a backdrop, the leaders of all nations are scrambling to somehow survive in their positions through this time period.  What is happening across the emerging world now is countries that had increased prices for food and energy are reversing policy.  Countries such as Saudi Arabia are bidding for world grain supplies.  Think about this for a minute.  What this means is that what is being employed around the world at a time of global crop failures is essentially price controls.  What happens when you have price controls?  No elasticity of demand.  What does that lead to?  Even worse supply/demand imbalances and ultimately food shortages and everything goes to the black market and farmers stop planting as much.  So what we now have is the very beginning of a food price spiral that will lead to prices in dollars at unimaginable heights.  I would start to be very careful of the quality of food you buy and where it comes from.  I assume companies will start mixing in all sort of fillers and garbage into their foods.  Especially in emerging markets looks for increases in tainted or corrupt food supplies.This will also affect oil prices and they should move substantially higher.  While people still quote WTI as the oil price and claim it is down, this is total and complete nonsense.  Nobody pays WTI prices.  Brent is $98/b and Asia Tapis is $101.50/b.  Anyone that is telling you oil prices are moving lower are either lying or don’t know what they are talking about.  For example while WTI is down 7% from recent highs, gasoline is down only 4% and heating oil is at the highs.  Do you pay WTI or do you buy gasoline?  There is also this idea that OPEC is going to come out and save the world by boosting production.  Good luck with that.  First of all, OPEC’s true spare capacity number is highly debatable and I am in the camp of those that thinks  they do not have control over the market at this point.  Banana Ben Bernanke does.  Secondly and most importantly these Arab nations are short food and we are in a food crisis.  They are also amongst the most vulnerable governments to overthrow.  You think for a second that they will crash oil as food prices are soaring?  Oil is their currency.  For what it is worth I think many of these regimes will be history within a year.  Then the Western governments will fall one by one.  This is the Fourth Turning.  There is no point trying to stop it, the only thing you can do is prepare.  There is precious little time left for that.

World is ‘one poor harvest’ from chaos, new book warns - In his new book "World on the Edge," released this week, Brown says mankind has pushed civilization to the brink of collapse by bleeding aquifers dry and overplowing land to feed an ever-growing population, while overloading the atmosphere with carbon dioxide. If we continue to sap Earth's natural resources, "civilizational collapse is no longer a matter of whether but when," Brown, the founder of Worldwatch and the Earth Policy Institute, which both seek to create a sustainable society, told AFP. . "Things could start unraveling at any time now and it's likely to start on the food front. "We've got to get our act together quickly. We don't have generations or even decades - we're one poor harvest away from chaos," he said. Brown points to warning signs and lays out arguments for why he believes the cause of the chaos will be the unsustainable way that mankind is going about producing more and more food.

Booming Ethanol Consumption in the U.S. - What happens to the amount of ethanol consumed by Americans when the federal government simultaneously mandates that an ever-increasing percentage of ethanol be added to gasoline while also subsidizing its production?  Well, perhaps unsurprisingly, what you get is what you see in the chart below happens:  The dividing line is 1993, following the Energy Policy Act of 1992, which required specified car fleets to purchase alternative fuel vehicles capable of operating with E-85, an 85%/15% blend of ethanol and gasoline. In addition, the Clean Air Act amendments of 1990 required the wintertime use of ethanol in 39 major metropolitan areas and full-year use in 9 others that had not satisfied the Environmental Protection Agency's imposed standards for carbon monoxide.

Are U.S. Ethanol Producers Profitable? - Ethanol consumption in the United States has been rising exponentially for more than a decade. You might think then that U.S. ethanol producers are making money hand over fist. But are they?  At first glance, you would certainly think so, thanks to the especially generous assistance they've received from the U.S. federal government over that time. That assistance has come in the following forms:

  • The government mandates that their product, ethanol, be added to the gasoline used by the overwhelming majority of motor vehicles in the United States. In 2011, the federal government will require oil companies to use over 12 billion gallons of ethanol, which will rise to 15 billion gallons in 2015 and 36 billion gallons per year in 2022.
  • Their production costs are very generously subsidized. U.S. ethanol producers receive a tax credit of 45 cent per gallon for the fuel ethanol they produce.
  • They are protected from international competition with foreign-based ethanol producers who are capable of producing ethanol more economically than U.S. producers through tariffs imposed by the U.S. government. The tariff adds 54 cents to the cost of each gallon of fuel ethanol that is be imported to the United States and sold to U.S. consumers.

Cole Gustafson, a biofuels economist at North Dakota State Universitygenerated the following chart which estimates how profitable U.S.-based ethanol producers were throughout the years of 2008 and 2009

    The Corn Ethanol Boondoggle Continues - Jim Quinn of The Burning Platform blasts Congress for keeping the ethanol party going in How Many Senators Does It Take To Screw A Taxpayer? Every time you fill up your car this winter you are participating in the biggest taxpayer swindle in history. Forcing consumers to use domestically produced ethanol is one of the single biggest boondoggles ever committed by the corrupt brainless twits in Washington DC. Ethanol prices have soared 30% in the last year as the supplies of corn have plunged. Only a policy created in Washington DC could drive up the prices of gasoline and food, with the added benefits of costing the American taxpayer billions in tax subsidies and killing people in 3rd world countries. The grand lame duck Congress tax compromise extended a 45-cent incentive to ethanol refiners for each gallon of the fuel blended with gasoline and renewed a 54-cent tariff on Brazilian imports. The extension of these subsidies, besides costing American taxpayers $6 billion per year, has the added benefit of driving up food costs across the globe, causing food riots in Tunisia, and resulting in the starving of poor peasants throughout the world.

    New ethanol blend won’t agree with many older engines The Environmental Protection Agency last week cleared the way for gasoline to be blended with up to 15 percent ethanol – a formulation that will make certain engines sputter and stall. It’s a decision that has raised opposition across the political spectrum. Sen. Olympia Snowe, R-Maine, and Sen. James Inhofe, R-Oklahoma, have raised concern about the limited availability of pure gasoline. Sen. Susan Collins, R-Maine, and Rep. Chellie Pingree, D-Maine, objected that the new blend is unsuitable for many engines. “Many Mainers are skeptical of ethanol, and for good reason,” Pingree said. “Many of our cars and small engines can’t burn it safely, it takes an enormous amount of fossil fuel to produce, and it costs us billions of dollars in federal subsidies every year.” The EPA acknowledges that the 15 percent ethanol blend is not suitable for small engines or vehicles built before 2001, but says it is not mandating its use. Replying to Snowe’s objections, an EPA official said that the new waiver “allows but does not require E15 to be sold.”

    Genetically modified crops are the key to human survival, says UK's chief scientist - Moves to block cultivation of genetically modified crops in the developing world can no longer be tolerated on ethical or moral grounds, the government's chief scientist, Sir John Beddington, has warned. He said the world faced "a perfect storm" of issues that could lead to widespread food shortages and public unrest over the next few decades. His warning comes in the wake of food riots in north Africa and rising global concern about mounting food prices. "A number of very important factors are about to change our world," said Beddington, an expert in population biology. "Its population is rising by six million every month and will reach a total of around 9,000 million by 2050. At the same time, it is estimated that by 2030 more than 60% of the population will be living in cities and will no longer be involved in growing crops or raising domestic animals. And on top of that the world's population is getting more prosperous and able to pay for more food."

    Food shortage ''needs agricultural revolution'' - A future food shortage could be tackled by genetically modified (GM) crops, the government's chief scientific adviser Professor Sir John Beddington has said in response to a report by Foresight on global food and farming futures.  At the same time, Environment Secretary Caroline Spelman and International Development Secretary Andrew Mitchell said there needed to a worldwide agricultural revolution to tackle the problem, with farmers growing more food at less cost to the environment than they are today. Beddington warned that while global population would reach 9bn by 2050 the world would need 40 per cent more food, 30 per cent more water and 50 per cent more energy.   "If there are genetically modified organisms that actually solve problems that we can't solve in other ways, and are shown to be safe from a human health point of view, and safe from an environmental point of view, and they can solve problems we can't solve otherwise, then we should use them," Beddington told the BBC. "

    Commodities: This Time is Different - Krugman - I’ve been getting a fair bit of correspondence insisting that political unrest, in the Arab world and elsewhere, is being caused by … Ben Bernanke. You see, quantitative easing is responsible for rising food prices, which leads to riots, which — OK, there are a lot of broken links in that chain. But it surely is time to take a look at food prices and commodity prices more broadly. During the last commodity price spike, less than three years ago, many people laid the blame at the feet of speculators. I never accepted that as the prime cause, mainly because so many of the speculation-did-it people seemed confused about the difference between buying a futures contract and actually hoarding physical stocks; as a very useful analysis by Sanders and Irwin (pdf) puts it,  Index fund buying is no more “new demand” than the corresponding selling is “new supply.”  True, high futures prices can provide an incentive to accumulate physical stocks. But during the 2007-2008 price surge there was little evidence of such accumulation.What about this time? I find it illuminating to take the IMF commodity data and rank commodities by the percentage price increase during 2010: Up at the top are cotton and iron ore. What’s going on up there?

    Top USDA bee researcher, Jeffrey Pettis, also found Bayer pesticide imidacloprid harmful to honeybees - Remember the case of the leaked document showing that the EPA’s own scientists are concerned about a pesticide it approved that might harm fragile honeybee populations? Well, it turns that the EPA isn’t the only government agency whose researchers are worried about neonicotinoid pesticides. USDA researchers also have good evidence that these nicotine-derived chemicals, marketed by German agrichemical giant Bayer, could be playing a part in Colony Collapse Disorder—the mysterious massive honeybee die-offs that United States and Europe have been experiencing in recent years. So why on earth are they still in use on million of acres of American farmland?

    Pesticide linked to bee deaths should be suspended, MPs told - A new generation of pesticides is implicated in the widespread deaths of bees and other pollinators and should be suspended in Britain while the Government reviews new scientific evidence about their effects, MPs were told yesterday.  Neonicotinoid pesticides are linked by "a growing weight of science" to insect losses, and the assessment regimes for them are inadequate, the Labour MP Martin Caton told the House of Commons. Mr Caton, MP for Gower, said in an adjournment debate that "alarm bells should be ringing" about neonicotinoids, which are "systemic" insecticides – that is, they are present in every part of treated plants, including the pollen and nectar which bees and other pollinators regularly gather. At the moment, the Government's position is that the compounds are safe when used properly, and there are no restrictions on their UK use – even though they have been banned, in varying degrees, in other countries

    Peer review: Trial by Twitter - Nature News -This critical onslaught was striking — but not exceptional. Papers are increasingly being taken apart in blogs, on Twitter and on other social media within hours rather than years, and in public, rather than at small conferences or in private conversation. In December, for example, many scientists blogged immediate criticisms of another widely publicized paper2 — this one heralding bacteria that the authors claimed use arsenic rather than phosphorus in their DNA backbone.  To many researchers, such rapid response is all to the good, because it weeds out sloppy work faster. "When some of these things sit around in the scientific literature for a long time, they can do damage: they can influence what people work on, they can influence whole fields," says Goldstein. This was avoided in the case of the longevity-gene paper, he says. One week after its publication, the authors released a statement saying, in part, "We have been made aware that there is a technical error in the lab test used … [and] are now closely re-examining the analysis."

    Should cutting down forests increase a nation’s GDP? - Is the measure of a country’s wealth just its gross domestic product? Or should the definition be broadened to value a nation’s forests and fisheries or even its atmosphere? In a major new publication, the World Bank makes a strong case for embracing a broader definition of wealth as it works to alleviate poverty around the globe. By including agricultural land, protected areas, minerals beneath the ground, energy and even laws and governing institutions as “assets,” economists say they can better spur green growth. “The problem with GDP growth as an indicator … is that it treats both the production of goods and services and the value of asset liquidation as part of the product of the nation,” authors wrote in “The Changing Wealth of Nations.” “Thus, a country could grow its GDP by depleting its stocks of forests and minerals, for example, but this growth would not be sustainable.”

    Yellowstone Has Bulged as Magma Pocket Swells - Yellowstone National Park's supervolcano just took a deep "breath," causing miles of ground to rise dramatically, scientists report.  The simmering volcano has produced major eruptions—each a thousand times more powerful than Mount St. Helens's 1980 eruption—three times in the past 2.1 million years. Yellowstone's caldera, which covers a 25- by 37-mile (40- by 60-kilometer) swath of Wyoming, is an ancient crater formed after the last big blast, some 640,000 years ago.(See "When Yellowstone Explodes" in National Geographic magazine.) Since then, about 30 smaller eruptions—including one as recent as 70,000 years ago—have filled the caldera with lava and ash, producing the relatively flat landscape we see today.

    Copper Prices Rise to Record Highs, Thefts Rise Too - Paul Kedrosky reported yesterday that copper thefts are rising again, due to the all-time record high prices in recent months.  The chart above displays monthly copper prices back to 1980, and shows that copper prices have tripled from $1.40 per pound at the end of 2008 to recent highs this month approaching $4.50 per pound.   According to a Google News search, there have been 545 news stories in just the last week containing the phrase "copper theft," and that compares to 665 stories during the entire year of 2009 when copper prices were between $1.50-$3.00 per pound, and 1,750 stories last year as prices rose above $4 per pound by the end of the year. 

    California, EPA to Work on Joint Auto Standards —California state officials have agreed to work with federal officials to develop new greenhouse-gas standards for cars and light-duty trucks built for 2017 through 2025, following weeks of pressure from the auto industry.  In an announcement Monday, the U.S. Environmental Protection Agency said California officials have scrapped their plans to issue state-specific standards in March. Instead, the EPA and California Air Resources Board will now issue standards jointly by Sept. 1.  The news was applauded by auto makers, which said California is now more likely to issue the same greenhouse-gas standard as the federal government, thereby reducing the risk that the state would adopt more stringent standards than federal officials.

    Another terrific ABC News story — on the role global warming is playing in extreme winter weather - Earlier this month, ABC ran one of the best climate change stories ever to appear on a major network’s evening news show:  “Raging Waters In Australia and Brazil Product of Global Warming.” On Friday they aired another very good piece — and now we know the secret of their accurate reporting.  As they explain: ABC news contacted 10 climate scientists to ask their take, if the extreme winter like the one we’re having is the way of the future.  The consensus:  global warming is playing a role by shifting weather patterns in unpredictable ways.  Many say the forecast for the future calls for record-breaking precipitation and extreme temperatures year-round — and that means winter with more snow. The dividing line between good climate reporting and bad climate reporting is almost always whether the reporter talked to real climate scientists.  Typically, the more a reporter talks to, the better the story. It is very hard to get the story wrong if you talk to several of the leading climate scientists in any specific subfield. Here’s the full story: (news video)

    What's "Normal" Weather Is About to Officially Change - While you've been freezing your tail off for the past few weeks, the National Climatic Data Center has been gearing up to announce new definitions of "normal" weather conditions for 10,000 regions across the country. And these new "normals" are going to be a lot warmer than the current definitions.  Here's why: The NCDC uses temperature and precipitation data from the previous three decades to calculate what's "normal" for a region. Currently, that includes the relatively cold 1970s. New figures will replace the chilly 1970s with the 2000s, which was the warmest decade ever recorded. Check out the difference in these maps, showing the "temperature anomaly" (defined by NOAA here) for each decade.

    Toxic Ash Clouds Might Be Culprit in Biggest Mass Extinction - Tiny particles embedded in ancient Canadian rocks have provided new clues about what might have triggered Earth's deadliest mass extinction. The ultimate cause, researchers say, might be globe-smothering clouds of toxic ash similar to that spewed by modern-day coal-fired power plants. The die-off, which occurred worldwide about 250 million years ago at the end of the Permian period, was even more extensive than the one that wiped out the dinosaurs. More than 90% of marine species went extinct, and land-based ecosystems suffered almost as much. Scientists have long debated the reasons. Favorite hypotheses include an asteroid impact, massive volcanic eruptions in Siberia, and toxic oceans. Geochemist Stephen Grasby of the Geological Survey of Canada in Calgary and colleagues report online today in Nature Geoscience a new twist on the volcano notion.

    Researchers find smoking gun of world’s biggest extinction - Grasby and colleagues discovered layers of coal ash in rocks from the extinction boundary in Canada's High Arctic that give the first direct proof to support this and have published their findings in Nature Geoscience."Our research is the first to show direct evidence that massive volcanic eruptions – the largest the world has ever witnessed –caused massive coal combustion thus supporting models for significant generation of greenhouse gases at this time," says Grasby. At the time of the Permian extinction, the Earth contained one big land mass, a supercontinent known as Pangaea. The environment ranged from desert to lush forest. Four-limbed vertebrates were becoming more diverse and among them were primitive amphibians, early reptiles and synapsids: the group that would, one day, include mammals.

    Canada sees staggering mildness as planet’s high-pressure record is “obliterated” - Ostro explains how global warming is changing the weather - The largest anomalies here exceed 21°C (37.8°F) above average, which are very large values to be sustained for an entire month. The disinformers and many in the media love to focus on where it is cold in the winter.  It has been cool where many people live.  Brr! Unfortunately for homo sapiens, it’s been staggeringly warm where the ice is.  I’ll do a post on Greenland shortly, but the NSF-sponsored researchers at UCAR/NCAR  have posted some staggering data on just how warm it has been in northern Canada: To put this picture into even sharper focus, let’s take a look at Coral Harbour, located at the northwest corner of Hudson Bay in the province of Nunavut. On a typical mid-January day, the town drops to a low of –34°C (–29.2°F) and reaches a high of just -26°C (–14.8°F). Compare that to what Coral Harbour actually experienced in the first twelve days of January 2011, as reported by Environment Canada (see table at left).

    • After New Year’s Day, the town went 11 days without getting down to its average daily high.
    • On the 6th of the month, the low temperature was –3.7°C (25.3°F). That’s a remarkable 30°C (54°F) above average.

    Cold comfort: Canada's record-smashing mildness: Some fascinating weather has unfolded across the Northern Hemisphere over the last month... heavy snow that battered the mid-Atlantic and New England states in late December... the United Kingdom’s coldest December in at least the last century. Meanwhile, the sparsely populated Canadian Arctic basked in near-unprecedented mildness.It’s the second chapter of a tale that began a year ago, when Canada as a whole saw the warmest and driest winter in its history.  Much of the blame went to El Niño, which typically produces warmer-than-average weather across Canada.  So far, so good—but similar things are happening this winter, even with a La Niña now at the helm.Just how mild has it been?  The map at right shows departures from average surface temperatures for the period from 17 December 2010 to 15 January 2011, as calculated by NOAA’s Earth Systems Research Laboratory.  The blue blip along the southeast U.S. coast indicates readings between 3°C and 6°C (5.4–10.8°F) below average for the 30-day period as a whole. That’s noteworthy—and in fact, it was the coldest December in more than a century of record-keeping across south Florida.... Blue also shows up across the UK, where December averaged 5.2°C (9.4°F) below normal.What really jumps out, though, is a blob of green, yellow, orange, and red covering a major swath of northern and eastern Canada. The largest anomalies here exceed 21°C (37.8°F) above average, which are very large values to be sustained for an entire month.

    Shrinking Snow and Ice Cover Intensify Global Warming - The decreases in Earth’s snow and ice cover over the past 30 years have exacerbated global warming more than models predict they should have, on average, new research from the University of Michigan shows. To conduct this study, Mark Flanner, assistant professor in the Department of Atmospheric, Oceanic and Space Sciences, analyzed satellite data showing snow and ice during the past three decades in the Northern Hemisphere, which holds the majority of the planet’s frozen surface area. The research is newly published online in Nature Geoscience. Snow and ice reflect the sun’s light and heat back to space, causing an atmospheric cooling effect. But as the planet warms, more ice melts and in some cases, less snow falls, exposing additional ground and water that absorb more heat, amplifying the effects of warmer temperatures. This change in reflectance contributes to what’s called “albedo feedback,” one of the main positive feedback mechanisms adding fuel to the planet’s warming trend. The strongest positive feedback is from atmospheric water vapor, and cloud changes may also enhance warming.

    Temperatures of North Atlantic “are unprecedented over the past 2000 years and are presumably linked to the Arctic amplification of global warming” — Science - The 3.5°F warming of Fram Strait water over the past century is "not just the latest in a series of natural multidecadal oscillations."  - Study after study finds recent warming is unprecedented in magnitude and speed and cause.  The anti-science crowd keeps trying to debunk one or two old Hockey Sticks, but new ones crop up faster than a speeding puck. Science just published a new one, “Enhanced Modern Heat Transfer to the Arctic by Warm Atlantic Water” (subs. req’d), news release here, “Warming North Atlantic water tied to heating Arctic, according to new study.”I have pulled out the key graph — and it is one heck of a Hockey Stick.  It is derived from “planktic foraminifers in a sediment core”: Thin lines are raw data, bold lines are three-point running means….  (C) Summer temperatures at 50-m water depth (red)….  Gray bars mark averages until 1835 CE and 1890 to 2007 CE. Blue line is the normalized Atlantic Water core temperature (AWCT) record … from the Arctic Ocean (1895 to 2002; 6-year averages)….  (D) Summer temperatures (purple) [calculated with a different method]The lead author, Robert Spielhagen of the Leibniz Institute of Marine Sciences said, “Such a warming of the Atlantic water in the Fram Strait is significantly different from all climate variations in the last 2,000 years.”

    Astonishing record-smashing 600-billion-ton ice-sheet mass-balance loss on Greenland during 2010 - The GRACE satellites continue to measure the change in gravity around the Greenland ice sheet. Here is the latest data showing the record amount of ice loss Greenland experienced in the 2010 summer. H/T to Tenney Naumer from "Climate Change: The Next Generation" blog and Dr John Wahr at the University of Colorado who analysed the GRACE data and granted permission to reproduce it here. It's interesting to compare this data to previous blog posts in May 2010 and November 2010. The ice loss in 2010 is the greatest in the satellite record around 600 billion tonnes of ice mass loss over the 2010 summer. More importantly, the rate of ice loss continues to increase, more than doubling since 2002. The GRACE satellites only started recording observations in 2002. A more long-term picture is available by combining GRACE data with a range of other estimations of Greenland ice loss which give us a 50-year picture as well as a range of independent measurement techniques

    Warming North Atlantic water tied to heating Arctic — The temperatures of North Atlantic Ocean water flowing north into the Arctic Ocean adjacent to Greenland -- the warmest water in at least 2,000 years -- are likely related to the amplification of global warming in the Arctic, says a new international study involving the University of Colorado Boulder. Led by Robert Spielhagen of the Academy of Sciences, Humanities and Literature in Mainz, Germany, the study showed that water from the Fram Strait that runs between Greenland and Svalbard -- an archipelago constituting the northernmost part of Norway -- has warmed roughly 3.5 degrees Fahrenheit in the past century. The Fram Strait water temperatures today are about 2.5 degrees F warmer than during the Medieval Warm Period, which heated the North Atlantic from roughly 900 to 1300 and affected the climate in Northern Europe and northern North America. The team believes that the rapid warming of the Arctic and recent decrease in Arctic sea ice extent are tied to the enhanced heat transfer from the North Atlantic Ocean, said Spielhagen. According to CU-Boulder's National Snow and Ice Data Center, the total loss of Arctic sea ice extent from 1979 to 2009 was an area larger than the state of Alaska, and some scientists there believe the Arctic will become ice-free during the summers within the next several decades. "Such a warming of the Atlantic water in the Fram Strait is significantly different from all climate variations in the last 2,000 years," said Spielhagen, also of the Leibniz Institute of Marine Sciences in Keil, Germany.

    New Melt Record for Greenland Ice Sheet; 'Exceptional' Season Stretched Up to 50 Days Longer Than Average -  — New research shows that 2010 set new records for the melting of the Greenland Ice Sheet, expected to be a major contributor to projected sea level rises in coming decades. This past melt season was exceptional, with melting in some areas stretching up to 50 days longer than average," said Dr. Marco Tedesco, director of the Cryospheric Processes Laboratory at The City College of New York (CCNY -- CUNY), who is leading a project studying variables that affect ice sheet melting. "Melting in 2010 started exceptionally early at the end of April and ended quite late in mid- September." The study, with different aspects sponsored by World Wildlife Fund (WWF), the National Science Foundation and NASA, examined surface temperature anomalies over the Greenland ice sheet surface, as well as estimates of surface melting from satellite data, ground observations and models.

    Um... Greenland's ice sheet melt in 2010 broke record - I'm not a scientist, but I think the news that the Greenland ice sheet experienced record melt in 2010 should be on the front page across the country. But instead, that particular article from the Washington Post is relegated to a story in their "Post Carbon" blog. The finding was announced in a paper, published Friday in Environmental Research Letters and described a combination of factors that brought about the record ice sheet melt last year. "This past melt season was exceptional, with melting in some areas stretching up to 50 days longer than average," said Marco Tedesco, director of the Cryospheric Processes at the City College of New York, and the paper's lead author. "Melting in 2010 started exceptionally early at the end of April and ended quite late in mid- September." Eight researchers from the U.S., Belgium, and the Netherlands co-wrote the paper, which examined the "albedo" effect on Greenland's ice sheet. White snow reflects more sunlight so less of the heat from the sun is absorbed and melts the ice sheet. With less snow, the "albedo" is less effective and ice melt is accelerated. The ice melt  in Greenland during 2010 was more than double the average yearly loss over the past three decades.

    Death toll from flooding in Brazil surpasses 800 - Devastating floods in Brazil's Rio de Janeiro state have killed more than 800 people, according to new government figures. State authorities said late Sunday that 809 people were killed after flooding and massive mudslides flattened houses and wiped out entire neighborhoods in hillside towns. The city of Nova Friburgo was the hardest hit, with at least 391 victims, Rio de Janeiro state government said. The flooding, caused by days of torrential rains, has left thousands of people homeless throughout the state, according to the government's tally. Other states in the South American country have also seen heavy rainfall. Earlier this month, authorities in neighboring Sao Paulo state said flooding had killed 24 people.

    Global Boiling: Floods Devastate The World - Although 2011 is less than a month old, the human toll of our fossil-fueled climate is staggering:

      • Australia is facing a “disaster of biblical proportions,” after weeks of rain. “The extent of flooding being experienced by Queensland is unprecedented and requires a national and united response,” Australian Prime Minister Julia Gillard said. “Dozens of towns have been isolated or partially submerged” by Australia’s extraordinary floods, which have killed at least 20 and are now “flushing toxic, pesticide-laden sediment into the Great Barrier Reef, and could threaten fragile corals and marine life in the world’s largest living organism.” The disaster “is costing Australia at least $3 billion in lost farming and coal exports.”
      • – Extreme rains have caused “the worst natural disaster to hit Brazil in four decades,” where the “death toll from flooding and mudslides near Rio de Janeiro” could approach 1,000 victims.
      • – Extraordinary rains “have triggered widespread floods and mudslides” in Sri Lanka, killing 43 and affecting millions, prompting the UN to make a $51 million appeal.
      • – “Floods and heavy storms in South Africa have killed at least 123 people and left around 20,000 in need of immediate basic relief aid.” Farmers may produce “the nation’s smallest winter-wheat harvest in 19 years” as “floods and heavy rain damage crops.”
      • – “Three people, two of them children, died on Sunday,” in Mozambique, “when they were swept away by the waters of the Mecutane river, swollen by torrential rains earlier in the day.” Around 35,000 people along the the banks of the Zambezi have been evacuated.
      • – Continuous rains in the Philippines have killed at least 68 people and left 1.9 million people “reeling.”
      • – “Mild temperatures melted record December snowfalls across Germany, causing rivers from the Rhine in the west to the Oder in the east to burst their banks, flooding fields and towns, turning streets into waterways, and leaving one person feared dead.”
      • – “Heavy snow and rain in the U.S. Midwest” likely mean record floods when the snowpack thaws

    Rising waters threaten North Carolina, and national security (video) -  The sea that sculpted North Carolina's coast, from its arc of barrier islands to the vast, nurturing sounds, is reshaping it once again. Water is rising three times faster on the N.C. coast than it did a century ago as warming oceans expand and land ice melts, recent research has found. It's the beginning of what a N.C. science panel expects will be a 1-meter increase by 2100. Rising sea level is the clearest signal of climate change in North Carolina. Few places in the United States stand to be more transformed. About 2,000 square miles of our low, flat coast, an area nearly four times the size of Mecklenburg County, is 1 meter (about 39 inches) or less above water. At risk are more than 30,500 homes and other buildings, including some of the state's most expensive real estate. Economists say $6.9 billion in property, in just the four counties they studied, will be at risk from rising seas by late this century.

    This Is A Real Headline About Australia - Normally weather excuses are the last refuge of a scoundrel, but unless you actually desire to be ignorant you can't deny the remarkable weather events that are happening around the world right now.  First, we can start in New York City, where we just crushed the old January record for snowfall (woo!). Then of course there's the drought in the rest of the country, and the extreme cold in India. But what's really remarkable to us this morning is this Bloomberg headline: Cyclone Bianca Intensifies off Northwest Australia, Halts Some Oil Output. Given that much of the country has been underwater for weeks and weeks now, the fact that a new cyclone is intensifying is just jaw-dropping. If you're denying the impact of weather on commodities right now, you have your head in the sand.

    Climate-induced mayhem likely to start in Bangladesh - Nowhere is the potential threat from climate change more worrisome than in Bangladesh, a country strategically sandwiched between rising superpowers China and India, and which also acts as a bridge between South Asia and Southeast Asia. Already, Bangladesh is beset by extreme poverty, overcrowding and flooding that frequently renders large numbers of people homeless. The country's Muslim majority is the target of Islamist radicalization. Over the next two generations, those problems are likely to grow worse if climate change, as predicted, raises sea levels and temperatures. By 2050, rising oceans are projected to cost the low-lying country 17-20% of its land mass. That in turn is expected to render at least 20 million people homeless and decimate food production of rice and wheat, according to the United Nations Intergovernmental Panel on Climate Change. The potential for internal unrest to spill into neighboring India is great.

    Climate Apartheid? The India-Bangladesh Superfence - My friend came to me, with sadness in his eyes. He told me that he wanted help. Before his country dies. And so begin the lyrics to "Bangla Desh" from George Harrison's Concert for Bangla Desh held on 1 August 1971 in Madison Square Garden. Well before we had Sir Bono and Sir Bob Geldof, Live Aid and Live 8, we had the late, great Beatle setting the template for all there was to follow. This forerunner of all benefit concerts was held to support the victims of the 12 November 1970 Bhola cyclone in which an estimated 300,000 lost their lives in the region then called East Pakistan--today's Bangladesh. Just as Pakistan emerged from India, so did Bangladesh in turn emerge from Pakistan, declaring independence on 26 March 1971. It was a very difficult time for Bangladesh to say the least as it faced both the aftermath of a devastating natural calamity and the teething woes of becoming a nation--hence the lyrics above. Now, politics on the Indian subcontinent are usually as contentious as they are interesting. Back then, Pakistan tried hard to keep Bangladesh from becoming a country, and India offered support. Among other things, India opened its border with East Pakistan to help refugees from the disaster cope. Unfortunately, environmental pressures on Bangladesh have hardly ebbed in the intervening years. Obviously, it hasn't gained any elevation while global warming has taken further effect. What more if sea levels continue to rise? With a population of over 160 million, Bangladesh is far from a tiny country population-wise.

    The State of Clean Energy - Roughly 24 hours after Politico reported that Carol Browner, Barack Obama's energy and environmental adviser, was leaving, the president came out strong for clean energy in his State of the Union address: He set a goal of getting 80 percent of our energy from clean sources by 2035.  It's premature to start the party, though. Obama has made us happy before. As a candidate, he promised: "My presidency will mark a new chapter in America's leadership on climate change that will strengthen our security and create millions of new jobs in the process." That didn't turn into climate legislation. And while including wind and solar power as part of his national vision in his speech, the president conceded that he was open to having some energy sources be nuclear, "clean coal," and natural gas -- types of energy that make environmentalists cringe, even if they emit less carbon into the atmosphere than oil and regular coal do

    Obama on Energy and Climate - Here is the portion of President Obama's State of the Union Address devoted to energy and climate:  I have mixed reactions.  Firstly, I'm delighted that this section was the first substantive area discussed in the speech, once the general platitudes were over.  I take that to mean the President is serious about still trying to do more in this area, despite last year's failure to pass any kind of climate plan. I find it sad that there was no explicit discussion of the incontrovertible scientific fact that we are destabilizing our climate with our energy system.  Elsewhere in the world, this can be discussed frankly, but in the US, out of deference to half the political spectrum being in total denial, the elephant in the room cannot be named.   There are aggressive goals for converting the energy system to "clean energy" with no discussion at all as to why that might be necessary.  I understand why the President did this: he needs Republican votes to pass anything and there's no point in antagonizing them.

    Clean Energy Stimulus to Peak at $67 Billion in 2011, World Economic Forum Say - Government stimulus programs benefiting clean energy projects including solar and wind power may peak this year, then decline in 2012 and 2013, the World Economic Forum said in a report by Bloomberg New Energy Finance. About $67 billion of funds will be channeled to low-carbon energy this year from $190 billion pledged to the industry by world governments since the start of 2009, the groups said today in a study released in Davos, Switzerland. Just over half that amount will follow next year, and about a fifth in 2013. In 2010, about $59 billion was paid out, study showed. That helped spur a record $243 billion of investments in renewable power, said New Energy Finance Chief Executive Officer Michael Liebreich. The WilderHill New Energy Index of 100 companies developing low-carbon technologies slid 15 percent last year.

    Climate Benefits of Natural Gas May Be Overstated - Advocates for natural gas routinely assert that it produces 50 percent less greenhouse gases than coal and is a significant step toward a greener energy future. But those assumptions are based on emissions from the tailpipe or smokestack and don’t account for the methane and other pollution emitted when gas is extracted and piped to power plants and other customers.  The EPA’s new analysis doubles its previous estimates for the amount of methane gas that leaks from loose pipe fittings and is vented from gas wells, drastically changing the picture of the nation’s emissions that the agency painted as recently as April. Calculations for some gas-field emissions jumped by several hundred percent. Methane levels from the hydraulic fracturing of shale gas were 9,000 times higher than previously reported. When all these emissions are counted, gas may be as little as 25 percent cleaner than coal, or perhaps even less.

    EDF’s Solar ‘Time Bomb’ Will Tick On After France Pops Bubble - France’s solar power boom that’s led to farmers building unneeded barns just to cover them in panels is costing Electricite de France SA more than a billion euros ($1.3 billion) a year as it meets state pledges to pay above-market prices for renewable energy. The cost is siphoning off funds from EDF as it plans to spend 35 billion euros to extend the life of France’s aging nuclear plants. The tax shortfall will widen this year and last until 2017 even as the government moves to cool the solar rush, said Aurel BGC analyst Louis Boujard. Elsewhere in Europe, governments have stepped in to contain spiraling growth in solar generation. The Czech Senate introduced a temporary tax on solar producers in December, and Spain limited the hours during which existing solar parks can earn premium rates. Germany almost doubled the surcharge consumers have to pay in renewable-energy subsidies starting this year.

    New Mexico Supreme Court Overrules Tea Party Governor Fighting Climate Law - The New Mexico Supreme Court has ruled unanimously that new Tea Party Governor Susana Martinez violated the state constitution when she prevented New Mexico’s democratically-approved rule reducing carbon pollution from being published as codified state law. Essentially their supreme court said “no one is above the law.” The lawsuit was filed by the environmental nonprofit New Energy Economy, and reflects growing claims that Gov. Martinez tried to suppress the rule in an attempt to appease major carbon polluters who contributed heavily to her gubernatorial campaign, and that her suppression was arbitrary and illegal. Preventing its publication was not discretionary, the court ruled. According to eyewitnesses, it seemed as if this New Mexico Supreme Court ruling took just 30 minutes to decide.

    A Great Plains pipeline debate - A massive feat of engineering by any measure, the Keystone pipeline expansion project would transport crude oil close to 1,700 miles from "oil sands" in the icy reaches of Hardisty, Alberta, down through the Great Plains to the refineries of Port Arthur, Tex. In doing so, the giant pipe also promises to allay some fears about U.S. energy security: The oil will come from a trusted ally, and its cross-continental path avoids visions of another deep-sea drilling disaster. But the decision on whether to issue a permit to the project, opposed by environmental groups, rests with the State Department, which has little expertise in engineering or environmental matters. And reflecting the chaos of U.S. energy and environmental policy, the proposed pipeline is pitting Montana landowners against pipe fitters in Nebraska and creating unlikely allies of Nebraska ranchers and chieftains from Alberta's indigenous communities.

    Coal-country lawmakers ramp up push against EPA permit veto - A bipartisan group of House lawmakers is launching fresh attacks against the Environmental Protection Agency (EPA) over its recent decision to block a large mountaintop-removal mining project in West Virginia. Lawmakers from West Virginia and Ohio introduced a measure Wednesday that would prevent EPA from vetoing Clean Water Act permits that have already been approved by the Army Corps of Engineers. Rep. David McKinley (R-W.Va.) sponsored the bill, and co-sponsors include Reps. Nick Rahall (W.Va.), the top Democrat on the Transportation and Infrastructure Committee; Shelley Moore Capito (R-W.Va.); and Ohio Republicans Bill Johnson and Bob Gibbs. Coal-industry allies are furious with EPA over its decision this month to veto the Clean Water Act permit for Arch Coal’s Spruce No. 1 mine in West Virginia after the large project won approval from the Corps in 2007. The new bill would apply retroactively to the beginning of this year, thus blocking EPA’s veto of the mine, McKinley’s office said.

    House Bill Would Curb EPA Veto Power, Restore Revoked Mountaintop Mining Permit - A West Virginia Republican filed a bipartisan House bill yesterday that would prevent U.S. EPA from retroactively vetoing water permits as it did earlier this month, blocking the largest-ever proposed mountaintop coal mine in Appalachia. Rep. David McKinley’s legislation (H.R. 457 (pdf)) also aims to reverse EPA’s permit veto by setting an effective date of Jan. 1. At issue is EPA’s Jan. 13 veto of a Clean Water Act permit issued by the Army Corps of Engineers to the proposed 2,200-acre Spruce No. 1 mountaintop mine, citing damage the project would do to the environment and nearby West Virginia communities (Greenwire, Jan. 13). West Virginia’s congressional delegation bristled in the aftermath of EPA’s veto. The coal-mining industry directly employs 31,000 in Appalachian states and produces about 11 percent of the nation’s coal.

    Scenario to Cap World Emissions by 2020 Is Fading Fast, Warns IEA Economist - From his perch as chief economist for the International Energy Agency (IEA), Fatih Birol is virtually shouting his global warming predictions from the Paris rooftops.  Unless the United States, Europe, China, India and the other emerging economies get on a crash course to slash greenhouse gases, Birol contends, world leaders can simply forget about one of their oft-talked-about goals: stabilizing the average global temperature rise at 2 degrees Celsius.  "As we stand now," Birol said on Friday, "we're only a few meters away from saying goodbye to the 2-degree target." In speeches in London and Abu Dhabi last week, and in an interview with ClimateWire, Birol said he's trying to reach the energy markets. Oil prices are heavy on the minds of the world's largest oil consumers. The U.S. economy is picking up, and China is lapping up as much oil as it can, as the Organization of Petroleum Exporting Countries considers, once again, the prospect of $100 crude and faces pressure to boost production. Crude prices in Africa and Asia topped $100 a barrel Friday.

    Heating Oil Rises on Cold Weather Forecast for U.S. Northeast - The premium of heating oil over crude reached the highest level in two years as forecasts for a cold snap in the U.S. Northeast signaled increased demand for heating fuel and oil fell on speculation OPEC may boost output.  The heating oil crack spread gained a seventh day as below- normal temperatures were projected in the U.S. Northeast Jan. 29 through Feb. 6, according to the National Weather Service’s Climate Prediction Center. The Northeast is the largest user of heating oil. Saudi Arabian Oil Minister Ali al-Naimi signaled OPEC may increase production to meet increasing fuel demand.  “The crack spreads continue to widen on the back of good demand,” Worldwide oil demand may increase in 2011 by as much as 1.8 million barrels a day, or 2 percent, al-Naimi said in a speech in Riyadh today. He said that the Organization of Petroleum Exporting Countries’ policy is to meet any additional requirement for crude.

    BP victim fund is ‘inaccurate and misleading’ - An expert witness for Gulf Coast residents suing BP over its giant oil spill has claimed that the energy major's $20bn (£12bn) compensation fund for victims is "inaccurate and misleading". Geoffrey Hazard, a law professor at the University of California hired by the plaintiffs, has questioned whether the process is "more just and fair" than the law – as allegedly portrayed by the fund – especially since claimants are forced to sign away their rights to sue the oil giant at a later date.  He also asks whether the fund, overseen by Kenneth Feinberg, can be properly neutral when all its expenses are paid by BP.  The idea that claimants will have to pay higher lawyer fees if they do not sue BP is not necessarily accurate, Dr Hazard claims, because within the class action suits the court has the power to limit fees going to lawyers.

    BP Accused by Victims of Racketeering Law Violation - BP Plc was accused by oil-spill victims’ lawyers of breaking civil racketeering law by engaging in acts that led to the worst such disaster in U.S. history.  “BP engaged in a pattern of fraudulent conduct directed at regulators from the inception of the Macondo project, continuing through and after the spill and to this day,” victims’ lawyers Stephen Herman and James Roy, said yesterday in a court filing in New Orleans. “BP’s fraudulent actions and omissions were part of a broader pattern of unlawful conduct that it has employed over the years to place profits over safety.” Herman and Roy are liaison counsel for a committee representing plaintiffs in more than 400 lawsuits over personal and economic injuries caused by last April’s explosion of the Deepwater Horizon drilling rig off the Louisiana coast.

    BP's oil is still out there, right? - Dusty - Of course it is, but the government and their pals at BP want you to think its all gone. From Naomi Kleins piece up at The Nation: For the scientists aboard the WeatherBird II, the recasting of the Deepwater Horizon spill as a good-news story about a disaster averted has not been easy to watch. Over the past seven months, they, along with a small group of similarly focused oceanographers from other universities, have logged dozens of weeks at sea in cramped research vessels, carefully measuring and monitoring the spill's impact on the delicate and little-understood ecology of the deep ocean. And these veteran scientists have seen things that they describe as unprecedented. Among their most striking findings are graveyards of recently deceased coral, oiled crab larvae, evidence of bizarre sickness in the phytoplankton and bacterial communities, and a mysterious brown liquid coating large swaths of the ocean floor, snuffing out life underneath. All are worrying signs that the toxins that invaded these waters are not finished wreaking havoc and could, in the months and years to come, lead to consequences as severe as commercial fishery collapses and even species extinction.

    Report: Dispersant Chemicals Lingering in the Gulf - In the weeks after the Deepwater Horizon disaster, BP—with the consent of federal regulators—spread 1.8 million gallons of dispersants on the surface of the Gulf and at the wellhead a mile below. Using dispersants in this volume and at this depth was unprecedented, and there wasn't a great understanding of the implications. Now a new report indicates that some of the chemical components of the dispersants might remain in the Gulf for months. The report, from scientists at Woods Hole Oceanographic Institution, finds that dispersant components aren't breaking down all that fast, lingering in plumes of undersea oil and gas that researchers have been studying. This should "raise questions about what impact the deep-water residue of oil and dispersant—which some say has its own toxic effects—might have had on environment and marine life in the Gulf," the Institute said in a release this week. The lead author on the report was chemist Elizabeth B. Kujawinski, and it appeared this week in the American Chemical Society journal Environmental Science & Technology. Researchers found a component of the chemical dispersant, dioctyl sodium sulfosuccinate, up to 200 miles from the wellhead. They were also still finding the chemical two to three months after the injections. This would indicate that the mixture was not biodegrading rapidly, the scientists concluded.

    West Coast senators push Pacific shore drilling ban - Democratic senators from the California, Oregon and Washington state launched a new drive Tuesday to ban drilling off the Pacific coast but face long odds of getting the bill past the House’s new Republican majority, especially at a time of high gasoline prices. The bill’s sponsors cited the economic and environmental risks of offshore drilling highlighted by last year’s Gulf of Mexico spill. “One of the lessons learned from the disastrous BP oil spill is that without a fundamental transformation of the oil industry, another spill is possible, even likely,” said Sen. Maria Cantwell (D-Wash.), one of the sponsors. A long-standing congressional ban on new Pacific offshore oil drilling expired in late 2008 as high gasoline prices became a hot political issue. Currently, the Pacific Coast is only protected by President Obama’s pledge that there will be no new offshore drilling, Cantwell said. The legislation, she said, would enact a permanent moratorium into law that could not be overturned at the whim of a future administration.

    Tradable Energy Quotas: A policy framework for peak oil and climate change -  On the 18th January 2011, the UK’s All Party Parliamentary Group on Peak Oil (APPGOPO) launched their report into the TEQs (Tradable Energy Quotas) system of energy rationing. Speakers included two Members of Parliament – John Hemming MP, Chair of APPGOPO and Caroline Lucas MP, author of the 2006 peak oil report Fuelling a Fuel Crisis. Also speaking were Jeremy Leggett, convenor of the UK Industry Taskforce on Peak Oil and Energy Security and Shaun Chamberlin, co-author of the new report. Copies of the report, answers to Frequently Asked Questions, video footage of the launch event and links to the media coverage can be found at: APPGOPO’s endorsement of TEQs comes at an interesting time in the rationing scheme’s progress towards political acceptability.

    Even oil-rich Saudi Arabia looks to alternative energy - With vast oil reserves that are far from exhausted, Saudi Arabia, facing rising domestic energy demand that could cut into its oil exports, has decided to explore nuclear and renewable energy, Oil Minister Ali al-Naimi has said. "We have started to take the required steps to utilize several energy sources locally, in particular solar and nuclear energy," he told a conference in Riyadh. The kingdom has massive proven reserves. In November, Naimi put the figure at 264 billion barrels, and said Saudi Arabia was capable of supplying crude for the next 80 years at current production levels "even if we never found another barrel."However, Saudi Arabia anticipates a rise in domestic energy demand, which within 20 years could see an increase in domestic oil consumption to around eight million barrels per day, approaching its current output, a former commerce minister and head of a Saudi energy research center said.

    Schork Oil Outlook: Shorting the Trend? Remember Keynes - Pointing out the widening Nymex WTI/ICE Brent spread is, at this stage, akin to pointing out a leak on the Titanic, and about as hard to ignore. But what was the iceberg that hit the spread and caused it to blow out from a high print of -$1.67 in December to a low of -$8.24 on January 14th (a 393% increase)?  Well, we always expect a certain degree of variation when contracts approach expiration, and the Brent contract for February delivery did indeed go off the board on the 14th. However, this month’s fluctuation was especially sharp and, if rumors on the grapevine are true, due in part to a single trading firm.  According to a news report released yesterday afternoon, Hetco (partly owned by Hess Corporation) has taken control of “the first eight North Sea Forties crude oil cargoes loading in February” in addition to two Brent cargoes. There are 25 total Forties cargoes, each of which typically comes to 600K barrels.  This may not mean much on the electronic markets, but Hetco has effectively taken control of ~30% of the Forties and Brent physical market in February.

    U.S. cash crude – Grades hold gains as spreads blowout - Light Louisiana Sweet LLS- and Mars sour MRS- were offered stronger early Thursday as the transatlantic arb widened further.  LLS was offered at $12.50 over West Texas Intermediate WTC-LLS, $1.10 higher than Wednesday's late trade. Mars was offered at $6.50 over WTI WTC-MRS-, $1 higher than Wednesday. Prices are notional as wild moves in both the transatlantic Brent/WTI spread and the front month WTI spreads are seen sidelining some traders from buying at the beginning of the March period. "All numbers are very sketchy due to the wild move in Brent/WTI and WTI/WTI," said one Gulf Coast trader. Trade has been slow as many of the northeastern traders out of the office, still digging out from a massive snowstorm. The weakness in WTI - landlocked in Cushing, Oklahoma and the strength of Brent due to production problems and African unrest threatening similar grades has pushed the transatlantic spread wider than ever.

    Is the global economy approaching an inflection point? - During a presentation last week a questioner asked me what I thought about predictions that gasoline prices would reach $5 a gallon this summer. I offered this critique. I said that the oil prices implied by $5-a-gallon gas could probably not be attained in such a weak global economy. And, something short of that price would probably send the economy into a tailspin. I don't foresee such an event soon, but it does seem to me that at some point high energy prices will lead to another economic decline. Perhaps there might even be a crash since the financial sector--which is even more fragile than it was in 2008 in my view--might face another crisis as a result of too much money flowing into the energy sector and therefore not enough flowing into the financial sector. I warned everyone not to rush out and phone their brokers. And yet, there are signs of the same kind of overheated bullishness on commodities and bearishness on bonds that we saw in the first half of 2008. And, we've seen the same kind of massive central bank easing again that preceded the commodity run-up that year

    An Export Land Model Analysis for the USA-Part 1 - It has taken me four months to get here, but I am finally in a position to use my analysis of trends in petroleum production and consumption for the USA, and its top ten import sources, to do an “export land model” analysis for the USA. Actually, I have been doing a running analysis as I finished each country, but now its time to step back and look at the data from a broader perspective. But first, some background. As you can see from the quote at the top of this article, the concept of the “Export Land Model” as coined by Jeffery Brown, was inspired by the late Matt Simmons and is based on a simple but important idea. The net amount of oil available for export from an oil producing country (i.e., an “Export Land”) should equal that country’s total production, minus its domestic consumption. It follows therefore, that if you can accurately predict the future trends in an export land’s oil production and consumption then you can also predict what that country’s future net oil exports will look like.

    Ian Fraser: Myopic Metrics and Blind Alleys for High Finance – and Big Oil, too - It was financial institutions’ blind faith in flawed metrics, and their penchant for burying risk, through the use of deceptive risk models such as Value At Risk, that, as much as anything else, encouraged a generation of bank CEOs to lead their institutions over a cliff. Equally flawed metrics are now driving risky, and indeed sometimes even desperate, behavior in the oil and gas sector. Campaigners suggest that investors’ and analysts’ obsession with certain flawed indicators is driving international oil companies such as Shell BP, Total and ENI to take environmental, political and financial risks that are likely to blow up in investors’ faces – indeed in all of our faces (they already have in the case of BP’s disastrous Deepwater Horizon spill). According to a report by Massachusetts-based Oil Change International, Platform, and Greenpeace, “Reserves Replacement Ratio (RRR)” – the rate at which production was replaced by new oil discoveries – is the most pernicious indicator of all. The report suggests that, among other things, RRR is driving oil firms to play fast and loose with the environment in ecologically vulnerable frontier regions like Alberta and the Arctic.

    TheOilDrum: The BP Energy Outlook to 2030 - a review - There is a significant reliance, among those who write on fossil fuels, on the statistics that BP annually compile on global energy production. For example it provides underlying information for Energy Export Databrowser, as well as many of the posts at The Oil Drum. And so when BP just released their forecast for energy for the next 20 years (Energy Outlook 2030) it is worth having a look at to see what they predict.The report is very briefly summarized in the introductory speech by Bob Dudley, the Chief Executive, who chose the following highlights:

    • Global energy growth will average 1.7%, but will be generated by non-OECD nations, while demand from OECD will remain relatively stable.
    • Oil supply will grow at around 1% per year, with major increases in supply coming from OPEC, particularly Saudi Arabia and Iraq.
    • Coal use will grow at an average of 1.2% per year, largely through demand for power from non-OECD nations.
    • Natural gas will be increasingly used as a power source, with demand growing at 2.1% per year.
    • Renewable energy sources will continue to be favored, with growth being at around 8% per year, and with demand for biofuels tripling over the two decades.
    • Deepwater production of oil will rise from 7% of the global demand to 9% by 2020.

    Egypt Unrest Sends Oil Prices Surging - Oil prices surged Friday after anti-government protests intensified in Egypt, touching off fears that the unrest that has swept much of the region could spread to other oil-producing countries. Light, sweet crude for March delivery rose $3.61, or 4.2%, at $89.25 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange gained $1.63, or $1.7%, at $99.02 a barrel. It earlier touched a 16-month high of $99.63 a barrel.  Egyptian President Hosni Mubarak on Friday declared a curfew in greater Cairo, Alexandria and Suez amid the rising crackdown against protesters. Tanks entered city streets and police fired rubber bullets, tear gas and water cannons to disperse the protesters, who numbered in the tens of thousands.  Egypt produces roughly 685,000 barrels of oil per day, according to the U.S. Energy Information Administration, a figure dwarfed by major oil producers like Saudi Arabia. But the Suez canal is a key transit point for oil and fuel shipments from the Persian Gulf to the Western Hemisphere, and the instability raises concerns of supply disruptions

    Oil, Food, and the Wealth of MENA Countries - This morning, I've been catching up on some reading about the protests in Egypt and Algeria, following on the Jasmine Revolution that is in process in Tunisia.  Clearly, the reason for interest is wondering to what extent is there any risk of these events spreading into the big oil exporters, which could cause extremely large disruptions in the global economy.  This is probably unlikely, but not so inconceivable that serious observers aren't starting to at least think about it.  For example, Marc Lynch writes: The end of the Tunisian story hasn't yet been written. We don't yet know whether the so-called Jasmine Revolution will produce fundamental change or a return to a cosmetically-modified status quo ante, democracy or a newly configured authoritarianism. But most of the policy community has long since moved on to ask whether the Tunisian protests will spread to other Arab countries -- Egypt, of course, but also Jordan, Yemen, Algeria, Libya, and almost every place else.

    Welcome, ‘Peak Oil’ - The truth is that the world’s output of conventional crude oil peaked in 2005 and global oil exports are also past their prime.  Furthermore, the unconventional sources (tar sands, heavy sour crude, ethanol, natural gas liquids, bio-fuels and shale) are struggling to keep up with the ongoing depletion in the world’s largest oil fields. Therefore, it is probable that the world’s current production of total liquids is at or near maximum capacity. Veteran clients and subscribers will recall that we have been extremely concerned about ‘Peak Oil’. However, for many years, ours was one of the lone voices in the dark.  It is interesting to observe that up until 2007, various government sponsored energy agencies were extremely optimistic about their oil production forecasts.  Thereafter, in November 2008, the IEA released its World Energy Outlook 2010 report, which contained a thorough analysis of the world’s 800 largest oil fields.  In this study, the IEA admitted (for the first time) that most of the world’s largest oil fields are depleting at a rapid clip and serious capital spending is essential to avoid an energy crunch in 2020.  Although this report was a step in the right direction, in our view, the IEA was still painting an unrealistic picture.

     The Peak Oil Catastrophe-in-waiting - The United States continues to slumber while a catastrophe lies in wait. Increasing numbers of analysts and policymakers are warning of another super price spike for oil and the likelihood of "peak oil" more generally.  Peak oil is the point at which global oil production reaches a maximum and then declines. The speed of the decline is a key unknown and if it is relatively fast, the results could be truly dire for economies around the world.  We saw prices as high as $147 a barrel in mid-2008 (the dominant factor for gasoline prices well over $4 a gallon), which played a strong role, perhaps the dominant role, in the global Great Recession -- as high oil prices have in most recessions over the last fifty years. Once the recession hit, oil demand dropped and prices plummeted as low as $33 a barrel.  We can expect far higher prices as the global recovery continues. An increasing number of analysts are projecting prices as high or higher than the 2008 peak in the next couple of years.

    Preparing for Life in a Peak Oil World - We know that peak oil will be here soon, and we feel like we should be doing something. But what? . It is hard to know for certain, but a reasonable guess is that the impact will be like a major recession or depression. Many people will be laid off from work. Gasoline is likely to be very expensive ($10 a gallon or more) and may not be available, except in limited quantities after waiting in line for a long time. Fewer goods of all types will be available in stores. Imports from third-world countries are likely to be especially unavailable, because of the impact of the oil shortage on their economies. Gasoline prices may not rise as high as $10 gallon; the problem may be that at lower prices than $10 gallon, oil prices send the economy into recession. There may actually be a glut of oil supply because of recession or depression, because many cannot afford the high priced oil. For example, state highway departments cannot afford high priced asphalt. This is related to low "energy return on energy invested". . Countries that use a lot of oil for purposes other than creating new goods and services are likely to be especially vulnerable to recession.

    Oil Decline Rate And Population - The rapid increase in the world’s population over the last hundred years is not merely coincident with the rapid increase in oil production. It is the latter that has actually allowed (the word “caused” might be too strong) the former: that is to say, oil has been the main source of energy within industrial society. It is only with abundant oil that a large population is possible. It was industrialization, improved agriculture, improved medicine, the expansion of humanity into the Americas, and so on, that first created the modern rise in population, but it was oil in particular that made it possible for human population to grow as fast as it has been doing (Catton, 1982). When oil production drops to half of its peak amount, world population must also drop by half.

    Chinese Oil Consumption Growth - I took the annual data from the BP spreadsheet, and extended it to 2010 based on the data in the first three quarters vs the same quarters of 2009 (from the EIA Table 2.4).  This next graph plots both consumption (blue, left scale in millions of barrels/day) and the annual percentage growth (red, right scale): You can see that consumption in 2010 looks well over 9mbd, and will likely exceed 10mbd in 2011.  The growth rate was somewhat suppressed during the 1998 Asian flu event and the 2000-2001 tech crash, then grew rapidly in the early 2000s, fell in the 2005-2008 oil shock, but then recovered to almost 10% - above trend - by 2010 with the moderation of prices.  Chinese consumption hasn't fallen year-on-year since 1990. What is trend growth exactly?  Well, if we take the prior decade compound annual growth rate (CAGR), that looks as follow:

    China to import more fuels despite clean energy drive (Reuters) – China will ramp up conventional fuel imports and production to power its economy in 2011 despite accelerating efforts to develop clean, renewable and alternative energy. The National Energy Administration (NEA) estimated on Friday that energy demand in the world’s second largest economy will increase steadily but the growth could moderate from last year. It did not provide an estimate of overall energy demand this year or energy used last year. “China’s net coal imports hit 146 million tonnes in 2010. It could keep increasing in 2011,” Wang Siqiang, deputy head of general affairs department under the NEA, said in a quarterly press conference. “Australia, Indonesia, South Africa, Columbia and Russia will continue increasing their percentages of exports to China along with their rising coal output in 2011.'

    China aiming to more than double natural gas use - Bloomberg reported that China has set a preliminary target of more than doubling the consumption of natural gas in the country to 260 billion cubic meters by 2015. It said citing persons close to the National Development and Reform Commission, China’s economic planning body that the country plans to produce 170 billion cubic meters of the fuel from domestic fields and purchase an additional 90 billion cubic meters from overseas by 2015. The government will announce the target soon. Chinese energy companies including PetroChina Co are increasing supply by starting up new domestic fields and acquiring overseas assets. China is also expanding its capacity to receive imported liquefied natural gas on its eastern coast and has started taking delivery of piped gas from Turkmenistan after opening a line that runs through Central Asian countries in 2009. The nation’s apparent gas demand last year was 107.2 billion cubic meters, with imports of 12.2 billion cubic meters.

    Why China missed the industrial revolution - One of the big debates in economics is about the causes of the arguably most dramatic change in development trajectory in (recent) world history, the industrial revolution. China has been one of the world’s most dynamic economies in recent decades, but how did it fall so far behind? This column argues that the industrial revolution occurred in Europe rather than China because European entrepreneurs were eager to adopt machines to cut down on high labour costs. China didn’t “miss” the industrial revolution – it didn’t need it.

    Can the sea solve China's water crisis? China's £1.1bn desalination plant is just the latest megaproject in its increasingly desperate race against water shortages. The highest-tech effort yet to ease China's water crisis sits between a wide, flat grid of salt farms and two giant cooling towers that rise up from a vast expanse of reclaimed land on the western shore of the Bohai Sea. Odourless, quiet and billowing clear white smoke into a sharp blue sky, the Beijiang desalination and power plant contrast sharply with the tangled pipes, dirty chimneys and foul waterways more usually associated with China's traditional industrial landscape. The 12.1bn yuan (£1.1bn) facility is the most advanced of a series of showcase megaprojects rising up in the Tianjin-Binhai development zone. This stretch of coastline is at the forefront of the government's ambitious and costly attempt to use science and technology to shift China on to a more sustainable path of development.

    Hu Jintao's visit: the story the media missed - The news accounts were filled with the long list of items that President Obama was likely to raise with President Hu. There are issues about China respecting the patents and copyrights of US firms. The US has concerns about market access in China for our retailers, our financial firms and some of our manufactured products.  And then there are issues about the relative value of the dollar and yuan. Yep, the White House press corps got together the whole list, presented it to the public, and then went home and had a drink. If these reporters actually had to cover the news to get a paycheck, then this checklist of concerns would have been just the beginning of their job. It's great for the Obama administration to come up with a wishlist that it would like from China's leadership. But this is not Disney World. China doesn't hand the United States everything on its wishlist.

    Hu's counting - DURING his state visit to America last week, President Hu Jintao of China offered some familiar banalities and worthy pieties, as this week’s Banyan remarks. But he also made a couple of hard, quantitative claims. In a speech on January 20th, President Hu said that cheap inexpensive imports from China had saved American consumers $600 billion over the past decade (2001-2010) and that exports to China had created over 14m jobs around the world. Those figures were probably provided by the Ministry of Commerce, but I’ve no idea how they were calculated. (The figure of 14m jobs made an earlier appearance in a 2009 piece in the People’s Daily.) In this blogpost and a sequel, I’ll see if I can make sense of President Hu’s arithmetic.

    The End of China’s Surplus - China’s current-account surplus – the combination of its trade surplus and its net income from foreign investments – is the largest in the world. With a trade surplus of $190 billion and the income from its nearly $3 trillion portfolio of foreign assets, China’s external surplus stands at $316 billion, or 6.1% of annual GDP. Because the current-account surplus is denominated in foreign currencies, China must use these funds to invest abroad, primarily by purchasing government bonds issued by the United States and European countries. As a result, interest rates in those countries are lower than they would otherwise be. That may all be about to change. The policies that China will adopt as part of its new five-year plan will shrink its trade and current-account surpluses. It is possible that, before the end of the decade, China’s current-account surplus will move into deficit, as the country imports more than it exports and spends its foreign-investment income on imports rather than on foreign securities. If that happens, China will no longer be a net buyer of US and other foreign bonds, putting upward pressure on interest rates in those countries.

    Analysis: Be careful what you wish for: the China Price starts - Call it the price of success. China is starting to pass on the rising cost of labor and other manufacturing inputs as it restructures its economy, creating a potential new inflation headache for Western countries already grappling with surging commodity prices. The threat for now is no greater than a distant cloud in a clear blue sky. Excess capacity and high unemployment in the United States and Europe mean that most companies will be unable to pass on higher costs from China and will have to accept lower profit margins instead. But the evidence is clear. The U.S. Bureau of Labor Statistics reported earlier this month that its China import price index rose 0.9 percent in the fourth quarter after holding broadly steady for the previous 18 months. The index had dropped 3.4 percent during the global financial crisis, erasing part of a 6.7 percent jump between the end of 2007 and the middle of 2008.

    Wal-Mart Fined In China For Deceptive Price Practices To Mask Inflation - First, Wal Mart's primary gimmick for masking inflation was confined to using smaller packages sold at the same price. Now, it has devolved to outright fraud and misrepresentation. Top global discount stores Wal-Mart and Carrefour have both been fined in China for "misleading pricing at some of their stores in the nation, as the government works to rein in rising prices for consumer goods." Presumably outright lies (and being caught) are the last bastion before even such ultra low price point retailers are finally forced to hike their prices. Bloomberg explains further: "Authorities in cities including Shanghai, Chongqing, and Kunming discovered incidents at local Wal-Mart and Carrefour outlets that included labeling on products with prices that didn’t match what shoppers were charged at payment, exaggeration of discounts and labeling that led to confusion about how much a product cost.

    China’s state giants too big to play with - Promoting social equality and justice has been the single most oft-stated commitment that the Chinese leadership has made to its people in the past year.  In an interview with China National Radio late last month, Premier Wen Jiabao vowed to "render society more fair and just". This echoed his now-famous statement at the National People's Congress last March, that "equality and justice should shine more brightly than the sun". A leitmotif of the 12th Five-Year Plan (2011 to 2015) is "inclusive growth", meaning all citizens should be able to share equitably in China's spectacular economic development.  Yet nothing militates against the ideals of equality and justice more than the special privileges - and humongous profits - enjoyed by the nation's 129 centrally controlled state-owned enterprises (SOEs). There are signs that in its last 20 months in office, the administration of President Hu Jintao and Wen is determined to, in Chinese parlance, return the nation's wealth - including that of the giant SOEs - to the people.  Yet the chances are high that given the SOEs' extraordinary economic and political clout and sterling ties to the Chinese Communist Party (CCP) leadership, these symbols of state capitalism will pull out all the stops to safeguard their interests.

    Higher Yuan Won’t Fix China-U.S. Gap - A rise in the yuan’s exchange rate with the dollar is unlikely to do much to reduce China’s yawning financial gap with the U.S., a new report from the Federal Reserve Bank of Dallas argues. Instead, the paper, released Tuesday, argues this huge outflow of dollars to China can be largely fixed by China addressing key structural issues regarding its domestic savings rate. Do that, Jian Wang writes, and an issue that’s become a central difficulty in relations between the U.S. can be largely defused. The paper argues the main force driving the current account gap is China’s propensity to save and the balance between state and privately owned firms. Wang writes that the shift into higher margin activities by state owned firms may hold the answer to reducing the trade gap.

    The Real Cost Of Offshoring - Whenever critics of globalization complain about the loss of American jobs to low-cost countries such as China and India, supporters point to the powerful performance of the U.S. economy. And with good reason. Despite the latest slow quarter, official statistics show that America's economic output has grown at a solid 3.3% annual rate since 2003, a period when imports from low-cost countries have soared. Similarly, domestic manufacturing output has expanded at a decent pace. On the face of it, offshoring doesn't seem to be having much of an effect at all. But new evidence suggests that shifting production overseas has inflicted worse damage on the U.S. economy than the numbers show. BusinessWeek has learned of a gaping flaw in the way statistics treat offshoring, with serious economic and political implications. Top government statisticians now acknowledge that the problem exists, and say it could prove to be significant.

    A Mercantilist World? - China and Germany already pursue mercantilism through their currency polices, and if the USA does also, mercantilism is that much closer to becoming the global economic order. A mercantilist economic order is not likely to be an economic order in which anyone except the very wealthy would be happy: part of the push to increase trade profits would involve a push to lower labor prices.  It would also be an economic order where conflict would be endemic. Between the great mercantile powers, trade conflict. Within the great mercantile powers, class conflict. Between the successful mercantilist powers and their less-successful trading partners, international conflict. There is a cost, paid in security measures and hatred, to maintaining a class society: to being the filthy rich minority in impoverished world. Nor can I see how such a world could be environmentally sustainable: there would always be the temptation to gain a competitive edge by damaging the environment by extensively using fossil-fuel energy, overfishing, polluting. A neo-mercantilist world would institutionalize the tragedy of the commons.  This could be the way the world ends.

    Globalization Marches On - Gideon Rachman observed that, “When Barack Obama visited India recently, the US President warned his hosts that the debate about globalization has reopened in the West,” and that “a backlash…is forming…and growing in advanced economies.” But Rachman’s alarmism is misplaced. The fear of globalization in the West is nothing new. Articulate intellectuals and groups such as labor unions and environmental organizations in the advanced economies have voiced anti-globalization fears and sentiments for at least a quarter-century. The fear of globalization, however, began historically in the East, not the West. After World War II, the West dismantled barriers to trade and investment flows, and worked to eliminate exchange controls and move to currency convertibility. What was sometimes called the liberal international economic order was the order of the day, and it was embraced by public opinion as well. By contrast, the East generally embraced the fearful view that, as the Chilean sociologist Oswaldo Sunkel put it, integration into the international economy would lead to disintegration of the national economy.

    Americans Increasingly View Global Economy As A Negative - A growing number of Americans consider the accelerating trend toward globalization a bad thing for the United States. At the same time, a majority now see being the world's No. 1 economic power as an important national goal.  Just over one-third of all Americans see the increasing interconnection of the global economy as a good thing, according to a new Washington Post poll conducted to coincide with the annual meeting of the World Economic Forum in Davos-Klosters, Switzerland.  The numbers mark a staggering turnabout over the past decade: In 2001, six in 10 Americans said tightening economic ties were a positive development. That dropped to 42 percent in 2003 and now sits as 36 percent.

    China rating agency blames U.S. for "credit war" (Reuters) - The United States is effectively printing cheap dollars as it implements an ultra-loose policy to spur its flagging economy, setting the stage for "a world credit war," a Chinese rating agency said on Friday. The Beijing-based Dagong Global Credit Rating, a relative newcomer in the sovereign debt rating realm, said in its 2011 Sovereign Credit Risk Outlook that quantitative easing by the U.S. Federal Reserve has "eroded the legitimacy of the global monetary system that takes the dollar as the key reserve currency." The policy easing was also "bringing the U.S. dollar's credit-worthiness to a vulnerable position," it said. Dagong, which has been rating Chinese corporate bonds since 1994, created a splash by rating the United States at double-A, below China's AA-plus, in July 2010. It downgraded the U.S. sovereign credit rating last November, following the Fed's decision to pump more dollars into the U.S. economy.

    Microcredit: The Good, The Bad, And The Ugly - For more than twenty years, microcredit has been widely heralded as the remedy for world poverty. Recent news stories, however, have sullied microcredit’s glowing reputation with reports on scandals, exorbitant compensation to managers, skyrocketing interest rates, and aggressive marketing schemes. Once praised as a universal panacea, microlenders are now being widely attacked as predatory loan sharks. In December 2010, Sheik Hasina Wazed, the prime minister of Bangladesh and former microcredit advocate, accused microcredit programs of “sucking blood from the poor in the name of poverty alleviation.” What happened?  It turns out there are two very different models of microcredit. As Muhammad Yunus, winner of the 2006 Nobel Prize, pointed out in his January 15, 2011 New York Times op-ed, one type of microcredit program is designed to serve the poor; another to maximize financial returns to program managers and Wall Street investors.

    BRIC Inflation Threatens Priciest Consumer Stocks as Food Bills Increase - Emerging-market consumer companies are valued at the most expensive levels on record just as surging food and energy costs curb household spending from Sao Paulo to Shanghai.  Shares in the MSCI Emerging Markets Consumer Discretionary Index traded at a 15-year high of 2.6 times net assets last week, data compiled by Bloomberg show. Wynn Macau Ltd., owned by billionaire Stephen Wynn’s casino company, fetched a record 28 times forecast profit. Mahindra & Mahindra Ltd., India’s biggest sport-utility vehicle maker, has a price-to-book ratio 53 percent higher than global peers, while Brazil’s Cia. Hering, producer of Hering brand apparel, commands a 15 percent premium.  Economic growth and supply shortages sent a United Nations gauge of food prices to a record last month, cutting the buying power of 2.8 billion people in Brazil, Russia, India and China who spend 19 percent of their income on groceries, compared with 6 percent in the U.S., Euromonitor International data show. Consumer shares were the second-worst performers among 10 industries in periods of rising inflation since 2001, according to Morgan Stanley.

    Average inflation during 2010-11 to jump up to 9 per cent: Finance Ministry - The finance ministry on Monday said the average annual inflation (rpt) inflation during the current fiscal will jump to 9 per cent, which is more than double the figure of 3.8 per cent recorded a year ago.  "...the economic advisors tell that we are likely to end the year with 9 per cent (average) inflation for the year 2010-11," Revenue Secretary Sunil Mitra told reporters in New Delhi.  The inflation has been a major concern throughout the year, mainly driven by rising prices of essential food items including onion, other vegetables, fruit and milk.

    Feeling the Heat: Comparing Global Inflation -  Consumer prices are moving unevenly across the world. Economic growth, supply and demand, currency values and a variety of other factors drive consumer prices up — inflation — or down — deflation. The following graphic gives a snapshot of inflation rates in 50 of 51 largest economies. (The U.A.E is excluded because it doesn’t have consistent data for the full period.) See a full interactive version here.

    What the 'New Global Elite' are Talking About at Davos - Over the years I've been attending Davos not as a Global 500 CEO, government or NGO leader but as a worker. Basically I'm one of hundreds of academics and authors who are invited to hold sessions, participate in panels and otherwise try to stimulate everyone else to be innovative about improving the state of the world. On Wednesday I had the pleasure of hosting a session on the New Realities with the Forum's community of Young Global Leaders.  The session addressed the question: If structural change is becoming the norm globally, then what are the major adjustments looming ahead and how should leaders face them? Here are some of the answers being discussed at Davos: We had seven groups that each tackled one of the following topics: The schools and education system in the digital age; the newspaper in the digital age; the university: moving to collaborative learning; government as a platform; healthcare: achieving collaborative health; Democracy 2.0; and global problem-solving: beyond nation states. The sessions are private but I can say a few words about my views on the topics and how I introduced the discussion

    Alarming array of risks faces leaders in Davos (Reuters) - World leaders and top executives have plenty of crises to discuss this year. Ballooning European government debt, rising inflation, fears of trade and currency wars, spiraling food prices and lingering problems in the world financial system provide a sobering array of threats for people attending the World Economic Forum (WEF). More than 30 heads of state, over 1,400 business leaders and eight central bank chiefs will flock to Davos, an expensive Swiss ski resort, for the Forum which opens on Wednesday.The WEF named the risk that parlous government finances will trigger sovereign debt defaults as one of the biggest threats facing the world in 2011 in a report published before the meeting. Klaus Schwab, who chairs the Forum, said nations were suffering from "global burnout syndrome" and were too weak to tackle the plethora of inter-related threats facing business and governments. To help to address the problem, the WEF will launch at this year's Forum a global network designed to help policymakers and corporate chiefs to share information about potential risks.

    Video: Roubini on Global Economy, Risks Ahead - New York University economics Prof. Nouriel Roubini foresees risks ahead as the economies of developing nations surge, while the U.S. and the West remain stuck in the slow-growth lane. He talks with WSJ’s Simon Constable.

    Has the optimism returned? -- I have, as usual, succeeded in spending a day in Davos without attending a single public session. But I have managed to speak to several interesting people about the world economy. My sense is that optimism has returned. Even Dr Doom – Nouriel Roubini – has become notably less pessimistic. China and India are here in force and radiating the good will of those whose time has come. There seems to be little doubt that they will continue to grow very rapidly. The mood about the US has also markedly improved. Some informed observers are even talking about 3.5 per cent growth this year. Few seem to believe that the federal government will have any serious difficulty selling its debt. Even the panic over the eurozone seems to have abated. People seem to believe that a default will be avoided this year. At the same time, it is not hard to find alternative perspectives. One emphasises the sheer uncertainty. Another stresses the potential for an unexpected eurozone default, perhaps by Ireland, after its election. That could lead to a panic in the wholesale markets, on which European banks depend. Yet another worry is inflation and the rising public debt in high-income countries.

    Social protection in Sub-Saharan Africa - Can developing countries afford large social-protection programmes, such as unemployment benefits or medical insurance? Summarising studies from across Africa, this column finds that such programmes are politically, fiscally, and administratively feasible – even for low-income Sub-Saharan African countries – and on a scale and scope previously thought out of reach.

    Kan Says Japanese Public Must Shoulder Burden Amid `Severe' Fiscal Strain - Prime Minister Naoto Kan said the Japanese public will have to bear “a certain level of burden” and called for embracing free trade as the government opened parliament with warnings of severe financial difficulties.  Speaking at the opening of this year’s Diet session in Tokyo, Kan and his Cabinet ministers reinforced his push to eventually raise the 5 percent consumption tax to sustain welfare programs while containing the world’s largest public debt. Finance Minister Yoshihiko Noda said the nation’s debt burden can’t rely on bond sales to cover revenue shortfalls.  Kan is striving to win passage of spending bills for his record 92.4 trillion yen ($1.1 trillion) budget through the opposition-controlled upper house. The ruling Democratic Party of Japan will seek talks with opposition lawmakers for his push to join the U.S.-led Trans-Pacific Partnership trade talks with nine Asia-Pacific countries, he said.

    Japan Pledges to Take Bold Action on Yen If Abrupt Gains Threaten Outlook - Japanese authorities said they stand ready to take action on the yen should the nation’s currency appreciate, signaling their readiness to intervene again in the foreign-exchange market.  “While the yen’s abrupt movements appear to receding, an excessive strengthening of the currency can’t be tolerated because of the adverse effects it may have on the economy and financial markets over the long term,” the government said in an economic policy paper released in Tokyo today. “We will continue to take bold action when necessary.”  The government intervened in currency markets for the first time in six years on Sept. 15 to stem the yen’s advance toward a 15-year high. The currency’s 8 percent appreciation against the dollar in the past year has prompted companies including Toyota Motor Corp. to consider moving more production overseas to protect profits.

    Japanese pensions costing 10% of GDP - Payouts from Japan's public pension programmes reached a record $612 billion in the year to March 2010, costing more than 10 percent of nominal GDP, government figures show. The data, released Monday, came as Prime Minister Naoto Kan makes social security reform his priority amid battles with a political opposition intent on stopping ruling party policies in order to push Kan to call a general election. The data meant each pension recipient was supported by 1.8 people in the workforce, pressuring public and household finances, the Nikkei business daily said Tuesday. The ratio between the pension cost and nominal gross domestic product compared with about six percent for the United States and an average 7.2 percent for countries in the Organisation for Economic Cooperation and Development (OECD) in 2005, the Nikkei said.

    Japan's Credit Rating Cut to AA- by S&P on Debt Load  -- Japan’s credit rating was cut for the first time in nine years by Standard & Poor’s as persistent deflation and political gridlock undermine efforts to reduce a 943 trillion yen ($11 trillion) debt burden. The world’s most indebted nation is now ranked at AA-, the fourth-highest level, putting the country on a par with China, which likely passed Japan last year to become the second-largest economy. The government lacks a “coherent strategy” to address the nation’s debt, the rating company said in a statement. The outlook for the rating is stable, S&P said

    Japan's downgrade: A peek at America's future? - Standard & Poor's on Thursday downgraded Japan's long-term credit rating. Granted, the rating is still very, very strong, but the action does indicate how investors are growing nervous about the deteriorating state of government finances even in those economies considered to be the bedrock of the global economy. Japan has been heading here for a while. Its government debt to GDP ratio, at around 200%, is already the highest of any industrialized country. Its economy has been in a slow-motion economic crisis for two decades, yet policymakers have proven incapable of undertaking the sort of reforms necessary to get growth going again. And despite talk of a hike in the consumption tax and other measures to shore up state finances, the latest budget, passed in December, is anything but austere, with borrowing expected to exceed tax revenues. Thus giant budget deficits are expected to continue. S&P noted all this in its statement on the downgrade:

    Warning shot for America and Europe as S&P downgrades Japan - Standard & Poor's has downgraded Japan for the first time in nine years, citing lack of a "coherent strategy" to control its monster deficits or grasp the nettle to reform.  The move is a chilly reminder that sovereign debt woes continue to fester across much of the industrial world, and still pose a threat to the fragile global recovery.  The US rating agency cut Japan's $10.6 trillion (£6.6 trillion) debt one notch to AA-, warning that the mix of government paralysis, a shrinking workforce and a fast-rising interest burden have left the country's debt dynamics on an unsustainable footing.   The unfolding drama in Tokyo has global implications since Japan is the world's top external creditor with $3 trillion of net assets abroad. "This is potentially a much bigger story than any default in Greece," The concern is that Japanese banks, pension funds and life insurers may forced to repatriate large sums to cover losses at home if the fiscal crisis triggers a jump in bond yields. This could set off a worldwide fall in asset prices.

    Japanese Bond Amnesia - Krugman - Amid all the stories about the S&P downgrade of Japan, I’ve seen hardly any mentions of the fact that Japan was downgraded below Botswana in 2002. And here was the effect on the interest rate: Nada. In fact, if you bought JGBs just before the downgrade, you ended up doing very well. I’m not saying that Japan’s long-run budget situation isn’t troubling. But the rating agencies (a) don’t know anything the rest of us don’t (b) are way too quick to downgrade sovereign debt, especially as compared with their what-me-worry attitude toward private securities (c) have very little actual influence on market.

    New ideas about taxes in France - The structure of the tax code in France is getting new attention these days. President Sarkozy has made fiscal reform a key issue in the run-up to the presidential elections in 2012. The Nouvel Obs has a very good section this week on a recent book by Camille Landais, Thomas Piketty, and Emmanuel Saez, economists with long expert knowledge of the French fiscal system. The book is Pour une révolution fiscale: Un impôt sur le revenu pour le XXIe siècle, and it offers a stringent critique of the existing system and a set of proposals for a reformed system. The book has a companion website here. In a word, these experts conclude that the existing tax structure in France is seriously unjust because it is anti-progressive at the very high end of the income distribution -- the top 1 percent decline steeply in the percentage of their income that is collected in the form of the several tax vehicles.  Only 20% of the state' revenues derive from taxes that are truly progressive

    Don't rule out debt buy-back idea: Juncker (Reuters) - European leaders should not shy away from a proposal to buy back the bonds of troubled euro member states but should not rely too much on rich countries, Eurogroup Chief Jean-Claude Juncker said. "It would be wrong to create taboos but we cannot overstretch the strong countries," Juncker said. A source told Reuters on Thursday that euro zone ministers are considering whether the bloc's rescue fund could buy back bonds of debt-ridden states, a plan Portugal said it supported. Der Spiegel magazine also reported in an unsourced reported that the idea of a buy-back, which it said was first raised by the European rescue fund's chief Klaus Regling, had been greeted with sympathy by euro zone finance ministers this week. Without citing any sources, Der Spiegel said Regling's suggestion stood good chances of becoming reality.

    The eurozone’s best solution is the least likely - Last week we got a glimpse of what a “permanent” crisis resolution strategy for the eurozone might look like: a bond repurchase programme for Greek debt.  Such a package would involve a big increase in the existing €440bn ($599bn) bail-out fund, the European financial stability facility. The EFSF needs more headroom to lend to Portugal, and even to Spain if needed. It may also need funds for other bond repurchases besides any large Greek programme.  There are various ways such a programme might work. The EFSF could lend money to the Greek government, which could then buy back its own bonds. An intriguing alternative is for the EFSF to buy Greek bonds (either on secondary markets or from the European Central Bank), then swap them for new bonds issued by Athens.  But there are two problems. If you buy only from the secondary markets and from the ECB, you may end up with a crisis resolution programme that is too small. The vast majority of these bonds are not in the secondary market but held by banks that use them as collateral in ECB refinance operations. And these bonds are not for sale. The second problem is German politics. The Germans are not opposed to a structured finance solution to this crisis. Quite the contrary. But Angela Merkel, German chancellor, will not allow the ceiling of the EFSF to be raised beyond €440bn – though she is apparently ready to agree that this ceiling can actually be reached, which it now cannot.

    Hedge funds are betting heavily on crisis resolution in March - Klaus Regling is the originator of the bond repurchase idea that has triggerred a state of euphoria among investors; German finance ministry supports the idea but there are big differences of opinion inside the German government; investors bought $8bn worth of euro in a 7-day period, the highest ever; euro now close to $1.36, and spreads down; Wolfgang Münchau warns that bond buy backs have at most a marginal effect, since most of the Greek bonds are not traded on the secondary markets; Euro crisis sinks first government as Greens pull out of Irish government; the implosion of Brian Cowen raises questions about the Irish finance bill; Cavaco Silva wins the Portuguese elections in a first-round victory; the Franco-German competitiveness gap may be vastly exaggerated; Jean-Claude Trichet, meanwhile, says core inflation is a bad headline inflation indicator, and says the ECB was watching out for second-round effects.[more]

    Have the Media Made the Greek Crisis Worse? [YES] Paper by Sonja Juko Developments over the course of 2009 and early 2010 have demonstrated that industrialized nations are not immune to credit crises that can threaten their solvency. Dislocations in sovereign credit markets could have triggered a default of countries like Greece, Spain, Italy or Portugal if it had not been for the action by other eurozone members. While it seems obvious that high leverage (that is, the degree to which states rely on credit) to fund their activities has been at the root of the problems, the Greek case suggests that fundamentals alone cannot explain the timing and the dynamic of recent developments. To understand what caused the evaporation of trust vis-à-vis Greek sovereign debt titles, one has to analyze what determined the perception of bond investors. The paper argues that the media contributed to the downward spiral in the level of confidence by investors through its intensified and overly value laden coverage of the Greek case. To explain what fosters media bias and how it translates into bond markets dynamics the paper looks at institutional features of the media business and the functional relationship between media organizations and financial markets. The role of the media has been subject to much scholarly scrutiny, but has thus far not been in the realm of sovereign credit. This paper aims to fill this gap and, by doing so, tries to shed light on the recent credit crisis of the state.

    Ireland to cannibalize its workforce to fix economic woes -  It has been about two and a half centuries since one of Ireland’s most famous authors, Jonathan Swift, suggested that the nation’s wealthy eat the children of its poor citizens as a way of dealing with poverty in his satirical essay, “A Modest Proposal.” Well, according to some, the originally sardonic proposal might not be that far-fetched right now, as the nation’s government, for the first time, plans to use a portion of its 24-billion euro National Pension Reserve Fund (NPRF) to buy its struggling debt. Sources say that the proposal, which is unprecedented for the NPRF, will further erode the fund and leave Irish workers with little or no retirement assets. Approximately 10 billion euros from the fund already was earmarked in November to help bail out the country’s three largest banks, Bank of Ireland, Anglo-Irish Bank Group Plc and Allied Irish Banks, Plc. The move comes on top of having been granted 85 billion euros in bailout money in November from the European Union and the International Monetary Fund.

    Ireland Government Crumbles As Green Party Pulls Out Of Ruling Coalition - It has been a while since we had one of those "before Asia opens" kind of Sundays. Today just may be one. BBC has just reported that the Irish Green party has pulled out of the ruling coalition with Fianna Fail which is "expected to bring forward the general election from 11 March." In other words suddenly the entire Irish "rescue", taken for granted for over a month, will have to be reexamined, once the new ruling party, which will certainly be from the current opposition reevaluates the terms. Elections are now expected to come some time in mid-February. Look for peripheral bond spreads to go whooosh tomorrow.

    Irish Give 51 Billion More Reasons to Avoid Bonds: Euro Credit - Irish bondholders may have another 51 billion reasons to worry.  Figures published by the central bank this month showed it lent as much as that sum in euros, equivalent to $70 billion, to commercial banks. Unlike the 132 billion euros the European Central Bank is using to prop up the country’s financial system, the government may be on the hook for it. Ireland has the fourth-highest debt level in Europe.  “The increased liability of the state makes it more likely that senior bank bondholders will be forced to take a hit,”  “While we don’t currently see a restructuring of sovereign bonds, the risk increases the higher the aggregated general government debt level goes.”

    Euro Zone inflation: The Good, The Bad and The Ugly - There were a trio of mixed developments on that front Thursday. (See a related graphic comparing inflation across the world.) The Good (or at least the OK): Germany’s annual inflation rate only ticked up slightly in January, less than economists had feared. Based on regional figures from German states, CPI fell 0.5% from December, which nonetheless pushed the annual rate up 0.2 percentage point to 1.9%. That’s a two-year high, but not enough to set off alarm bells at the ECB.  German figures have “reduced the risk of an unpleasant surprise for the ECB with next week’s euro zone data.” He expects an increase in euro zone inflation to 2.3% from 2.2%. The Bad: Consumer inflation expectations are marching sharply higher. According to the European Commission’s monthly sentiment survey, an index of consumer price expectations over the next 12 months jumped almost six points to 20.9, the highest level since August 2008 when euro zone inflation was running at 3.8%.

    Inflated expectations and spare capacity concerns - As Nicolas Sarkozy has noticed, worries about global inflation have picked up in the first weeks of 2011. And according to two notes out on Monday this is not just down to rising commodity prices; there is also a lack of spare capacity that is being reflected in rising core inflation and increased expectations. Which means JP Morgan Asset Management’s ‘Deflation Alert Indicator’ is beginning to undermine its purpose: This indicator mashes together implied inflation expectations from US five-year/five-year forward break-even rates; correlation of global stock/bond returns; and a breadth measure of commodity prices. According to JPM “these indicators largely reflect what market participants are thinking and contrast with real economic data.”

    Inflation as great a threat as European debt crisis, warns IMF - Inflation as great a threat as European debt crisis, warns IMF. Soaring oil and food prices are translating into dangerously high inflation in emerging economies, where there are already “signs of overheating in some countries via rapid credit growth or rising asset prices”, the IMF said in its World Economic Outlook update.  “In emerging economies, key risks relate to overheating, a rapid rise of inflation pressures, and the possibility of a hard landing,” the IMF said.  “With emerging markets now accounting for almost 40pc of global consumption and more than two-thirds of global growth, a slowdown in these economies would deal a serious blow to the global recovery.” The IMF has markedly increased its oil price forecast for 2011, from $79 a barrel in October to $90, and is now forecasting that food prices will remain high until “after the 2011 crop season” as “weather-related crop damage was greater than expected in late 2010”.  “Near-term risks are now to the upside for most commodity classes,” it said.

    Trichet Signals ECB Won't React to Inflation Jump Unless It Boosts Wages - European Central Bank President Jean-Claude Trichet signaled the bank won’t react to a temporary jump in inflation caused by higher commodity prices as long as it doesn’t fuel wage increases, or so-called “second-round effects.”  “All central banks, in periods like this where you have inflation threats that are coming from commodities, have to go through the hump and be very careful that there are no second- round effects,”  “This is what we are doing,” he said, adding the ECB doesn’t see any second-round effects “at this stage.”  Trichet earlier this month toughened his rhetoric on inflation after it accelerated to 2.2 percent in December, breaching the ECB’s 2 percent limit for the first time in more than two years. The change in tone prompted some economists to bring forward forecasts for ECB rate increases and helped drive the euro more than five cents higher against the dollar. Since then, ECB policy makers have indicated markets may have over- interpreted the central bank’s message.

    Trichet Says ECB Will Do What Is Necessary to Keep Inflation Under Control - European Central Bank President Jean-Claude Trichet reiterated policy makers will do what is needed to keep inflation in check and stressed that the ECB’s credibility on price stability remains intact.  “We will do what is necessary,” . “It is not by chance that we have delivered price stability. Our credibility is based on that doctrine.” ECB Executive Board Member Juergen Stark and Belgium’s Guy Quaden, colleagues of Trichet on the bank’s governing council, said yesterday that officials will “act” to counter inflation risks from so-called second-round effects, where workers demand higher wages in compensation for higher living costs.  German import prices rose at the fastest annual pace in 29 years in December, while inflation in the euro area breached the ECB’s 2 percent limit for the first time in more than two years. Policy makers are debating how to respond to those price gains fanned by surging commodity costs without derailing an uneven recovery in the crisis-afflicted euro region.

    A Hawk for All Seasons - Krugman - Which brings me to Jean-Claude Trichet’s latest warnings about inflation. As the chart above (of 12-month changes) shows, eurozone inflation has behaved a lot like US inflation: low and falling core inflation in the face of a depressed economy, but big swings in headline inflation around that trend with fluctuations in commodity prices. But Trichet now says that the headline number is the one to watch. Those of us whose memories stretch back more than a few months can only say, hmmmm. First of all, if headline inflation is The One, why wasn’t the ECB all worked up about below-target inflation in 2009? Funny, I don’t recall a lot of speeches about the need for monetary loosening. Why, it’s almost as if the ECB switches between inflation measures to pick whichever one currently makes the case for tight money (a point Willem Buiter made a while back).

    The Eurozone and NGDP - Several quasi-monetarist bloggers like Scott Sumner, David Beckworth, Bill Woolsey, and myself have all been making the claim that the recession can be blamed — at least in part — on tight monetary policy as reflected in the collapse in nominal spending. As further evidence that this might be the case beyond the United States, Kantoos, a blog reader and fellow blogger, sent me a link to a recent post on nominal GDP of the Eurozone-15 from 1996 to the most recent data release. The graph shows the trend of NGDP for the Eurozone-15, the actual trajectory, and the percentage deviation from trend. As can be seen from the graph, in late 2008 NGDP began to fall significantly below trend. While NGDP has started to grow, it is still well below the trend line — nearly 10%.

    Europe’s Industrial Rebound: The Power of Mean Revision -- RTT News details: Eurozone industrial new order growth quickened in November, led by Portugal, Finland and Germany, official figures showed Monday. Industrial orders rose 2.1% month-on-month in November, after rising 1.4% in October, the European Union Statistical office Eurostat said. On an annual basis, industrial order growth accelerated to 19.9% from 14.8% recorded in the preceding month. The rise exceeded the 17.5% increase economists had forecast.  The below charts show that much of this is purely a rebound off lows, with a relatively strong relationship between those reporting strong results in 2010 off of lower figures in 2009.

    Spain gets rid of the Cajas - Spain turns savings banks into ordinary banks by September with minimal core capital of 8% of risk-weighted assets; remaining cajas will be nationalised, or forced to merge; El Pais says the decision is intended to separate the good from the bad banks; there is a significant disagreement within the German government on how to approach reform of the EFSF; Willem Buiter is alarmed by the use, and lack of transparency, of the Emergency Liquidity Facility, which works outside the eurosystem; Paul Taylor says the effect of the bond buyback operation may be rather limited; like China, a fast expanding German economy is hitting the non-inflationary speed limits; Nicolas Sarkozy presents an ambitious, but vague agenda for the French G20 presidency; Portugal’s government is following Spain in tightening dismal laws; the euro’s rise against the dollar continued yesterday; the Irish parties, meanwhile, reach agreement to pass the finance bill, paving way for elections Feb 25. [more]

    Markets give thumbs down to Spanish bank recapitalisation - Amount set aside for the recapitalisation of Spanish Cajas is widely considered way to small – another missed opportunity to resolve its financial crisis once and for all; an Austrian insurer announced that it voluntarily marked down the value of its Greek sovereign debt; Bruegel says Greek debt should be restructured; the EFSF bond auction for a five-year bond at 2.89% was nine times oversubscribed; Reuters Breakingviews makes the point that this gives the EFSF soon room for cutting interest rates; pressure is growing in Ireland for a renegotiation of the terms; Karl Whelan says the present interest rate raises issues of debt substainability; the updated IMF forecast show downward revision of growth in 2012 for the major western economies; Mark Schieritz explains why bond repurchases won’t work; Axel Leijonhufvud and Paul Krugman disagree on the impact of low interest rates; spreads are rising again, but so is the euro; US house prices are falling again; a German opinion, meanwhile, shows that the Germans have no confidence in the EU – and only 4% have ever heard of Herman van Rompuy. [more]

    Spain tightens capital ratios for savings banks even further - Unlisted cajas will need core capital ratios of 9-10%, provoking an outcry among Caja chiefs; Salgado says tough measures necessary to restore international confidence in the Spanish banking system; a member of German Council of Economic Advisors says Greek will have to restructure its debts; so did the chairman of the European Parliament’s crisis committee; Ireland’s likely next finance minister says he would be seeking renegotiations on EFSF interest rates, and bank bondholder haircuts; new Fianna Fail leader apologises for his party’s economic mismanagement; Germany is still holding out on EFSF compromise, but officials signal readiness to compromise; Merkel and Barroso are said to have had a “lively” conversion over dinner; Lutz Meier says Sarkozy’s is temperamentally unsuited to the G20 presidency, as he is incapable of working out political concepts and compromises; Italy is not participating in the global economic recovery; official French unemployment rises to 8%, while estimates of actual unemployment suggest a rate of 16%; the latest mediation attempt to form a Belgian government failed yet again, as the King appoints himself mediator. [more]

    IMF: Instability Threatens Recovery —European officials need to expand the region's financial rescue fund and subject their banks to more rigorous stress tests to quell a key threat to the global economic recovery, the International Monetary Fund said Tuesday. A pair of reports released by the fund suggested its biggest area of concern remains Europe, where fears of a sovereign debt crisis and questions about the financial health of some of the region's banks have led to increasing market turbulence. The financial rescues of Greece and Ireland and the potential for other countries to need aid continue to hurt market confidence in the region, the IMF said.The fund warned that absent a series of "comprehensive, rapid, and decisive policy actions," market fears could spread to the stronger European economies and to others around the globe The IMF expressed concern about the growing linkage between bank and government debt woes in some European countries, as doubts about banks' financial condition dovetail with questions about governments' abilities to service their debts, which in turn heighten fears about rising funding costs, in a worsening cycle.

    A question to my German friends - Last week we got a glimpse of what a “permanent” crisis resolution strategy for the eurozone might look like: a bond repurchase programme for Greek debt. The reaction to reports that European Union officials were considering this option reminded me of the heydays of using structured finance to spread risk. The markets were euphoric.  Such a package would involve a big increase in the existing €440bn ($599bn) bail-out fund, the European financial stability facility. The EFSF needs more headroom to lend to Portugal, and even to Spain if needed. It may also need funds for other bond repurchases besides any large Greek programme.  There are various ways such a programme might work. The EFSF could lend money to the Greek government, which could then buy back its own bonds. An intriguing alternative is for the EFSF to buy Greek bonds (either on secondary markets or from the European Central Bank), then swap them for new bonds issued by Athens. Either way, the ECB would thus be relieved from its securities market programme, which has so far bought €76.5bn in bonds from eurozone peripheral countries . 

    Those second round effects – again - German inflation rises, prompting the ECB to step up its verbal warning on second round effects; Belgian inflation reached 3.2% as a result of indexing; rising inflation and hawkish ECB comments led to a fall in interest rate futures, and a rise in German two-year yields to a 15-month high; euro’s rally has ended; economists are sharply divided on the meaning of the rise in imported inflation; Eurostat rules that member states must account for EFSF debt as gross debt in the national accounts; the Basel rules have been one of the factor for the large oversubscription of EFSF bonds; Jean Quatremer says oversubscription is boost to the E-bond advocates; French economists remain obsessed about the gaps in Franco-German competitiveness; EU sentiment indicators stall; Willem Buiter, meanwhile, says EFSF only postpones the inevitable: sovereign default beckons.[more]

    Kein optimalen Währungsraum - BRIAN BLACKSTONE reports on the hawkish sentiments emerging from European Central Bank officials as headline inflation creeps above 2%. Core inflation is just 1.1% in the euro zone. But the ECB appears to be digging in its heels that headline inflation is all that matters. Most economists would agree that is true over the long run. But many economists, including Federal Reserve officials, think core inflation, which strips out food and energy, is a good gauge of future overall inflation. The ECB thinks no such thing. Trichet said in a recent Wall Street Journal interview that core “is not necessarily a good predictor for future headline inflation.”... This could be a problem. Why? The blogger Kantoos makes an interesting case here that the European Central Bank has done a reasonable, though not perfect (and almost certainly not official), job targeting [update: German] nominal GDP, a policy recommended by economists like Scott Sumner who have argued that central banks have done far too little to stabilise economies through the crisis and recession. Here's the key chart:

    What do Germans hate more, inflation or bailouts?  -- David Beckworth asks whether Germans hate inflation more than bailouts. That is indeed a difficult question. First of all, I completely agree that looser monetary policy in the Eurozone is necessary. Not only because it facilitates the adjustment in the periphery as Ryan Avent has correctly argued. More importantly, as I have repeatedly written (in German, though) aggregate demand is almost 10% below trend – and falling. So despite my recent claim that ECB policy seems to be right for Germany, it is a disaster for the Eurozone as a whole. Why then does Germany resist more expansionary monetary policy? First, because many people in Germany think that the ECB policy is already highly expansionary – despite the fact that the inflation expectations for the Eurozone beg to differ, let alone the NGDP data above (albeit, German inflation may be on the rise):

    Policy Paralysis in Germany - Kantoos responds to my earlier question as to whether Germans dislike inflation or bailouts more. He says that this is a difficult question since Germans passionately detest both. What is known, though, is that because of these strong views there is a sort of  policy paralysis in Germany that leads to a non-optimal policy outcome: This would be the worst possible deal for the Eurozone that Germany could have made: The bailouts prolong the crisis without putting the burden, where it should be put: on the bondholders. And yes, these are in part German banks and insurances. The contractionary monetary policy on the other hand forces the periphery in an already suboptimal currency union to adjust even more than what would otherwise have been necessary with an adequate monetary policy. Sigh. On a lighter note, Merle Hazard has penned a new song about Germany problems:

    Buiter on Europe’s secret liquidity operations - Willem Buiter wants you to familiarise yourself with the ELA. That’s the Emergency Liquidity Assistance that the eurozone’s national central banks (NCBs) are able to provide their local banks under some legal fuzziness in the eurozone. The acronym has managed to grab a few headlines over in Ireland, but for the most part ELAs remains relatively unknown. Soo too, do the details of them. In theory ELAs are pretty much independent since they’re not (technically) part of eurosystem operations. National central banks can offer them where and when they see fit — as long as they follow a few basic rules. And according to ECB opinions, any ELAs extended  should also be temporary, extended to illiquid institutions (not insolvent ones) and against decent collateral. And here’s where the Citigroup strategist’s latest note comes in: While there are some indications that the [Central Bank of Ireland] CBI has provided the ELA with “different collateral and larger haircuts” compared to the collateral used for the Eurosystem facilities, it is not clear if a penalty rate has been applied … Assuming, plausibly in our view, that the terms of ELA are at least no more favourable than those offered by the ECB, it is likely that the collateral offered would not be accepted by the ECB.

    Europe's stability fund needs more firepower - IMF (Reuters) - The effective size of Europe's financial rescue fund should be increased and its banks need rigorous stress-testing to help restore market confidence, the IMF said in a report released on Tuesday. The link between weak balance sheets of European banks and governments was a primary reason why the International Monetary Fund said global financial stability was still at risk nearly four years after the financial crisis struck. In an update to its Global Financial Stability Report, the IMF also cautioned emerging markets to be on the lookout for asset price bubbles or excessive credit stemming from heavy capital flows, spurred on in part by easy-money policies in advanced economies."While progress has been made and most financial sectors are on the mend, risks to global financial stability remain," the IMF wrote

    Lesson From Europe: Fiscal Austerity Kills Economies - There’s more evidence that fiscal austerity should never be a government policy objective. The UK has just released its 4th quarter GDP numbers and the results are predictably grim: a -0.5% decline in GDP for the last three months of 2010, versus a market expectation of +0.4%. This comes as no shock to anybody who understands basic sectoral flows. Taking income out of the private sector in the absence of any countervailing flows from the government or external sector means lower output, slower growth and higher unemployment. The UK economy’s performance is totally consistent with this analysis. Yet the FT is flooded with articles from the likes of Roger Altman and Robert Rubin. Why let evidence get in the way of a good neo-liberal theory? Neither Altman nor Rubin understand that it would be ruinous for this country if the federal government took their advice and pursued budget surpluses at a time when the external sector is in deficit and the private domestic sector needs to save to reduce its damaging debt levels. They, like virtually all mainstream economists/policy makers, haven’t taken the time to understand the sectoral balances. If they had, they would know that they are pursuing a strategy that would force the private sector into further debt. That’s precisely what’s happening in the UK.

    Public finances in 2011 : happy austerity - 2011 is going to be the year of austerity. The various stimuli programs put in place in the aftermath of the financial crisis have faded out, and the overall objective is now fiscal consolidation across Europe. Of course, the needs and requirement differ across countries. Greece and Ireland, having been taken off the markets and put under the umbrella of the EFSF, are special cases. Spain and Portugal have mammoth adjustment to do if it they want to avoid the same sudden stop of financing. Italy has a small deficit, but a very high level of debt (more than 100% of GDP). France and Germany are in an intermediary position.  If it wasn't sufficient, the currently under discussion  European Stabilisation Mechanism ensures that 2013 becomes the unavoidable horizon for putting the public finances back on a sustainable track: after that, the member state's debts won't be covered by the umbrella of the European Financial Stability Fund (EFSF) anymore, since the ESM is only dealing with liquidity support. Thus, in the current state of the play, the possibility of a sovereign default will become a real threat after 2013, another incentive for the eurozone states to make efforts to appear solvent as soon as possible.

    Another year of malaise along the Atlantic. Joseph Stiglitz Criticizes Austerity Policy - By the numbers, the great recession’s long gone. The World Bank forecasts that developing countries—chugging along at an average growth rate of 6 percent—will expand the global economy by more than 3 percent this year. In the last six months, London’s FTSE 100 is up more than 15 percent, and Wall Street’s Dow Jones index is up nearly as much. It’s just about enough to say the good times are back. All this good news, however, provides little comfort to workers in the U.S. and Europe. Because even in the rosiest scenarios, job prospects there will continue to be few and far between. And more broadly, on jobs, austerity, and currencies, both sides of the Atlantic may spend the year caught in an ill-informed policymaking spiral that means, though it’s frustrating to say it, more malaise. No recovery can be called real without bringing down unemployment. As in the euro zone, the haunting number in the U.S. hovers around 10 percent. (In Spain, it’s twice that.) And there is a wide consensus among economists that something like the pre-crisis unemployment level of 5 percent remains years away, at least.

    UK output data cast doubt on US figures - The British economy shrank in the final quarter of 2010, a shock contraction that casts doubt on the strength of growth in the industrialised world and the wisdom of early fiscal tightening.  The UK Office for National Statistics said that output fell by 0.5 per cent in the fourth quarter – worse than economists’ expected 0.5 per cent rise – and that growth would still have been zero even without heavy snow in December.The contraction was caused by broad-brush weakness in services and consumption. Although initial output data are often revised, the UK numbers create doubt about fourth quarter data for the US that are due for release on Friday. Economists think that US growth quickened to an annualised rate of about 3.5 per cent, fuelled by a recovery in consumer spending. “These initial GDP figures are based on a fairly narrow series of production indicators and it is probable that the expenditure-based GDP figures in the next release will be less dismal,” said

    Major reforms needed, says banking inquiry head - The head of the commission reviewing whether the UK's biggest banks should be broken up has said wide-ranging reform is needed. In a speech in London, Sir John Vickers said plans to separate bank trading and retail operations were being looked at. These may require banks to put their investment arms into separate entities that could be allowed to collapse. Sir John stressed that no final decisions had yet been made by his Independent Commission on Banking. Sir John said the failure of banks to efficiently manage risks had been "spectacular".He said the shock from the fall in property prices "should not have caused havoc on anything like the scale experienced".

    Clegg Says U.K. Must ‘Insulate’ Economy From Investment Banks - U.K. Deputy Prime Minister Nick Clegg said he’s attracted to the idea of separating financial institutions’ activities to “insulate” the economy from the risks taken by investment banks. “The banking system needs to be made safe,” Clegg said. The U.K. must “make sure that we insulate and protect the British economy and British taxpayers above all from carrying this huge oversized liability that blew up in our face of course under Labour,” he said. The Independent Commission on Banking, sponsored by Prime Minister David Cameron’s coalition government of Conservatives and Clegg’s Liberal Democrats, said yesterday it’s looking at “ring-fencing” banking activities even if a full breakup of institutions is unlikely. Clegg said today that those comments were “very interesting.” Banking “can never again become such an oversized liability for the British economy,” Clegg said. “That’s why I think there is a strong case to look at the way in which you can hive off or insulate very high-risk over leveraged banking activities from low-risk high street retail banking.”

    A warning shot for the British experiment - The preliminary figures on UK gross domestic product for the fourth quarter of last year were a shock. Where now is the robust recovery that justified the government’s rapid fiscal retrenchment? In a word, nowhere. It is not just that output fell by 0.5 per cent from the previous quarter. Recovery was always likely to be “choppy”, as Mervyn King, governor of the Bank of England, noted in a significant speech this week. More important is the big picture: in the fourth quarter GDP was 4.4 per cent below where it had been at its latest peak, in the first quarter of 2008; it was the same as in the first quarter of 2006; and it was 8 per cent below the trend line for the last two decades. In short, the economy is very weak indeed. The decline may be revised away. But it is unlikely. Upward revisions of 0.5 percentage points, or more, between the initial estimate and that made three years later happened only six times between the first quarter of 1993 and the fourth quarter of 2007. On average, the revisions were just 0.1 percentage point. It is highly likely, then, that the fall in GDP will prove real. Moreover, this decline in an already desperately weak economy occurred not just before fiscal tightening had seriously begun but when both short-term and long-term interest rates were already extremely low. With inflation significantly overshooting its target, the chances that the monetary policy committee would have the courage to undertake further quantitative easing are, alas, negligible.

    Bank of England chief Mervyn King: standard of living to plunge at fastest rate since 1920s - Households face the most dramatic squeeze in living standards since the 1920s, the Governor of the Bank of England warned, as he reacted to the shock disclosure that the economy was shrinking again.Families will see their disposable income eaten up as they “pay the inevitable price” for the financial crisis, Mervyn King warned.  With wages failing to keep pace with rising inflation, workers’ take- home pay will end the year worth the same as in 2005 — the most prolonged fall in living standards for more than 80 years, he claimed.  Mr King issued the warning in a speech in Newcastle upon Tyne after official figures showed that gross domestic product fell by 0.5 per cent during the final three months last year. The Government blamed the unexpected reduction — the first since the third quarter of 2009 — on the freezing weather that paralysed much of the country last month.  But there were fears that the country was poised to slip back into recession, defined as two successive quarters of negative growth. Economists said the situation was “an absolute disaster”.