Fed's balance sheet shrinks in latest week - (Reuters) - The U.S. Federal Reserve's balance sheet shrank slightly in the latest week, led down by lower holdings of mortgage-backed securities and agency bonds, Fed data released on Thursday showed. The balance sheet shrank to $2.278 trillion in the week ended October 27 from $2.288 trillion the previous week.Fed balance sheet liabilities remain below their record high of $2.334 trillion hit in May. After declining early last year, the balance sheet surged amid the U.S. central bank's asset-buying program. For a graphic of the Fed's balance sheet, see: link.reuters.com/buf92k
Foreign central banks' US debt holdings rise-Fed (Reuters) - Foreign central banks' overall holdings of U.S. marketable securities at the Federal Reserve rose in the latest week, data from the U.S. central bank showed on Thursday. The Fed said its holdings of U.S. Treasury securities kept for overseas central banks rose $18.55 billion in the week ended Oct. 27 to stand at $3.300 trillion. The breakdown of custody holdings showed overseas central banks' holdings of Treasury debt rose by $20.81 billion to stand at $2.570 trillion. However, the foreign institutions' holdings of securities issued or guaranteed by the biggest U.S. mortgage financing agencies, including Fannie Mae and Freddie Mac, fell $2.26 billion to stand at $730.7 billion.
US Fed Total Discount Window Borrowings Wed $47.56 Billion - The U.S. Federal Reserve's balance sheet contracted slightly in the latest week as its Treasury securities holdings inched ahead.The Fed's asset holdings in the week ended Oct. 27 dipped to $2.298 trillion from $2.308 trillion a week earlier, the Fed said in a report released Thursday.Facing a slowing economy, the central bank in August decided to reinvest the proceeds of maturing mortgage bonds into U.S. Treasurys to prevent its portfolio of securities from shrinking and borrowing rates from rising.Since then, the size of the central bank's balance sheet has been stuck in a narrow range around $2.3 trillion. Fed officials are now considering expanding the balance sheet again by buying more Treasurys outright to jump-start the economy.
Bernanke Leaps into a Liquidity Trap - Hussman - In the Hicksian interpretation of the liquidity trap, monetary policy transmits its effect on the real economy by way of interest rates. In that view, the loss of monetary control occurs because at some point, a further reduction of interest rates fails to stimulate additional demand for capital investment. Alternatively, monetary policy might transmit its effect on the real economy by directly altering the quantity of funds available to lend. In that view, a liquidity trap would be characterized by the failure of real investment and output to expand in response to increases in the monetary base (currency and reserves). In either case, the hallmark of a liquidity trap is that holdings of money become "infinitely elastic." As the monetary base is increased, banks, corporations and individuals simply choose to hold onto those additional money balances, with no effect on the real economy. The typical Econ 101 chart of this is drawn in terms of "liquidity preference," that is, desired cash holdings, plotted against interest rates. When interest rates are high, people choose to hold less cash because cash doesn't earn interest. As interest rates decline toward zero (and especially if the Fed chooses to pay banks interest on cash reserves, which is presently the case), there is no effective difference between holding riskless debt securities (say, Treasury bills) and riskless cash balances, so additional cash balances are simply kept idle.
More Liquidity on the Way - The most anticipated announcement of the year - perhaps too anticipated (sell the news?) - will answer the question, "How much new money will the Fed decide dump into the situation at their next meeting?" Estimates range from a low of $500 billion to as high as $4 trillion. In the middle of the range is Bill Gross of PIMCO, who thinks the Fed needs to buy around $100 billion a month of US Treasuries (effectively monetizing the entire US deficit next year), while the high end is claimed by Jan Hatzius of Goldman Sachs, who makes the case that the Fed's own "Taylor Rule" requires them to buy $4 trillion if they wish to close the apparent gap that exists between that rule and economic reality. What began as a temporary rescue operation by the Fed and the feds to try and perform a normal Keynesian jump-start operation on the economy is now a permanent fixture without which the markets cannot operate.
Goldman: The Fed Needs To Print $4 Trillion In New Money - One of the amusing debates on the topic has been how much debt will the Fed print. Those who continue to refuse to acknowledge that the economy is in a near-comatose state, of course, hold on to the hope that the amount will be negligible: something like $500 billion (there was a time when half a trillion was a lot of money). A month ago we stated that the full amount will be much larger, and that the Fed will be a marginal buyer of up to $3 trillion. Turns out, even we were optimistic. A brand new analysis by Jan Hatzius, which performs a top down look at how much monetary stimulus is needed to fill the estimated 300 bps hole between the -7% Taylor Implied Funds Rate (of which, Hatzius believes, various other Federal interventions have already filled roughly 400 bps of differential) and the existing 0.2% FF rate. Using some back of the envelope math, the Goldman strategist concludes that every $1 trillion in new LSAP (large scale asset purchases) is the equivalent of a 75 bps rate cut (much less than comparable estimates by Dudley, 100-150bps, and Rudebusch, 130bps). In other words: the Fed will need to print $4 trillion in new money to close the Taylor gap. Here is the math.
Fed Watch: Too Little - Federal Reserve policymakers must be pleased with themselves. Market participants have fallen in line like lemmings off a cliff pursuing the obvious trades as the excitement over quantitative easing builds. Equities, bonds, commodities are all up. Dollar is down. Perhaps more importantly, measured inflation expectations have trended higher. Psychology is a powerful thing. Like leverage. But like leverage, psychology can turn against you. The psychology of market participants forms on the back of expectations, which in this case is for the Fed to announce a significant expansion of the balance sheet on November 3. If the Wall Street Journal is correct, the Fed is poised to disappoint those expectations with an announcement of "a few billion dollars over several months." This looks like a clear effort to temper expectations. How can Federal Reserve Chairman Ben Bernanke not view this as anything but yet another major policy error? The first supposedly "shock and awe" balance sheet expansion failed to reflate the economy. What kind of expectations should we have for the "shock and disappoint" strategy? And the stakes are even greater. Market participants already dutifully followed the first reflation attempt, and have eagerly embraced the second. Just exactly how many bites at the apple does Bernanke expect he is going to get? Fool me once….
QE2: Answers to four big questions facing the Fed - A month ago, I wrote about four key questions facing the Federal Reserve as it decides what new action to take to boost the economy. Now, we seem to more or less have some answers. In that piece, I did some hand-wringing about how new efforts to ease monetary policy, while appearing likely, might not happen if the economy showed improvement before the central bank's Nov. 2-3 policy meeting. Since then, the economy has continued on its sluggish growth path, and speeches from Chairman Ben S. Bernanke and Bill Dudley, New York Fed President and vice-chair of the central bank's policy committee, have given every indication that the Fed is prepared to pull the trigger. Indeed, at this point, if the Fed were to decide against taking any action next week, it would cause a major sell-off in global markets and amount to a communications failure of epic proportions.Below are the four questions I posed a month ago and the apparent answers.
Why Quantitative Easing Needs to Involve Securities Other than Government Securities » The point--from one point of view, the neo-Wicksellian point of view--behind quantitative easing is to reduce the interest rate that matters for private business investment: the long-term, default-risky, systemic-risky, beta-risky, real interest rates at which private businesses finance their capital expenditures. You can reduce this flow-of-funds equilibrium interest rate and raise the level of economic activity in any neo-Wicksellian framework in two ways:
- Reduce the "safe" real interest rate on short-term, safe government bonds.
- Reduce the various premia--duration, default, systemic risk, and beta risk--between the rates the Treasury pays to borrow in T-bills and the rates businesses pay to borrow.
Conventional open-market operations that lower the nominal interest rate on T-bills accomplish the first. Once the nominal interest rate on T-bills has been pushed to zero, quantitative easing policies that create expectations of higher future inflation continue to lower the real interest rate on T-bills and thus help the situation. Suppose, however, that the nominal interest rate on T-bills is zero and that you cannot alter inflation expectations--cannot commit to keeping your quantitative easing permanent, cannot commit to an exchange rate path, whatever, you cannot do it and inflation expectations are immovable. Then what?
The Bernanke Putt - Helicopter Ben is now turning to golf, according to an article in today's Wall Street Journal. I can't decide whether that feeling in my gut was pain, wrath, or an ironic chuckle, when I read the following: " Fed Chairman Ben Bernanke's push to restart the bond-buying program--a form of monetary stumulus known as quantitative easing [QE]--has been greeted with deep skepticism among some of his colleagues.... Mr. Bernanke has used the analogy of a golfer with a new putter: Unsure how it will work, he finds [the] best strategy is to tap lightly at first and keep tapping until the golfer figures out how best to use the putter." All this is fine and good, Dr. Bernanke, but shouldn't you have gotten your golf practice in well before now, at some prior time when the whole world wasn't watching your every twitch? Do you have any idea of the potential consequences of a misjudgment on your part? According to the WSJ, one of the fellows on your own team, Thomas Hoenig, calls the Fed's up-coming actions a "bargain with the devil."
Bernanke Misunderstands Conservatism - Bernanke discusses the appropriate use of an unfamiliar putter in a game of miniature golf that you are currently winning. Some reflection should convince you that the best strategy in this situation is to be conservative. In particular, your uncertainty about the response of the ball to your putter implies that you should strike the ball less firmly than you would if you knew precisely how the ball would react to the unfamiliar putter. Except that this is exactly wrong. There is no reason to expect that the danger from an overly lively putter outweighs the danger from an overly soft putter in miniature golf. Thus you should strike as normal. Now in standard golf Bernanke would have a point. Because in standard golf, getting to the putting stage itself is an accomplishment. You are now on the Green and if you screw up royally you could push yourself off the Green and be worse off then where you started. If you tap the ball too lightly then at worse you will be exactly where you started. Thus, the smart strategy is to be conservative.
Mr. Bernanke: You are playing Wii, not mini golf - Ben Bernanke recently used a golf metaphor to describe monetary policy: In remarks simply titled “Gradualism,” then-Governor Bernanke explained the case for policymakers “to move slowly and cautiously” when they can’t be sure about the consequences. “Imagine that you are playing in a miniature golf tournament and are leading on the final hole. You expect to win the tournament so long as you can finish the hole in a moderate number of strokes. However, for reasons I won’t try to explain, you find yourself playing with an unfamiliar putter and hence are uncertain about how far a stroke of given force will send the ball. How should you play to maximize your chances of winning the tournament? That’s way too gradual. Bernanke is playing something closer to electronic golf. After each practice swing in Wii, the likely distance the ball will travel is shown on the computer screen. The practice swings are the recent policy statements by Fed officials. The reactions of markets (everything from stocks to TIPS spreads) show us the likely effects.
The Communication Channel - The Fed’s statements have convinced legendary Bond Fund Manger Bill Gross that its time to get out of bonds. That means getting into something else. Emphasis in the original..We will tell them this. Certain Turkeys receive a Thanksgiving pardon or they just run faster than others! We intend PIMCO to be one of the chosen gobblers. The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next. You are doing what you have to do, and it may or may not work. But either way it will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment. A couple of things are happening. Gross is moving money offshore. That means the dollar will decline, which we have discussed before. This will be stimulating for the US economy. Second Gross is moving into corporate debt and agencies (housing).
A self-contradictory communications strategy - Does loosening monetary policy mean lower or higher nominal interest rates? An article in today's Financial Times is a good illustration of the problems that arise when central banks frame monetary policy as a (conditional) time-path for nominal interest rates. The Fed is trying to communicate two things. First, it is trying to communicate that it will buy long term bonds and this policy will be effective by pushing down yields on long term bonds, which should increase consumption and investment demand. Second, it is trying to communicate that this policy will be effective in increasing future inflation and real growth, both of which will push up yields on long term bonds. The Fed's "communications strategy" is self-contradictory. No single individual can believe both parts of that communications strategy at once. Here's my take. There's one group of people who have ignored the first part of the Fed's message, and who are selling bonds. There's a second group of people who have ignored the second part of the message and are buying bonds. And each individual in the second group thinks he is quick enough to get back out before everyone else in the second group changes his mind and joins the first group.
Contradictory Fed Strat? - Nick Rowe thinks Bernanke is confusing people The Fed is trying to communicate two things. First, it is trying to communicate that it will buy long term bonds and this policy will be effective by pushing down yields on long term bonds, which should increase consumption and investment demand. Second, it is trying to communicate that this policy will be effective in increasing future inflation and real growth, both of which will push up yields on long term bonds. The Fed’s "communications strategy" is self-contradictory. However, the Fed’s strategy can be summed up succinctly for bankers: get out of long dated nominal Treasuries. In the short run we are pushing down yields, so we are lowering the return you can lock in. In the long run yields are going to pop up so you are going to take capital losses. Ergo: find some other place to put your money. If you don’t want the zero nominal returns of cash or T-bills, I guess that means heading over to the real economy
What do the Fed's policy and poker have in common? - The optimal policy consists of a commitment to a “history-dependent” rule driven by the price level. Under that rule, the central bank commits to a given path for the level of the price index, and undertakes to make up for past inflation shortfalls (which would drive the price level below the target) by allowing future inflation to be sufficiently higher to bring prices back up towards the target path. The motivation behind a rule like this is to bestow the central bank the ability to manage inflation expectations (and, thus, control the level of the real interest rate), even when the nominal rate is stuck at the zero bound. By raising inflation expectations, the Fed could provide stimulus by lowering real interest rates, as well as penalizing cash holders, thus forcing them to put that cash to alternative uses—consumption or investment. While conceptually appealing, the proposed rule is vulnerable to lack of credibility. This is because, in order to conduct policy, a central bank needs not only a rule but also a tool to implement that rule. But here, the rule and the implementation tool virtually coincide: The rule is the central bank’s intention to allow higher inflation in the future in the event of past inflation shortfalls; and the tool is simply the verbal expression of that intention. This makes monetary policy akin to bluffing in poker: If the market buys the bluff, inflation expectations rise, real rates fall, cash gets spend, aggregate demand recovers. But why would the market buy the bluff, if, for example, it suspects that the central bank will renege on its “promise” of higher inflation in the future, and that it will “cheat” by raising interest rates once aggregate demand picks up?
Where Is Joe Stiglitz Coming From? - Joe Stiglitz joins... the Austrians, I think: Joseph Stiglitz: Why Easier Money Won't Work: As I understand it, Joe Stiglitz adopts his standard segmented-capital-markets view and makes three claims:
- The problem is one of impaired capital on the part of small banks and impaired collateral on the part os small enterprises--a credit channel problem--and quantitative easing in Treasuries will not help that problem.
- Quantitative easing will raise expectations of inflation on the part of financiers--and so will raise long-term nominal interest rates--without raising expectations of inflation on the part of industrialists, and so it will raise the perceived cost of capital to businesses and so diminish investment.
- Quantitative easing will unleash a process of combined and uneven quantitative easing across the globe that will create dangerous exchange rate and trade volatility.
What Does it Mean to Live Beyond Our Means? - Nine times out of 10, Joe Stiglitz is on the right side of the issue. But his response in a recent exchange with our own Lynn Parramore highlights a problem that progressives need to consider in the debate on fiscal stimulus: Lynn Parramore: People have said that before the crash, the U.S. provided the world’s consumer of last resort. How much has the world changed in that respect? Joseph Stiglitz: Well, before the crisis, the United States was living beyond its means, and much of what it was spending beyond its means was consumption. It is still the case that the United States is living beyond its means, but the good news is that the households are now beginning to save. But on the other hand, the government deficits have actually increased. So the fact is, the U.S. is continuing to spend beyond its means. Statements like this are potentially misread. In my view, the size of the public sector deficits per se are of no economic consequence until they become inflationary. At this stage, they are a very useful tool to help reduce private sector indebtedness, and should therefore be seen as a good thing, not a necessary evil. The alternative is 1930s-style debt deflation.
A New Normal for Monetary Policy? - John Taylor - A year and a half ago when the Fed’s extraordinary quantitative easing (QE) was shifting from emergency liquidity programs to large scale asset purchases, we convened a conference at Stanford’s Hoover Institution to discuss the shift. Jim Hamilton, of UC San Diego, in his talk Concerns about the Fed's New Balance Sheet and Peter Fisher of Blackrock in his talk The Market View expressed serious concerns about the extraordinary policies and the use of the Fed’s balance sheet to finance them. Don Kohn, then Fed Vice-Chair, attended and defended the Fed’s position. One concern expressed at the time (March 2009) was that such extraordinary measures would become a "new normal" for monetary policy, in which the Fed would not restrict its massive doses of QE to times of panics and other emergencies. Such a new normal would likely breed uncertainty and reduce the Fed’s independence, eventually leading to economic instability and inflation. I put it this way in my paper in the book, Road Ahead for the Fed, which came out of the conference:
Bill Gross' Arrogant Endorsement of Fed's QE Policy he calls History's Most "Brazen Ponzi Scheme" - It is not often you see bond managers openly embrace Ponzi schemes, but that is exactly what Bill Gross did in his post Run Turkey, Run. The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009. If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity. Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels. The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form. Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead.
Germany Says Fed Is Headed ‘Wrong Way’ With Monetary Easing - The Federal Reserve’s push toward easier monetary policy is the “wrong way” to stimulate growth and may amount to a manipulation of the dollar, German Economy Minister Rainer Bruederle said. Fed Chairman Ben S. Bernanke yesterday gave Group of 20 finance ministers and central bankers meeting in Gyeongju, South Korea an overview of the U.S. central bank’s efforts to jumpstart the world’s largest economy. His strategy, which investors expect will soon include greater asset purchases, drew criticism at the talks, said Bruederle. “It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle told reporters yesterday, saying that emerging-market officials were among the critics. Bruederle, a member of the Free Democratic Party, the junior partner in Chancellor Angela Merkel’s government, stepped in for hospitalized Finance Minister Wolfgang Schaeuble at the meeting. “Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate,” Bruederle said. .
The Fed’s Dangerous Game - The Federal Reserve’s commitment to pursuing another round of quantitative easing (QE) has been well telegraphed. There were the minutes from the Fed’s meeting in September and also some well timed speeches by Fed governors over the past few weeks. In addition to all the QE2 discussion – large scale asset purchases financed through printing money – FOMC members have considered “targeting a path for the price level rather than the rate of inflation, and targeting a path for the level of nominal GDP.” In short, the Fed has now moved beyond the esoteric “portfolio balance channel” to full-throttled support for policies designed to engineer higher inflation. Recently, the Fed has been eager to communicate to market participants that low inflation is somehow inconsistent with “price stability.” This is unfortunate and unlikely to be in the long-run interest of the U.S. economy or millions of households currently dealing with the fallout from prolonged unemployment.
- Interest rates rise. Interest rates are rising despite the intended opposite effect of QE 2 to be announced next Wednesday.
- As does inflation rise. While the Fed is focused on deflation, inflationary pressures are mounting. (I call this screwflation.) While this is one of the primary stated objectives of QE 2, the unintended consequence of rising input costs and rising prices of food, copper (up 16%), gasoline (up 13%) and so on is to reduce global growth, pressure corporate margins and squeeze consumers' real incomes further.
- A rapid U.S. dollar drop. Sliding 10% against the euro will surely help exports, but further quick declines could cause tensions with our trading partners.
- Chaos in housing. Mortgage-gate has trumped the impact of unprecedented lower mortgage rates on the slope of the housing recovery.
- The long tail of the last credit cycle remains an ever present risk. Europe's debt woes continue. As an example, spreads on Greek bonds have risen by nearly 50 basis points overnight.
What Would Milton Friedman Do Now? - Enough about John Maynard Keynes. We can be sure the 20th century British economic giant would advise more government spending to spur U.S. economic growth with consumers and businesses so hesitant and short-term interest rates at zero. What would Milton Friedman, the University of Chicago champion of monetary discipline, do now? What would he say—reversing the charges when he returned a reporter's call, as he always did—if asked about Federal Reserve Chairman Ben Bernanke's imminent move to print hundreds of billions of dollars to buy more U.S. Treasury bonds to put more money into the economy? Friedman believed in the power of money: the more money, the more income and, eventually, the more inflation. He didn't think the Fed could deliver full employment. He regarded interest rates as a misleading measure of whether the Fed was loose or tight. He favored flexible exchange rates, and would have lectured China against pegging its yuan to the dollar. He didn't trust central bankers. He blamed the Bank of Japan for the deflation of the 1990s and the Fed for the Great Depression of the 1930s and the Great Inflation of the 1970s
Friedman On Japan - Krugman - David Wessel has an article asking what Milton Friedman would say about quantitative easing, and concludes that he would have been in favor. But I was struck by Friedman’s 1998 remarks about Japan, in which he basically said that increasing the monetary base would do the trick: “The Bank of Japan can buy government bonds on the open market…” he wrote in 1998. “Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand…loans and open-market purchases. But whether they do so or not, the money supply will increase…. Higher money supply growth would have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately.”Well, they did that: staring in 2000, the BOJ nearly doubled monetary base over a period of 3 years. And the money just sat there. In fact, Japan’s experience is a key element of the case against monetarism. Just printing notes does not work when you’re in a liquidity trap.
Are We All Friedmanites Now? - One year ago, I argued in Reason that Milton Friedman’s writings on the Great Depression inspired the Federal Reserve’s response to the current economic crisis. Friedman held that artificially induced inflation would have prevented the ordeal of the 1930s, so I inferred that Fed Chairman Ben Bernanke’s implicit goal is likewise to ramp up inflation as a cure to our present ills.A year later, the Fed is beginning to make that goal explicit. Over the past few weeks, Bernanke and other Fed bigwigs have been dropping conspicuous hints that they plan to boost inflation and pump another round of conjured-up cash into the economy. One proposal is to inject $100 billion per month. It’s being called Quantitative Easing 2 (QE2). But why should the sequel be any more compelling than the original, which cost over $1 trillion and failed to move the unemployment rate or decisively revive the American economy?
Monetary Police is Science, Everything Else is Stamp-Collecting - Monetary policy decisions tend to be based on systematic analysis of alternative policy choices and their associated macroeconomic impacts: this is science. Fiscal policy choices, in contrast, spring from unsystematic speculation, grounded more in politics than economics: this is alchemy. In normal times, fiscal alchemy poses no insurmountable problems for monetary policy because fiscal expectations can be extrapolated from past fiscal behavior. But normal times may be coming to an end: aging populations are causing promised government old-age benefits to grow relentlessly and many governments have no plans for financing the benefits. In this era of fiscal stress, fiscal expectations are unanchored and fiscal alchemy creates unnecessary uncertainty and can undermine the ability of monetary policy to control inflation and influence real economic activity in the usual ways.
Monetary Base And Short Term Debt (Ultra-wonkish) Paul Krugman - A brief further note on the equivalence of quantitative easing and shifts in the maturity composition of federal debt, raised here. Some people have quarreled with my statement of this equivalence. It’s true, they say, that monetary base and Treasury bills both yield near-zero interest rates. But monetary base is money — it provides liquidity in a way that T-bills, no matter how negotiable, don’t. To which the answer is yes, but no — and right now it’s no. The point is that we’re now in a liquidity trap. What does that mean? It means that the Fed has pushed short rates down to zero, so that at the margin T-bills are no better than cash — and correspondingly, that means that at at the margin people and banks are holding some of their cash purely as a store of value. But, you say, it won’t always be thus: at some point the economy will recover to the point where the zero lower bound is no longer binding; and at that point monetary base and short-term debt will no longer be the same thing. Indeed. But at that point the Fed will be seeking to reduce the monetary base — by definition: it’s only once the Fed is trying to curb the size of the base that the zero lower bound ceases to be binding. So QE really is just like a shift in the maturity of federal debt.
Dudley: Fed Will Act Should Conditions Require It -The Federal Reserve is still prepared to provide additional support to the economy if needed, and it is closely watching mortgage foreclosures to ensure the integrity of the process, a top central bank official said Monday.Fed policymakers “have stated their commitment to take further actions to bring interest rates down further should economic conditions warrant,” Federal Reserve Bank of New York President William Dudley said. But he noted there are limits to what the Fed can accomplish: “The Fed cannot wave a magic wand and make the problems remaining from the preceding period of excess vanish immediately.”Referring back to a speech at the start of the month in which he suggested the central bank would most probably provide additional assistance, Dudley noted that “I said that I thought further Fed action was likely to be warranted unless the economic outlook were to evolve in a way that made me more confident we would see better outcomes for both employment and inflation before too long.” He also repeated that time period in which unemployment would fall and inflation would back toward desired levels was “unacceptable.”
Dudley: Fed no magician, but can support economy - The Federal Reserve cannot "wave a magic wand" to fix the economy overnight, but it can provide "essential" support, a top Fed policymaker said on Monday. Indeed, support will likely be warranted unless economic conditions improve, William Dudley, president of the New York Fed and a permanent voter on the Fed's policy-setting panel, said in a speech at Cornell University.His comments underline market expectations that the Fed will buy more long-term assets at its next policy-setting meeting on Nov 2-3 to try to revive the economic recovery.The U.S. central bank cut interest rates to near zero and bought $1.7 trillion in mortgage-related and Treasury debt to try to boost the economy during the global financial crisis. However, a Fed colleague known for steady opposition to easy monetary polices said further easing would be a "dangerous gamble" that could set in motion another wrenching boom and bust cycle. "There are real risks to quantitative easing," Kansas City Federal Reserve Bank President Thomas Hoenig said in Lawrence, Kansas, referring to extensive asset purchases by the Fed to push borrowing costs lower even though short-term rates are near zero.
Dudley Says Fed Members `Owe' Action to Millions of Unemployed Americans - Federal Reserve Bank of New York President William Dudley said the central bank needs to take action to bring down the unemployment rate even though expanding its balance sheet isn’t a “perfect” tool. “To the extent that we can do things to improve the economic environment, we certainly owe it to the millions of people who are unemployed to do so,” Dudley said today in response to audience questions after a speech in Ithaca, New York. Policy makers haven’t yet decided whether to buy additional assets to spur economic growth, he said. “I don’t think anyone at the Federal Reserve thinks” expanding the balance sheet is a “panacea to our nation’s ills,” said Dudley, 57, who is also vice chairman of the policy-setting Federal Open Market Committee. “We have a very clear mandate. They don’t say anything about ‘Don’t use a tool unless the tool is perfect.’”
Stimulus from the Fed Can Yield a High Return to Taxpayers - The collective budget shortfall for state and local governments from the start of the recession in December 2007 through the 2011 fiscal year is estimated to be $425 billion. Much of this shortfall has already been closed through budget cuts and tax increases mandated by state and local balanced budget requirements, and this is a direct offset of the federal stimulus package. There is likely to be another $140 billion shortfall in 2012 that must be closed, bringing the total to $565 billion, and there are additional shortfalls projected for subsequent years that could, in total, more than fully offset the federal stimulus package. (Since a large fraction of the $288 billion in tax cuts in the $767 billion stimulus package went to saving rather than consumption, the net stimulus was probably around $625 billion.)The large budget shortfalls that state and local governments face in coming years will place a considerable drag on the recovery if they are not addressed, and it's important to realize that there are still ways to help.
Structural Problems Need QE2 Too - One argument against further easing by the Fed is that the main source of U.S. economic problems is structural in nature and cannot be addressed by monetary policy. In particular, the balance sheets of households have collapsed and require a significant amount of painful deleveraging. More monetary stimulus cannot change that fact. First, I agree that there are big structural problems with the household sector and that they are driving much of the problems elsewhere. Households spent the past decade leveraging up and now they are having to reverse this buildup of debt given the collapse of the asset side of their balance sheets. This household balance sheet problem in turn got transferred to the government balance sheet and is also currently influencing aggregate spending choices. So yes, this is a structural problem and requires some radical structural solutions like swapping the underwater portion of mortgages for equity. Felix Salmon suggests some other structural solutions. Now just because this is a structural problem it does not follow that monetary policy cannot contribute in a productive manner to the deleveraging.
Nobel-Winner Pissarides: QE Won’t Help Jobs - The Federal Reserve won’t help the U.S. labor market by purchasing debt securities, but the move would likely prompt similar action by other central banks, one of this year’s Nobel laureates in economics said Friday. “Quantitative easing is not going to do anything for employment because there is already lots of liquidity” in the U.S. economy, Christopher Pissarides said. “If the Fed does do QE, then I hope the Bank of England will follow, and others too,” he said. “If the Fed does QE, then Trichet will do it plus 12%,” The European Central Bank, headed by Jean-Claude Trichet, has engaged in large-scale liquidity support of European banks but only very modest purchases of covered bonds. The Federal Reserve and the Bank of England have both purchased larges swathes of government and agency debt, and the Bank of Japan has begun following suit. Pissarides blamed the U.S. problems on “fiscal indiscipline.” “I don’t want the U.S. dollar to depreciate because it is Europe that bears the cost of this,” he said.
Fed, Bernanke Detail Response to Foreclosure Crisis - The U.S. Federal Reserve presented a report detailing its efforts to help Americans cope with the foreclosure crisis, and Chairman Ben Bernanke said in a speech that federal banking regulators expect preliminary results of their review of the nation’s latest foreclosure mess to be ready next month. “We are looking intensively at the firms’ policies, procedures and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures,” Bernanke said at a Fed and Federal Deposit Insurance Corp. sponsored conference on foreclosures and the future of housing finance. Bernanke didn’t address monetary policy or the economic outlook in his speech.
Plosser Says Fed in 'Difficult Spot' on Mortgage-Debt Buybacks - The Federal Reserve's effort to recover taxpayer money used in bailouts while also ensuring the stability of the financial system puts it in a "difficult spot," said Charles Plosser, president of the Philadelphia Fed. The New York Fed, which acquired mortgage debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc., has joined a bondholder group that aims to force Bank of America Corp. to buy back some bad home loans packaged into $47 billion of securities. On the one hand, the Fed has "a duty to the taxpayer to try to collect on behalf of the taxpayer on these mortgages," Plosser said today at an event in Philadelphia. "At the same time, as a regulator, and as someone who's trying to preserve financial stability and manage the oversight of banks and financial institutions, we've got another hat that we wear that says, 'Should we be in the business of suing the financial institutions that we are in fact responsible for supervising?'
Fed Asks Dealers to Estimate Size, Impact of Debt Purchases - The Federal Reserve asked bond dealers and investors for projections of central bank asset purchases over the next six months, along with the likely effect on yields, as it seeks to gauge the possible impact of new efforts to spur growth. “If they buy too much, I think there’s a real chance that rates are going to rise because people are worried about inflation,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “If they don’t buy much, they’re not going to have a market impact.” The New York Fed survey, obtained by Bloomberg News, asks about expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asks firms how often they anticipate the Fed will re- evaluate the program, and to estimate its ultimate size.
A Paralyzed Fed Defers Decision On Monetary Policy To Primary Dealers In An Act That Can Only Be Classified As Treason - if there was any doubt before which way the arrow of control, and particularly causality, points in America's financial system, the following stunner just released from Bloomberg confirms it once and for all; the New York Fed has issued a survey to Primary Dealers, which asks for suggestions on the size of QE2 as well as the time over which it would be completed. It also asks firms how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. This is nothing short of a stunning indication of three things: i) that the Fed is most likely completely paralyzed due to the escalating confrontation between the Hawks and the Doves, and that not even Bernanke believes has has sufficient clout to prevent what Time magazine has dubbed a potential opening salvo into a chain of events that could lead to civil war; i) that the Fed is effectively asking the Primary Dealers to act as underwriters on whatever announcement the Fed will come up with, and thus prop the market, and, most importantly, iii) that the PDs will most likely demand the highest possible amount, using Goldman's $2-4 trillion as a benchmark, and not only frontrun the ultimate issuance knowing full well what the syndicate of 18 will decide in advance of what the final amount will be, but will also ramp stocks on November 3 to make the actual QE announcement seem like a surprise. This also means that the Primary Dealers of America, which include among them such hedge funds as Goldman Sachs, such mortgage frauds as Bank of America, such insolvent foreign banks as Deutsche, RBS, UBS and RBS, and such middle-market excuses for banks as Jefferies, are now in control of US monetary, and as we explain below fiscal, policy.
Goldman Says Fed Purchases May Include 30-Year Bonds - Goldman Sachs Group Inc., one of the 18 primary dealers that trade with the Federal Reserve, said a resumption of asset purchases by policy makers next week would likely include 30-year Treasury bonds. Traders have speculated that the Fed would focus on buying U.S. government debt maturing in 10 years and less as part of a policy known as quantitative easing to sustain the economic recovery by keeping borrowing costs low. Ten-year Treasury notes serve as a benchmark for loans ranging from corporate debt to mortgages. Policy makers conclude their two-day meeting Nov. 3.
Fed Gears Up for Stimulus - The Federal Reserve is close to embarking on another round of monetary stimulus next week, against the backdrop of a weak economy and low inflation—and despite doubts about the wisdom and efficacy of the policy among economists and some of the Fed's own decision makers. The central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis. The announcement is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday. The Fed's aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates. It hopes that would spur more investment and spending and liven up the recovery. But officials want to avoid the "shock and awe" style used during the crisis in favor of an approach that allows them to adjust their policy, and possibly add to their purchases, over time as the recovery unfolds.
Federal Reserve 'Terrified' of Deflation: El-Erian - The Federal Reserve will announce a new round of easing next week because it is “terrified” of deflation, said Mohamed El-Erian, chief executive officer of Pimco. But he doesn't believe a restart of the Fed's "quantitative easing" program at its Nov. 2 and 3 meeting will be very effective in delivering high growth or low unemployment. Quantitative easing is a term used to refer to the Federal Reserve injecting more money into the economy. "QE is meant to drive down the price of safe assets so much that we are all pushed into doing something risky," El-Erian said in an interview
The Fed must adopt an inflation target - Providing a firm anchor for long-run inflation expectations would make the threat of deflation less likely. But a firm anchor would also give the Fed flexibility to respond to the weakness of the economy – because it would help ensure that any new moves to quantitative easing would not be misinterpreted as signalling a shift in the central bank’s long-run inflation goal, making an upward surge in inflation expectations less likely too. The Fed can establish a strong nominal anchor through two straightforward steps. First, the federal open market committee could come to a consensus on the specific numerical value that Mr Bernanke referred to as the “mandate-consistent inflation rate” in his recent speech. This should not be too difficult, because the Fed’s longer-run inflation projections indicate FOMC members already think this rate should be about 2 per cent, or a bit below. Second, the FOMC should announce that this rate would only be modified for sound economic reasons, such as improvements in the measurement of inflation or changes in the structure of the economy
The Moral Equivalent of Stagflation – Krugman - Stagflation had a huge impact on economic thinking. Why? Mainly because it was predicted: the Friedman-Phelps natural rate hypothesis said that the apparent positive tradeoff between inflation and unemployment would prove only temporary, and that once inflation had gone on for a while, disinflation would involve a period of both high inflation and high unemployment. So when that condition actually materialized, it gave huge prestige to the whole program of grounding macroeconomic models in microeconomic foundations. So what’s the parallel with the Nipponization of the U.S. economy? Well, like the stagflation of the 1970s, our current predicament was predicted well in advance. Liquidity-trap theorists — yes, with me playing a large and early role — told you what would happen if the economy suffered a sufficiently severe negative shock, one that pushed us up against the zero lower bound. We predicted, specifically, that:
1. Increases in the monetary base would fail to increase broad monetary aggregates, let alone boost the economy
2. Despite large monetary base expansion, the economy would slide toward deflation, not inflation
3. Despite large budget deficits, interest rates would stay low, because short-term rates would stay pinned at zero
TIPS Yield Goes Negative for First Time - A combination of low interest rates and growing fears of rising prices enabled the U.S. government to sell inflation-protected Treasury bonds with a negative yield for the first time ever on Monday.That means if inflation doesn't appear as investors expect, they could end up paying to lend money to the government. The Treasury sold $10 billion of five-year Treasury inflation protected securities, or TIPS, at an auction on Monday with a yield of negative 0.55%. The big demand is a sign the Federal Reserve is gaining some traction in its efforts to kickstart the economy and nudge inflation higher. TIPS are designed to protect investors against inflation, offering a return that rises as the cost of goods increase. In times of inflation, they are more attractive than standard Treasury bonds, whose fixed income stream is worth less as other prices are rising.
TIPS and the Risk of Deflation - SF Fed Economic Letter - The low level of inflation and the sluggish pace of economic recovery have raised concerns about sustained deflation—an inflation rate below zero with a general fall in prices. However, the relative prices of inflation-indexed and non-indexed Treasury bonds, which historically have proven to be good measures of inflation expectations, suggest that financial market participants consider the probability of deflation to be low.
Inflation Bonds Are Sold With Negative Yield for First Time- Inflation-protected securities sold at negative yields for the first time ever on Monday as traders anticipate that the Federal Reserve will start a new round of asset purchases. Analysts said that asset purchases by the Fed would lead to a higher inflation rate and a positive return on the bonds. The $10 billion auction of the five-year bonds sold at a negative yield of 0.550 percent, according to the Treasury Department. The results of the auction of the securities, known as TIPS, came as indexes on Wall Street edged higher, buoyed by recent strong corporate earnings and a rise in housing sales. The previous lowest yield for the TIPS was in the auction on April 26, when the yield was 0.550 percent. “It is saying that there is a true demand for inflation securities, because people perceive the quantitative easing program is enabling a higher inflation rate in the future,”
Negative real rates of return - Inflation-protected securities sold at negative yields for the first time ever on Monday as traders anticipate that the Federal Reserve will start a new round of asset purchases. There are liquidity issues, hedging issues, reinvestment risk issues, supply-side finance management issues, and so on. This does not show that our real economy has a negative real rate of return. Maybe, for reasons of institutional constraint, people buy these securities as an inflation hedge rather than investing in the real economy. Still... There is more here.
In Bond Frenzy, Investors Bet on Inflation - At a time when savers complain that they are earning almost no interest from their bank accounts, some investors on Monday bought United States government bonds that effectively had a negative rate of return. Bizarre as it sounds, that is correct. In an auction of a special kind of five-year Treasury bond, investors paid $105.50 for every $100 of bonds the government sold — agreeing to pay the government for the privilege of lending it money. The reason is that these types of bonds offer a guaranteed protection against inflation. So, if inflation soars — as some economists worry might happen, with the government seeking to give the economy a boost by flooding it with money — the value of the bonds would go up accordingly. The investors who took part in the $10 billion auction are betting that inflation, now at about 1 percent annually, will rise to a level that more than compensates for the premium they paid.
Negative real interest rates - What message should we take from negative real interest rates? If you're worried about inflation, one investment you might consider is an inflation protected security from the U.S. Treasury, such as the 4-1/2 year TIPS just issued. For a $1,000 investment, the Treasury will make a $2.50 coupon payment to you twice a year (or a 0.5% annual rate), and give you your $1,000 back in April 2015. If the headline CPI goes up between now and then, both the coupon and principal will go up by exactly the amount of inflation. And if there is deflation, you still get the $2.50 coupon and $1,000 principal back without penalty. Doesn't sound like much? Well, it looked good enough to investors that they just bought $10 billion worth of that security, paying $1,050 for each $1,000 par value. At that price, if there's no inflation, they lent more to the government than they're ever going to get back in coupons and principal over the entire life of the bond. That works out to a negative yield to maturity on the bond of about -0.5% if there's no inflation over the next 5 years.
Ezra Klein - How much inflation is the market expecting - You may have noticed some talk in recent days about Treasury selling inflation-protected bonds at a negative yield. This talk may have made your eyes glaze over. The short version is that it means investors think the Federal Reserve will be successful in its efforts to pump some inflation into the economy. But how successful? Annie Lowrey* crunched the numbers and found that "annual inflation for the next five years needs to be somewhere north of about 1.55 percent for the investors to break even. Any more inflation than that, and they make money." That's better than no inflation, but it's well below the Federal Reserve's target of 2 percent.
The Fed is fuelling the catastrophe of fast rising raw material prices - There are two main ways in which policymakers are insidiously interfering with the usual rules of supply and demand for raw materials, and myriad different smaller ones. We'll leave aside the smaller ones, such as China's attempt to leverage its monopoly of rare earth metals for geo-political purposes, and concentrate instead on the two biggies. One is the policy of ultra-cheap money in advanced economies to fight the economic crisis; and the other, more commodity-specific one, is massive public subsidy for the production of bio-fuels. Food is being elbowed out by pursuit of "clean fuel". As long as the US Federal Reserve remains accommodative, commodity prices are likely to keep rising. We are not yet back to anything like the extremes seen in the bubble of 2007/8. Oil prices at $140 a barrel, it will be recalled, were what helped tip the world economy into recession. Yet by long-run historic standards, both food and mineral prices are still exceptionally elevated and going higher. The underlying reasons are well known. Rapid industrialisation and urbanisation in the developing world has created a "super-cycle" that won't ease until these countries bump up against the limits of their growth potential. Most would agree there's some way to go. Into this already troubling mis-match between growing demand and finite supply stumbles the US Fed with a loose money policy of unprecedented proportions.
Signs Hyperinflation Is Arriving - Back in late August, I argued that hyperinflation would be triggered by a run on Treasury bonds. I described how such a run might happen, and argued that if Treasuries were no longer considered safe, then commodities would become the store of value. Such a run on commodities, I further argued, would inevitably lead to price increases and a rise in the Consumer Price Index, which would initially be interpreted by the Federal Reserve, the Federal government, as well as the commentariat, as a good thing: A sign that “the economy is recovering”, a sign that “normalcy” was returning. I argued that—far from being “a sign of recovery”—rising CPI would be the sign that things were about to get ugly. I concluded that, like the stagflation of ‘79, inflation would rise to the double digits relatively quickly. However, unlike in 1980, when Paul Volcker raised interest rates severely in order to halt inflation, in today’s weakened macro-economic environment, that remedy is simply not available to Ben Bernanke.
Bernanke Asset Purchases Risk Unleashing 1970s Inflation Genie - For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory. Bernanke next week is likely to preside over a decision to launch another round of large-scale asset purchases after deploying $1.7 trillion to pull the economy out of the financial crisis, comments from policy makers over the past week indicate. This time, with interest rates already near zero, the Fed will be aiming to increase the rate of inflation and reduce the cost of borrowing in real terms. The goal is to unlock consumer spending and jump-start an economy that’s growing too slowly to push unemployment lower. Estimates for the ultimate size of the asset-purchase program range from $1 trillion at Bank of America-Merrill Lynch Global Research to $2 trillion at Goldman Sachs Group Inc., with economists at both firms agreeing the Fed will likely start by announcing $500 billion after the Nov. 2-3 meeting. The danger is that once the Fed kindles price increases, inflation will be difficult to control.
Do Investors Expect Too Much From Bernanke? - Krugman - Financial markets seem convinced that quantitative easing will be highly effective at solving at least one problem: inflation running well below the Fed’s 2-percent-or-so target. The chart above shows the difference between interest rates on 5-year inflation-protected bonds (which are now negative) and rates on unprotected bonds; implicitly, the market forecast of inflation over the next five years has risen half a point. But I really don’t understand this. Granted that QE2 will probably have some positive effect, hopefully bigger than analysis based on the debt-maturity equivalence suggests. Still, the prospect remains that we’ll face multiple years of high unemployment — or, if you prefer, a protracted large output gap (PLOG). And history is clear on what that means: declining inflation: My guess, then, is that the markets are overreacting; they’re thinking, “The Fed is printing money!”, while forgetting that this ultimately matters, even for inflation, only to the extent that it seriously reduces unemployment.
What Bernanke thinks - THE Fed needs to do more. But as a Leader in this week's Economist notes, it would be extremely helpful to both the Fed and the American economy if it were joined in its efforts by better fiscal policymaking. The New York Times' Sewell Chan steals a look at Ben Bernanke's diary and learns that the Fed chairman agrees: The Federal Reserve is all but certain next week to begin a multibillion-dollar effort to coax the recovery along, but privately, Ben S. Bernanke, the chairman, worries that more is needed to turn the sluggish economy around and revive employment. He believes that without the Obama administration’s $787 billion stimulus program, the nation would have been worse off, and that Congress needs to continue to prop up the economy in the short run. But Mr. Bernanke has been reluctant to prominently voice those views... In fact, Mr Chan's insight has been distilled from "testimony, speeches and interviews with people close to [Mr Bernanke] over the last several months". But it sounds about right. The question is, is Mr Bernanke making a mistake in failing to make his views plain and public?
Bernanke’s Failure to Speak Out Irks Some Economists - The Federal Reserve is all but certain next week to begin a multibillion-dollar effort to coax the recovery along, but privately, Ben S. Bernanke, the chairman, worries that more is needed to turn the sluggish economy around and revive employment. He believes that without the Obama administration’s $787 billion stimulus program, the nation would have been worse off, and that Congress needs to continue to prop up the economy in the short run. He agrees that fiscal measures to support the recovery would probably make the Fed’s unconventional monetary policy more potent. But Mr. Bernanke has been reluctant to prominently voice those views, which were gleaned from testimony, speeches and interviews with people close to him over the last several months. His predecessor, Alan Greenspan, did not display such hesitation, advocating for the Bush tax cuts of 2001 and 2003.
What Ben Bernanke needs to tell Congress - In a recent speech at the Federal Reserve Bank of Boston, Bernanke made perfectly clear that the central bank is tired of watching the economy stagnate. "With an actual unemployment rate of nearly 10 percent," he said, "unemployment is clearly too high" -- and, yes, the italics are in his prepared text. So the Federal Reserve is likely to begin purchasing Treasury bonds -- "quantitative easing," it's called -- in an effort to lower interest rates and spur the economy. They did this in 2009, and to great effect. But the Federal Reserve can't go it alone. No one gets a job when the central bank buys a bond. It's only when the Fed's decision to buy a bond persuades some other economic actor to spend money that hiring ticks up. And thus far, that's not been happening. Banks and corporations have simply been stockpiling their cash, waiting for a recovery that, paradoxically, won't take hold until they start lending and spending again.
Sailing the Wrong Way with QE2? - Peter Orszag - To bolster the economy, we need a three-part shift in policy: · more fiscal expansion (read: more stimulus) now; · much more deficit reduction, enacted now, to take effect in two to three years; and · an improvement in the relationship between business and government (the current antagonism, even if not the primary explanation for slow hiring and sluggish investment, does seem to be affecting hiring and other business behavior). Unfortunately, the necessary shifts in fiscal policy are extremely unlikely to happen, and the strains between business and government are now so deep that they will take time to address. So we’re left relying on monetary policy — and in particular a much-anticipated second round of quantitative easing by the Federal Reserve — which may create more problems than it solves.
The Worst Economist In The World, 10/27/10 - Krugman - In my first WEITW post, I went after the claim that quantitative easing, by weakening the dollar, could actually hurt recovery — because, you see, a weaker dollar leads to higher commodity prices. As I tried to explain, a weaker dollar is also a stronger euro (and other currencies), so what raises prices in terms of one currency lowers them in terms of others, and the whole thing makes no sense. What I didn’t do at the time was take on a related argument — which wasn’t made in that article, but I knew was out there — which said that expansionary monetary policy in general leads to higher commodity prices, and therefore hurts recovery. Sure enough, we’ve got a senior official at the International Energy Agency saying QE2 could inflate prices in nominal terms and bring about inflation and could derail the recovery. So, how hard is this? Higher commodity prices will hurt the recovery only if they rise in real terms. And they’ll only rise in real terms if QE succeeds in increasing real demand. And this will happen only if, yes, QE2 is successful in helping economic recovery.
Economy is running out of gas - The U.S. economy is in danger of sliding back into another recession, even before we’re fully recovered from the last one. There’s nothing surprising about the economic outlook. We know from reading our history that it takes a long time to recover from credit bubbles, but we’ve become impatient, expecting trends that evolved over decades to reverse themselves quickly. We want the economy to fix itself, right now! But it won’t. The economy is slowly readjusting and rebalancing, but in the meantime it’s also suffering from a lack of demand to keep everyone employed. Our political system tried some half measures to keep demand up, but has apparently given up on even those. The economy is running out of gas, and there’s no fueling station in sight.
Q3 Advance Report: Real Annualized GDP Grew at 2.0% - 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 2.0 percent in the third quarter of 2010, (that is, from the second quarter to the third 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%. The current recovery is very weak - the 2nd half slowdown continues. A few key numbers: "The change in real private inventories added 1.44 percentage points to the third-quarter change in real GDP after adding 0.82 percentage point to the second-quarter change. Private businesses increased inventories $115.5 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first." Without the boost in inventories, GDP would have been barely positive in Q3.
Another disappointing GDP report - The U.S. economy managed to keep growing in the third quarter, but well below what's needed for a normal economic recovery. The Bureau of Economic Analysis reported today that U.S. real GDP grew at an annual rate of 2.0% during the third quarter. The latest GDP numbers bring our Econbrowser Recession Indicator Index for 2010:Q2 up to 9.1%. We would not declare that a new recession has begun until it gets back above 67%. Inventory rebuilding often contributes to above-average growth in the initial phases of a recovery, and continued to do its part in the third quarter as well, with inventory gains contributing 1.4 percentage points to the third-quarter growth. But that means that real final sales were only up an anemic 0.6% (annual rate) for Q3, the kind of number you might expect in a recession rather than the early stage of an economic recovery.
The long road back - FIRST, the good news. America's economy grew in the third quarter of 2010, the fifth consecutive quarter of expansion. Real GDP grew at an estimated 2.0% annual pace from July to September, up from the 1.7% pace recorded in the second quarter. Growth was largely attributable to continued acceleration in personal consumption expenditures. Personal spending has grown at a faster pace in each of the last three quarters. Things could certainly be worse. But they could also be substantially better. In fact, they've been better; real output has yet to return to its pre-recession peak, even after five quarters of recovery. That's a reflection of the steepness of the previous decline but also the shallowness of the recovery. Through the first five quarters of recovery after the 1982 recession, real GDP grew by 7.8%. The total expansion this time has been just 3.5%. Little wonder that employment has risen so slowly.
Real GDP: Still 0.8% below pre-recession levels - Real GDP is 0.8% below the pre-recession peak, so real GDP would have to grow at a 3.1% annualized pace in Q4 for the economy to be back at the pre-recession peak. That is unlikely since growth in personal consumption expenditures (PCE) will probably slow in Q4, and the contribution from the change in private inventories will likely be much smaller or negative in Q4. Probably the earliest the economy will be back to pre-recession levels for GDP would be in Q1 2011 and that requires a 1.6% annualized growth rate over the next two quarters. It might even take until Q2 2011 (my current forecast. Note: The following graphs are all constructed as a percent of the peak in each indicator. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.
Investment Contribution to GDP: Leading and Lagging Sectors - The following graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy. For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, blue. Residential Investment (RI) made a negative contribution to GDP in Q3 2010, and the four quarter rolling average is negative again. Equipment and software investment has made a significant positive contribution to GDP for five straight quarters (it is coincident). The contribution from nonresidential investment in structures was slightly positive in Q3. .
Another Tepid Quarter for GDP - BEA released its first estimates for third-quarter GDP yesterday. Headline growth was a disappointing, if not surprising, 2.0%. Here’s my usual graph of how various components of the economy contributed to overall growth: Housing fell back into the red, while non-residential structures eked out a small gain. Consumers continued to spend at a moderate pace (consumer spending grew at a 2.6% rate, thus adding 1.8 percentage points to growth). But the big stories were the continued boost from inventories, and the continued drag (in GDP-accounting terms) from imports. The pessimistic take on inventories (see, for example, this tweet from Nouriel Roubini) is that the third quarter build up was unintentional, and thus is bearish for fourth quarter growth. The optimistic take, I suppose, is that maybe businesses see stronger demand ahead. But that feels rather, er, speculative.
Why doesn't the government publish monthly GDP data? - A recent David Beckworth post linked to Macroeconomic Adviser’s monthly nominal GDP series. Please click on the Macro Adviser’s GDP link and take a look at the graph showing estimated monthly NGDP data. You will see that almost the entire drop in NGDP during this recession occurred during a brief 6 month period between June and December 2008. This fact is obscured by quarterly data, which show a very large drop in the average level of NGDP between 2008:4 and 2009:1. But again, by December 2008 it was almost all over, even though the official recession trough wouldn’t occur until June 2009, at a tad below December NGDP levels. I wish the Federal government would publish monthly NGDP data. It can’t be that hard to get estimates; after all, GDP is mostly constructed out of other monthly time series. And even the quarterly GDP reports are estimates, often sharply revised years after the fact.
What the GDP Report is Screaming to the Fed - There is a loud and clear message coming from today's BEA report on the U.S. economy: it is time for the Fed to adopt an level target for total current dollar spending. The report showed that final sales of domestic product grew at an annualized rate of only 2.4%. This is far too weak of a growth rate in aggregate demand for there to be a robust recovery. Moreover, it means that that total current dollar spending is falling further below its long-run trend. This can be seen in the figure below: The fitted trend puts final sales at about $16.5 trillion. Actual final sales is around $14.6 trillion, a whopping $1.9 trillion shortfall. That the Fed can let aggregate demand fall this far below trend is mind-boggling. It is even more staggering when one considers that there were forward-looking indicators all along that were telling the Fed it was passively tightening monetary policy by allowing this development to happen. This need for an aggregate demand target is further supported by the following two figures. The first one shows the year-on-year growth rate of final sales of domestic product over the most of the postwar period. It shows how far aggregate demand has to go just to get back to a normal growth rate of about 5%.
Chicago Fed: Economic activity slowed further in September - Note: This is a composite index based on a number of economic releases. From the Chicago Fed: Index shows economic activity slowed further in September Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.58 in September from –0.49 in August....The index’s three-month moving average, CFNAI-MA3, ticked down to –0.33 in September from –0.32 in August. September’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.
Welcome to the Recovery - Q3 GDP grew at a 2 percent annual rate, which would be okay performance for a full employment economy but is totally insufficient to mobilize the huge number of idle workers today. Here’s the shape of the recession and “recovery” in both real and nominal terms: As you can see, we’re still below the peak level of real output attained in Q4 of 2007. But in the intervening years, some new technologies have been invented, some firms have improved their business processes, and the size of the population has grown. We should be able to produce considerably more at the end of 2010 than we were producing at the end of 2007. That we’re failing to do so represents a massive failure of the American elite.
Why Has America’s Economic Recovery Stalled? - [It] was good news for everyone when the US economy began expanding in the summer of 2009... Unfortunately, the recovery has turned out to be very anemic. Now, 15 months into the expansion, the level of real GDP is still lower than it was when the recession started. Even more worrying, the rate of GDP growth has been declining almost from the start of the recovery. Because the downturn was not caused by high interest rates, lowering them could not lift the economy out of recession. The Obama administration therefore turned to fiscal policy... Unfortunately, the fiscal stimulus was not well enough designed to get the economy onto a strong, self-sustaining growth path. And, now that those stimulus programs are coming to an end, there is a danger that the economy will slide back into slow growth or even recession. One key to the US economy’s future is household demand. Although consumer spending has increased during the past four quarters, helped by substantial government transfer payments, the pace of spending growth
A proxy for nominal aggregate demand and payroll growth: Treasury receipts are recovering...Rebecca Wilder -I present an update on aggregate demand using the highest frequency of data available, US Treasury tax receipts. Tax receipts serve as a proxy for nominal aggregate demand via a nominal indicator of private payroll growth. US daily Treasury tax receipts are improving.The chart illustrates the federal deposits of income and employment taxes that are recorded on a daily basis and presented here as the annual pace of the 30-day rolling sum. The red line illustrates the average annual growth rate spanning the period 2005-current. Since roughly April of 2010, the annual pace of income and employment tax receipts has been above the average, 2.8%. In the third quarter, the annual pace of tax receipts jumped to 7.4% from 5.1% in the second quarter. Hours and employment are improving, supporting wage gains and higher tax receipts. But more importantly, the pace of tax receipt growth has not faltered, demonstrating ongoing recovery in the labor market and consumer demand.But it's not enough. The gains in tax receipts are likely a function of firms adding back hours instead of pumping up the work force. (see my previous post with links on the "hourless recovery").
Econ bloggers: outlook worse, again - Since we’re always curious to know what our blogospheric comrades are thinking, we’re highlighting a few items from the latest Kauffman survey of economic bloggers. The previous survey, released in August, emphasized how pessimistic they had become in the prior quarter — an outlook that turned out to be justified. And they’ve only become more pessimistic since: Economics bloggers are more pessimistic in their outlook on the U.S. economy than in any previous quarterly survey in 2010, with 99 percent saying that conditions are mixed, facing recession, or in recession. For an economy in which growth is the norm, 38 percent of respondents think that the U.S. economy is worse than official statistics indicate, and only 9 percent believe it is better. When asked to describe the economy using five adjectives, “uncertain” was used most frequently.
Q4 Economics Bloggers Survey - Growthology - For the fourth quarter in a row, the nation's top economics bloggers have conveyed a steadily deteriorating view of the U.S. economy in responses to a Ewing Marion Kauffman Foundation survey released today. In the fourth Kauffman Economic Outlook: A Quarterly Survey of Leading Economics Bloggers respondents' outlook on the U.S. economy is more pessimistic than in any previous quarterly survey in 2010, with 99 percent saying that conditions are mixed, facing recession or in recession. When asked about the probability of a double-dip recession in the United States, the average response is a 41 percent probability; two-fifths see a 20 percent probability, and opinion declines toward higher probabilities.
Think this economy is bad? Wait for 2012 - Greg Ip - We're barely two years past the banking crisis, still weathering the mortgage crisis and nervously watching Europe struggle with its sovereign debt crisis. Yet every economic seer has a favorite prediction about what part of the economy the next crisis will come from: Municipal bonds? Hedge funds? Derivatives? The federal debt? I, for one, have no idea what will cause the next economic disaster. But I do have an idea of when it will begin: 2012. Yes, an election year. Economic crises have a habit of erupting just when politicians face the voters. The reason is simple: They are born of long-festering problems such as lax lending, excessive deficits or an overvalued currency, and these are precisely the sort of problems that politicians try to ignore, hide or even double down on during campaign season, hoping to delay the reckoning until after the polls close or a new government takes office. Perversely, this only worsens the underlying imbalances, making the mess worse and the cost to the economy -- in lost income and jobs -- much higher.
Germany Calls Out Geithner's Hypocrisy, Says Money Printing Is FX Intervention - After months of US bitching and moaning about China's so called unfair exchange policies, when it is the US Fed which is the biggest currency manipulator in the world by orders of magnitude, one country finally had the guts to stand up and call out Tim Geithner on his endless bullshit. At the G-20 meeting, per Bloomberg, German Economic Minister Rainer Bruederle said that the Fed's "push toward easier monetary policy is the “wrong way” to stimulate growth and may amount to a manipulation of the dollar. Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate." The fact that China was smart enough to peg its currency to the most rapidly devaluing currency in the world is a different story altogether, and merely confirms that they are leap and bounds more sophisticated in their monetary policy than anyone gives them credit for. If Geithner wants to prevent a relative depreciation of the Yuan versus all other currencies in the world (especially the EUR, against which it continues to be in freefall), the answer is simple: stop bloody printing!
`Uncontrolled’ Dollar Printing Poses China Inflation Threat, Official Says –The U.S. Federal Reserve’s “uncontrolled” issuance of dollars is adding to inflation risks in China and creating difficulties for the nation’s businesses, Chinese Commerce Minister Chen Deming said. U.S. policies “and continued increases in commodity prices are bringing China the shock of imported inflation,” the state- run Xinhua News Agency cited Chen as saying at a trade fair in Guangzhou yesterday. He referred to “uncertainties” and “difficulties” for Chinese firms. Chen’s comments feed into a debate on currency policies. The U.S. argues that a stronger Chinese yuan would help to reduce imbalances in global supply and demand. At the same time, emerging nations face inflows of funds that threaten to fuel inflation and asset bubbles.
PIMCO's Gross: 30-year Bull Market in Bonds is Over - From PIMCO's Bill Gross: Run Turkey, Run [W]hile next Wednesday’s [FOMC] announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Anyone for 1.10% 5-year Treasuries? Well, the Fed will buy them, but then what, and how will PIMCO tell the 500 billion investor dollars in the Total Return strategy and our equally valued 750 billion dollars of other assets that the Thanksgiving Day axe has finally arrived?... Ben Bernanke ... [y]ou are doing what you have to do, and it may or may not work. But either way it will likely signify the end of a great 30-year bull market in bonds
Monetary Meltdown Monday - Last Friday, Geithner’s message was "Do as I say, not as I do." This weekend, Timmy took a big doo doo on the rest of the World as he pressed fellow Finance Ministers into (in theory) setting mechanisms to address trade balances (which means export countries need to strengthen their currencies against the dollar) while importing countries (like US) should not try to manipulate their own currency. Well, that sounds reasonable EXCEPT, before the ink is even dry on the G20 release, Timmy flies off to China to get them to commit to revalue the Yuan, which is pegged to the Dollar and effectively DE-values the dollar in an entirely manipulative manner. No, WE didn’t manipulate the Dollar, China did. We only told them to manipulate their currency which is tied to the dollar, so it’s not the same thing at all as us manipulating the dollar and —- oh my God Tim, how can you sleep at night??? So good morning, America, how are ya? I’ll tell you how you are, you are 1% poorer than you were on Friday
IMF says dollar 'overvalued' - The International Monetary Fund on Thursday said the dollar was overvalued on currency markets, while the euro, yen and pound were in line with fundamentals. "The real effective exchange rates of Japan, the euro area, and the UK all appear broadly in line with medium-term fundamentals, while the US dollar is on the strong side of fundamentals," the IMF said in a report to the Group of 20 economic powers. The IMF noted that recent government interventions in the foreign-exchange market had contributed to the imbalance, which has sparked fears of "currency wars" to protect exports amid the global economic recovery.
If Bernanke Is Really Debasing The Dollar… Needless to say, there was a great deal of focus on the recent “currency wars” theme that is prominent in the headlines. The focal point of the currency wars debate is the FOMC’s anticipated resumption of Quantitative Easing next month. There is a widespread belief that the U.S. is embarking on a policy of currency debasement. It is a view with which we do not agree. We often found ourselves pointing out that the Eurozone is the second largest economy in the world and despite the Euro’s sharp rally from the depths of its spring sovereign debt crisis lows, it still remains down year to date versus the Dollar. Then there is China’s RMB, which has appreciated modestly versus the Dollar, but everyone believes is still notably undervalued. Those two economies alone represent approximately half of Global GDP ex-US and in one case, the Dollar has appreciated and in the other, it is clearly undervalued. For some more perspective, here's a nice multi-year dollar index chart. Yes, the trend has been down, but we're still above lows made in 2008 and 2009, and a little bit below the lows made in 2005.
The US Dollar is doomed - Austerity be damned, at this rate Mr. Bernanke will go down in the history books as one of the greatest money creators ever to have walked this planet! Never mind sky-high deficits and a crushing debt overhang, at its most recent FOMC meeting, the Federal Reserve all but guaranteed another round of quantitative easing. While the American central bank did not officially expand its quantitative easing program last month, it did reiterate its willingness to institute more aggressive monetary policy measures in order to combat the risks of deflation. Furthermore, Mr. Bernanke did officially downgrade the Federal Reserve’s outlook for inflation.The truth is that the US is insolvent and its policymakers will stop at nothing in order to avoid sovereign default. So, it should come as no surprise that at its latest meeting, the Federal Reserve downplayed the risk of inflation, thereby setting the stage for another round of money creation.
Dollar at Risk of Becoming 'Toxic Waste': Charts - The dollar's slump could get far worse if the dollar index takes out last year's low, Robin Griffiths, technical strategist at Cazenove Capital, told CNBC Monday."If the (dollar index) takes out the low that was made roughly a year ago I really think that will not only encourage more sales, it will cause a little bit of minor panic," Griffiths said. "A year ago it was deemed too cheap, if it goes any lower than that it's actually become toxic waste." The dollar resumed its recent downtrend Monday in the wake of a meeting of finance ministers from the Group of 20 nations at the weekend. The meeting failed to yield a definitive agreement on currencies, putting selling pressure on the greenback. "The dollar is being trashed, we've actually had effectively devaluation of about 14 percent in the last two months," Griffiths said.
Why no Geithner greenbacks yet? - Interesting bit of trivia from a blogger named "madhedgefundtrader," posted on the iconoclastic finance site Zero Hedge (via Politico's Morning Money):Before he left, I pulled out all the cash in my wallet and pointed out to Geithner that while I had bills signed by previous Treasury Secretaries Larry Summers, Paul O’Neil, and Robert Rubin, I lacked one with his illegible scrawl. Did he have any which he could exchange with me? He sheepishly admitted that while such bills existed, they we[re] being held back from circulation until the Treasury’s existing stockpile of Hank Paulson bills ran out, in order to deliver taxpayers good value for money. I would only see his bills once the economy recovers and the growth of M1 starts to accelerate.It's actually kind of a telling characterological detail... Also, if you're wondering why I'm burying the lede by not explaining why Geithner was meeting with some dude called "madhedgefundtrader"--it turns out he's a longtime financial journalist-cum-money manager who knows Geithner dating back to his days as an assistant Treasury attache in Tokyo.
A little perspective on a weaker USD and economic activity – Rebecca Wilder - The Japanese yen, the Eurozone euro, and the British pound have appreciated 16%, 14%, and 9%, against the USD, respectively, since their 2010 lows. Some say that the "US wins" since the Fed's quantitative easing (QE2) will drive export growth via a weaker dollar. (Note that the Fed has not actually announced QE2, this is all just speculation.) I'm not suggesting that the stated Fed policy will be to drive down the dollar. What I do know, however, is that the United States production model is not structurally positioned to enjoy the economic panacea that is a persistent debasement of the dollar, neither in the near- nor medium- term.The bottom chart illustrates the export share in overall economic GDP, as forecasted by the European Commission (you can download this data at the Eurostat website). Notice that the US share of exports, expected to be just 12.3% in 2010, is minuscule compared to the export markets in Europe. So what I gather from a chart like this is that the weak dollar will hurt Europe much more than it will "help" the United States.
The scary actual US government debt - Boston University economist Laurence Kotlikoff says U.S. government debt is not $13.5-trillion (U.S.), which is 60 per cent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: $200-trillion – 840 per cent of current GDP. “Let’s get real,” Prof. Kotlikoff says. “The U.S. is bankrupt.” Writing in the September issue of Finance and Development, a journal of the International Monetary Fund, Prof. Kotlikoff says the IMF itself has quietly confirmed that the U.S. is in terrible fiscal trouble – far worse than the Washington-based lender of last resort has previously acknowledged. “The U.S. fiscal gap is huge,” the IMF asserted in a June report. “Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 per cent of U.S. GDP. ” This sum is equal to all current U.S. federal taxes combined. The consequences of the IMF’s fiscal fix, a doubling of federal taxes in perpetuity, would be appalling – and possibly worse than appalling.
Depression Within A Depression - In recent months, worshippers at the altar of Keynes have been hyperventilating over the possibility Congress will run a deficit of “only” $1.5 trillion in 2010. They have issued dire proclamations about a replay of the 1937-1938 Depression within the Great Depression. White House favorite and #1 Keynesian on the planet, Paul Krugman, declared that not borrowing an additional $100 billion to hand out to the unemployed for another 99 weeks would surely plunge the country into recession again: Today’s Keynesian economists have convinced boobus Americanus that the Great Depression was caused by the Federal Reserve being too tight with monetary policy and the Hoover administration not providing enough fiscal stimulus. Ben Bernanke and Barack Obama used this line of reasoning to ram through an $850 billion pork-laden stimulus package, as well as the purchase of $1.2 trillion of toxic mortgages by the Federal Reserve. The only trouble is that this storyline is a complete sham.
Buying Shares in the U.S. Economy - Forget all the kooky things that are happening with inflation-indexed Treasury bonds. Mark J. Kamstra of York University and Robert J. Shiller of Yale propose a new kind of way to invest in government securities: by buying a stake in the economy. In a paper published on The Economists’ Voice, a Berkeley Electronic Press publication, the economists argue that the American government should offer equity stakes in the economy, just as corporations do. In summary, this new security would be: a small-denomination [gross domestic product] share paying a coupon each year of one-trillionth of that year’s G.D.P., or about $14.60 at current levels. On this basis, we suggest the name ‘Trill’ be used to refer to this new security. Similar to shares issued by corporations paying a fraction of corporate earnings in dividends, the Trill would pay a fraction of the ‘earnings’ of the U.S. The ‘Trill’ would be “long term in maturity, perhaps even perpetual,” the authors write. Among their arguments for this new type of security is that it would (like Treasury’s Inflation-Protected Securities, known as TIPS) be relatively protected from a rise in the cost of living, since it would be based on nominal gross domestic product.
U.S. sells 5-year TIPS at negative yield; bonds up (MarketWatch) -- The Treasury Department sold $10 billion in 5-year Treasury Inflation Protected Securities on Monday at a yield of negative 0.55%, the first time the yield on the maturity has come in below zero. The negative real yield for the coupon indicates investors expect enough inflation to make the protection worthwhile.
Deficit Panel Targets Areas to Cut - The tax benefits are hugely popular with the public but they have drawn the panel's focus, in part because the White House has said these and other breaks cost the government about $1 trillion a year. Sacrosanct tax breaks, including mortgage-interest deductions, remain on the table just weeks before the deficit commission issues recommendations on ways to balance the budget by 2015. Alan Murray and David Weidner discuss. Also, Jennifer Levitz discusses a leading national tea-party group that is laying plans to maintain pressure on new members of Congress after the Nov. 2 vote. At stake, in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.The officials are also looking at potential cuts to defense spending and a freeze on domestic discretionary spending. It is unclear if the 18-member panel will be able to reach an agreement on any of the items by a Dec. 1 deadline.
How to Cut $343 Billion from the Federal Budget- Federal spending is on an unsustainable path that risks disaster for America. Runaway spending has increased annual federal budget deficits to unprecedented levels, adding $2.7 trillion to the national debt in the past two years alone. Each year’s huge federal deficit increases the mountain of national debt borrowed from future generations of Americans. Congress needs to cut federal spending sharply and quickly. This paper sets forth $343 billion in available spending cuts.
Shape-Shifting Deficit Hawks – Simon Johnson - We appear to be a week way from an election that, while really about persistent high unemployment, on the talking-point level is largely about deficits, with the Republicans continuing their usual posturing about cutting deficits without raising taxes or explaining what spending programs they are going to cut. Robert Pollin has contributed an analysis of the deficit hawks’ argument that is valuable for pointing out that there actually four deficit hawk arguments. In his words:
- “1. The traditional view. Large fiscal deficits will cause high interest rates, large government debts, and inflation.
- “2. Declining business confidence is the real danger. Even if the current deficits have not caused high interest rates and inflation, they are eroding business confidence.
- “3. Fiscal stimulus policies never work.
- “4. A long-term fiscal train-wreck is coming. Regardless of short-term considerations, we are courting disaster in the long-run with structural deficits that the recession has only worsened.
Republicans Plan Budget Cuts as Early Act If They Take Power – House Republicans plan to try to slash $100 billion from the federal budget as early as January if they wrest power from Democrats in this year’s midterm elections, setting up possible early showdowns with President Barack Obama on taxes and spending. Carrying out spending cuts that Republicans have pledged to seek -- which would amount to 21 percent of the government’s so-called discretionary money pot -- could prove politically difficult. Reducing funds for programs such as college loans for low-income students or medical research at the National Institutes of Health is harder than promising to do that on the campaign trail.
They're From The Tea Party And They've Come To take Their Country Back --- to the Dark Ages - There are many good reasons for Americans to feel apathetic if not downright politically hostile going into next week's election. Nearly ten percent of us are (officially) unemployed and those who aren't are often stuck in nowhere jobs with no raises or promotions and no hope in the near future for anything better. Many of us have homes that are worth less than we paid for them and everybody's hearing horrible stories every day about con men and fraud merchants stealing houses right out from under homeowners. And nothing ever seems to happen to any of the banksters and Masters of the Universe who caused all the problems in the first place. It's hard to blame people for just wanting to withdraw into their personal lives and forget about politics.
Pork for Me, Scraps for You, Tragedy for All - House Minority Leader John Boehner rails against government spending yet votes for a $485 million appropriation for the F-35 Joint Strike Fighter’s alternative engine, which the Pentagon wants to kill. Boehner’s district is near the General Electric plant that’s building the engine. Congressman Earl Pomeroy, Democrat of North Dakota, is a member of the fiscally conservative Blue Dog Coalition. He got an “F” on his 2009 report card from the National Taxpayers’ Union, which ranks members on the restraint they exercise in the areas of taxing and spending. Mississippi Senator Thad Cochran, ranking member on the Appropriations Committee, has a lifetime rating of 80 from the American Conservative Union. Yet he secured $490 million of earmarks in 2010, making him the biggest Senate porker for the third consecutive year, according to watchdog group Citizens Against Government Waste. With fiscal conservatives like these, who needs big spenders?
Divide on Federal Deficit Could Grow After Election - Dan Froomkin of the Nieman Watchdog Project interviews William K. Black about the media’s underreporting of fraud cases. Black, a regulator and professor at the University of Missouri-Kansas City, outlined nine stories he thinks are currently being underreported. The majority of them concern fraud: mortgage fraud, consciously fraudulent lending practices, lack of prosecution, “echo” epidemics of fraud, and the “ongoing massive cover-up of losses on bad assets.” Black also laments the “continued absence of effective regulation,” writing that “It should be scandalous that Obama left in charge, or even promoted, the anti-regulators who permitted the Great Recession. The (failed) anti-regulator of Fannie and Freddie, for example, remains FHFA’s acting director.”
Handicapping the deficit under divided government - If Republicans take the House, how much likelier is a full extension of the Bush tax cuts? I'd say the odds that the cuts for income over $250,000 remain in place for at least a few more years go up by at least 50 percent, and if those cuts are extended once, I think it's also likelier that they get extended again. If Republicans take the House and the Senate, how much likelier is a full extension of the Bush tax cuts? I'd say it goes up to 70 percent, and the only reason I don't say 100 percent is that President Obama has more incentive to pick a fight with Congress. Now, if Republicans take the House, how much likelier is a deficit-reduction deal that increases revenues or cuts spending by at least $700 billion over the next 10 years, thus making up for the tax cuts? Maybe 10 or 20 percent? What if the Republicans take the Senate, too? I'd think the chances might actually go down, as Obama would need to fight on behalf of his base if he's going to remain viable for 2010. You might see some changes made to Social Security, but nothing on the order of $700 billion over the next 10 years.
Ezra Klein - Divided government and deficits in one graph… From Alicia Parlapiano, one of the Post's graphics wizards: What you're seeing there is that it's not the composition of the government, but the growth of the economy, that drives the deficit. Wide gaps open up during the 1973, 1981, 1991 and 2008 recessions, and they close as the economy recovers. That's holding true now, too: The annual deficit fell by $125 billion between 2009 and 2010 -- the single largest drop in our history.
GOP leaders tell Obama: There will be “No Compromise” - Utah Senate GOP candidate Mike Lee: A government shutdown "May be absolutely necessary - Earlier this week, Senate minority leader Mitch McConnell said, “The single most important thing we want to achieve is for President Obama to be a one-term president.” Now more Republicans have crush the always-dubious notion that we might see some sort of post-partisan compromise on energy or any other government-funded strategy to create jobs or protect the health and well-being of our children. In an interview with NPR today about what tea party-backed candidates would do if they gain seats in Congress, Utah GOP Senate nominee Mike Lee explicitly said he would refuse to vote to raise the debt limit, even if it leads to a government shutdown:
The Dangers of Gridlock in Economic Policy - I have three big concerns. The first is that we will be gripped by the austerity movement that has captured Europe and that, as a result, we will withdraw stimulus too soon. Republicans have been promoting policies to reduce the deficit for some time now, spending cuts in particular are on the agenda. Many among the Republican leadership would have canceled the remaining stimulus already, including extensions to unemployment insurance, if they were in control. The second concern is related to the first. I expect that we will have a slow, agonizing recovery, particularly for employment. I do not expect a double dip, but it’s not out of the question by any means, and we need to be ready in case it happens. Unfortunately, the election is likely to bring gridlock and it’s doubtful that Congress will be able to act in response to a second downturn. An increase government expenditures in response to a slowdown is certainly off the table. But my biggest concern is what will happen if new problems emerge in the financial sector. The resolution authority in the Dodd-Frank legislation is supposed to prevent the need for another financial bailout, but I am not at all confident that this will be sufficient to solve widespread problems and threats of failure in the banking system. There’s a good chance that the resolution authority won’t get the job done and that a bailout will be the only way to resolve severe problems. However, if problems do arise and another financial bailout is needed, forget it.
Divided We Fail, by Paul Krugman - Barring a huge upset, Republicans will take control of at least one house of Congress next week. How worried should we be by that prospect? This is going to be terrible. In fact, future historians will probably look back at the 2010 election as a catastrophe for America, one that condemned the nation to years of political chaos and economic weakness. In the late-1990s, Republicans and Democrats were able to work together on some issues. President Obama seems to believe that the same thing can happen again today. Good luck with that. Mitch McConnell, the Senate minority leader, has received a lot of attention thanks to a headline-grabbing quote: “The single most important thing we want to achieve is for President Obama to be a one-term president.” Mr. McConnell was saying ... that, in 1995, Republicans erred by focusing too much on their policy agenda and not enough on destroying the president... So this time around, he implied, they’ll stay focused on bringing down Mr. Obama.
Why US voters are suing Dr Obama - An ambulance stops by the roadside to help a man suffering from a heart attack. After desperate measures, the patient survives. Brought into hospital, he then makes a protracted and partial recovery. Then, two years later, far from feeling grateful, he sues the paramedics and doctors. If it were not for their interference, he insists, he would be as good as new. As for the heart attack, it was a minor event. He would have been far better off if he had been left alone. That is the situation in which Dr Barack Obama finds himself. A large part of the American public has long since forgotten the gravity of the financial heart attack that hit the US in the autumn of 2008. The Republicans have convinced many voters that the intervention by the Democrats, not the catastrophe George W.Bush bequeathed, explains the malaise. It is a propaganda coup.
The Scaremongers of the Roundtable - How often do you see capitalists screaming and even going to court to defend the principle that legitimate owners cannot exercise any control over their property? It is not happening in Latin America or in socialist Sweden, but in the United States of America.The capitalists in question are nothing short of the upper echelon of corporate America: the Business Roundtable, a powerful group composed of the CEOs of major US corporations, which promotes pro-business public policies. The object of their contention is the much-debated “shareholders’ access to proxy” rule, adopted by the Securities and Exchange Commission (SEC) in August to address the fundamental lack of accountability of corporate boards. In the current system, corporate boards are self-perpetuating entities. To be elected, a board member needs to be nominated by the current board, where executives have considerable influence. As a result, board members owe their loyalty to the managers who directly or indirectly appoint them – and thus have little incentive to dissent, lest they be punished with exclusion.
The U.S. Chamber of Commerce is not the same thing as American business - I don’t understand why everyone is so surprised to find out that large corporations are funneling massive amounts of money to the U.S. Chamber of Commerce. Last week’s NYT report has been making the Internet rounds, and while I appreciate the point that the Chamber is much more partisan than its non-profit status would suggest—70 of the Chamber’s 93 midterm campaign ads either support Republican candidates or attack their opponents, despite the Chamber’s promise to the Federal Election Commission that it only talks about issues—there’s also a curious amount of wonderment at big-company donations. Yes, Wall Street firms sent millions of dollars to the Chamber when financial re-regulation was on the table, and the insurance industry got out its checkbook when it was time to talk healthcare reform. Why would anyone be surprised?The more counterintuitive and telling story, which the Times only flicks at, is how unsatisfied certain businesspeople are growing with the U.S. Chamber.
Why Business Should Fear the Tea Party - America's business leaders have not exactly shied away from offering political views. Verizon CEO Ivan Seidenberg has accused President Obama of creating a hostile environment for investment and job-creation, while General Electric's Jeff Immelt says the administration is out of sync with entrepreneurs. All of which makes particularly curious the deafening silence of business leaders about the tea party that's now taking over the GOP and about to take over a chunk of Congress. Maybe business leaders see it as a relatively harmless fringe group advocating the fiscally responsible small-government positions most CEOs agree with. Business leaders should take a closer look. Even if it's now on the fringe, the tea party won't be for long. By fueling the Republican surge in the midterm elections, the tea party has become the single most powerful force in the GOP. It's backing at least 14 Senate candidates, both challengers and incumbents, and is playing a significant role in scores of House races. It has already shaken the GOP to its core, defeating establishment Senators Lisa Murkowski in Alaska and Bob Bennett in Utah, and exerting a strong gravitational pull on many other Republicans, such as Arizona's John McCain.
I Fear the Fear of the Fear Mongering More Than the Fear Mongering Itself - I’ve recently seen this commercial produced by Citizens Against Government Waste on prime-time TV. I think it’s what those who oppose efforts to reduce the deficit refer to as “fear mongering.” I think it does qualify as “frightening” and if not a total exaggeration is at least overly dramatic in its depiction of the Chinese as an evil enemy. What bothers me about the motives of CAGW in putting out this ad is that they’re trying to scare people into supporting… NOT less borrowing, but really lower spending and lower taxes. As CAGW themselves explain (emphasis added):The new ad is part of an ongoing communications program in CAGW’s decades-long fight against wasteful government spending, increased taxes, out-of-control deficit spending, and a crippling national debt that threatens the future and survival of our country. In other words this is intended to scare people into supporting the false notion that we can reduce the debt by reducing spending–and only “wasteful” and the vaguely-defined “out-of-control deficit” spending at that–alone. This is delusional. Yet I think I fear the anti-fear-mongering ads put out by the “Our Fiscal Security” folks even more.
Desperate measures - With Republicans poised to sweep into office and obstruct Obama's agenda, is there anything he can do to revive the economy over the next two years? Last week I wrote about the possibility that we’re in a Japan-style recession—a rare form of economic disease that’s largely unresponsive to conventional remedies, like lower interest rates. This type of malady—the fashionable term is “balance-sheet recession”—tends to follow a collapse in the price of housing or stocks, at which point people become so preoccupied with paying down debt that they refuse to borrow even on super-attractive terms. Consumer spending plummets, dragging the economy down with it, until the debt-repayment cycle runs its course. Devastatingly, that process took more than a decade in Japan, and the fear is that a similar fate might befall the United States.
Beyond Keynes and Hayek -Many are urging a Keynesian boost to deficit spending to revive the economy and/or avoid double-dip recession. We assume that this is unlikely either because experience shows that the multipliers are low and the government believes the markets have no appetite for a big deficit-spending financed fiscal reflation; or because the government thinks the present crisis is not a Keynesian one induced by insufficient demand, and hence a fiscal boost could be counter-productive. It would also seem that quantitative easing has not had a stimulating effect on the economy. Wherever the money has gone, it is not into the real economy. A similar situation prevails in the US where, as Alan Greenspan pointed out in the Financial Times of 6 October, corporates are using the money supply to buy liquid assets rather than "real" investments.Consumers are also not spending but saving to deleverage, and even so consumer indebtedness is still dire. Much more deleveraging will have to be done before the negative wealth effect will vanish and spending resume.
Look South to Re-learn Countercyclical Fiscal Policy - During much of the last decade, U.S. fiscal policy has been procyclical, that is, destabilizing. We wasted the opportunity of the 2003-07 expansion by running large budget deficits. As a result, in 2010, Washington now feels constrained by inherited debts to withdraw fiscal stimulus at a time when unemployment is still high. Fiscal policy in the UK and other European countries has been even more destabilizing over the last decade. Governments decide to expand when the economy is strong and then contract when it is weak, thereby exacerbating the business cycle. Meanwhile, some emerging market and developing countries have learned how to run countercyclical fiscal policy - saving in the boom and easing in the recession - during the same decade that we advanced countries have forgotten how to. The frenetic debate at any moment for or against “fiscal conservatism” is artificial. It is not the right answer always to cut any more than it is the right answer always to expand. Americans should take a perspective longer than the annual budget cycle or the bi-annual electoral cycle, let alone the daily news cycle.
Deleterious Doodling About The Deficit - In today's Washington Post business section, Lori Montgomery has a big article on "A renewed focus on spending," starting with how the GOP is making noises about cutting spending to cut the deficit without raising taxes, while not mentioning anything too serious, although Boehner supposedly might be open to cutting some loopholes in the tax code, thereby de facto raising taxes, if Grover Norquist will let him (assuming as most think that the GOP will take control of the House after next week's election), and if anybody thinks elimination of the tax deduction for mortgage interest is remotely on the table in a period with a terrible housing market, there is a bridge in Brooklyn for sale to them. Then most of the article lugubriously goes on about all the efforts at supposed bipartisanship on the Deficit Commission. Yet again, we read about all this agreement to "stabilize social security finances" by raising future retirement ages, because "The current Social Security program will not survive based on upon current rules." Well, beating a drum beaten often here, this latter is so much baloney.
Now Isn’t the Time to Cut the Deficit, by Christina Romer - The clamor to cut the budget deficit is deafening. Blue Dog Democrats, Tea Party Republicans and doomsday economists are calling for immediate action. And the demands for austerity coming from abroad are even louder. Make no mistake: persistent large budget deficits are a significant problem. ... And our projected long-run deficits are simply unsustainable. So, the question is not whether we need to reduce our deficit. The question is when. Now is not the time. Unemployment is still near 10 percent in the United States and in Europe. Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.Some advocates of austerity argue that fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth substantially. Taking budget actions now that would further increase unemployment would be not only cruel, but also short-sighted.
Christina Romer on Fiscal Policy - This New York Times piece is representative of a set of views on the federal deficit, and is certainly consistent with Krugman's Friday NYT column on fiscal policy in the UK. The gist of Romer's piece (sparing you the medical analogies) is that:
1. A lot of people want a smaller federal government deficit in the US:
2. We need to reduce the deficit "when the economy is back to normal," but "now is not the time."
3. Romer views her recommendations as being supported by mainstream macroeconomics:
4. Part of the reason for waiting for the economy to be "back to normal," has to do with what (according to Romer) monetary policy should be doing when the deficit-reduction actually occurs.
It's clear in Romer's piece where she is coming from. She subscribes to plain-and-simple IS/LM aggregate-demand-management Old Keynesian macroeconomics
Alan Blinder: Our Fiscal Policy Paradox -The practice of monetary and fiscal policy is fraught with difficulties, but the central concept is straightforward, compelling and, by the way, 75 years old: The government should push the economy forward when unemployment is high and slow it down when inflation threatens. To do so, governments normally have two principal sets of weapons. Fiscal policy means moving some taxes or elements of public spending up or down to either propel or restrain total spending. In the United States, such decisions are made politically, by Congress and the president. Monetary policy normally (but not now) means lowering or raising short-term interest rates to either speed up growth or slow it down. That power, of course, resides in the technocratic Federal Reserve. In 2008 and 2009, the U.S. government rolled out the heavy fiscal and monetary artillery to stave off Great Depression 2.0. Taxes were cut, spending was increased, and the Fed pushed the federal-funds rate all the way down to virtually zero. It worked.
A Far Away Country Of Which We Know Nothing- Krugman - I’ve been getting a lot of correspondence lately that runs something like this: You’re an idiot. Give me one example in all of history of a country that spent its way out of a depressed economy Ahem. There’s this country — people may not have heard of it — called the United States of America: The blue line is total debt, public plus private, in billions of dollars; the red line debt as a percentage of GDP (both on left scale). But that was different, you say — it was a war! To which I reply, you think it’s better if we spend all that money on useless things? Sigh.
Sam, Janet, and Fiscal Policy - One of the common arguments against fiscal policy in the current situation – one that sounds sensible – is that debt is the problem, so how can debt be the solution? Households borrowed too much; now you want the government to borrow even more?What’s wrong with that argument? It assumes, implicitly, that debt is debt – that it doesn’t matter who owes the money. Yet that can’t be right; if it were, we wouldn’t have a problem in the first place. After all, to a first approximation debt is money we owe to ourselves – yes, the US has debt to China etc., but that’s not at the heart of the problem. Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth – one person’s liability is another person’s asset. It follows that the level of debt matters only if the distribution of net worth matters, if highly indebted players face different constraints from players with low debt. And this means that all debt isn’t created equal – which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past.To see my point, imagine first a world in which there are only two kinds of people: Spendthrift Sams and Judicious Janets.
BusinessWeek Publishes Misleading Article on Federal Withholding Changes in 2011 - All taxpayers should be concerned about the impending expiration of tax cuts (from both the Bush and Obama years) but no one should have a heart attack reading BusinessWeek’s latest estimates of how much higher the taxes will be. They’re way too high. In an article yesterday, BusinessWeek purports to show how much more will be withheld from each two-week paycheck this coming January, assuming all the tax cuts expire. They make several errors, though, so taxpayers should either wait for the official tables from the IRS or check out the Tax Foundation’s calculator at MyTaxBurden.org. Since Congress has yet to act to extend any of the cuts, it is increasingly likely the IRS will release initial 2011 withholding tables to employers assuming that the cuts expire. This would result in smaller paychecks beginning next year.
YouGov - On Taxes, an Energized Minority -- During the 2008 campaign Barack Obama skillfully crafted a popular position on renewing the big Bush-era tax cuts. Obama pledged to keep the lower tax rates for families earning less than $250,000 per year—the vast majority of American taxpayers—while letting the top tax rate revert to its 2000 level. With the tax cuts set to expire at the end of this year President Obama has stuck to that position, despite a concerted effort by conservatives to insist that none of the tax cuts should be allowed to expire in the midst of a recession. What is more, he has managed to keep at least a slim majority of Americans on his side. A YouGov/Polimetrix survey fielded last week found that 42% of the public support the president’s position—a 4-point increase from 2008. Another 11% go even further, wanting to let all the tax cuts expire. Only 28%—slightly fewer than in 2008—favor retaining all the tax cuts, including those for the richest taxpayers.
One More Time with Gusto: Tax Cuts Do Not Pay for Themselves –Thoma - Republicans are selling snake oil once again: Some Republican Senate candidates have suggested that extending the Bush tax cuts — which are scheduled to expire at the end of the year — will actually be good for the country’s bottom line, as the economic growth that results will more than offset the trillions of dollars in lost revenue. “By extending tax cuts you pay down the deficit, you grow the economy by giving people more money,” said Colorado Republican Ken Buck. Today, on Fox News Sunday, Pennsylvania’s Republican Senate nominee Pat Toomey joined this club, telling Fox’s Chris Wallace that “it’s not clear” that extending the Bush tax cuts — while also lowering the corporate tax rate — would increase the deficit... But, of course, the Bush tax cuts did not even come close to paying for themselves. The Bush tax cuts cost us around $1.7 trillion in revenue from 2001 through 2008, in part because of weak output and job growth following the cuts (contrary to assertions about how the tax cuts would stimulate economic growth).As for the cost of extending the tax cuts to the wealthy, the Tax Policy Center estimates that making all the Bush tax cuts permanent, as opposed to extending them only for the middle and lower classes, would cost $680 billion over the next decade.
Exasperation with tax cut slogans - Mark Thoma expresses his exasperation with the tax cut slogans of lawyers and journalists: The disappointing part is that the press still lets them get away with this. At best, the press generally says something like "some economists claim this isn't true," implying there's a debate about this issue -- that some credible economists think the tax cuts will, in fact, pay for themselves -- when there is no debate and the answer is clear. Tax cuts don't pay for themselves. If the press won't call them on this obvious falsehood, how can we trust them on anything? Instead of reflecting poorly on the press, this ought to bring the general credibility of the people making these claims into question. The press ought to ask something like, "Are you this ignorant about economics, in which case why should anyone vote for you, or are you deliberately misleading people? I'll assume you aren't ignorant, so here's the question. If you are willing to make false claims about the revenue generated from tax cuts in order to promote them for the wealthy, what other falsehoods will you be willing to promote in order to serve political ends? If voters can't trust you to tell the truth about tax cuts, how can they trust you on anything?"
Consumer, Tax Groups Offers Spending-Cut Ideas - An unusual joint-project by the U.S. Public Interest Research Group and the National Taxpayers Union has come up with 30 different cuts in government spending that it says would save taxpayers $600 billion.Their study, Toward Common Ground: Bridging the Political Divide to Reduce Spending comes as the National Commission on Fiscal Responsibility and Reform looks for ways to cut spending and present a balanced budget by 2015. The ideas include cutting $62 billion in spending by ending certain subsidies for farmers and big companies and another cutting another $108 billion “from ending low-priority or unnecessary weapons systems, along with rightsizing other programs.”
Democrats touting tax cuts - The New York Times ran a story this week about the Obama tax cuts--the point? while the Tea Partiers rage against the Obama administration because they want more tax cuts, they have missed the fact of substantial tax cuts under the Obama administration. See Michael Cooper, From Obama, the Tax Cut Nobody Heard of, a CBS News POll that showed that fewer than 1 in 10 Americans knew that Obama had cut taxes for most Americans, with a third mistakenly thinking their taxes had increased under Obama). The reason for the failure to notice. It might be partly the vast expenditure of funds to support misleading propaganda that claims that the Obama administration's policies are terrible for ordinary Americans. But it is at least in part because of the design of the economic stimulus tax cuts--intended to let the tax relief arrive in paycheck after paycheck (about $65 a month for typical families) so that it would be spent and thus help the economy, rather than arriving in a lump sum that might more likely be used as savings/debt reduction that would have less of an effect on the economy.
The Wall St. Journal's anti-FAIR Tax editorial - I've often commented on the so-called "FAIR Tax" on this blog--a proposal for a consumption tax that tends to be supported by GOP politicians and right-wing propaganda tanks and is often blatantly misrepresented in discussions. See, e.g., Bruce Bartlett on Fair Tax Proposal ; FAIR Tax: Huckabee's win in Iowa requires more discussion of his tax proposals. Caron on TaxProf notes today the Wall Street Journal's editorial on the issue and commenter Ed D notes a number of the problems with the FAIR tax that I've pointed out before. The so-called "FAIR Tax" is in fact terribly unfair. It is an extraordinarily regressive tax, since it is a tax on consumption rather than income and at least the bottom half of the income distribution tend to spend all of their income. It is often represented as a 23% tax, but that figure is misleading, since it is calculated based on a tax-inclusive sales price rather than a tax-exclusive one as most sales taxes are (so a 23% tax is really considerably higher than 23 dollars on a 100 dollar purchase price). Further, the rate would have to be much higher than that to be revenue neutral-- at least 30% and realistically even around 50%. The Fair Tax proposal includes a tax paid by the government to the government and other unlikely sources of income, assumes no losses due to compliance problems, calls for "simple" enforcement due to elimination of the income tax, and assumes away transition problems while shoving a huge burden to the states. All of those proposals are unworkable:
White House considering 'decoupling' top-tier tax cut - With Republicans poised to gain ground in Tuesday's elections, the White House is losing hope that Congress will approve its plan to raise taxes on the nation's wealthiest families and is increasingly focusing on a new strategy that would preserve tax breaks for both the wealthy and the middle class. According to people familiar with talks at the White House and among senior Democrats on Capitol Hill, breaking apart the Bush administration tax cuts is now being discussed as a more realistic goal. That strategy calls for permanent extension of cuts that benefit families earning less than $250,000 a year, and temporary extension of cuts on income above that amount. The move would "decouple" the two sets of provisions, Democrats said, and focus the debate when tax cuts for the rich expired next year or the year after. Republicans would be forced to defend carve-outs for a tiny minority populated by millionaires, an unpopular position that would be difficult to advance without the cover of a broad-based tax cut for everyone, aides in both parties said.
Broke States Or Stock Selloff: The Capital Gains Tax Dilemma - With just two months until the end of the year, the one most important issue facing the US economy, which is what the fate of the Bush tax cuts will be, and especially that of capital gains tax, remains still unresolved, Bloomberg has done a good analysis that frames the dilemma for the crippled administration: insolvent states or a market sell off. One would hope that with Geithner's track record vis-a-vis taxes, the former would take precedence, although as Blankfein has been rumored to seek the capital to expand his 15 CPW duplex into a triplex, the final outcome is pretty much clear, and it likely means little if no change to cap gains taxes, and thus no sell off in stocks. The problem is, however, that California, the state with the biggest economy, projects taxpayers’ capital gains will grow 40 percent this year while New York, the third-most-populous state, forecasts a 59 percent increase, or roughly 24% from the current 15%: an event which would have rather dramatic implications on investors desire to close out positions well before January 1. Should these states not be able to recoup revenues from actual capital gains receipts, then a federal bailout is virtually assured.
Would Trimming the U.S. Corporate Tax Rate Matter? - A terrific story the other day by Jesse Drucker at Bloomberg got me thinking: Would it really matter very much if the U.S. cut its corporate tax rate from the current 35 percent to 25 percent? While that idea has growing support in Congress, it may be a classic case of closing the barn door long after the horse has escaped. It may be that only a fundamental change in the way we tax multi-national companies, and not just a cut in rates, can fix the many problems that vex our corporate tax system. Jesse took a deep dive into the tax status of Google Inc. and found that thanks to some clever—but apparently perfectly legal—planning, Google cut its taxes by more than $3 billion over the past three years and drove its overseas tax rate to 2.4 percent. Jesse figured Google boosted after-tax earnings by 26 percent last year alone with just some clever tax tricks.
Companies Guard Tax Loopholes, Stalling Tax Cuts As President Obama considers lowering the corporate tax rate, an impediment to reform is the corporations who, in theory, stand to benefit. In short, corporate America, can't decide which highly lucrative tax loophole it should fight to keep. To reduce the 35 percent corporate rate, the Financial Times reports, companies would have to give up any number of the provisions that currently allow them to engineer their own tax breaks -- by, for example, deferring profits on overseas income, recording profits in low-tax countries or getting tax breaks for research. The trouble is, they can't agree on which perks they want to give up, and, the FT reports, the divisions could stall reform. Some of these current provisions can be quite lucrative. Google, for instance, as Bloomberg reported last week, funnels much of its overseas profit through Ireland and the Netherlands to Bermuda. The complicated strategy, whose components are called the "Dutch Sandwich" and the "Double Irish," has effectively cut Google's overseas tax rate to just 2.4 percent, saving it about $3.1 billion over the last three years.
Mortgage-interest tax break may face ax — The hugely popular mortgage-interest tax deduction could be targeted by a bipartisan commission charged with finding ways to chop the deficit, according to a report published Monday. The Wall Street Journal reported that the mortgage-interest deduction, child tax credits and payment for health insurance with pretax dollars all could be put in jeopardy by the deficit commission, which is to issue recommendations on balancing the budget by 2015
How to Reform the Mortgage Interest Deduction - Right now, the mortgage interest deduction can be claimed by anyone whose mortgage balance is less than $ 1 million. Does someone who can afford a mortgage of $900,000 really need help from the government? Probably not. And there’s an awful lot of interest that can be deducted with a mortgage of that size. So one way cut the cost of the mortgage interest deduction would be to limit the size of the balance on which it can be claimed. One reasonable limit might be a $500,000 threshold. Most middle class Americans aren’t buying homes that will result in a mortgage balance of much more than that. The precise balance that should qualify can be debated, but it’s pretty obvious that $1 million is far too high. While lowering the maximum balance that qualifies for the credit would help, it wouldn’t be a perfect solution. What if Bill Gates had a home worth many millions of dollars, but his mortgage balance had declined to $500,000? He could then deduct his mortgage interest, even under the revised limit above
Bob Perry, Real Estate G.O.P. Donor - The New York Times has a feature, Big Gifts to G.O.P. Groups Push Donor to New Level, about Bob Perry, a wealthy home builder from Texas, who funded the Swift Boat attacks against Kerry and is a major funder on the right. Perry created Perry Homes, a high-end custom home company out of Houston. Your gut reaction is probably that the home mortgage interest deduction and other housing subsidies go primarily to lower income people purchasing cheaper homes, people on the margin between owning a home and not owning a home. That’s the exact opposite of what really happens. Research has found that the tax deduction does little to increase home ownership. Other research has found that the tax savings for households earning more than $250,000 is 10 times the tax savings for households earning between $40,000 and $75,000 a year. The businesses who benefit the most from this system are those in the business of building high-end custom single-family detached homes. And the homeowners who benefit the most from this system are, well, probably not you.
Secret Campaign Giving and Abusing the Tax Law - The two big stories of this campaign season are voter backlash against Democrats and the rise of the so-called Super PACs-- massive campaign funding organizations that use the tax law to protect the anonymity of their donors. These money laundries, organized as 501(c)(4) groups under the Internal Revenue Code, violate the spirit of the tax laws and may well violate the letter of the law as well. But they are getting a pass from the Internal Revenue Service. The biggest and best known is Crossroads Grassroots Political Strategies, organized by GOP strategists Karl Rove and Ed Gillespie. Grassroots says it aims to raise an unprecedented $65 million in this year’s election cycle—nearly all of it anonymous. But the concept is not new. It was first used by Democrats in the 1990s and this year supporters of both parties have created scores of these outfits. This year’s Supreme Court decision in the Citizen’s United case made these organizations even more attractive by opening the door to unlimited giving by businesses and unions.
Private Tax Collectors: Invented In Ancient Rome, Now Run By Wall Street - As the Huffington Post Investigative Fund reported this week, big banks and hedge funds in the U.S. have been quietly collecting taxes on hundreds of thousands of homes. The process, called "tax farming," is simple: A company goes to a local government and reimburses it for taxes that citizens aren't paying. In return, the company gets to act like an old-fashioned tax thug -- the kind rabbis condemn in the Bible -- charging up to 18 percent interest and thousands of dollars in legal fees, simply because it can. As the District of Columbia attorney general told the HuffPost Investigative Fund, there's "no oversight at all."Like many great American traditions, the tax farming game was perfected by the ancient Romans. Provincial governors, and later Rome itself, sold tax-collection rights to private companies called publicani. As in modern America, this was a speculative bet -- a company paid a local government's tax debt, and then tried its own hand at recouping the loss. The Roman version was plainly brutal. In ours, the brutality is subtle. But in the estimation of one expert in ancient finance, it's just as bad: In our own way, we're sliding toward the conditions of ancient Rome, where private tax collectors employed soldiers to wring excessive amounts of cash from debtors.
Volcker: Don’t Let The Banks Weaken My Rule - As I’ve been documenting, Republicans on the House Financial Services Committee have set their sights on weakening some of the key provisions in the Dodd-Frank financial reform law. One of these is the Volcker rule — named after former Federal Reserve Chairman and current Obama administration adviser Paul Volcker — which is aimed at preventing banks from trading for their own benefit with federally insured funds.Banks are already thumbing their nose at the Volcker rule and laying the groundwork for a return to risky trading; they’re taking advantage of Dodd-Frank’s infancy, going on new adventures as regulators work out what, exactly, the Volcker rule should outlaw. And the banks are betting that the GOP will push regulators into making exceedingly narrow, so that risky (but profitable) trading can go on unabated. But Volcker is pushing back, telling regulators to leave the rule more open, thus allowing them to crack down on a potentially wider range of activities
Volcker’s rule on rules - Former Fed chairman Paul Volcker has some advice for financial regulators writing rules to define new limits on banks’ ability to trade for their own accounts: be as vague as possible. At least that’s the message in this WSJ piece by Deborah Solomon (for which, to be upfront, Volcker declined to comment). At first pass, that sounds a little nuts. If Dodd-Frank means to clamp down on proprietary trading at institutions that receive federal guarantees (like deposit insurance), then why wouldn’t regulations spell out, as specifically as possible, what those banks aren’t allowed to do? Solomon explains: Mr. Volcker’s concern, according to several people familiar with the matter, is that narrow or prescriptive rules would invite gamesmanship on the part of banks and could allow firms to evade the rule’s intent. Already, some banks and their lobbyists are seeking to sway regulators and encourage them to narrowly define certain types of trading activities, according to government officials.
Proprietary Trading Goes Under Cover: Michael Lewis - A few weeks ago we asked a simple question: Why are the same Wall Street banks that lobbied so hard to dilute the passages in the Dodd-Frank financial overhaul bill banning proprietary trading now jettisoning their proprietary trading groups, without so much as a whimper? The law directs regulators to study the prop trading ban for another 15 months before deciding how to enforce it: why is Wall Street caving now? The many answers offered by Wall Street insiders in response boil down to a simple sentence: The banks have no intention of ceasing their prop trading. They are merely disguising the activity, by giving it some other name.
Regulators Push Banks to Limit Reliance on Credit Ratings - Banks and institutional investors should break their dependency on credit rating agencies and take more responsibility for assessing the quality of the debt that they buy, a panel that is rewriting global rules on risk said Wednesday. The Financial Stability Board, which was created by members of the G-20 to work on ways to avoid future financial crises, said in a report that overreliance on credit ratings had contributed to the financial crisis, as downgrades of certain debt issuers provoked market stampedes. The main credit rating agencies — Standard & Poor’s, Moody’s and Fitch Ratings — have faced sharp criticism for assigning high ratings to subprime mortgages and other assets that later declined drastically in value. During Europe’s sovereign debt crisis, downgrades of debt issued by countries like Greece or Portugal helped prompt sell-offs of their government bonds and contributed to market turmoil.
The Post Election GOP War on Financial Reform - Here’s the crucial thing to remember about financial reform: the status quo previous to the Dodd–Frank Wall Street Reform and Consumer Protection Act financial reform bill was entirely favorable to Wall Street and the largest banks. The major, serial bailouts of 2008 were not the result of some unelected, socialist technocrats hidden away in a government basement somewhere exploiting a loophole. They were the results of GOP-appointed Hank Paulson, GOP-appointed Sheila Bair and GOP-appointed Ben Bernanke, all with the support of a Bush White House-sponsored EESA going to Congress and asking that an emergency bill be passed to allow for TARP. If this all happens all over again, and it could, there’s nothing to stop the government from going to Congress and demanding more money for the financial system. Congress can always pass new laws in an emergency, even if it means overturning old laws. The only way to stop this is through prudential regulation on the front end, separating out business lines that need a set of Federal insurance and those that don’t, and a resolution mechanism that is earlier and reduces uncertainty on the backend.
Adviser to Consumer Agency Had Role in Lending - A senior adviser to Elizabeth Warren, hired to help start the Consumer Financial Protection Bureau, is an investor in and, until recently, served as a director of a company that helps to arrange low-documentation loans for consumers with often-spotty credit histories. Rajeev V. Date, a former banker who was hired this month as a senior adviser to Ms. Warren, was an active participant in the debate over the Dodd-Frank Act, the financial regulation bill that created the consumer bureau. During that time, he also served as a director of Prosper Marketplace Inc., a so-called peer-to-peer lender that operates an online market to match consumers seeking loans with lenders. In its first four years of operation, more than 25 percent of the loans it helped arrange went into default, according to the company’s financial statements.
Raj Date Is The Best Thing To Happen To Consumers Since Elizabeth Warren - The New York Times should be embarrassed. This morning, the paper of record published an outrageous hit-piece on Raj Date, one of the most effective consumer advocates in the nation. The article completely misconstrues Date's work on financial reform, ignores his years of work pushing for stronger consumer protection, and falsely portrays Date as some kind of nefarious subprime hooligan. When Elizabeth Warren hired Date as an adviser for the new Consumer Financial Protection Bureau, it was the best possible hire she could have made, and activists continue to celebrate the decision with good reason. The Times owes both Date and the public an apology for this egregious smear.
A Failed Dirt-Finding Expedition on the CFPB - Today’s New York Times came out with a bizarre hit piece on the Consumer Financial Protection Bureau and the first wave of hires. They attempted to argue that there are already huge conflicts between those staffing the creation of the Bureau and those that they will be tasked to regulate. This will be a problem for any agency, and it’s one to be very conscious of and make sure that proper disclosures and vetting have occurred. But what’s so surprising about the article is how little they were able to find. After going through the record of the initial hires of advisors for the CFPB, the only thing they were able to flag was that Warren advisor Raj Date was, up until recently, a director of Prosper Marketplace Inc. The company is lobbying to be regulated as a bank, instead of regulated by the SEC, debating whether what they do constitutes issuing securities. I read the piece waiting for a bang, but all I found was a whimper.
Warren: States Likely to Lead Foreclosure-Fallout Response - State attorney generals likely will take the lead in dealing with the latest U.S. foreclosure mess, consumer advocate and Obama administration special adviser Elizabeth Warren said in an interview.“I’m hopeful with the information that they gather, the information that’s being gathered on the federal side, that we get a better sense of the parameters of this problem,” she said in an interview. “When that happens, it will be time to start talking about action.” Warren, who has been charged with setting up a new Consumer Financial Protection Bureau, suggested the agency may not become deeply entangled with the issue. “At this point, the consumer agency’s role in the overall process is trying to gather information and determine a little bit about the scope of the problem,” she said.
Warren Outlines Sweeping New Approach to Consumer Financial Protection - Elizabeth Warren, the architect of the new Bureau of Consumer Financial Protection, spelled out a sweeping new strategy today to use the latest in “crowd-sourcing” technology to collect tips from millions of consumers about deceptive new financial practices, from misleading mortgages and improper “gotcha’’ fees on credit cards to outright fraud.In an interview on Tuesday with National Journal, Warren said new techniques like crowd-sourcing -- scaled-up variations on Wikipedia -- make it possible to collect valuable information from millions of ordinary consumers who report problems as they arise. Using new systems to organize and find patterns in all that information, Warren said, the bureau could be able to spot new enforcement targets in a matter of days -- an unheard-of response time for traditional regulators. “Crowd-sourcing” has become one of the hottest forms of information gathering, and refers to online collaborations like Wikipedia that are built through contributions from thousands or even millions of people.
The less you know about finance the better - Everywhere you turn these days, some bigwig policymaker is talking about the importance of financial literacy education. Here’s Ben Bernanke doing it. And there’s Tim Geithner and Arne Duncan. Even the President. It’s easy to understand why we feel like we need this, what with all the bad financial decision-making of recent years. The only problem is, there’s a fair amount of evidence that a lot of what we do to teach better financial habits, like courses in high school, doesn’t work. Some research has shown that financial education is more likely to stick if it’s focused on one topic and comes right before a person makes a related decision—learning about mortgages as you’re house shopping, say, or getting a lesson in compounding interest along with your credit card.But maybe there’s a simpler approach. Maybe we should ignore real-world complexity altogether and just teach people financial rules of thumb.
A proposal for countercyclical contingent capital instruments - Contingent capital requirements may reduce the problems of low-quality bank capital and excessively leveraged institutions, but they also risk being too complex. This column aims to strike an appropriate balance by presenting a proposal based on both macroeconomic and bank-level triggers for debt-to-equity conversion. It assesses how such a rule would have performed in identifying stressed banks in recent years.
So What Is Insider Trading? - Have you heard about the railroad workers charged with insider trading? Late last month, the Securities and Exchange Commission brought an unusual and colorful insider-trading case: It accused two employees who worked in the rail yard of Florida East Coast Industries and their relatives of making more than $1 million by trading on inside information about the takeover of the company. How did these employees — a mechanical engineer and a trainman — know their company was on the block? Well, they were very observant. They noticed “there were an unusual number of daytime tours” of the rail yard, the S.E.C. said in its complaint, with “people dressed in business attire.” The case is raising eyebrows — and some important questions — about what constitutes insider trading at a time when the government is taking a tougher line against Wall Street and white-collar crime.
Death throes of the monolines - We are now living in a world without a triple-A rated bond insurer. On Monday, Standard & Poor’s downgraded Assured Guaranty Corp. and Assured Guaranty Municipal Corp. from AAA to AA+. Assured, which specialises in wrapping securitisations and US municipal debt, was the last monoline to hold a triple-A, and indeed appears to be one of the last bond insurers altogether. As Structured Finance News notes, Assured commands 100 per cent of the bond insurance market, wrapping 1,293 issues worth $20.8bn in the first three quarters of this year. The rather elliptical reasoning for the downgrade, from S&P:
Watchdog: Funny math used on AIG bailout - The Treasury Department changed its accounting style and produced an overly optimistic estimate of taxpayer losses in the AIG bailout, the special investigator for the federal bailouts said in a report released Monday. Treasury disputes the inspector general's criticism, and says it was transparent in its calculations. Special Inspector General Neil Barofsky's latest report to Congress also heaps new criticism on Treasury for taking credit for efforts to help homeowners with mortgages exceeding their home's value to secure modified loans.
Valuing the Taxpayers' A.I.G. Stake - Taxpayers have an unusual reason to watch stock prices this fall. The Treasury is in the process of selling its stakes in three of the companies that it spent the most money bailing out in 2008 and 2009, and much will depend on how those stocks perform in coming months. The Treasury has said it expects to lose about $29 billion on its many rescues, not counting Fannie Mae and Freddie Mac, which were put in conservatorships outside the Troubled Asset Relief Program. Most of the taxpayers’ losses will be concentrated in the Treasury’s housing finance program and the auto companies. But the total could be better or worse, depending on how the market receives the stocks of General Motors, Citigroup and the American International Group.
Can Regulators Shine Light on the Next Shadow System? - Some financial industry critics blame the so-called shadow banking system for many of the problems that occurred leading up to the 2008 crisis. The growth of non-depository financial firms with weak regulatory oversight may have resulted in excessive risk-taking. A few commonly cited examples include the very high leverage at failed investment banks like Bear Sterns and Lehman Brothers and the unregulated credit default swap market that caused big problems for AIG. Might the shadow system return, and if it does, can regulators do better? Floyd Norris of the New York Times reports that Citigroup CEO Vikram Pandit worries that Basel III's new capital requirements could cause a new shadow system
Banks should be broken up, Bank of England Governor Mervyn King warns - Telegraph. Mervyn King, Governor of the Bank of England, has thrown his weight behind breaking up the banks as part of wider reforms to protect the taxpayer from another financial industry meltdown. In a speech to the Buttonwood Gathering in New York, he set out his vision for a banking industry that does not imperil the next generation. He warned creditors that "they will bear losses in the event of failure" and stressed that banks in the future must be "financed much more heavily by equity rather than short-term debt". Addressing the option of separating investment banking from retail banking, he said: "If there is a need for genuinely safe deposits the only way they can be provided, while ensuring costs and benefits are fully aligned, is to insist such deposits do not coexist with risky assets." Read his full speech here.
We Interview Maria Bartiromo on C-Span’s Book TV - Yves Smith - This interview of Maria Bartiromo, of her new book, The Weekend That Changed Wall Street, was taped back in September. Some readers may deem it to be a bit softball, but a book TV program isn’t a format that lends itself to pointed questions. In fact, I found the experience a bit like what I have been told about S&M: even though the domme looks like the party in charge, in fact her job is to administer the precise amount of pain the submissive signals that he wants. Bartiromo is obviously very seasoned, and at certain junctures (for instance, when I tried interrupting her, another where she anticipated and cut off a follow up question) she signaled pretty clearly that she wasn’t going to go into controversial territory. As reader Herbert B said,I must give her credit for avoiding saying a single word that would put so much as a chip in CNBC’s rice bowl. What little she revealed, however, was worthwhile.
SIGTARP: HAMP Servicing Abuses Led to Unwarranted Foreclosures - Yves Smith - The latest SIGTARP (Special Inspector General of the Troubled Asset Relief Program) report is, if such a thing is possible, even more damning than its previous quarterly reports. It slams the Treasury for abject failure to meet the program’s own objectives, its lack of proper control and metrics, its “Mission Accomplished” declarations, its phony accounting, particularly with regard to AIG, and its abject failure on loan modifications (note one of TARP goals was to preserve homeownership. The Economic Populist has a good summary of the report. It’s distressing to see that this account, which is unusually forthright in its criticism because the performance of the TARP is so terrible, get short shrift in the MSM and even in the blogosphere. Unfortunately, this suggests that Team Obama is proving Jospeh Goebbels to have been correct: tell a big enough lie and keep repeating it, and the public will eventually come to believe it. And the lie is the one the Administration has been hawking for some time, that TARP was a success. The big reason is that they’ve sold the canard that the TARP was profitable. First, that is counting chickens long before they are hatched; in particular, as SIGTARP points out, the Treasury claims on AIG are a whooper, and there is also $80 billion in funds committed that might still be deployed. And the Treasury has included a $2 billion credit line as part of its proposed AIG resturcturing, which seems a bizarrely small amount. One time insurance analyst (and successful AIG short) John Hempton says the $2 billion really is a statement that AIG is being supported.
The Cost of the TARP: Yet Again - NPR told us yet again that we should be happy about the TARP because it really didn't cost us very much. Since the notion of the TARP free lunch continues to be promulgated widely let's look at it from a slightly different perspective. In the past, I have made the point that the government made loans and guarantees to huge banks like Goldman Sachs and Citigroup at well below the market price during a financial crisis. This allowed these banks to survive and prosper. If the market had been allowed to work its magic, the shareholders of these banks would have lost all their holdings, their top executives would be walking the unemployment lines, and many of their creditors would have been forced to accept less than 100 cents on the dollar for their debt. This would mean that they would not have claim to trillions of dollars of the economy's wealth which they now have. The costless TARP argument says that this should not concern us since the TARP did not add significantly to the national debt. So, let's try another approach.
Testimony of Katherine Porter Before the Congressional Oversight Panel Hearing on the TARP Foreclosure Mitigation Program - I believe the law is somewhat unsettled on what actually must be done via a securitization to complete the transfers correctly. Some have argued that the traditional processes govern. This would mean the note must be negotiated (if a negotiable instrument) or endorsed (if bearer paper) and that the mortgage must be assigned to each party in the securitization process. The latter issue implicates MERS, the Mortgage Electronic Recording System and whether its efforts to declare itself the nominee for the mortgagee and not make public recordation of the assignments are valid. Others believe that the primary issue is whether the note was transferred correctly, on the theory that the “mortgage follows the note” (but it is not clear whether the same rules applies for a deed of trust). But even here, there is disagreement on whether the transfer of the notes needed to have occurred individually, by endorsement (negotiable instrument) or by transfer of possession (bearer paper), or whether the pooling and servicing agreement somehow suffices to effectuate the transfer of the notes to the trust. The implications of problems with transfer are serious. If the trust does not have the loan, homeowners may have been making payments to the wrong party. If the trust does not have the note or mortgage, it may not have standing to foreclose or legal authority to negotiate a loan modification. To the extent that these transfers are being completed retroactively, it raises issues about honesty in creating and dating the assignments/transfers and about what parties can do, if anything, if an entity in the securitization chain, such as Lehman Brothers or New Century, is no longer in existence. Moreover, retroactive transfers may violate the terms of the trust, which often prohibit the addition of new assets, or may cause the trust to lose its REMIC status, a favorable treatment under the Internal Revenue Code. Chain of title problems have the potential to expose the banks to investor lawsuits and to hinder their legal authority to foreclose or even to do loss mitigation.
Obama No Longer Bothering to Lie Credibly: Claims Financial Crisis Cost Less Than S&L Crisis - Yves Smith - I’m so offended by the latest Obama canard, that the financial crisis of 2007-2008 cost less than 1% of GDP, that I barely know where to begin. Not only does this Administration lie on a routine basis, it doesn’t even bother to tell credible lies. .And this one came directly from the top, not via minions. It’s not that this misrepresentation is earth-shaking, but that it epitomizes why the Obama Administration is well on its way to being an abject failure. On the Jon Stewart Show (starting roughly at the 1:10 mark on this segment) Obama claims the cost of this crisis will be less than 1% of GDP, versus 2.5% for the savings and loan crisis (sorry, no embed code, you need to go here): The reason Obama makes such baldfacedly phony statements is twofold: first, his pattern of seeing PR as the preferred solution to all problems, and second, his resulting slavish devotion to smoke and mirrors over sound policy.
Barack Obama’s Daily Show Interview: “Larry Summers Did a Heckuva Job” (Yikes!) - Last night, Barack Obama was a guest on The Daily Show, thereby becoming the first sitting president to appear as Jon Stewart’s guest. (In July, Obama became the first sitting president ever to appear on The View.) In the half-hour-long interview, Stewart quizzed his grizzled guest about health-care reform, the financial crisis, and the midterm elections. Stewart’s most combative query concerned National Economic Council director Larry Summers—in particular, Obama’s hiring thereof. “We can’t expect different results with the same people,” Stewart said, referring to Summers’s previous stint as treasury secretary under Bill Clinton. He continued, “Larry Summers ... that seems like the exact same person.” Obama, inadvertently quoting his imminently quotable predecessor, replied, “Larry Summers did a heckuva job.” Stewart, somewhat shocked, advised him, “You don’t wanna use that phrase...”
No Mr. President, Larry Summers Did Not Resolve the Financial Crisis for a Pittance, He Just Papered Over the Problem - I passed up the obvious title: "Heckuva Job Larry!" That was the moment of President Obama's appearance on The Daily Show with Jon Stewart that set all Americans cringing. Yes, he really said that Summers "did a heckuva job." The candidate that was gifted the opportunity to run against the legacy of one of the worst presidents in U.S. history has, as president, used Bush as his role model to continue many disastrous policies. It was strangely fitting that he would channel Bush's infamous praise ("Heckuva job Brownie") for the FEMA chief who failed New Orleans so badly in the hurricane. President Obama understandably wishes to focus attention on the economic disaster he inherited from President Bush. But Jon Stewart's question to him, which led to the president's gaffe, correctly asked about the message that Summers' appointment sent about the administration's commitment to fundamental change.
On the Daily Show, Obama is the last laugh – On Comedy Central, the joke was on President Obama Wednesday night. The president had come, on the eve of what will almost certainly be the loss of his governing majority, to plead his case before Jon Stewart, gatekeeper of the disillusioned left. But instead of displaying the sizzle that won him an army of youthful supporters two years ago, Obama had a Brownie moment. The Daily Show host was giving Obama a tough time about hiring the conventional and Clintonian Larry Summers as his top economic advisor. "In fairness," the president replied defensively, "Larry Summers did a heckuva job." "You don't want to use that phrase, dude," Stewart recommended with a laugh. Dude. The indignity of a comedy show host calling the commander in chief "dude" pretty well captured the moment for Obama
Fire Tim Geithner. Then Be a One-Term President. - I doubt even the Internet's self-appointed Chief Geithner Apologist will be foolish enough to stand by him after this piece of shite: Some people just don’t like movies with happy endings. How else to explain this week’s report by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP)? Rather than focusing on the growing evidence we’ve seen in recent months that TARP will be far less costly than anyone expected, SIGTARP instead sought to generate a false controversy over AIG to try and grab a few, cheap headlines. There are no "facts" in that paragraph, and there is no excuse for this coming from Treasury. Ignore that Treasury is deliberately including selling off its expected future value as part of its "break-even" calculation. Ignore that Treasury's practice has been to count "TARP" (the first effort) as the only Government Subsidy to those institutions that have "paid back" their loans by ramping up debt and refusing to be "financial intermediaries" [Link updated] which was the half-assed justification for giving them that money in the first place. Ignore the billions of dollars of asset guarantees from the Fed that are still the only reason people pretend The Big C is solvent.
Treasury Shielding Citigroup as Deletions Make FOIA Meaningless – The late Bloomberg News reporter Mark Pittman asked the U.S. Treasury in January 2009 to identify $301 billion of securities owned by Citigroup Inc. that the government had agreed to guarantee. He made the request on the grounds that taxpayers ought to know how their money was being used. More than 20 months later, after saying at least five times that a response was imminent, Treasury officials responded with 560 pages of printed-out e-mails -- none of which Pittman requested. They were so heavily redacted that most of what’s left are everyday messages such as “Did you just try to call me?” and “Monday will be a busy day!” None of the documents answers Pittman’s request for “records sufficient to show the names of the relevant securities” or the dates and terms of the guarantees. Even so, the U.S. government considers the collection of e-mails a partial response to an official request under the federal Freedom of Information Act, or FOIA. The Justice Department in July cited an increase in such responses as evidence that “more information is being released” under the law.
Treasury Thumbs Nose at Bloomberg FOIA Request on Citi Guarantees - - Yves Smith - The Obama Administration and the Fed are engaging in precisely the same tactics to deny access to what ought to be public property, in this case, information about how taxpayer funds were utilized during the crisis. And that means not just the TARP, but the many other handouts to banks, including guarantees, regulatory forbearance, the operation of various rescue facilities and programs (arguably, the slightly over $1 trillion in MBS purchases was aimed at banks, not borrowers), and other hidden subsidies.Predictably, the Obama administration promised transparency and instead delivered foot dragging and obfuscation. Bloomberg provides an unpleasant but nevertheless illuminating account of how a request by its reporter Mark PIttman for information regarding the November 2009 bailout of Citigroup was treated with what amounts to contempt. I say “what amounts to” because the Treasury did bother complying with the form of the FOIA inquiry.
U.S. Seeks to Shield Goldman Secrets - Goldman Sachs Group Inc. has always closely guarded the secrets of its lucrative high-speed trading system. Now the securities firm is getting a help from an unusual source: federal prosecutors. Federal prosecutors in Manhattan this week asked a federal district judge to seal the courtroom at the forthcoming trial of a former Goldman computer programmer accused of stealing the firm's computer code. The trial is set to start to late November. Prosecutors also asked that any documents related to Goldman's trading strategies remain under seal.
Banks: U.S. Solicitor General Blocked Fed Appeal to Supreme Court - A group of large commercial banks said the Obama administration’s top lawyer at the Supreme Court blocked the Federal Reserve from filing an appeal to the high court in a case involving disclosure of central bank loans. The Clearing House Association said in a court filing that it didn’t learn until Oct. 22 that the U.S. solicitor general was not authorizing the Fed to pursue an appeal to prevent the release of information identifying banks that received emergency loans from the Fed at the peak of the 2008 financial crisis.
Now It’s Official: Corruption Has Risen in US, Leading to Fall in Global Ranking - Yves Smith I suspect some readers will take issue with the US being ranked as high as it is, 22 out of 178 nations, in an annual survey of public sector corruption by Transparency International. However, it fell from 19 the year prior, so the trajectory at least is correct. The New York Times provided a brief description of methodology which may shed some light on these results: The index, which seeks to gauge domestic public sector corruption, is figured with data compiled from surveys of country experts and business leaders, and relies on perceptions rather than legal findings, which can differ sharply across borders depending on enforcement. The index reflects two years of data to iron out one-time spikes.
U.S. Financial Markets: The Well Has Been Poisoned (Anger of the Honest Part II) - The full consequences of what I termed The Rot Within: Our Culture of Financial Fraud and the Anger of the Honest (October 15, 2010) are now unfolding: the well has been poisoned. One of my most astute correspondents made a critical observation that I've seen nowhere else: once a market has been poisoned by fraud which goes unpunished, then institutional players will avoid that market as untrustworthy. Without institutional trust and participation, the market then withers on the vine-- exactly what has happened to the U.S. mortgage securities market. The market for mortgage-backed securities has vanished, except for one player: the Federal Reserve, which has bought a staggering $1.2 trillion in the past 18 months to create the facsimile of an active market. The well has been poisoned. The only mortgages being traded are those 100% guaranteed by the U.S. government: in effect, the risks intrinsic to a corrupted market have been shifted to the taxpayers, while the criminals who profited from the fraud and embezzlement got away scot-free. Here are the correspondent's comments:
What Kind of Stories Are the Media Failing to Cover? - A midterm campaign that has turned heavily on the issue of the mounting federal debt is likely to yield a government even more split over what to do about it, people in both parties say, with diminished Democrats and reinforced Republicans confronting internal divisions even as they dig in against the other side. In the weeks after next Tuesday’s elections, the White House and a lame-duck Congress will face immediate decisions testing the balance of power — on extending the Bush-era tax rates, approving overdue spending bills to keep the government operating and, possibly, debating the recommendations that President Obama has directed a bipartisan debt-reduction commission to offer by December. The report of the 18-member commission, which includes a dozen senior members of Congress, six from each party, will help determine whether a bipartisan consensus exists to deal with the unsustainable combination of fast-growing entitlement programs like Social Security and Medicare and inadequate tax revenues.
The Role of the Elite - Jim Manzi has an absolutely outstanding post on the role of elites in public life. It's not well understood, at least by Americans, that for many of the issues on which Europe and America are arguably quite divided, the general population isn't that divided at all. Attitudes towards the death penalty and climate change aren't that different between the ordinary citizens of the two continents; they may not even be that different among the elites. The difference is, in Europe, the elites have a much stronger role in shaping policy. This inspired Ezra Klein to blog in defense of elites, and to an extent I think he's right. But I'm much more skeptical of elites than Ezra is, for a number of reasons. The first is that, as Manzi says, the elites aren't quite as smart as they think they are:
Companies Hoarding $1 Trillion In Cash - As the economic recovery remains tepid, companies continue to sit on piles of cash, shifting it around internally rather than spending it. The hoard totals about $1 trillion for U.S. companies, Reuters reports, citing data from Moody's. For non-financial companies, the total is about $943 billion as of the middle of 2010, compared to $775 billion at the end of 2008, Moody's said. Even though revenue decreased in the second quarter, corporate profits in the S&P 500 were up 38 percent from the same period last year, the Wall Street Journal reported earlier this month. Thanks to massive cost-cutting strategies, such as firing employees, it was corporate America's sixth highest quarterly profit ever. Banks, which also have large cash reserves, used that money to pad their earnings reports, the WSJ says. Of the combined $16.8 billion that the 18 biggest U.S. commercial banks earned in the third quarter (not counting the $10.4 billion charge that stained Bank of America's earnings report), $8.1 billion came from their reserve funds, the WSJ says. At some banks, the contributions from these rainy-day funds outweighed the actual earnings. Of Citigroup's $2.2 billion profit, for instance, 92 percent, the WSJ says, came from its reserves.
Banks Turn Their Reserves to Profit - Call it steroids for bank profits. The biggest U.S. banks virtually doubled their collective earnings in the third quarter just by injecting $8.1 billion into net income from funds they had set aside to cover loan losses. There are 18 commercial banks in the U.S. with at least $50 billion in assets, and together they earned an adjusted $16.8 billion in the third quarter. Of those profits, nearly half, or 48%, were from drawing down what bankers call loan-loss reserves, according to an analysis by Dow Jones Newswires. A year ago, the same 18 banks earned $6.2 billion in quarterly profits; at that time, they added more than $7.8 billion to the same reserves, a move that reduced their profits. The analysis omits a $10.4 billion noncash charge to earnings that Bank of America Corp. disclosed during the third quarter.
Junk Sets October Record, Mortgage Bonds Rally - Sales of junk bonds in the U.S. set a record for October as returns topped investment-grade debt and more borrowers were raised than cut. Government-backed mortgage bonds may beat Treasuries by the most in at least 10 years. Fortescue Metals Group Ltd. and Calpine Corp. led speculative-grade companies issuing $33 billion of debt this month, according to data compiled by Bloomberg. The notes have gained 2.32 percent on average in October, compared with a loss of 0.16 percent for high-grade securities, Bank of America Merrill Lynch Index data show. Not since March have high-yield, high-risk securities outperformed by such a wide margin. Investors have driven relative yields down to the lowest in five months on confidence the Federal Reserve will flood the economy with money, allowing the neediest borrowers to access capital and refinance debt. The rally is robust enough to extend into next year, said James Murren, chief executive officer of Las Vegas-based casino operator MGM Resorts International, which sold $500 million of notes rated CCC+ on Oct. 25.
Pay for Non-Performance - The Economist's Matt Steinglass, responding to yesterday's post about skyrocketing incomes of the rich, offers this note: A few years back, this paper did an extended investigation of increasing CEO compensation, and found that while "abuses and downright crookery" were part of the story, CEO pay gains were justified by increased returns to investors. That, however, was in 2007, before the global financial crisis erased many of those gains. This is revealing about high-end pay packages on two levels. Increased compensation has mostly been the effect of huge pay increases in the financial sector and among Fortune 5000 executives. But as Matt points out, the increasing returns their companies enjoyed were largely illusory. That's now a lot more obvious than it was five years ago, but there's nonetheless been no movement to reduce executive/financial pay in response. Still, not all of those increasing returns were illusory. A lot of it was perfectly real. More broadly, then, the question is this: if returns are increasing everywhere, do CEOs as a class deserve ever increasing pay packets? Why?
Bailout Oversight Panel Slams Obama Administration Over Foreclosure Crisis -- A key government panel keeping tabs on the bailout strongly criticized the Obama administration Wednesday for its apparent failure on a variety of housing-related fronts, from its ineffective foreclosure-prevention initiatives to its refusal to acknowledge the growing crisis sparked by widespread evidence that mortgage companies frequently take their customers' homes via fraud.Faced with increasingly heated criticism from the Congressional Oversight Panel, the administration's representative -- the Treasury Department's housing rescue chief, Phyllis Caldwell -- hunkered down, refusing to answer basic questions. It was a familiar scene.
Treasury Department Says HAMP Doesn't Put People Into Default - A federal watchdog reported Monday that the Obama administration's signature anti-foreclosure program sometimes causes people to lose their homes to foreclosure -- a conclusion that had already been reached by some homeowners and their advocates. The Treasury Department, which administers the Home Affordable Modification Program, did not respond to that claim in its answer to the watchdog's report. But a Treasury official told HuffPost on Tuesday that no one who is current on their mortgage payments can become delinquent because of a HAMP modification. Consumer advocates heartily disagree. "Treasury's wrong about that," said Diane Thompson, a lawyer with the National Consumer Law Center. "Everybody comes out of the trial modification period owing more than they did when they went in, and everybody comes out with their credit worse."
TARP Watchdog: Just $600 Million Of HAMP’s $50 Billion Has Been Spent - For months now, the Obama administration signature foreclosure prevention program — the Home Affordable Modification Program (HAMP) — has been sputtering along, with more borrowers now getting booted out of the program than receiving a sustainable mortgage modification. In fact, many borrowers who enter the program wind up worse off financially, as the failure to obtain a permanent modification results in the borrower owing back fees and late penalties to the bank. One of the biggest problems with the program is that the banks simply have no incentive to participate on a large scale, as they receive incentive payments for successful modifications but are subject to no repercussions for failing to keep qualified borrowers in their homes. Yesterday, the Special Inspector General for the Troubled Asset Relief Program (TARP), from which HAMP’s money comes, noted that just $600 million of the $50 billion allocated to HAMP has been expended, adding that “a program that began with much promise now must be counted among those that risk generating public anger and mistrust.”
The Creditors' Ball - Paul Krugman - I haven’t written at all about HAMP — the administration’s disastrously failed home mortgage modification program, which was supposed to be the modern version of FDR’s Home Owners Loan Corporation. My excuse, such as it is, is that I don’t presume to know the legal ins and outs well enough to devise an alternative. But still: this is a case where the administration had (and still has) the money, $50 billion from TARP. That should be enough to dangle some pretty big carrots in front of lenders. And it could have had sticks, too: it could have advocated cramdown, it could have taken advantage of the popular anger to put pressure on the banks at any time — and especially as the foreclosure scandal has broken. I mean, the money wasn’t even being spent, which is a scandal in itself at a time when the economy so desperately needed help. And tales of the Kafkaesque process have been spreading for many months; read David Dayen’s series at Firedoglake. I really don’t understand the passivity here.
US taxpayers warned Fannie Mae and Freddie Mac may need $363bn bailouts -Federal Housing Finance Agency regulator says government-backed funds may need further aid over bad mortgage losses. US regulators have warned that taxpayers may end up absorbing losses of $363bn (£231bn) from bad mortgage loans – the latest sign that problematic lending practices that triggered the 2008 banking crisis continue to buffet the US.The issue, which has flared anew this month with a ban on the resale of foreclosed homes after flaws in the legal processes were exposed, has led investors to voice fears of second housing-related crisis.
FT Alphaville » Those money-guzzling GSEs - The Federal Housing Finance Agency, the US body charged with overseeing Fannie Mae and Freddie Mac after the two were placed into conservatorship in 2008, has released new projections for how much additional money the Government-Sponsered Enterprises will have to draw from taxpayers over the next three years. You can get most of the story just by looking at these two graphics, the first of which shows three scenarios for the future path of house prices, and the second showing how much the Treasury will lose under each scenario: The “additional dividends” category refers to annual dividends of 10 per cent paid by the GSEs on US Treasury-owned preferred stock.
Fannie and Freddie's Foreclosure Barons - [Editor's note: In November 2009, MoJo reporter Andy Kroll received a tip about a little-known yet powerful firm, the Law Offices of David J. Stern, which handled staggering numbers of foreclosures in southeastern Florida—the throbbing heart of nation's housing crisis. Among the allegations, the tipster had it from insiders that Stern employees were routinely falsifying legal paperwork in an effort to push borrowers out of their homes as quickly—and profitably—as possible. Kroll spent eight months investigating Stern's firm and its ilk—a breed of deep-pocketed and controversial operations dubbed "foreclosure mills." After sifting through thousands of pages of court documents, interviewing scores of legal experts and former Stern employees, and attending dozens of foreclosure hearings in drab Florida courtrooms, he emerged with a portrait of a law firm—indeed, an entire industry—that was willing to cut corners, deceive judges, and even (allegedly) commit fraud—all at the expense of America's homeowners.
Losses from US CMBS defaults approaching record-S&P (Reuters) - Defaults by U.S. commercial mortgage debt that is bundled in securitizations are likely to climb at least until 2011, while losses from the deals are approaching an all-time high, Standard & Poor's said on Monday. Issuers defaulted on 1200 loans in the first half of this year and if the current pace continues defaults could eclipse 2009's total of 2,138 defaults, S&P said. S&P conducted a study of more than 69,000 commercial mortgage loans that were originated for securitizations between 1993 and 2008 and found that more than half of the defaults occurred in the 18 months between January 2009 and June 2010.
Commercial Real Estate: "Normal market conditions years away" - From the Las Vegas Sun: Commercial real estate’s slide likely at an end The commercial real estate market led by the office sector appears to have halted its slide analysts said. With little construction and the demand for space outpacing those who are giving it up, it appears the office market isn’t going to worsen, “While it’s easy to latch on to even the smallest bright spot, the return to more normal market conditions is years away, but must start somewhere,” Joyce said. It is possible the office vacancy rate has peaked - or is near the peak as the the Reis vacancy data suggests - but it will take a long time to absorb all the excess office space. And that means non-residential investment in office buildings will be low for some time.
FT Alphaville » MERS casts its shadow on commercial mortgages - Barclays Capital analysts have done it. They’ve linked Mortgage Electronic Registration Systems Inc — currently making headlines in US residential mortgages — to the commercial mortgage market. And specifically, Commercial Mortgage-Backed Securities. According to BarCap, the MERS Commercial database is not open for public use — so you have to start estimating. And there are two ways of doing that. You could have a quick look at the Pooling and Servicing Agreements (PSAs) for CMBS created between 2004 and 2008, which would give you a figure of about $280bn worth of conduit deals with some MERS language in them. Note though that later (2010) CMBS deals don’t seem to mention MERS, according to BarCap.
MERS Concerns Extend to Commercial Real Estate - Yves Smith - When we’ve discussed the woes afflicting residential mortgage securitizations, in particular, the deep seated problems arising from the frequent if not widespread failure of the original parties to the deal to take the steps stipulated in their own agreements needed to convey the notes (the borrower’s promissory note) to the securitization legal vehicle, a trust. Although we’ve touched on the problems posed by MERS, if you’ve screwed up on conveying the note in a RMBS, you are very badly stuck. MERS related problems are rounding error. But that isn’t to minimize the problems MERS has created separately, particularly with the integrity of local records, and the way MERS has been abused in court proceedings. Specifically, and bizarrely, foreclosures are often made in the name of MERS. In 45 states, the note is the critical document, and the lien, which is what is registered at MERS, has no independent status. It is the noteholder that has to foreclose, not a mere computer registry for the mortgage. Increasingly, state courts are taking a very dim view of MERS foreclosures. Housing Wire points out that MERS has also been a party foreclosing in some commercial real estate transactions, again presumably in securitized deals. However, HW assures readers this won’t be a big problem, since relatively few commercial deals actually wind up in foreclosure
Nation's Biggest Banks Each Hold over $20B in Foreclosures: Report - New data released this week shows that the nation’s largest banks are holding monstrous volumes of soured home loans. Not only has the housing crisis left major lenders knee-deep in an ocean of non-performers, but added exposure to early delinquencies means they could sink even deeper. According to an analysis by Weiss Ratings, an independent ratings agency covering the financial sector, JPMorgan Chase, Bank of America, and Wells Fargo each reported more than $20 billion in single-family mortgages currently foreclosed or in the process of foreclosure as of midyear. In addition, Weiss found that for each dollar these banks held of mortgages in foreclosure, there were an additional $2 in loans in the pipeline that were 30 days or more past due. Among all U.S. banks, JPMorgan Chase has the largest volume of mortgages in foreclosure or foreclosed with $21.7 billion. On top of that, the company has $43.4 billion more in mortgages past due. Compared to JPMorgan, Bank of America has a somewhat smaller volume of foreclosures — $20.3 billion — but it has a larger pipeline of past-due mortgages at $54.6 billion. Wells Fargo’s foreclosures come to $20.5 billion, with $48 billion in overdue home loans.
The Tombstone Blues - The latest version of Pretend - going on a couple of weeks now - is the nation whistling past the graveyard of mortgage documentation fraud while skeletons dance around everything connected with the money system. Halloween came early this year. The USA is getting to look like one big Masque of the Red Death, so I suppose it's convenient that our pop culture has been saturated with vampires, zombies, and werewolves for a decade, coincident with the self-cannibalizing of our economy. Something in the zeitgeist told us to get with the program of a twilight existence. We're well-schooled now in the ways of the undead, operating under cover of darkness, going for the neck at every opportunity, even eating our young - if you consider the debt orgy, both private and public, as a way to party like it's 1999 by consuming your children's' future. The big banks leading the charge of the anthropophagi are making like it's no big deal that notes representing money lent have become mysteriously dissociated from the mortgages that secure them. In the good old days, these things traveled in pairs, like boy-and-girl, Laurel and Hardy, a horse and carriage. It made for straight-forward property transfers, where Person A could be confident he was buying something free and clear from Person B. What a quaint concept, free and clear!
How Did the Banks Get Away With Pledging Mortgages to Multiple Buyers? - I’ve repeatedly documented that mortgages were pledged multiple times to different buyers. See this, this and this. In response, some people (including one of the country’s top bankruptcy lawyers) have told me they don’t buy it. So I wrote to some of the leading experts on mortgage fraud – L. Randall Wray (economics professor), Christopher Whalen (banking expert with Institutional Risk Analytics), and William K. Black (professor of economics and law, and the senior regulator during the S & L crisis) – to seek their insight. Chris Whalen told me: All good points, but the short answer is that nobody may have noticed until now. The issue of substitution and other games played by servicers makes exact tracking of loans problematic. It should show up in the servicers reports and should be caught, but there are a lot of things that go on in loan servicing that nobody talks about. Until about 2006, the GSEs and banks would advance cash and would substitute, but not now. The noble practitioners you heard from are all sincere and want to believe in intelligent design.
Lest We Forget: How The Banks Are REALLY Screwing Us In The Foreclosure Mess - Everyone, and I mean everyone you ought to be reading, has been working through the mechanics and the meaning of the foreclosure fraud being performed on the nation by our biggest banks. For a quick overview, head on over to Rortybomb, just read your way down, and check out Naked Capitalism as well. I promise you, once you start down the trail of links, you’ll have days of infuriating study ahead of you. But for all the justified outrage at the simple disdain for the concept of property rights and the rule of law* there’s something else being missed here, something that astute observers have commented on, but that seems to be a bit obscured as we all, understandably, rubberneck in horror at the trainwreck that the major banks have made of the foreclosure process. And that is that the entire foreclosure endeavor is in fact a huge imposed cost on American homeowners and our economy; it almost certainly runs against the long-term interests of the financial system as whole. Foreclosure as it is being practiced now is likely to be a net negative for homeowners now, to the point that subsidizing in some way those who got into trouble is economically rational, even if it might be galling to those who’ve paid up and gone about their business.
Economists: U.S. should remove top bank execs over foreclosure mess - Two economists, William K. Black and L. Randall Wray of the University of Missouri-Kansas City, are proposing a solution to the foreclosure mess: They want the federal government to take control of the banks and oust their top executives. "We should remove the senior leadership of the banks and replace them with experienced bankers with a reputation for integrity and competence, i.e., the honest officers that quit or were fired because they refused to engage in fraud," Black and Wray wrote in an essay on HuffingtonPost.com on Oct. 22. The posting has been circulated widely on the Internet and has prompted strong reaction from fans and critics of their radical proposal. The professors said Bank of America should be the first to be taken into receivership. Here's how their plan would work: A receiver is appointed on Friday. The bank opens for business as normal (from the bank's customers' perspective) on Monday. The checks clear, the ATMs work, and the branches all open. The receiver's managers direct the business operations, find the true facts about the bank's operations, senior managers, and financial condition, recognize the real losses, and make the appropriate referrals to the FBI and the SEC so that the frauds can be investigated and prosecuted. "If the government does not hold the fraudulent CEOs responsible, who is supposed to stop the epidemic of elite financial fraud?
Foreclose on the Foreclosure Fraudsters, Part 2: Spurious Arguments Against Holding the Fraudsters Accountable - Our call for closing down control frauds and stopping the foreclosure frauds typically meets with three objections. First, it is claimed that while there were some bad apple lenders, much of the fraud was committed by borrowers. Our proposal would let fraudulent borrowers remain in homes to which they are not entitled, punishing the banks that were duped. Second, the biggest banks are too important to foreclose. And third, it is not possible to resolve a "too big to fail" institution. Let us deal with the "borrower fraud" argument first because it is the area containing the most erroneous assumptions. There was fraud at every step in the home finance food chain: the appraisers were paid to overvalue real estate; mortgage brokers were paid to induce borrowers to accept loan terms they could not possibly afford; loan applications overstated the borrowers' incomes; speculators lied when they claimed that six different homes were their principal dwelling; mortgage securitizers made false reps and warranties about the quality of the packaged loans; credit ratings agencies were overpaid to overrate the securities sold on to investors; and investment banks stuffed collateralized debt obligations with toxic securities that were handpicked by hedge fund managers to ensure they would self destruct.
The Subprime Debacle: Act 2, Part 2 - Mauldin - Anyone who owns stocks in banks with relatively large MBS exposure is not investing, they are gambling that the losses will not be more than management is telling them. There will be no bailouts (at least I hope not) this time around. Fool me once, shame on you; fool me twice, shame on me. There will be little sympathy for shareholders or bondholders this time, if it comes to that. One more sad point. The FDIC (read taxpayers) is liable for some of this, as they took over some of these institutions. It just keeps on coming. Final rant. If you were part of a group that knowingly created or sold flawed and fraudulent mortgage-backed securities to pensions and insurance companies and took home tens of millions in bonuses, up and down the management chain, maybe you should consider moving yourself and your money to a country that does not honor US extradition, because my guess is that, as all this comes out, you may have to hire some very expensive lawyers and get measured for pinstripes.
Federal Auditor Says Obama's Anti-Foreclosure Effort Risks 'Generating Public Anger And Mistrust' - Far from helping at-risk homeowners, the Home Affordable Modification Program has actually made some homeowners worse off, according to the Special Inspector General for the Troubled Asset Relief Program -- also known as the Wall Street bailout. The Treasury Department set aside $50 billion from TARP, plus another $25 billion from taxpayer-owned Fannie Mae and Freddie Mac, to give mortgage servicers thousand-dollar incentives to reduce monthly mortgage payments by modifying eligible homeowners' loans. But more people have been bounced from the program than have been helped by it. People who apply for modifications via HAMP sometimes "end up unnecessarily depleting their dwindling savings in an ultimately futile effort to obtain the sustainable relief promised by the program guidelines," the report notes, putting the imprimatur of the federal government on a claim long made by housing experts and homeowner advocates. "Others, who may have somehow found ways to continue to make their mortgage payments, have been drawn into failed trial modifications that have left them with more principal outstanding on their loans, less home equity (or a position further 'underwater'), and worse credit scores.
Shadows And Fog - Krugman - I’m finding the foreclosure issue difficult to write about; it’s clear that there has been massive malfeasance on the part of the banks (again), but it’s less easy to say what should be done. One thing is clear, however: the main argument being made for turning a blind eye to the situation, and avoiding anything like a temporary freeze on foreclosures, is wrong.I’m referring to the argument that we need to let foreclosures proceed, never mind the doubts, because it’s important to get those properties seized and sold, so that we clean up the mess. That’s the argument you’ve been hearing from administration officials — and it sounds reasonable if you don’t look at what actually happens to foreclosed homes. For the fact is that a startling number of those homes aren’t being sold: there’s a huge “shadow inventory” of homes that have been seized, but not yet put on the market.
What We Reward Is What We Get - Maxine Udall - Maybe there's a another question that is more relevant: what other features of the economy might combine with low interest rates and low credit standards to increase the marginal home buyer's desire to take chances or to ignore risk? Specifically, what is the effect of an economy in which low and middle incomes have been stagnating for nigh onto 30 years? Surely, some of those who bought homes induced by lower barriers and prices were simply trying to grab the gold ring that has been receding from their grasp for at least a generation. Salaries may not have risen, but there was apparently money to be made by leveraging what little they had into a home that historically had provided a source of wealth for many working and middle class families. The allure of a casino is difficult to resist when other means for achieving economic security are diminished. What I find myself wondering is: did the failure of our politics and our economy to deliver shared universal opulence over the last 30 years create incentives for many individuals to opt for speculation and imprudent participation in housing markets, instead of pursuing the (now non-existent) gains that used to accrue to productivity, prudent risk-taking, and creative innovation? If the answer to the last question is "yes," then we can hardly fault individuals for responding rationally to prevailing incentives. If we as a country want productivity, prudent risk-taking, and creative (and productive) innovation, we had best start rewarding it.
U.S. lawyer forms foreclosure resistance movement (Reuters) - In a stately 19th century mansion in the middle of this former textile mill town, a local political scion has formed a mortgage foreclosure resistance movement. O. Max Gardner III, 65, pioneered techniques in preventing big banks from foreclosing on loans and has taught his methods to 559 other lawyers in the last four years.He teaches a sort of legal jiu jitsu: how to exploit opponents' large size and disorganization for the benefit of consumers who do not want to give up their homes.Once lawyers exit his training program, they stay on his expanding e-mail list, and are allowed access to an online document repository to share information. They work together to come up with new ways to slow down foreclosures and share strategies on other bankruptcy issues, communicating at a rate of 350 messages a day. In the fragmented world of consumer bankruptcy law, where lawyers that represent consumers often work at small firms, Gardner, from his one-person law firm, is creating a sort of virtual law firm with hundreds of partners.
Wells Fargo Case Belies Claim It Always Verifies Mortgage Paperwork - Wells Fargo says it has generally avoided the foreclosure paperwork scandal plaguing the nation’s banks because its employees personally review and verify every document that they sign. But a previously unpublished deposition details how that didn’t happen in at least one case. In the deposition  taken last summer, a bank employee admitted to submitting unverified documents to a federal bankruptcy court in northern Texas twice in the same case, even though she signed off that the documents, swearing that they were “true and correct.”The employee said she “couldn’t guestimate ” how frequently she submitted court documents without personally verifying the information. In the deposition , a Wells Fargo employee named Tamara Savery said she twice submitted documents to the court about who owned the Guevaras’ loan without personally researching or reviewing  the underlying documents. She said she relied on the “expertise of others ” when signing the legal paperwork.The deposition did not delve into Wells Fargo’s wider practices. But in other cases , Wells Fargo employees have said they signed numerous affidavits a day without first verifying the information.
Foreclosures Had Errors, Bank Finds - For weeks, Bank of America has insisted its review had not turned up any serious errors, and emphasized that it had not found a single case where a homeowner was facing foreclosure in error. But on Sunday, the bank revised its fairly combative public stance. Bank of America had found errors, but only in a tiny number of cases, Dan Frahm, a spokesman for the bank, said late Sunday. “These are examples of exceptions that were caught early in the process through control steps,” Mr. Frahm said. “They do not reflect exceptions in final documents that are being resubmitted to the courts.”
So Much For Bank Claims That Nothing is Wrong with Foreclosures: 4450 Foreclosures Halted In NYC Due to Inaccuracies -- Yves Smith - After the dramatic multi-state foreclosure halts by three major servicers, GMAC, Bank of America, and JP Morgan, over the use of improper, “robo signed” affidavits, the new party line from these banks and others who also used robo signers, like Wells Fargo, is that this was a mere “technical” problem, that they had reviewed ten of thousands of pending foreclosures and claimed the underlying information and processes were sound. A review by the New York Daily News indicates otherwise. Note that New York is a judicial foreclosure state. Thousands of foreclosures across the city are in question because paperwork used to justify the seizure of homes is riddled with flaws, a Daily News probe has found. Banks have suspended some 4,450 foreclosures in all five boroughs because of paperwork problems like missing and inaccurate documents, dubious signatures and banks trying to foreclose on mortgages they don’t even own…..Last week, New York’s top judge, Jonathan Lippman, began requiring all bank lawyers to sign a form vouching for the accuracy of their foreclosure paperwork.
Masaccio: Foreclosure Fraud Isn’t Mere Paperwork -The administration and the banks want you to believe that there is nothing more to foreclosure fraud than just mere paperwork. I point out here that the false affidavits and rocket dockets can rob people of their legal rights. But that was just the first grade primer. When home mortgages are securitized, a whole new level of legal rights and duties are set up that go far beyond the minimal requirements of the Uniform Commercial Code. The interaction of these rights and duties make it difficult to determine who is entitled to enforce securitized mortgage notes.
One Mess That Can’t Be Papered Over - According to real estate lawyers, most banks that have gotten into trouble because they didn’t produce proper proof of ownership in foreclosure proceedings can probably cure these deficiencies. But doing so will be costly and time-consuming, requiring banks to comb through every mortgage assignment and secure proper signatures at each step of the way — and it surely will take much longer than a few weeks, as banks have contended. Once this has been done appropriately (not by robo-signers, mind you) the missing links in the banks’ chain of ownership can be considered complete and individual foreclosures can proceed legally. None of this will be easy, however. And it will be especially challenging when one or more of the parties in the chain has gone bankrupt or been acquired, as is the case with so many participants in the mortgage business.
Morgenson Sort of Acknowledges Problems with Residential MBS Rights to Foreclose - Yves Smith - Gretchen Morgenson has written an uncharacteristically cautious piece, “One Mess That Can’t Be Papered Over,” which in a rather abstract manner, discusses the issue we’ve been harping on for over a month, that the trusts that were established to hold the promissory notes for residential real estate loans and the related liens (the mortgage) may in fact not have taken the steps necessary for them to have ownership. The story only gives a rather hazy account of the issues, and also pulls its punches as to the implications. It does signal the problems could be serious for specific deals, but pointedly steers clear of suggesting they are widespread. I’m puzzled as to the sketchy description and the pulled punches. It might simply have been vagaries of deadlines, however, that Morgenson couldn’t confirm as many details as she needed to to run a more definitive piece. The issue, as we’ve indicated, that some, and we have reason to believe many, residential backed mortgage securitizations failed to take the measures stipulated in the governing contract, the pooling and servicing agreement, for the trust to obtain the promissory notes.
Faulty Foreclosures - Last week Bank of America announced that it was restarting foreclosures after conducting a thorough review of its foreclosure process in two weeks and found everything to be all right.Today the Wall Street Journal reports that Bank of America has found problems in 10-25 of the first "several hundred" loan files it has reviewed as it refiles foreclosures. So what's going on? I think the only way to read these two stories together is to conclude that Bank of America didn't actually conduct much of a review during its brief foreclosure freeze. At best, they engaged in some sampling of loan files, and at worst, they merely reviewed procedures, not actual files. Frankly, it was never credible that BofA (or GMAC) undertook a serious review of foreclosure problems. BofA has taken months, if not years, to achieve a paltry number of loan modifications; why would anyone think that they could possibly give themselves a clean bill of health on foreclosures in a couple of weeks?
Foreclosure Mills in Florida Slipping the Net of Attorney General Investigation - Yves Smith - I hope readers will forgive the overweight reporting on Florida, but it is serving as a test ground for how battles over foreclosures and mortgage fraud will play out around the US. Florida is not only one of the states with the highest level of foreclosures, but it also has the most cohesive group of anti-foreclosure lawyers, as well as more intensive reporting of developments within the state, thanks to sites like 4ClosureFraud.org and ForeclosureHamlet.org. So in many respects, this conflict is more advanced in Florida than in other states.One development which has not gotten much attention is how the local foreclosure mills, which were targeted in an investigation by the state’s Republican attorney general Bill McCollum, seem to be escaping the inquiry. Given the opportunistic timing of the launch of McCollum’s probes, and the fact that the biggest foreclosure mill operator, David Stern, promptly hired the biggest Republican fixer in the state, this outcome should not be surprising. But the investigation is being sidestepped in a very obvious manner; one would think it would have been more seemly to have it peter out, post election, when media interest would have moved on. There appears to have been more than the usual winks and nods to get this matter out of the courts and safely in the hands of the Florida Bar Association: Letter From the Florida Bar to 6th Circuit Chief Judge Mcgrady.
JP Morgan Chase Plays Fast and Dirty in Florida Loan Mod Waiver - Yves Smith - I’ve harbored the sneaking suspicion that JP Morgan Chase is the worst behaved of the big US retail banks, based on a couple of experiences with them a bit more than two years ago. Not to bore readers with details, but basically, bank staff lied to me persistently regarding the terms of various products. Of course, the real terms, spelled out in difficult to decipher language in itty bitty print in a very long document, were far more unfavorable to me. It was only a credit card and a supposedly fee free checking account, both of which I promptly closed, so all I suffered was a teeny bit of inconvenience and the annoyance of being had. But if a fairly finance savvy person like me can be fooled by Chase, image the field day it has with normal marks.Further confirmation of Chase’s duplicity comes via an e-mail from Lisa Epstein, who runs ForeclosureHamlet.org in Florida. If I’ve parsed this document correctly (and lawyers are welcome to opine), it’s a doozy (you can download it from ScribD if you prefer). JP Morgan Chase Foreclosure Waiver and Release Redacted
Lawsuit Alleges that MERS Owes California a Potential $60-120 Billion in Unpaid Land-Recording Fees - Former hedge fund manager Shah Gilani notes: In creating MERS, these institutions actually changed the land-title system that this country - for much of its history - has relied upon to determine legal ownership status of land titleholders. Not only did the lenders sidestep (read that to mean avoid) paying billions of dollars in fees to local governments, they paid themselves from the fees that MERS collected. MERS is facing class-action lawsuits and civil racketeering suits around the country and their members are being individually named in all these suits. One suit alleges that MERS owes California a potential $60 billion to $120 billion in unpaid land-recording fees. If suits against MERS and all its members are successful, unpaid recording fees and fines (that can be as much as $10,000 per incident) would make every one of them insolvent. MERS is a shell company, with no employees.
The Corporatism of MERS - Taken in itself, MERS is just a lesser moving part of the big mechanism of the Foreclosuregate Land Scandal. It’s a malfunctioning gear, not the ghost in the machine. The most important features are the break in the chain of ownership, leaving the liens homeless and vagrant, and the vagrancy of the securities in the MBS trusts. In both cases we seem to be left with nothing but unsecured paper. The MBS themselves are worthless, and neither kind of paper directly touches the house. All of this has been propped up in the eyes of the law by massive, systematic forgery and perjury. The culpable conspiracy to commit fraud must encompass all officers of every entity involved, right up to the CEOs of BofA, Wells, Citi, and JPM. (Goldman Sachs and Morgan Stanley as well, since they knew how the MBS scam worked.) MERS is just an electronic registry set up to secretively toss around ”ownership” in the form of virtual ones and zeroes but not in the form of the physical paper required for it to have any force of law. This was intended to render the conveyor belt from originator to trust and servicer to investor more “efficient”, meaning cheaper in labor and tax evasion. It was also helpful in tranche fraud, since rather than the mortgages actually being sliced and diced ahead of time, the computer waited until one went bad and then assigned it to the proper tranche so the favored gamblers wouldn’t take the hit. The system was like a million Schrodinger’s cat boxes where people bet on how many cats were dead, except that the connected players were tipped off whenever a cat died and always got to avoid those boxes. Nearly a year ago I wrote about this, and I think my description and assessment hold up pretty well
SNR Denton Provides Intellectually Dishonest, Flawed Defense of Mortage Securitizations -- Yves Smith - An analysis posted by the law firm, SNR Denton, “Commentary on Transfers of Mortgage Loans to RMBS Securitization Trusts,’ makes a conceptual error similar to that of the paper my colleague thrashed. It makes a very long and impressive sounding rebuttal of the line of argument made with increasing success by attorneys in court, and recapped on this blog: that the parties to the mortgage securitization failed to take the steps required to convey the borrower promissory notes and related liens (technically, the mortgage or in some states, the deed of trust) to the the securitzation entity, a trust. But as we will show, the arguments made in the article are simply irrelevant.And unlike the graduate student who performed the misguided Fed/Treasury analysis, SNR Denton clearly knows better. SNR Denton is effectively the successor to Thatcher, Proffitt & Wood. Thatcher Proffitt was a leader, arguably the leader, in devising the legal structures and documents for mortgage securitizations. Let’s start from the top of the article, since the efforts to misdirect start there:
Bond Investors to Complain About Robo-Signing Costs - Mortgage-bond investors represented by Dallas lawyer Talcott Franklin will send letters to securities trustees complaining that they shouldn’t bear the costs of loan servicers’ so-called robo-signing. The investors, who Franklin has said own more than $500 billion of the securities, are “pretty disturbed” that mortgage-bond trusts are being forced to pay penalties after loan servicers including Detroit-based Ally Financial Inc. filed false affidavits in foreclosure cases, he said. Judges are forcing the trusts to cover homeowners’ attorney fees when servicer misdeeds are discovered, he said. “Look who got sanctioned,” Franklin said today at a conference in New York organized by law firm Grais & Ellsworth LLP. “It wasn’t the servicer, it was the holder of the note.” Franklin said the group of investors coordinating through his firm’s RMBS Investor Clearing House now own more than 25 percent of so-called voting rights for about 2,600 mortgage securitizations, and more than 50 percent for about 1,150 deals.
Blackrock VP Editorial on Bankruptcy Reform for Foreclosure Fraud Crisis, Junior Lien Problems - I missed it the first time around, but I wanted to flag this WSJ editorial by Barbara Novick, a vice chairman of BlackRock, titled Why a Foreclosure Moratorium Is a Bad Idea. So what’s the answer to this mess? Bankruptcy reform. A special chapter of bankruptcy should be created to fix the mortgage crisis and hasten a housing recovery, while protecting borrowers and investors alike. Regulators would identify an affordable total debt-to-income ratio for overburdened borrowers. Qualified individuals could then file for this special bankruptcy by presenting all their debts—mortgages, credit-card bills, car loans, and the like—to a court (or an arbitrator). No debts would be excluded, so the borrower’s entire balance sheet could be addressed. I can guarantee that if bankruptcy reform was seriously back on the table then calls for a foreclosure moratorium would go away. Indeed it’s because our courts have been corrupted through the current foreclosure processes, and the normal reset mechanism for debts in courts has a defect which excludes mortgages (because nobody ever thought there could be a nationwide housing bubble before), that bankruptcy reform would be the ultimate safeguard.
More on the Peculiar Pimco, BlackRock, New York Fed Putback Letter to Countrywide - Yves Smith - Readers may find it odd that I keep returning to the matter of the widely touted letter last week signed by investors Pimco et al pushing Countrywide as servicer to put back loans on some 115 mortgage securitizations totaling $47 billion, of which the letter-writers holdings represent roughly $16.5 billion. The big reason is that this letter, which is a procedural first step which may be laying the ground for litigation, is likely to mean far less than the media reaction would lead you to believe. We did a quick and dirty analysis last week that showed that even if this effort succeeds, the recovery amount is likely to be far less than is widely anticipated. Aside from the overhyping of this particular situation, we have suddenly seen a shift in sentiment where banks and servicers are suddenly seen as vulnerable, and all sorts of litigation is being filed. The problem is that a lot of reporters tend to treat all cases as having equally good potential, when some have good foundations in underlying legal theories and fact sets, while others are a stretch. This particular possible future legal action falls into the latter category. Let’s dig into a couple of issues.
Bank of America, JPMorgan Get Texas Subpoenas on Foreclosures - Bank of America Corp., JPMorgan Chase & Co. and seven other banks or loan servicers were subpoenaed by Texas Attorney General Greg Abbott for information about their foreclosure practices, a spokesman said.“The state is subpoenaing information and documents,” Jerry Strickland, the spokesman, said yesterday in an interview. He didn’t elaborate. The state also subpoenaed Ally Financial Inc., CitiMortgage Inc. and Wells Fargo & Co The Texas subpoenas followed letters sent by Abbott’s office to 30 loan servicers on Oct. 4, asking them to halt foreclosures in the state pending a review of their practices. Abbott asked banks then to identify employees who filed faulty affidavits or other documents in the state and identify foreclosures that used such documents. He also asked lenders and servicers to halt all sales of properties previously foreclosed upon and stop all evictions.
Bank of America Sued in Class Action Over Flouting of Foreclosure Rules - Bank of America has been hit with a class action on behalf of homeowners seeking damages for alleged disregard of foreclosure process rules. The suit, filed Wednesday in federal court in Newark, N.J., accuses Bank of America and two subsidiaries, LaSalle Bank and BAC Home Loans Servicing, of "an undisciplined rush to seize homes" through "pervasive and willful disregard of knowledge, facts and statutes." Bank of America has filed foreclosure proceedings on many mortgages in New Jersey without holding the necessary rights as the mortgagee or assignee at the time of foreclosure, the suit says. "Many thousands of foreclosures are plainly void under statute and settled New Jersey case law. Many borrowers never obtain statutorily required notices, and many foreclosure suits are filed entirely based in inaccurate recitations concerning ownership of the mortgage, the note, or the assignment," the suit says.
Fed’s ‘Pit Bull’ Takes on Bank of America in BuyBack Battle - Kathy D. Patrick is a Houston lawyer who spends her Sundays teaching children about God. The rest of the week, according to one attorney who knows her, she can be “as frightening as a pit bull on steroids.” Patrick, 50, is “fearless and tenacious,” said Dan Cogdell, a Houston criminal-defense lawyer who said she is capable of pit bull-like aggressiveness “if the need be.” If she succeeds in getting Bank of America to settle, it may trigger more calls for buybacks in the $1.4 trillion market for so-called non-agency mortgage securities, which lack government backing. Bank costs from repurchasing mortgages in such securities may total as much as $179.2 billion, including expenses related to suits against bond underwriters, Chris Gamaitoni, a Compass Point Research and Trading LLC analyst, estimated in August.
Don't count on banks buying back those bum mortgages. -Last week several large investors and the New York Federal Reserve sent a threatening letter to Countrywide, the mortgage giant that is now part of Bank of America. The investors were objecting to the way Countrywide was handling $47 billion in mortgage-backed securities that they owned. (The New York Fed is involved because it owns Bear Stearns and AIG securities as part of the rescue of those firms.) Arguing, among other things, that these mortgages didn't meet Countrywide's purported underwriting standards, the investors want Countrywide to buy them back.Chris Gamaitoni of Compass Point estimates that the 11 biggest banks, including JP Morgan, Bank of America, and Goldman Sachs, could end up losing almost $200 billion thanks to mortgage repurchases. That is a stunning and (given banks' well-publicized misbehavior in creating the housing mess) supremely satisfying number. Forcing mortgage bankers to buy back those bad loans seems like perfect retribution. But investors probably can't make it happen.
U.S. probing foreclosure processing firms - The more banks foreclosed on homes, the more a little-known company in Florida called Lender Processing Services saw its revenue and stock price soar. For a fee, the Jacksonville company would locate and assemble the documents necessary for a lender to foreclose on a borrower who defaulted on a mortgage. Working on behalf of the biggest names in the industry, including J.P. Morgan Chase, Bank of America and Citigroup, LPS says it handles more than half of all foreclosures in the country. Now, amid reports of shoddy and possibly fraudulent paperwork, LPS as well as a handful of other document processors and law firms are coming under scrutiny for the criminal investigations into the foreclosure debacle. Law enforcement authorities on both state and federal levels are probing whether individuals at these foreclosure companies and at the banks that hired them committed an array of possible crimes - mail and wire fraud, money laundering, conspiracy and racketeering. No charges have been filed.
Mortgage Industry Defense is Flimsy, Congressional Oversight Panel Provides Counter-Evidence - Yves Smith - Reader MBSGuy wrote to express his disgust with the mortgage industry’s efforts to pretend that nothing is rotten in Denmark. His object of contempt was an article in Bloomberg which dutifully recited the current talking points. The flacks have clearly been working full time: the headline, “Mortgage Industry Bristles at ‘Robin Hood’ Foreclosure Theories,” is yet another example of creative phrase-mongering to try to discredit critics. And get a load of the assertions: The “number of attorneys that signed off on” the policies used when Wall Street firms packaged mortgages into bonds means it’s likely that the trusts used to hold the debt will be able to prove they own the loans in almost all cases, said Philip Seares, a managing director at Citigroup Inc. who run its trading of whole loans. The industry also has faith that loan assignments handled by the Mortgage Electronic Registration System, or MERS, can’t be broadly contested, Seares and Mortgage Bankers Association President John Courson said, As we indicated in a post earlier tonight, judges ARE contesting the use of MERS, and in particular, the casual assignments made by parties who were not employees of the company that owned the note. In addition, all state supreme courts that have ruled on foreclosures in the name of MERS (admittedly a different issue than MERS assignments per se), save Minnesota, which passed MERS-friendly statutes, have ruled against it. .
NYC Judge Foreclosure Smackdown Shows Problems With Bank “Technicalities” Defense - Yves Smith - (video) A story at the New York Daily News on a foreclosure case dismissed by Judge Arthur Schack illustrates that the problems that banks are having with foreclosures, which they are characterizing as “technical” or “paperwork” run deeper than that. And that is before you get to the issue that we have discussed at length on this blog, namely, the failure to convey promissory notes and related liens as stipulated by the contract governing mortgage securitizations, the pooling and servicing agreement. It is important to acknowledge that Judge Schack is an outlier. He was early to take issue with the bank practices in foreclosure filings and details some of the problems he sees on a routine basis: However, it is also important to bear in mind that Schack’s concerns result strictly from looking at the ability of servicers and trustees to establish that they are really the proper party to be foreclosing. The reason that this is of concern is that there are documented cases of multiple parties showing up to foreclose on a single home, and a party that per the Office of the Comptroller of the Currency was not the noteholder winding up with the home. That means the borrower, having already lost her home, is exposed to the risk of the real noteholder trying to obtain the balance of the mortgage from her.
Wells Fargo to refile 55,000 foreclosures - Wells Fargo & Co. on Wednesday conceded that it discovered flaws in foreclosure documents and that it plans to refile paperwork in 55,000 foreclosure cases.The San Francisco-based bank had previously stood by its foreclosure paperwork as other major mortgage lenders came under scrutiny. Wells Fargo proceeded with foreclosures while rivals including Bank of America Corp. and JPMorgan Chase & Co. delayed theirs. Wells said it had identified possible problems with a final step in its foreclosure process by bank employees and notaries on legal affidavits. The bank will begin the filings in 23 states and hopes to complete them by mid-November.
Wells Fargo Finds Foreclosure “Lapses” in 55,000 Current Cases - Yves Smith - We criticized Wells for falsely claiming in briefings in Washington DC that it did not have robo signers when there were already depositions in the public domain to the contrary. In these same presentations, Wells claimed to be a good operator, free of the sort of lapses at other servicers that were generating bad press. Wells was shown to be a liar on the first count, and amusingly in a prominent venue. In a weird bit of cosmic justice, the very next day, the Financial Times ran a first page story on the Wells use of robo signers. The second shoe dropping, the general lapses in Wells’ foreclosures, has taken more time to come to light, and this time, they are by the bank’s own admission. However, as has proven to be the pattern with all the major parties in the foreclosure process, Wells is claiming that needing to file additional documentation in 55,000 cases is no big deal and of course that nothing really is amiss. It will be interesting to see what local courts make of this. If any of these new filings contradict previously provided evidence (and by definition, a replacement of a robo signed affidavit is an admission the earlier submission was improper, hence a fraud on the court;
The real reason why a foreclosure moratorium would be a bad idea - I was on Marketplace the other day debating Mike Konczal about whether a foreclosure moratorium would be a good idea. I took the no position for two reasons: (1) A moratorium would slow down the eventual resolution of the housing crisis; (2) A moratorium would add yet another level of uncertainty about the ability to foreclose going forward, which would discourage the private sector from returning to the mortgage market. If lenders can't take away the houses of people who don't make their payments, they will not advance mortgage money in the first place. But last night it occurred to me why I have such a visceral reaction to such things as moratoriums: they strip property rights without due process. If a borrower agrees to repay a mortgage, and everything about the mortgage is legitimate, and the borrower ceases to make payments, the lender has a property right to take the house.
Ohio Attorney General Guts Bank “Just Submit New Affidavits” Plan - Yves Smith - We have pointed out several times that banks were being awfully optimistic in assuming that they could simply replace improper “robo signed” affidavits with ones that were done correctly. The submission of a phony affidavit is a fraud on the court. The lawyers involved are subject to sanctions and judges could reject the filing, forcing banks to restart foreclosures from scratch. The Ohio attorney general is using the leverage this situation presents to turn the table on banks. From the Wall Street Journal:In two letters released Friday, Attorney General Richard Cordray criticized a number of banks and loan-servicing companies, including Wells Fargo & Co.; Ally Financial Inc.’s GMAC Mortgage; Bank of America Corp.; and J.P. Morgan Chase & Co. Mr. Cordray said the banks are trying to paper over fraud committed in foreclosures with temporary fixes that don’t address underlying problems in the banks’ practices.“It is not acceptable for a party who believes they submitted false court documents to merely replace those documents. Wells Fargo and any other banks are not simply allowed a ‘do-over,’” he wrote in the letter to Wells. The other letter was sent to Ohio judges, who were asked to notify Mr. Cordray when banks file substitute affidavits….“The banks are committing fraud on the court, essentially perjury, and then saying ‘Whoops! You caught me! Here’s some different evidence and use that instead,’
Will State AGs in Shining Armor Slay the Bank Dragons? - Yves Smith -Joe Nocera has a very hopeful piece at the New York Times on the potential scope and impact of the investigation by all 50 state attorneys general into the robo signing scandal. Nocera stresses that the leader of this effort, Tom Miller of Iowa, and a core group of assistant AGs with long standing working relationships, are using the probe into what banks would have you believe are mere paperwork problems to delve into more serious abuses, with an eye to forcing the servicers to make serious loan modifications: And best of all, they have a very clear idea of what they are trying to accomplish. They don’t want to merely reform the foreclosure system (though that would be nice, wouldn’t it?). Nor do they particularly want a big financial settlement, which would be meaningless for a giant like Bank of America. Rather, they hope to use their investigation as a cudgel to force the big banks and servicers to do something they’ve long resisted: institute widespread, systematic loan modifications. “Instead of paying a huge fine,” “maybe have the servicers adequately fund a serious modification process.” Getting the banks and servicers to take loan modification seriously is another in a series of areas where the Obama Treasury Department has failed miserably.
Foreclosuregate Explained: Big Banks on the Brink - Scandal is spreading across Wall St. like a very bad case of poison ivy. A rash of fraudulent home foreclosures has exposed some of the nation's biggest banks to an even worse condition ... bankruptcy. Until late 2007, the money boys on Wall St. made a bundle in the housing market. After the bubble burst, they were just itching to cash in on the down side, calling in all those bad loans they made and selling off millions of repossessed homes. According to RealtyTrac, Inc., which compiles such data, lenders foreclosed on 3.2 million properties in the last three years, 288,000 in the last quarter, the highest number on record. But evidence came to light, first in New York, then Florida, Maine, Ohio, and other states that lenders were taking shortcuts to speed up foreclosures. Law firms hired so-called "robo-signers," some of whom have admitted in depositions that they routinely signed off on thousands of foreclosure papers they had never read and sometimes forged signatures of notary publics who were not present.
Title insurers drop demands on mortgage lenders in foreclosure cases - Mortgage servicers have successfully pushed back an attempt to make them explicitly responsible for title problems resulting from their handling of foreclosure paperwork and legal procedures. Three major title insurance companies - First American Financial, Old Republic International and Stewart Information Services - told Wall Street analysts in conference calls Thursday that they had decided not to demand written indemnifications from lenders re-selling foreclosed homes. Combined, the three companies account for 52 percent of the title insurance market. Such indemnification agreements were drafted earlier this month with input from Fannie Mae and Freddie Mac and their regulator, the Federal Housing Finance Agency, along with the title industry's trade group, the American Land Title Association. They were seen as a way to keep the market for foreclosed properties working despite legal uncertainty.
More on Foreclosures and Discovery - Adam's post earlier this week, about how Federal bank regulators are examining whether mortgage companies cut corners during foreclosures, suggests more discovery questions for those defending foreclsoures. These inquires might include “To your knowledge, are your mortgage foreclosure policies or procedures currently under investigation by any governmental agency? If so, please state the name of the investigating agency and describe the nature of the investigation.” The request for production could also include a request for “copies of all documents you have received in connection with any investigation described in response to [the interrogatory].” An attorney might also request regular supplements to the response, where the rule does not require it, since the discovery rules can be scetchy on this point in some jurisdictions.
Banks ‘Want to Sit Down’ With States to Discuss Foreclosures - A 50-state task force investigating U.S. foreclosure practices may meet with lenders as early as this week, less than a month after JPMorgan Chase & Co. and Bank of America Corp. suspended some home seizures. “We’ve had several conference calls with major lenders,” Colorado Attorney General John Suthers said in an interview, declining to specify which ones. “The banks want to sit down with the attorneys general. These meetings are being set up,” said Suthers, whose office is a member of the executive committee of the task force.
Foreclosure activity up across most US metro areas -- The foreclosure crisis intensified across a majority of large U.S. metropolitan areas this summer, with Chicago and Seattle - cities outside of the states that have shouldered the worst of the housing downturn - seeing a sharp increase in foreclosure warnings. California, Nevada, Florida and Arizona remain the nation's foreclosure hotbeds, accounting for 19 of the top 20 metropolitan areas with the highest foreclosure rates between July and September, foreclosure listing firm RealtyTrac Inc. said Thursday."The epidemic is spreading from the states at the ground zero of the foreclosure problems out into areas that hadn't been previously affected,"
Homeowners Facing Foreclosure Demand Legal Recourse - As lenders have reviewed tens of thousands of mortgages for errors in recent weeks, more and more homeowners are stepping forward to say that they were victims of bank mistakes — and in many cases, demanding legal recourse. Some homeowners say the banks tried to foreclose on a house that did not even have a mortgage. Others say they believed they were negotiating with the bank in good faith. Still others say that even though they are delinquent on their mortgage payments, they deserve the right to due process before being evicted. Some consumer lawyers say they are now swamped with homeowners saying they have been wronged by slipshod bank practices and want to fight to keep their homes. Joseph deMello, a Massachusetts lawyer who represents Mr. Rought, said the common denominator in many of the cases was an overwhelmed system of foreclosures in which banks relied on subcontractors to do much of the work.
The Big Lie on Fraudclosure - Yesterday morning, I had The Misinformation Hour on TV as I got dressed for work. One of the comments that was made – “No one was wrongly thrown out of their home” — was repeated or ignored by hosts and guests alike. This is patently demonstrably false, and yet no one challenged it. The banks have gotten the Big Lie technique down to a science: State a lie so colossal that no one could believe anyone “has the impudence to distort the truth so infamously.” In practice, adding factually accurate, but irrelevant or misleading color, helps push the lie on unsusp0ecting rubes. The banks and their many supplicants have been successful in doing just that in the robosigning issue. Any discussion about property rights, due process, or criminal investigations into perjury are thwarted; instead, the focus is on deadbeat homeowners. And note that I am the guy who in Q1 2010 wrote More Foreclosures, Please . . .) The misdirection is successful, and the average reader/viewer/listener has no idea how badly they are being misinformed.
US Foreclosure Pipeline Slows - The foreclosure process in the US is slowing, enabling delinquent borrowers to stay in their homes for months after they stop making mortgage payments, according to one of the largest lenders. Freddie Mac, one of the two government-owned entities that finance about half all US mortgages, says that homes are taking as long as eight months to work their way through its foreclosure pipeline, two months longer than was typical before the housing crisis began. The delay is the result of more borrowers staying in their homes for months after foreclosure proceedings have begun, requiring Freddie Mac to evict them before it can put those homes back on the market.
Freddie Mac: 90+ Day Delinquency Rate Declines Slightly in September - The following graph shows the Freddie Mac serious delinquency rate (loans that are "three monthly payments or more past due or in foreclosure"):Freddie Mac reports that the serious delinquency rate declined to 3.80% in September, from 3.83% in August. Some of the rapid increase last year was probably because of foreclosure moratoriums, and distortions from modification programs because loans in trial mods were considered delinquent until the modifications were made permanent. As modifications have become permanent, they are no longer counted as delinquent. Also, both Fannie Mae and Freddie Mac started foreclosing again (they have a record number of REOs) - and REO (real estate owned) is not counted in the delinquency rate. The delinquency rate will probably start increasing again in October because of more foreclosure moratoriums, and possibly from falling house prices.
Mortgage delinquencies are in 'serious trouble,' says LPS analyst - Kyle Lundstedt, managing director of the applied analytics division at Lender Processing Services, said the housing market remains in "serious trouble" as current mortgage delinquencies are above 7 million distressed homeowners. Lundstedt spoke at Thursday's State of Housing webinar hosted by HousingWire. He said that he doesn't agree with earlier speaker Mark Zandi, chief economist for Moody's Analytics, who held strong optimism for the housing market. Perhaps most alarming to Lundstedt is the rise in prime mortgage delinquencies. "The prime markets are the place we've seen the most increase in foreclosure," he said. Lundstedt also pointed to regional troubles in the housing market. "It's shocking the 13% of mortgage in Florida are in foreclosure," he said. "Not delinquent, not in default, but in foreclosure."
Mortgage Modifications Slow in September - Even as banks, borrowers and regulators battle over how much faulty documentation by lenders should impede foreclosures, fresh evidence came Monday that the housing market remained very wobbly. Only 28,000 defaulting borrowers received permanent loan modifications in September, the Treasury Department said. That was the lowest number since last fall when the program to help struggling homeowners stay in their homes was just getting started. Would-be sellers also had a tough go of it recently on two fronts. Home sales continued to fall sharply from 2009 levels and prices started to drop again after a period of equilibrium, according to separate reports from the National Association of Realtors and CoreLogic, a housing data company.
Foreclosures Are Revived - Short Sales Are Resisted -— Bank of America and GMAC are firing up their formidable foreclosure machines again today, after a brief pause. But hard-pressed homeowners like Lydia Sweetland are asking why lenders often balk at a less disruptive solution: short sales, which allow owners to sell deeply devalued homes for less than what remains on their mortgage. Ms. Sweetland, 47, tried such a sale this summer out of desperation. She had lost her high-paying job and drained her once-flush retirement savings, and her bank, GMAC, wouldn’t modify her mortgage. The halt in most foreclosures the last few weeks gave a hint of hope to homeowners like Ms. Sweetland, who found breathing room to pursue alternatives. Consumer advocates took the view that this might pressure banks to offer mortgage modifications on better terms and perhaps drive interest in short sales, which are rising sharply in many corners of the nation.
Short Sales vs. Foreclosures - Michael Powell at the NY Times looks at short sales and foreclosures: Owners Seek to Sell at a Loss, but Bankers Push Foreclosure The article offers two explanations for why lenders seem to prefer foreclosures: 1) short sale fraud, and 2) some incentives might favor foreclosure. From Powell: [F]inancial incentives can push toward a foreclosure rather than a short sale. Servicers can reap high fees from foreclosures. And lenders can try to collect on private mortgage insurance. Some advocates and real estate agents also point to an April 2009 regulatory change in an obscure federal accounting law. The change, in effect, allowed banks to foreclose on a home without having to write down a loss until that home was sold. By contrast, if a bank agrees to a short sale, it must mark the loss immediately.In a more normal environment, servicers can "reap high fees" from foreclosures, but in the current environment there is a less of an incentive (since investors are reviewing all expenses closely). And mortgage insurance is a definite stumbling block to some short sales. But there is little evidence of the banks sitting on REOs to avoid taking losses (there just aren't that many REOs on their balance sheets) - so I think that point is incorrect.
Foreclosures vs Short Sales vs Principal Modifications by Kid Dynamite - Short sales, on the other hand, seem like a slam dunk for the banks - instead of having to foreclose, remove the borrower from the house and sell the house themselves - the banks merely have to accept less than the value of the mortgage in a sale of the house. Since the value of the house bears no resemblance to the outstanding mortgage, I would think that the banks would like this deal - homeowners are hardly going to take advantage of banks by executing short sales (although there are potential ways that people try to beat the system with short sales, like having a friend buy the house on the cheap and then sell it back to them). As long as the banks have a decent estimate of the market value of the home, it seems clear to me that they should prefer a short sale at fair market value to a foreclosure which would then result in the bank attempting to garner fair market value anyway through their own sale process. Which brings me to today's NY Times article about how hard it is to get short sales done - banks prefer to foreclose, for some mysterious reason.
Should the US Government Encourage Banks to Write Down the Principal on Underwater Mortgages? - The Economist asks: Should the US government encourage banks to write down the principal on underwater mortgages? And if so, how? I didn't have anything to say, but I answered anyway: Only in ways that avoid using taxpayer cash Mark Thoma. Here are the other responses:Yes, it's the best route to household deleveraging Viral Acharya Banks must mark their assets to market Laurence Kotlikoff The sooner banks acknowledge losses, the better Hans-Werner Sinn [all responses]
September Existing Home Sales: 4.53 million SAAR, 10.7 months of supply - The NAR reports: September Existing-Home Sales Show Another Strong Gain Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, jumped 10.0 percent to a seasonally adjusted annual rate of 4.53 million in September from a downwardly revised 4.12 million in August, but remain 19.1 percent below the 5.60 million-unit pace in September 2009 when first-time buyers were ramping up in advance of the initial deadline for the tax credit last November.This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. The second graph shows nationwide inventory for existing homes.According to the NAR, inventory decreased slightly to 4.04 million in September from August from 4.12 million in August. The all time record high was 4.58 million homes for sale in July 2008. The last graph shows the 'months of supply' metric. Months of supply decreased to 10.7 months in September from 12.0 months in August. This is extremely high and suggests prices, as measured by the repeat sales indexes like Case-Shiller and CoreLogic, will continue to decline.
Home Sales: Distressing Gap Sept 2010 - By request, here is an update - this graph shows existing home sales (left axis) and new home sales (right axis) through September. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due partially to distressed sales). Note: it is important to note that existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different. Initially the gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties. The two spikes in existing home sales were due primarily to the homebuyer tax credits (the initial credit last year, followed by the 2nd credit this year). There were also two smaller bumps for new home sales related to the tax credits.
Existing Home Inventory increases 8.9% Year-over-Year - Earlier the NAR released the existing home sales data for September; here are a couple more graphs ... The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change. Although inventory decreased slightly from August 2010 to September 2010, inventory increased 8.9% YoY in September. This is the largest YoY increase in inventory since early 2008. Note: Usually July is the peak month for inventory. The year-over-year increase in inventory is very bad news because the reported inventory is already historically very high (around 4 million), and the 10.7 months of supply in September is far above normal. And double digit months-of-supply suggests house prices will continue to fall. By request - the second graph shows existing home sales Not Seasonally Adjusted (NSA). The red columns are for 2010. Sales for the last three months are significantly below the previous years, and sales will probably be well weak for the remainder of 2010.
Shadow Inventory Avalanche, Coming Soon - Much has been written about the so-called “shadow inventory” since the term was first coined a few years ago. Some analysts and commentators have argued about whether it even exists. Let’s take an in-depth look at this shadow inventory and see whether it really is a threat to housing markets around the country. Rather than joining the dispute about what the term actually means, I will simply define it in this way: The “Shadow Inventory” is comprised of all those distressed residential properties (other than MLS listings) which we know will almost certainly be coming onto the market in the not-to-distant future. The starting point in discussing the shadow inventory has to be homes actually on MLS listings around the country. With the plunge in home sales starting in July, the number of listings has risen substantially since the spring. For example, California listings are up 25% since April.
Number of the Week: 107 Months to Clear Banks’ Housing Backlog - 107: How many months it would take to sell banks’ current and shadow inventory of foreclosed homes. Banks’ vast pile of foreclosed homes doesn’t appear to be diminishing. That’s a troubling sign for the future of the housing market. Back in April, this column tallied up all the foreclosed homes sitting in banks’ inventory, as well as the “shadow” inventory of homes in the foreclosure process or on which owners had missed at least two mortgage payments. At the time, we reported that at the current rate of sales, it would take 103 months to unload it all. Over the past six months, that number has actually risen. Banks managed to pare down the shadow inventory, but largely by taking possession of foreclosed homes. As of September, they owned nearly 994,000 foreclosed homes, up 21% from a year earlier. The shadow inventory stood at 5.2 million homes, down 7% from a year earlier. Grand total: 107 months of inventory.
WSJ Survey: Housing Inventories up in 19 of 28 Markets Year-over-Year - From the WSJ: Housing Gloom Deepens - The growing pessimism is attributed partly to rising inventory in many markets ... The Wall Street Journal's latest quarterly survey ... in 28 major metropolitan areas found inventories of unsold homes were up in 19 markets ... compared with a year ago ... "We'll see some additional price declines," said David Berson, chief economist at PMI Group Inc ... "The gains we've seen can't be sustained given the current supply situation." I highlighted the 8.9% year-over-year inventory increase in the NAR report - a strong indicator of more house price declines to come, especially with the already high level of supply. This survey from the WSJ shows that the inventory increases are fairly widespread. And that suggests that price declines will probably be widespread too. This morning CoreLogic noted that house prices declined in 78 out of the largest 100 metropolitan areas in their August report.
CoreLogic: House Prices Declined 1.2% in August - Notes: CoreLogic reports the year-over-year change. The headline for this post is for the change from July 2010 to August 2010. The CoreLogic HPI is a three month weighted average of June, July and August, and is not seasonally adjusted (NSA). From CoreLogic: August Home Prices Declined 1.5 Percent Year Over Year CoreLogic ... today released its Home Price Index (HPI) which shows that home prices in the U.S. declined for the first time this year. According to the CoreLogic HPI, national home prices, including distressed sales, declined 1.5 percent in August 2010 compared to August 2009 and increased by 0.6 percent in July 2010 compared to July 2009. Excluding distressed sales, year-over-year prices declined 0.4 percent in August 2010. ...
U.S. home prices drop 0.2% in August— Home prices fell 0.2% in August, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s, in a report labelled “disappointing” by its compilers. This is the first drop in the index after four straight monthly gains as demand spiked by the homebuyer tax credit that expired at the end of April. Prices fell in 15 of the 20 metropolitan areas tracked by Case-Shiller in August compared with July. Annualized price growth slowed to 1.7% from 3.2% in July. Chicago, Detroit, Las Vegas, New York and Washington, D.C. were the only five cities that recorded small improvements in home prices over July.
Case-Shiller: Home Price declines widespread in August - S&P/Case-Shiller released the monthly Home Price Indices for August (actually a 3 month average of June, July and August). This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities).Case-Shiller reports NSA, I use the SA data. From S&P: Home Prices Increases Slow Down in August Data through August 2010, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show a deceleration in the annual growth rates in 17 of the 20 MSAs and the 10- and 20-City Composites in August compared to what was reported for July 2010. The 10-City Composite was up 2.6% and the 20-City Composite was up 1.7% from their levels in August 2009. Home prices decreased in 15 of the 20 MSAs and both Composites in August from their July levels.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 29.2% from the peak, and down 0.2% in August(SA).The Composite 20 index is off 28.8% from the peak, and down 0.3% in August (SA). The second graph shows the Year over year change in both indices. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.
A Look at Case-Shiller, by Metro Area (October Update) The S&P/Case-Shiller Composite 20 home price index, a broad gauge of U.S. home prices, posted a 1.7% increase from 2009, but the gains decelerated sharply in the waning days of government tax credits and 12 of 20 cities posted year-over-year declines. On a monthly basis, 15 cities notched declines from July, compared to just eight month-on-month drops in the July report. Seasonal variations can distort month-on-month comparisons. Based on a seasonal adjustment calculated by S&P, no city posted a monthly home-price increase in August. “Given the continued influx of distressed properties – which make up about one third of sales – it is hard to make a case for significant price appreciation,” “Furthermore, given the ongoing supply/demand imbalance, we remain of the belief that further declines in prices simply have to be realized in order to help clear the market in an efficient manner.”Below, see data from the 20 metro areas Case-Shiller tracks, sortable by name, level, monthly change and year-over-year change — just click the column headers to re-sort.
Down again - THE storm clouds have been gathering for months. Almost immediately after the expiration of the government's tax credit for homebuyers, it became clear that American housing market stability had been remarkably dependent on the generous subsidy. Data on mortgage applications for purchase and new and existing home sales attested to a striking contraction in housing market activity. And eventually prices began to follow. In July, both of the national home price indexes published by S&P/Case-Shiller ticked downward after rising for much of the previous year. Data released this morning indicated that declines accelerated in August. The broadest index, Case-Shiller's 20-city composite, fell 0.3% from July to August (this data is seasonally adjusted), after sinking 0.2% the prior month. Home prices were still up year-over-year, but the pace of annual appreciation declined in August. On seasonally adjusted data, only 1 of the 20 cities surveyed enjoyed an increase in prices in August. New York, alone, had a rise in values for August—of 0.01%. Five cities experienced monthly price declines of greater than 1%, and in Phoenix values fell 2.2% just from July to August. Prices in Las Vegas fell yet again. Values in Sin City are at their lowest level since December of 1999, a drop of almost 60% from the peak of the boom.
Clear Capital Reports Sudden and Dramatic Drop in U.S. Home Prices - Clear Capital issued a market alert Friday after identifying what the company called a “dramatic change” in U.S. home prices. The valuation firm’s index is showing a 5.9 percent two-month drop in home prices through September and October, representing a magnitude and speed of decline not seen since March 2009, the height of the housing downturn. “Clear Capital’s latest data through October 22 shows even more pronounced price declines than our most recent Home Data Index market report released two weeks ago,” said Dr. Alex Villacorta, senior statistician for Clear Capital. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.” With a falloff of nearly 6 percent in just two months, home prices are now at the same level as in mid-April 2010, two weeks prior to the expiration of the federal government’s homebuyer tax credit, according to Clear Capital.
House Prices have corrected to what year? - Housing consultant John Burns presented this slide as part of the UCLA Anderson Forecast this week: John Burns used median prices for this slide. It shows that the "biggest bubble markets" are back to 2000 to 2002 median prices, whereas some areas are still at 2006 prices. And here is a timeline for the 20 Case-Shiller cities: There is no y-axis because this is based on a price index (not median prices). Detroit is back to 1995 prices, and some cities like Dallas, Portland and Seattle are only back to 2005 or 2006 prices (the bubble arrived later in the Northwest).
Real House Prices, Price-to-Rent Ratio - Yesterday CoreLogic reported that house prices declined 1.2% in August, and this morning S&P Case-Shiller reported widespread price declines in August (really an average of June, July and August). This post looks at real prices and the price-to-rent ratio, but first here is a graph of the two Case-Shiller composite indexes, and the CoreLogic HPI (NSA).All three indexes are above the lows of early 2009, but it appears that prices are now falling - and I expect all three indexes to show new lows later this year or in early 2011. Here is a similar graph through August 2010 using the Case-Shiller Composite 20 and CoreLogic House Price Index.This graph shows the price to rent ratio (January 1998 = 1.0). Recent reports suggest rents might have bottomed, but this suggests that house prices are still a little too high on a national basis. The third graph shows the CoreLogic house price index and the Case-Shiller Composite 20 index through August 2010 in real terms (adjusted with CPI less Shelter).
Home Builders Slash 2010 Construction Forecast - The National Association of Home Builders Wednesday slashed its 2010 forecast for single-family home construction, but said activity will accelerate the following two years as the economy improves.Single-family housing starts are set to grow 8.4% this year to 479,000 before construction hits 655,000 new houses in 2011 and 970,000 in 2012, the association said.“Single-family starts will revive, slowly,” chief economist David Crowe said in presentation slides ahead of the group’s construction forecast seminar. In May, the group had forecast 552,000 single-family starts in 2010. That would have been a 24.9% jump from last year’s 442,000, the lowest annual output since the government began collecting the data in 1959.
Record-low mortgage rates will be gone in 2011: MBA - Mortgage rates may be as low as they’ll get — rates are on course to rise, slowly moving toward 5% by the end of next year, according to the Mortgage Bankers Association’s economic forecast, released Tuesday at the group’s annual convention here. The group predicts rates on the 30-year fixed-rate mortgage will average 4.4% in the fourth quarter of 2010, increasing to a 4.7% average in the first quarter of 2011, and climbing to 5.1% by the end of next year. That’s barring any “blockbuster” announcement from the Federal Reserve next month, said Jay Brinkmann, chief economist of the MBA.
Mortgages to Drop Below $1 Trillion to Low Since 1996 -- Home lending in the U.S. will fall below $1 trillion next year to the lowest level since 1996, according to the Mortgage Bankers Association. Originations will decline to $996 billion in 2011, from a projected total of $1.4 trillion this year, the trade group said today in a statement released during its annual conference in Atlanta. Lending reached a record $3.8 trillion in 2003 as refinancing soared, with new loans remaining elevated over the next few years as home prices and sales boomed. Rates that are unlikely to go lower even if the Federal Reserve buys more U.S. debt will cause refinancing to dissipate by the second half of next year, Jay Brinkmann, the mortgage group’s chief economist, said. A rush by U.S. homeowners to refinance at near record-low interest rates has marked a rare bright spot for the mortgage industry, under attack for choking the economy with shoddy loans and botched foreclosures.
DataQuick: California Mortgage Defaults Rise in Third Quarter - This graph shows the Notices of Default (NOD) by year through 2009, and for the first three quarters of 2010, in California from DataQuick. Although the pace of filings has slowed from the previous two years, it is still very high by historical standards. From DataQuick: California Mortgage Defaults Rise in Third Quarter The number of foreclosure proceedings initiated by lenders between July and September edged higher on a quarter-to-quarter basis for the first time since early last year. But the number of home owners who went all the way through that process to foreclosure dipped from the previous quarter and a year ago, a real estate information service reported. A total of 83,261 Notices of Default ("NODs") were recorded at county recorder offices during the July-through-September period. That was up 18.9 percent from 70,051 in the prior quarter, and down 25.5 percent from 111,689 in third-quarter 2009,
Mass defaults call into question notion that we're getting thriftier - Nearly three years after borrowing pushed the country into the Great Recession, Americans are still cleaning up their debts. Dallas-Fort Worth residents have an average of $1,423 less consumer debt than they had in June 2008, according to Experian, one of the big national credit-rating agencies. Another measure shows the average Texan has shed $1,227 – 3.3 percent of total debt. Consumers in states with higher average debt loads have reduced even more – in California, by nearly 10 percent. But are we paying these debts or walking away? What have we learned from punishing economic times? "The truthful answer is, nobody knows," said Richard Fisher, president of the Federal Reserve Bank of Dallas. The national saving rate has tripled to about 6 percent. But we've defaulted on hundreds of billions of dollars of mortgage and consumer loan obligations
Executives Reluctant to Move for New Job - The job market is getting better ever so slightly, but the housing bust is discouraging U.S. managers and executives from moving to take new jobs. Only 6.9% of unemployed managers and executives who found new jobs in the third quarter relocated for that position, down from 13.4% in the same quarter a year earlier, according to a survey of about 3,000 successful job seekers conducted by outplacement consultancy Challenger, Gray & Christmas, Inc. The 6.9% was the lowest for the measure since Challenger, Gray first began tracking it in 1986. “Continued weakness in the housing market is undoubtedly the biggest factor suppressing relocation. Job seekers who own a home — even if they are open to relocating for a new job — are basically stuck where they are if they are unable or unwilling to sell their homes without incurring a significant loss,” said John A. Challenger, chief executive officer of the firm.
Can't move, can't move up - HERE'S another datapoint indicating that negative equity could be limiting labour mobility and contributing a structural element to current unemployment: The percentage of unemployed managers and executives relocating for a new position fell to a record low in the third quarter of 2010, as a slightly improved job market and greatly depreciated home values combined to eliminate this option for most job seekers. Just 6.9 percent of job seekers who found employment in the third quarter relocated for the new position. That was down from a relocation rate of 13.4 percent in the same quarter a year ago ... “Continued weakness in the housing market is undoubtedly the biggest factor suppressing relocation. Job seekers who own a home – even if they are open to relocating for a new job – are basically stuck where they are if they are unable or unwilling to sell their homes without incurring a significant loss,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.
Consumer Contraction Now Exceeds the Great Recession - In the above chart, the day-by-day courses of the 2008 and 2010 contractions are plotted in a superimposed manner, with the plots aligned on the left margin at the first day during each event that our Daily Growth Index went negative. The plots then progress day-by-day to the right, tracing out the changes in the daily rate of contraction in consumer demand for the two events. The true severity of any contraction event is the area between the “zero” axis in the above chart and the line being traced out by the daily contraction values. By that measure the “Great Recession of 2008″ had a total of 793 percentage-days of contraction over the course of 221 days, whereas the current 2010 contraction has reached 820 percentage-days over the course of 282 days — without yet clearly forming a bottom. The damage to the economy is already 3% worse than in 2008, and the 2010 contraction has lasted 28% longer than the entire 2008 event without yet starting to recover.
ATA: Truck Tonnage Index increases in September: "Economy barely growing" - From the American Trucking Association: ATA Truck Tonnage Index Rose 1.7 Percent in September The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 1.7 percent in September after falling a revised 2.8 percent in August. The latest gain put the SA index at 108.7 (2000=100) in September from 106.9 in August. Compared with September 2009, SA tonnage climbed 5.1 percent, which was well above August’s 2.9 percent year-over-year gain. Year-to-date, tonnage is up 6.1 percent compared with the same period in 2009.
Seeking Radical Solutions - In this country we have real problems that need real solutions. They are too many to enumerate here but I will make a few generalities.
The middle class is under immense pressure. There has been no real wage growth for a decade or more. The second earner in most families in the workforce, is yet the real standard of living has not moved appreciably except that perhaps we have bigger houses, which is not necessarily a good thing in the long run.
We continue in the shadow of a boom bust cycle with unemployment and underemployment running somewhere in the 16-20% range.
Interest rates are at all time lows and yet the Fed can only think to stimulate the economy by further purchases of financial assets.
Markets are no longer trustworthy. In the stock market, program trading dominates volume. I heard recently that 70% of trade positions are held for an average of 11 seconds. These trading algorithms are in a cut throat competition to trade on information a fraction of a second before other computers.
The United States, state, and local governments are in a pickle and are looking to reduce spending, which will further suppress aggregate demand at a time when the economy is weak.
We are stuck in expensive foreign wars that appear to be endless.
Luxury buying on rise, as jobless not spending - Consumers are buying more luxury items but spending remains tight for everyday essentials such as food and dental care, a USA TODAY analysis finds, suggesting a growing divide between haves and have-nots. Purchases of TVs, jewelry, recreational vehicles and pet supplies are growing robustly, government data show. At the same time, spending on medical care, day care and education is down in the dumps. "The rising tide isn't lifting all boats," says Carl Steidtmann, chief economist at the Deloitte accounting and consulting firm and author of an index tracking consumer spending.
Consumer Spending Up, but Can Fast Growth Last? - Economic output grew at an annual rate of 2 percent in the third quarter, largely driven by growth in consumer spending. The fact that consumers spending last quarter increased at an annual rate of 2.6 percent can generally be seen as good news, considering that we need growth anywhere we can find it (and that the economy is still consumer-driven). That was the fastest consumption growth rate since the fourth quarter of 2006.But there are reasons to worry that such fast-paced growth may not be sustainable. For one, consumers are still buried under mountains of debt, and no one knows exactly how much more deleveraging households will have to go through before their debt levels become manageable. Additionally, job growth has been weak to nonexistent in recent months. Finally, to the extent that consumers are spending more, it seems they are more attracted to foreign-made goods. Exports increased last quarter by a 5 percent annual rate while imports surged 17.4 percent. .
Consumers Issue a Cautious Christmas Spending Forecast - Gallup's initial measure of Americans' 2010 Christmas spending intentions finds consumers planning to spend an average of $715 on gifts, roughly on par with the $740 recorded in October 2009. The $25 decrease in Americans' holiday spending intentions between October 2009 and October 2010 (not a statistically significant change) contrasts with a $61 year-over-year reduction in intended spending found last October and a $108 reduction found a year prior. Gallup will update this measure in early November and again in early December. The December forecast has historically been a strong indicator of the direction of holiday retail sales, forecasting the extent to which sales will be higher or lower than the previous year. The October figure is not always predictive of the December forecast. Americans' average prediction of the total amount they will spend on Christmas gifts this year is not highly encouraging for retailers, who may be hoping for a return to pre-recessionary buying habits.
Cold Turkey — and Cold Holidays — for the Unemployed - Over 1.2 million Americans will face a cutoff in unemployment benefits in December if Congress (which returns to work for a week in mid-November) does not extend the emergency unemployment insurance program for the long-term unemployed before it goes home for Thanksgiving, according to a recent report from the National Employment Law Project.The map below shows the number of weeks of benefits now available in each state (click here for details): If Congress fails to extend the emergency program before its November 30 expiration, the number of available weeks will drop significantly:
Ruining Christmas: 1.2 Million Will Lose Benefits By Year's End Unless Congress Acts - If Congress fails to reauthorize extended unemployment benefits by the end of November, it will spoil the holidays for 1.2 million people, according to the National Employment Law Project. "The program deadline falls in the midst of the holiday season, when unemployed families do their best to put food on the table and hold on to their family traditions," said NELP in a release. "It's also a time when the economy, especially the retail sector, is counting on consumer spending -- supported in part by unemployment benefits -- to maintain the recovery." Over the summer, the Senate spent nearly two months fighting over the reauthorization as 2.5 million people who've been unemployed for six months or longer missed checks. States fund jobless aid for the first 26 weeks after a layoff, and during recessions Congress routinely makes additional benefits available. Right now in the hardest-hit states, the unemployed are eligible for an additional 73 weeks of benefits. According to the latest data from the Labor Department, 4.3 million people receive state benefits and 5.1 million people receive federal benefits.
1.2 million people could lose unemployment benefits - When Congress returns to work after the midterm elections, one of the first items they’ll have to address is a possible extension to unemployment benefits. Over 1.2 million people will lose their benefits if the extension is not approved, according to a report released Friday by the National Employment Law Project. NELP, a worker’s advocacy group, says that if benefits are lost, many people will be in left in dire straits. The $290 a week in pay that the average unemployed person is given is often barely enough to survive on. Almost half, or 42%, of unemployed Americans have been out of work for six months or more. Congress has extended the benefits to 99 weeks or more, but the extensions have been met with resistance.
Macro Musing: Are We in Another Jobless Recovery? -We expect that the sluggish pace of recovery in employment will continue for some time. We anticipate that private payrolls will expand by just 90 thousand over the final three months of 2010, followed by an increase of about 2.7 million during 2011. In other words, according to the forecast, even 2½ years after the end of the recession, less than half of the jobs lost during the past two years will have been restored. Indeed, in our forecast, the previous peak in private employment, which occurred in December 2007, will not be reached until 2013, almost four years after the end of the recession
The New QE: Quantitative Electioneering - Every four years, when Michael Bloomberg runs for Mayor, the Big Apple is transformed into a winter wonderland where it's Christmas all year round — at least for the consultants, ad salespeople, canvassers, caterers, and hangers-on whom the mayor employs. In 2009, Bloomberg injected $102 million into the city's economy in order to win a third four-year term for a job that pays him only $1 per year.No wonder the city's leaders decided to overturn the law limiting a mayor to two terms. Having Bloomberg run for re-election is like staging a Super Bowl, NBA All-Star game, and World Series. Meg Whitman is doing Bloomberg one better. In her bid to replace Arnold Schwarzenegger as California's governor, the former EBay CEO has already plowed $140 million into the Golden State's stricken economy. One can only hazard a guess as to how much higher California's unemployment rate (12.4 percent in September) would be without Whitman. In Connecticut, where I live, another CEO is having an even greater proportional impact. Former WWE CEO Linda McMahon through mid-October had spent more than $41 million of her own money on a Senate campaign — about $25 for every voting age adult in the state. McMahon is single-handedly boosting Connecticut's office and retail vacancy rates by renting out storefronts, and has saturated the airwaves with ads the way Starbucks has saturated Seattle.
Public and private jobs - These BLS data have been frequently cited to support the claim that public sector workers are paid more than private sector workers. However, as described at a February 2009 conference sponsored by the Federal Reserve Bank of Chicago, the wage differentials shown above do not adjust for differences in the types of jobs in private and public sectors. According to an analysis of the 2008 BLS data presented at the Fed conference, the main reason for the wage discrepancy is that private sector jobs are generally lower-skilled and thus lower-paid retail jobs, while public sector jobs are generally higher-skilled and higher-paid professional positions, although lower-skilled positions pay more in the public than in the private sector due to higher levels of public sector unionization. Representatives of the BLS pointed out that "..roughly two thirds of public sector jobs are professional and administrative, while 51% of private sector jobs are; and retail sales and food service jobs, relatively low-paid and often part-time positions, represent 20% of private sector jobs, but only 2% of public sector jobs."
Moody’s: Companies Reluctant to Spend on Expansion, Hiring - Nonfinancial companies in the U.S. had about $943 billion of cash on hand as of mid-year, but they aren’t likely to spend it on expansion and hiring due to lingering economic uncertainty, Moody’s Investors Service said Wednesday following a study of corporate cash piles.Rather, it said the companies are more likely to spend the money on buying other companies or repurchasing their own stock–moves that either immediately boost operations or return value to shareholders. “Companies will hesitate to spend their cash hoards on expansion until there is greater certainty about the direction of the U.S. economy,” said Moody’s senior vice president Steven Oman. That hesitancy is “doing little to abbreviate the jobless recovery.”
Kill the Myth About Uncertainty Slowing Hiring and Investment - Is there any evidence whatsoever that this antagonism is "affecting hiring and other business behavior?" If the antagonism was affecting hiring, then we would expect to see firms increase the length of the average workweek as they worked their existing workforce longer hours rather than take on new workers. There is zero evidence of this. The average workweek is up slightly from the low-point of the downturn, but it has been flat in recent months. It is still far shorter than it was before the downturn. If businesses were deferring hiring then we would also expect to see them make more use of temps. Again, the data will not cooperate. Temp hiring is also up some from the low-point of the recession, but it still down more than 20 percent from pre-recession levels. As far as the "other business behavior," investment, which is the one we most care about, has actually been pretty healthy in the last few quarters. Investment in equipment and software has grown at nearly a 20 percent annual rate over this period. Investment in structures has been plummeting, but this is to be expected
Real GDP Growth and the Unemployment Rate - Here is an excerpt from a previous post earlier this month and his probably worth repeating after the GDP report this morning. This relationship suggests the unemployment will rise with only 2% real GDP growth: Here is an update on a version of Okun's Law. This graph shows the annual change in real GDP (x-axis) vs. the annual change in the unemployment rate (y-axis). Note: For this graph I used a rolling four quarter change - so all the data points are not independent. However - remember - this "law" is really just a guide. The following table summarizes several scenarios over the next year (starting from the current 9.6% unemployment rate):
Workers of the World, Watch Out! - The light went red, my feet touched down to stop and steady myself, and as I gazed at the traffic backing up in both directions, I asked myself, “Where on earth are all these people going?” Then it dawned on me ...work. Yes, it’s been that long since I was one of them — 432 days to be exact. I’d forgotten about commuter traffic. And that morning, a second epiphany followed the first: I hate people with jobs. I’m writing to announce that I’ve officially gone beyond the usual job-loss spectrum of denial to acceptance. I’ve hit a more obscure step, No. 8 or 9, in which you to come to grips with the fact that you can’t stand anybody who is employed. Employed people, with their benefits and direct deposits, seem so smug to me now — bills paid up, money for weekend getaways and nights at the movies. “ The problem, I find, is no longer my unemployment. It’s the people with employment — rushing past me on the sidewalk, ties in the wind — who are killing my spirit. I want to start tripping them as they race by, maybe throw an iced coffee in a few of their “out-of-my-way-I’ve-got-to-get-to-my-next-appointment” faces.
Automation Insurance: Robots Are Replacing Middle Class Jobs - Last April, the MIT economist David Autor published a report that looked at the shifting employment landscape in America. He came to this scary conclusion: Our workforce is splitting in two. The number of high-skill, high-income jobs (think lawyers or research scientists or managers) is growing. So is the number of low-skill, low-income jobs (think food preparation or security guards). Those jobs in the middle? They’re disappearing. Autor calls it “the polarization of job opportunities.” These days, all of us, from President Obama on down, are thinking about jobs. The unemployment rate is hovering around 10 percent, we’ve watched the ground disappear from under Detroit and Wall Street, and there’s a pervading sense that other industries might be next.The middle class is disappearing and the problem is deeper than politics. How will we understand work in the coming age of robotics?
Scary New Wage Data: Now for some really scary breaking news, from the latest payroll tax data. Every 34th wage earner in America in 2008 went all of 2009 without earning a single dollar, new data from the Social Security Administration show. Total wages, median wages, and average wages all declined, but at the very top, salaries grew more than fivefold. Measured in 2009 dollars, total wages fell to just above $5.9 trillion, down $215 billion from the previous year. Compared with 2007, when the economy peaked, total wages were down $313 billion or 5 percent in real terms.The number of Americans with any wages in 2009 fell by more than 4.5 million compared with the previous year. Because the population grew by about 1 percent, the number of idle hands and minds grew by 6 million.
The Information Economy Powers Wage Increases - What large county in the United States experienced the largest increase in weekly wages during the generally bleak 12 months between early 2009 and 2010? It’s a long, narrow island with some very tall buildings, and many observers thought the recession would wreck its finance-based economy. Yes, the wonder county of 2009 appears to have been New York County, that is, the borough of Manhattan, where wages grew by a stunning 11.9 percent, according to the Bureau of Labor Statistics. National wages rose only by an anemic 0.8 percent, and only 19 areas had wage growth above 3 percent. Most counties detailed by the bureau showed wage declines over the year. The biggest loser was San Mateo County, in California, where wages dropped by 17.7 percent. While California’s unemployment rate remains at 12.4 percent, the idea-intensive economy around San Francisco Bay, like Manhattan, appears to be holding up quite well. Santa Clara County, which contains Silicon Valley, experienced 8.7 percent wage growth from 2009 to 2010. San Francisco County had 5.4 percent wage growth. These two counties were third and fifth on the list ranking areas by wage growth.
Employers in U.S. Start Bracing for Higher Tax Withholding - Employers in the U.S. are starting to warn their workers to prepare for slimmer paychecks if Congress fails to vote on an extension of Bush-era tax cuts. “I’ve been doing payroll for probably close to 30 years now, and never have we seen something like this where it gets that down to the wire,” said Dennis Danilewicz, who manages payroll services for about 14,000 employees at New York University’s Langone Medical Center. “That’s what’s got a lot of people nervous. All we can do is start preparing communications with a couple of different scenarios.” Lawmakers won’t start debating whether to extend the cuts, which expire Dec. 31, until after the Nov. 2 elections. Because it takes weeks to prepare withholding schedules, the Internal Revenue Service will probably have to assume the cuts will expire and direct employers to increase payroll deductions starting Jan. 1, experts say.
What Should You Have to Sacrifice to Get a Job? - Nearly 15 million Americans are jobless today. Many of these workers have not been able to find any openings suited to their skills and experience. But there is an ongoing debate about whether workers should be pushed to take whatever jobs they can find, particularly if the types of jobs they lost may not come back in the recovery. Policies that make staying unemployed easier — like the extensions of jobless benefits — serve only to keep displaced workers in denial of the fact that they’re never going to land their “ideal” job, the argument goes. In light of this debate, I was interested to see what kinds of compromises most Americans think the unemployed should be willing to stomach for a new job. And lo and behold, I came across this chart, from a report by Rutgers’s Heldrich Center for Workforce Development:
David Brooks Tells Us the Unemployed Are Really Concerned About Values - Hell no, I'm not kidding. Here it is: "the public's real anxiety is about values, not economics: the gnawing sense that Americans have become debt-addicted and self-indulgent." This is really priceless. There are more than 25 million people unemployed, underemployed or who have given up looking for work altogether, but they are not concerned about economics. They are worried about values. Okay, I will stop with the ridiculing of David Brooks, I know it's cheap fun. But, I do have to point out one other real winner in this column: " Obama came to be defined by his emergency responses to the fiscal crisis." Yes, the column says "fiscal." Is this the mother of all Freudian slips or what? Brooks somehow wrote "fiscal," when he obviously meant "financial."
The Cyclical/Structural Unemployment Debate - There's been a lot of talk these days about whether unemployment in the U.S. today is the product of "cyclical" or "structural" factors. For example, see: And he huffed...and he puffed...and he blew the structural unemployment house down! This blustering (by the big bad blog wolf) brings back a fond memory. In the fall of 1988, I had the good fortune of being enrolled in a PhD macro class taught by Peter Howitt. Anyway, it was in that class that the first learned of the "cyclical vs structural" debate. Evidently, the modern version of this debate started out with Lilien's "Sectoral Shifts and Cyclical Unemployment" paper. One part of the AK counterargument exploited Beveridge curve evidence. I understood their argument as saying that if structural shifts are the primary driving force, then one would expect to see a positively sloped Beveridge curve (much like what we are seeing right now in the U.S.). In fact, the Beveridge curve is negatively sloped. Ergo, aggregate demand shocks yes; structural shifts no.
The failure problem with industrial policy - There is a fair amount of support these days for the idea that the government should be getting involved in industrial policy. The argument is that the government can help make the U.S. become a competitive producer of green technologies. This will have several benefits, so the theory goes, including giving us something to export, creating high paid green jobs, and helping the environment. Proponents point to the example of Germany, which has used industrial policy to help create a large solar panel industry. Or they’ll point to China, whose government has a heavy hand in creating their many green manufacturers. Let’s leave aside for now the question of whether those policies are working for those countries, the question is should we do it here? Many will point out that we are already involved in industrial policy in the energy sector, it’s just that our industrial policy favors dirty energy. The important thing is, Matt Yglesias tweeted yesterday, “that we have bad industrial policy now and should make it explicit and improve it”. I can agree with this sentiment, but I would modify it to say this: we have bad industrial policy now, and we should prove we can fix the existing problems before expanding it’s scope and aim.
Labor Law Is Broken, Economist Says - In a new paper, Richard B. Freeman, a labor economist at Harvard, said he had some “harsh and impolitic” news for the National Labor Relations Act on its 75th anniversary. He declared that the law “has become an anachronism irrelevant for most workers and firms.” Mr. Freeman wrote that the act was passed to replace the costly unionization fights of yesteryear – often involving strikes, lockouts, violent confrontations — with “a ‘laboratory conditions’ elections process for ascertaining workers’ attitudes toward union representation that would be free from employer pressures or dishonest statements by employers or unions.” He said unionization elections in the private-sector “have turned into massive employer campaigns against unions.”That, he wrote, is a major reason the percentage of private-sector workers in unions has fallen to 7 percent, down from nearly 40 percent in the 1950s. He argued that the penalties in the National Labor Relations Act were weak and “have failed to deter firms from illegal actions to prevent unionization.” “Far from a laboratory conditions experiment in democracy,” he wrote, “the N.L.R.B. process turned into the same costly fight between unions and firms that union organizing was before the act, albeit in a different venue with different weapons.”
Rich Mom, Poor Mom - The Mama Grizzlies running for office this fall oppose increased government spending, including programs that could help parents balance paid employment with family work. Perhaps increased economic inequality in the United States means that individuals running for office don’t have a very clear understanding of the problems facing people in different circumstances than their own. In particular, they don’t fully appreciate the difficulties many mothers face holding down difficult jobs while caring for young children. You might assume that highly paid women suffer a bigger economic penalty than other women when they have a baby because, after all, they have more earnings to lose.In a startling new look at the “motherhood penalty,” however, two sociologists at the University of Massachusetts Amherst, Michelle J. Budig and Melissa J. Hodges, show that mothers with lower earnings suffer the biggest percentage loss in hourly wages.
Earnings by age and sex, third quarter of 2010 - Women who usually worked full time had median weekly earnings of $662, or 81.4 percent of the $813 median for men, in the third quarter of 2010. Usual weekly earnings of full-time workers varied by age. Among men, those age 45 to 54 and age 55 to 64 had the highest median weekly earnings, $941 and $983, respectively. Usual weekly earnings were highest for women from age 35 to 64; median weekly earnings were $729 for women age 35 to 44 and age 45 to 54, essentially the same as the $739 median for women age 55 to 64. Median weekly earnings of the nation's 101.4 million full-time wage and salary workers were $740 in the third quarter of 2010, not seasonally adjusted. This was 0.3-percent higher than a year earlier, compared with a gain of 1.2 percent in the Consumer Price Index for All Urban Consumers (CPI-U) over the same period.
Recession's reverberations keep pummeling the young - As the nation struggles with the aftermath of the Great Recession, few groups have suffered greater setbacks or face greater long-term damage than young Americans — damage that could shadow their entire working lives. Unemployment for 20- to 24-year-olds hit a record high of more than 17% earlier this year. Even for young adults with college degrees, the jobless rate has averaged 9.3% this year, double the figure for older graduates, according to the Labor Department. Adding to the impact, surveys by the Pew Research Center indicate, a greater share of workers in their 20s lost hours or were cut down to part-time status than any other age group. And their incomes have fallen more sharply, even as they are far more likely than others to say they are working harder than ever.
Who are the Undeserving? - There is a long history of dividing the poor into those deserving help (e.g. becasue they are disabled and unable to work), and those who are undeserving (e.g. they are fully capable of work, and if they are unemployed it must be because they are lazy and aren't trying, not because jobs aren't available -- we heard echoes of this in the debate over extending unemployment insurance). It allows those who might be asked to pay the bills to support the unemployed -- those who benefit so much from a system that can displace workers into the ranks of the unemployed, workers who have done nothing wrong exept be employed in the wrong industry -- to deflect responsibility onto the poor themselves. Attempts to draw such distinctions have led, in the past, to things such as workhouses.Chris Dillow wonders why, if we are going to make such distinctions, we don't also point to the underserving rich
Why the minimum wage should go - Karl responded recently to a post by Barbara Kiviat who wondered “why should we care about the minimum wage?”. Karl’s general point is that the minimum wage is harming lot’s of families, and Barbara’s point is that we shouldn’t spend so much time on a policy that has little affect on the economy and doesn’t help low income families anyway. But if Barabara thinks both sides care too much about this issue, then shouldn’t she be arguing for Democrats take advantage of the Republican’s foolish obsession and trade a repeal of the minimum wage for a policy that actually benefits poor people? I’ve argued before that the balance of new minimum wage evidence shows that the minimum wage causes unemployment, so I won’t rehash that evidence here (if you’re under the assumption Card/Krueger is the end of the debate, I’d encourage you to follow the link). But I do want to focus on the inefficiency of the minimum wage.
Attack on the Middle Class!! - THE REMARKABLE thing about the American middle class is that we still have one, given the job losses, housing bust, and 401(k) wipeout of the past three years—and considering that for 35 years, politicians (and the bankers who own them) have been hammering away at middle-class institutions. The assault began in the 1970s, when New York City's fiscal crisis and California's property-tax revolt marked the start of a long decline in public services. Next came the recession and anti-union policies of the early 1980s, whose whip's end hit the black working class especially hard. (Automakers have long been among the nation's largest private employers of African Americans. In the late '70s, one in every 50 African Americans in the workforce was employed in the industry.) Thanks to the UAW, the automakers provided good jobs and pensions for workers who, in many cases, had a high-school education at best. When Chrysler hit the ropes in 1979, Congress did pitch in with a $1.5 billion loan guarantee (I worked on that bill as an economist for the House banking committee), but the decade that followed still pummeled autoworkers—as they did all of American manufacturing.
Food Stamp Usage Soars Among US Working Families - Lillie Gonzales does whatever it takes to provide for three ravenous sons who live under her roof. She grows her own vegetables at home on Kauai, runs her own small business and like a record 42 million other Americans, she relies on food stamps. Data from the U.S. Department of Agriculture reviewed by The Associated Press shows that 32 states have adopted rules making it easier to qualify for food stamps since 2007. In all, 38 states have loosened eligibility standards. Hawaii has gone farther than most, allowing a family like Gonzales' to earn up to $59,328 and still get food stamps. Prior to an Oct. 1 increase, the income eligibility limit for a Hawaii family of five was $38,568 a year. "If I didn't have food stamps, I would be buying white rice and Spam every day," said Gonzales, whose Island Angels business makes Hawaiian-style fabric angel ornaments, quilts, aprons and purses. Eligibility for food stamps varies from state to state, with the 11 most generous states allowing families to apply if their gross income is less than double the federal poverty line of $22,050 for a family of four on the U.S. mainland. The threshold is higher in Alaska and Hawaii.
Trouble in the Suburbs - The suburbs were once considered by many to be a retreat from poor economic and social conditions in cities. Now, however, they’re home to nearly one-third of our nation’s poor—and rising. The last decade set in motion this shift in the map of poverty, but the recession exacerbated key economic trends that rapidly increased the growth rate of suburban poverty to more than double that of central cities. Federal and state governments should take note: This emerging trend calls for a corresponding shift in poverty policies that includes a more regional, all-encompassing approach.
Beveridge Curves for 4 U.S. Regions - Regarding my earlier post, a few people have pointed out that the measure of job vacancies I employed was based on newspaper advertisements. To the extent that there has been a shift in advertising away from print to online media, the Beveridge curves I plotted earlier may be distorted. Evidently, the conference board has some measure of online job advertisements, available (I think) for only since 2005 or so. My RA reports that they want $20K for the data. Uh...sure. I'll see what I can do about this. But in the meantime, I provide plots of regional Beveridge curves using JOLTS data which, unfortunately, is available only for the past decade. I do this first the conventional way, plotting vacancies against unemployment. But because I am no fan of unemployment measures (half of the flow into employment comes from out of the labor force), I also plot the BC my preferred way; that is, with vacancies plotted against the employment ratio.
Government job cuts ravage California - Weighed down by a struggling economy, government agencies in California shed 37,300 workers last month — more jobs than were lost in the private sector — as cities and counties made their biggest payroll cutbacks since at least 1990. What's more, analysts see more job cuts ahead as California faces an estimated $10-billion shortfall in the state budget that the next governor must address. Cities and counties, meanwhile, are still struggling with tepid sales and property tax revenue. Cities across the state have taken stringent measures to balance their budgets, said Eva Spiegel, a spokeswoman with the League of California Cities.
Oakland laid off 80 police officers and delayed pothole repairs. Fullerton laid off 14 police officers and three firefighters, cut library hours and closed restrooms at several parks. Oceanside laid off 28 police officers and three firefighters, closed a swimming pool and a recreation center and eliminated the city Bookmobile.
State Borrowing To Fund Unemployment Set For December Default… States have been borrowing from Washington to fund their unemployment trust funds. Next month, they have to start paying that money back. Since March of 2009, 31 states have borrowed billions from the federal government to continue paying out unemployment benefits while keeping their UI trust funds from insolvency. But many US states are now in a vicious cycle that will be exploding in December. As businesses lay off workers, fewer payroll tax dollars go into each state’s unemployment insurance trust fund. Simultaneously, as businesses lay off workers, more dollars are coming out of those states’ trust funds to pay unemployment benefits.
Job loss by state: An interactive map - The Map shows the percentage of jobs each state has lost since the start of the recession in December 2007. Although the recession officially ended in June of 2009, all states except Alaska, North Dakota and the District of Columbia continue to see a jobs deficit. For several states, the loss of jobs has been staggering. Nevada has lost 14.2% of its jobs since December 2007, and Arizona has lost 10.3%. The percentage of jobs lost is 10% in Michigan, 9.4% in Florida, 9% in California, 8.3% in Oregon and 8.1% in Georgia. Rates of job loss approaching or exceeding 10% in many of the country’s most populous states help to explain the difficulty those without jobs face finding new work. Importantly, these percentages reflect total jobs lost but do not include the jobs that should have been created over the past three years just to keep up with population growth. The country as a whole has lost 7.8 million, or 5.6% of its total jobs since the start of the recession. Because it should have created around 100,000 jobs every month just to keep up with population growth, there is a nationwide shortage of more than 11 million jobs today.
Roubini: States are Doomed (CNBC) “Dr.Doom ” says U.S. states are in for it. Municipal debt is up to 20% of GDP, he told me exclusively. And unfunded liabilities of state and local pension funds? Those are as high as $3 trillion — another 20% of GDP. So, basically, get ready — especially in Q1 when states can no longer use federal money to plug their budget holes. “The issue is whether the Federal government will bail out state and local governments with a federal guarantee of their debt,” Roubini told me, likening the scenario to the money received by Greece and to be generalized to other Eurozone members in trouble via the new European "stabilization fund." Some might call it the trillion dollar question: what will the government do if the states fail? The possibility of states failing, is no longer a scary hypothetical. Roubini said that many US states are semi-insolvent. According to a report by the Center on Budget and Policy Priorities, forty-eight states addressed shortfalls in their fiscal year 2010 budgets, totaling $191 billion or 29% of state budgets — the largest gaps on record.
Financial Disaster Set to Erupt Again - Ever since the financial crisis first erupted, the apparent goal of those in charge has been to try and kick each can -- er, problem -- down the road until things somehow improve or so that somebody else would get stuck with cleaning up the mess. Of course, all they've really done is create the equivalent of a toxic waste dump, filled with little time bombs capable of wreaking widespread economic and financial havoc. Based on the following Minyanville commentary, "The Fiscal Disaster Set to Explode in December," it looks like the clock on one of them is ticking down fast: States have been borrowing from Washington to fund their unemployment trust funds. Next month, they have to start paying that money back. US states are now in a vicious cycle that will be exploding in December. As businesses lay off workers, fewer payroll tax dollars go into each state’s unemployment insurance trust fund. Simultaneously, as businesses lay off workers, more dollars are coming out of those states’ trust funds to pay unemployment benefits.
U.S. State on the Verge of Default: A Simulation…. Or Is It? - The scenario: It’s 2013. The third largest U.S. state — dubbed New Jefferson — faces a $1.5 billion bond payment and its governor and legislators are gridlocked. The governor calls Washington and asks for an emergency loan to avoid default and another $10 billion to tide the state over. The chairman of the National Economic Council — played by Robert Rubin, who actually held the job in the Clinton White House, convenes a meeting. The audience at the Economist magazine’s Buttonwood conference in New York Monday afternoon watches as Rubin listens to the Treasury secretary (played by Laura Tyson, another Clinton White House veteran), the Fed chairman (played by former Fed governor Laurence Meyer), the chief of staff (played by former Bush chief of staff Joshua Bolten), and the chairman of the Council of Economic Advisers (played by Glenn Hubbard, who held that job in the Bush White House.) But at times, it’s hard to tell what’s simulation and what’s reality.
Larry Meyer: State fiscal crisis simulation at the Buttonwood Conference - TheEconomist - Larry Meyer played the role of Fed Chairman yesterday on a panel of policymakers facing a bond crisis of a large U.S. state. During the two-hour simulation, the "Fed Chairman" noted that the potential bailout of a state facing default would be an "inherently political issue." Nonetheless, he reassured policymakers that the Fed would stand ready offer a lending hand should the situation risk spilling over to the wider economy, and would, of course, be present at policy discussions to offer its ideas. At the very least, he convinced the audience: Immediately after the panel discussion, a clear majority indicated that the Fed should not be responsible for the bailout.
The Corrosion of America - If you had a leak in your roof or in the kitchen or basement, you’d probably think it a good idea to have it taken care of before matters got worse, and more expensive. If only we had the same attitude when it comes to the vast and intricately linked water systems in the United States. Most of us take clean and readily available water for granted. But the truth is that the nation’s water systems are in sorry shape — deteriorating even as the population grows and demand increases. Aging and corroded pipes are bursting somewhere every couple of minutes. Dilapidated sewer systems are contaminating waterways and drinking water. Many local systems are so old and inadequate — in some cases, so utterly rotten — that they are overwhelmed by heavy rain. For decades, these systems — some built around the time of the Civil War — have been ignored by politicians and residents accustomed to paying almost nothing for water delivery and sewage removal. And so each year, hundreds of thousands of ruptures damage streets and homes and cause dangerous pollutants to seep into drinking water supplies.”
Legislature likely to cut deep to meet possible $25 billion budget gap - Texas faces a budget crisis of truly daunting proportions, with lawmakers likely to cut sacrosanct programs such as education for the first time in memory and to lay off hundreds if not thousands of state workers and public university employees. Texas' GOP leaders, their eyes on the Nov. 2 election, have played down the problem's size, even as the hole in the next two-year cycle has grown in recent weeks to as much as $24 billion to $25 billion. That's about 25 percent of current spending. The gap is now proportionately larger than the deficit California recently closed with cuts and fee increases, its fourth dose of budget misery since September 2008.
California Borrows $6.7 Billion Cash From JPMorgan-Led Group - California borrowed $6.7 billion from JPMorgan Chase & Co. and five other banks to pay delinquent bills that piled up during the state’s record-length budget impasse, Treasurer Bill Lockyer said. California, the largest U.S. issuer of municipal debt, agreed to pay 1.4 percent to the banks, which also include Goldman Sachs Group Inc., for the bridge loan, Lockyer said. He will repay the debt in about two weeks when he sells an estimated $10 billion of revenue anticipation notes, a short- term municipal bond the state offers when cash is low and repays from later tax collections. The so-called bridge loan was needed after the most populous state racked up $8.4 billion of bills that couldn’t be paid in the 100 days California was without a budget. Governor Arnold Schwarzenegger signed the spending plan Oct. 8 after lawmakers agreed on steps to eliminate a $19 billion deficit brought on by the recession.
California Is Broke - 19 Reasons Why It May Be Time For Everyone To Leave The State Of California For Good - Today, millions of Californians are dreaming about leaving the state for good. The truth is that California is broke. The economy of the state is in shambles. The official unemployment rate has been sitting above 12 percent for an extended period of time, and poverty is everywhere. For many Californians today, there are very few reasons to stay in the state but a whole lot of reasons to leave: falling housing prices, rising crime, budget cuts, rampant illegal immigration, horrific traffic, some of the most brutal tax rates in the nation, increasing gang violence and the ever present threat of wildfires, mudslides and natural disasters. The truth is that it is easy to understand why there are now more Americans moving out of California each year than there are Americans moving into the state. California has become a complete and total disaster zone in more ways than one, and an increasing number of Californians are deciding that enough is enough and they are getting out for good. Sadly, the state of California is facing such a wide array of social, economic, and political problems that it is hard to even document them all. It is really one huge gigantic mess at this point. Just consider the following facts about what life is like in the state of California today....
States Face Budget Holes If US Capital-Gains Tax Doesn't Rise - California and New York, after closing budget deficits of more than $27 billion this year, may face $1.3 billion in combined new gaps if the federal capital- gains tax rate doesn’t rise as scheduled, state documents show. Both count on increased revenue -- $1.1 billion in California and as much as $225 million in New York -- as investors rush to sell assets before the federal capital-gains tax rate goes up to 20 percent, set for Jan. 1. Currently it’s 15 percent. Surging asset sales ahead of the pending increase “could fuel an inflow at the state level,” said Scott Pattison, executive director of the National Association of State Budget Officers. If the rate doesn’t change, then states may not see a jump in related revenue, he said.
A clear choice ahead for New York's future - Ask any political leader, business group or public union, and they all agree New York is at a critical juncture. The state faces budget gaps of at least $37 billion over the next three years, and state spending is far outpacing revenue. County and city governments are proposing budgets with layoffs and service cuts — on top of the ones they've already made. Upstate is suffering from population losses, struggling urban cores and a dwindling manufacturing base.Meanwhile, the cost of living in New York continues to rise, putting further strain on its population and economic base. The Tax Foundation last month showed that Monroe County has the highest percentage of taxes paid compared with home values in the country.
New York's MTA Would Pay $606 Million to Unwind Swaps - New York’s Metropolitan Transportation Authority, which carries 8.5 million weekday riders, would have to pay $606.2 million if forced to unwind interest-rate swap contracts, the agency said. The MTA, the biggest U.S. transit authority, has 17 such agreements on $4.2 billion of debt, its finance committee was told at a meeting today. The agency, which has contracts with eight banks and insurance companies including UBS AG and JPMorgan Chase & Co., has to end the swaps if its credit ratings fall below the BBB to BB range. The MTA’s bonds carry different ratings according to type. If swaps on these were terminated, the agency would have to pay banks $215.4 million. Most of the MTA’s remaining $16.8 billion of debt is rated AA or AA-. “If our, God forbid, transportation-revenue bonds credit fell to a BBB category, some of the contracts would have a termination right?” said Doreen Frasca, an MTA board member. “That’s pretty scary.”
Real estate and municipal revenue - Atlanta Fed's macroblog - In September, the Federal Reserve Bank of Atlanta's Center for Real Estate Analytics sponsored a conference to examine the impact the real estate downturn is having on public sector finances. It's no secret that state and local governments are currently experiencing substantial revenue declines. One popular explanation is that deteriorating local real estate conditions are responsible for a portion of that decline, but it turns out that this explanation is not the main cause, at least not yet. One of the sessions in the conference featured attempts by three economists from the Federal Reserve Board of Governors (Lutz, Molloy, and Shan) and two from Florida State University (Doerner and Ihlanfeldt) to estimate the direct impact of the decline in real estate values on local tax revenues. Both papers examined the multiple channels of influence between the decline in real estate values and local revenues. The largest channel, of course, is the decline in property tax income related to declining assessed property values. Of course, property owners don't pay property taxes based on the current value of their home. They pay based on an assessment that is at least a year old.
Indiana tells parents: Drop disabled kids at shelters - Indiana's budget crunch has become so severe that some state workers have suggested leaving severely disabled people at homeless shelters if they can't be cared for at home, parents and advocates said.They said workers at Indiana's Bureau of Developmental Disabilities Services have told parents that's one option they have when families can no longer care for children at home and haven't received Medicaid waivers that pay for services that support disabled people living independently.Marcus Barlow, a spokesman for the Family and Social Services Administration, the umbrella agency that includes the bureau, said suggesting homeless shelters is not the agency's policy and workers who did so would be disciplined.
Schools face funding riddle with new state budget - The new state budget looks like one that would make California school officials happy. State legislators restored $1.7 billion to schools, cut by the governor in his May budget revision. But lawmakers deferred payment until next July, and education leaders – weary from years of cuts – don't trust that the money will make it to schools. The budget also suspended Proposition 98, which guarantees a minimum funding level for public education. This resulted in a loss of $4.3 billion to schools, according to School Services of California Inc., a consulting firm that advises school districts. An unexpected budget twist has added to the angst. Gov. Arnold Schwarzenegger vetoed $133 million in mental health funding for special education, essentially shifting responsibility for providing services from counties to school districts.
State money won't dash Pasadena plans to close schools - Promises from the state to pump more money into the Pasadena public schools won't stop some board members from keeping alive a plan to consolidate schools. The state budget approved earlier this month in Sacramento is expected to inject more than $4 million into the Pasadena Unified School District for 2010-11, with promises that the money will continue in 2011-12, district officials said. The development prompted the PUSD to put an item on this Tuesday's agenda to discuss halting the school consolidation program. PUSD began talks to shutter schools in an effort to save money. While the new money would be enough to keep PUSD from closing schools, one school board member said the state's budget is not worth the paper it's written on.
37 Kids Per Class, Bells That Don't Ring: Illinois Students Experience Budget Problems Up Close - The video with this web story is the director's cut. Illinois is now more than $1 billion behind in payments owed to school districts across the state because of the budget crisis. But what exactly does that mean for each individual school, for each individual student? FOX Chicago News wanted to put a face-- many faces, actually-- on the situation by going inside one of the Chicago-area's most financially-strapped school districts: First stop, Neubert Elementary in Algonquin.
LAUSD downsizes new borrowing - Los Angeles Unified officials Tuesday unanimously voted to scale down a new round of borrowing for facilities projects, approving only $125 million in new loans while also delaying up to 1,000 planned campus upgrades. The school board had originally planned to borrow $320 million for projects that included relocating a school police station and computer system upgrades. But facing bleak budget forecasts and still weeks away from approving a new master plan, the board downsized the loan and postponed up to 1,000 already-approved modernization projects at least until future bond revenues come in, expected no earlier than 2014. LAUSD Chief Facilities Executive James Sohn said when the borrowing proposal was first brought to the board in the spring, the district still hadn't examined its entire modernization plan.
Where Has All The Money Been Going? - For two decades, researchers at the Economic Policy Institute have been tracking nine school districts, typical of districts nationwide, to understand how the spending levels and composition in elementary and secondary education have changed over time. Our first report, Where’s the Money Gone? (1995) tracked expenditures from 1967 to 1991. Our second report, Where’s the Money Going? (1997) carried the analysis forward to 1996.These reports concluded that conventional views of the rise of education spending are exaggerated because inflation in educational services is more rapid than inflation in the economy overall. When an appropriate education price deflator is applied, elementary and secondary school spending increases since 1967 have been substantial, but not as much so as commonly believed. Briefing Paper # 281
Privatized Education Ripoff in the Homeless Shelters - Phoenix salespeople then barraged him with phone calls and e-mails, urging a tour of its Cleveland campus. “If higher education is important to you for professional growth, and to achieve your academic goals, why wait any longer? Classes start soon and space is limited,” one Phoenix employee e-mailed him on Apr. 15. “I’ll be happy to walk you through the entire application process”.” “Rollins’ experience is increasingly common. The boom in for-profit education, driven by a political consensus that all Americans need more than a high school diploma, has intensified efforts to recruit the homeless. Such disadvantaged students are desirable because they qualify for federal grants and loans, which are largely responsible for the prosperity of for-profit colleges. Federal aid to students at for-profit colleges jumped from $4.6 billion in 2000 to $26.5 billion in 2009. Publicly traded higher education companies derive three-fourths of their revenue from federal funds, with Phoenix at 86%, up from just 48% in 2001 and approaching the 90% limit set by federal law.” It gets worse:
Nearly 9 Million Students Facing Pell Grant Cuts If Congress Doesn’t Act - When Congress comes back into Washington for a lame duck session following November’s midterm elections, it will have a few noteworthy tasks that it needs to accomplish. As Congressional Quarterly’s Chuck Conlon and Greg Vadala pointed out, one of these is the federal Pell Grant program — which provides higher education grants to middle- and lower-income students — as it is facing a substantial budget shortfall: President Obama wanted to include extra money for Pell grants in the stopgap legislation that Congress enacted to fund the government until early December, one of many add-ons that were not included in the measure. Republicans mainly opposed Democratic efforts to add funding to the continuing resolution, which kept it relatively “clean”…If the Pell shortfall is not addressed, almost 9 million students would face a cut of more than 15 percent in their fiscal 2011 maximum award, said the Committee for Education Funding. For the 2011 fiscal year, which theoretically began at the beginning of this month, the Pell Grant program is facing a roughly $5.7 billion shortfall. If it isn’t closed, the maximum grant under the program will be cut by some $845 for the 2011 academic year. And this will come at a time when, due to the lingering effects of the Great Recession, there will be about 8.7 million Pell Grant recipients, up from 7.7 million in 2009.
College tuition costs climbing again this fall - College tuition costs shot up again this fall, and students and their families are leaning more on the federal government to make higher education more affordable in tough economic times, according to two reports issued Thursday.At public four-year schools, many of them ravaged by state budget cuts, average in-state tuition and fees this fall rose 7.9 percent, or $555, to $7,605, according to the College Board's "Trends in College Pricing." The average sticker price at private nonprofit colleges increased 4.5 percent, or $1,164, to $27,293. Massive government subsidies and aid from schools helped keep in check the actual price many students pay. But experts caution that federal aid can only do so much and that even higher tuition is likely unless state appropriations rebound or colleges drastically cut costs.
Shame as a Philanthropic Motivator -Some schools have an honor roll. Dartmouth and Cornell have created a sort of dishonor roll, for seniors who declined to give money toward their class gift. From The Chronicle of Higher Education: With lists supplied by college administrators, student volunteers at Dartmouth College and Cornell University circulated the names of students who had not donated to senior-gift drives. The programs relied on students to single out their peers to meet high participation goals. Not everyone participated happily. The single student from Dartmouth’s 1,123-student Class of 2010 who did not contribute this year was criticized in a column in the college newspaper and on a popular blog, which posted her name and photograph. The student e-mailed a testy response to fellow classmates describing her position. Now, shame is not exactly a new tactic for fund-raising. But it certainly seems an unusual one for this particular setting.
Law schools are manufacturing more lawyers than America needs, and law students aren't happy about it. - During the recession, the logic was ubiquitous: The economy is terrible—better to wait it out! It is a three-year fast track to a remunerative, respectable career! It's not just learning a subject—it's learning how to think! Law school, always the safe choice, became a more popular choice. Between 2007 and 2009, the number of LSAT takers climbed 20.5 percent. Law school applications increased in turn. But now a number of recent or current law students are saying—or screaming—that they made a mistake. They went to law school, they say, and now they're underemployed or jobless, in debt, and three years older. And statistics show that the evidence is more than anecdotal.
Student Debt and the Class of 2009 (Interactive map) - Download the full report: Student Debt and the Class of 2009
Janitors With Ph.D.s: Why We're Spending Way Too Much on Higher Education - For politicians, boosting college graduation rates has always been a fairly uncontroversial goal to support. The Obama administration is doing so, rather relentlessly, through a number of initiatives designed to better prepare students for college and support them once they get there. The assumptions are 1) that students who graduate from college have increased potential for economic mobility, and 2) the more students who earn college degrees, the more our economy will grow. But are either of those assumptions still true, in light of our new economic reality? Or are we wasting money investing in a sector that's producing thousands of janitors with Ph.D.s? One thing's for sure: our higher education system has produced thousands of janitors with Ph.D.s or other professional degrees -- about 5,057 of them, in fact, plus more than 8,000 waiters and waitresses. When you look at all college degrees, there are more than 317,000 over-educated Americans serving us our meals, more than 80,000 shaking our martinis and some 62,000 mowing our lawns.
Putting a Price on Professors -A 265-page spreadsheet, released last month by the chancellor of the Texas A&M University system, amounted to a profit-and-loss statement for each faculty member, weighing annual salary against students taught, tuition generated, and research grants obtained. Ms. Johnson came out very much in the black; in the period analyzed—fiscal year 2009—she netted the public university $279,617. Some of her colleagues weren't nearly so profitable. Newly hired assistant professor Charles Criscione, for instance, spent much of the year setting up a lab to research parasite genetics and ended up $45,305 in the red. The balance sheet sparked an immediate uproar from faculty, who called it misleading, simplistic and crass—not to mention, riddled with errors. But the move here comes amid a national drive, backed by some on both the left and the right, to assess more rigorously what, exactly, public universities are doing with their students—and their tax dollars.
Beyond Crazy - Daniel Hamermesh points out a Wall Street Journal article on how colleges and universities are trying to increase accountability and productivity by measuring costs and benefits quantitatively. The “star” example is Texas A&M, which created a report showing a profit-and-loss summary for each professor or lecturer, where revenues are defined as external grants plus a share of tuition (if you teach one hundred students, you are credited with ten times as much revenues as someone who teaches ten students). Let’s not argue about whether our colleges and universities are doing a good job. Let’s not even argue about whether we need more transparency and accountability in higher education. Assuming we do, this is just about the most idiotic way of doing it that I could imagine. No, wait; there’s no way I could have imagined something this stupid.
Teachers' retirement plan's unfunded liability increases - The Oklahoma Teachers Retirement System, which is one of the most underfunded plans in the nation, saw its unfunded liability grow by nearly $1 billion the past year. Figures released Wednesday to the system's board of trustees show its unfunded liability has increased by $902 million to $10.4 billion as of June 30, the end of the 2010 fiscal year. Its unfunded liability was at $9.5 billion a year earlier, said James Wilbanks, executive director of the state agency. The pension plan as of June 30 was funded at 47.9 percent compared with 48.8 percent a year earlier. Most experts prefer pension plans to be funded at 80 percent.The figures mean that if every teacher and retired teacher cashed in their pensions, the pension plan has enough money to pay only 48 cents on the dollar. The retirement plan has about 153,000 members, including 90,000 active teachers and about 50,000 retirees and beneficiaries.
Pension Plans in California Underfunded by $326 Billion: Study - Pension plans in California face a shortfall of more than $326 billion, taking into account deficits for the state teachers’ and public employee pension programs, according to a study published in October by the Foundation for Educational Choice. The pension plan shortfalls are a significant contributor to the state’s budget crisis and a dire indication of a gloomy financial future for California. “These numbers are mind-boggling,” said Robert Enlow, President and CEO of the Foundation for Educational Choice, in a statement. “It’s a pipe dream to think that California can provide a quality education, keep prisoners behind bars, pave roads and meet other obligations when such enormous bills are coming due.” Even though the State of California only reports a $75.5 billion pension shortfall, consisting of $40.5 billion to the state’s Teachers’ Retirement System (CalSTRS) and $35 billion to the state’s Public Employee Retirement System (Cal PERS), the Foundation for Educational Choice found that a more accurate figure, which includes unfunded health benefits, would be $326.6 billion.
Retired and broke: Why retirees are declaring bankruptcy… For more and more seniors, retirement doesn’t mean a debt-free life of leisure. An increasing number of Americans aged 65 and older are declaring bankruptcy, according to a recent study by John Pottow, professor of law at the University of Michigan Law School. Those aged 65 and older represented seven percent of bankruptcy filers in 2007, a mind-boggling jump from 1991. They are the “fastest-growing age demographic,” according to Pottow’s study. What’s the culprit for so much debt? Credit cards. Two-thirds of Americans who filed for bankruptcy said credit cards were the key reason for their financial problems, according to Pottow’s research. Besides having more credit card debt compared with younger bankruptcy filers, 44.8 percent of those aged 65 and older also had more plastic in their wallets. “They’re using credit cards as a maladaptive coping mechanism,” Pottow says.:“They’re just trying to live off of a fixed income, and that’s usually Social Security. Maybe they have a small pension. We find they’ve used credit cards to supplement that income and expenses or they just end up getting into a lot of medical debt.”
Study: Marin pensions $2 billion in debt - A new study concludes that Marin County's pension system is more than $2 billion in debt, more than double the amount cited by local officials. The review of public unfunded liability, or the cost of benefits promised employees by elected officials but left unfunded, indicates liability estimates issued by the county are risky because they are based on the belief pension investments will earn 7.75 percent annually even though they have fallen short over the past decade.
For many over 55, debt defers dreams - A growing number of Americans age 55 and older have put their retirement dreams on hold as they face a dismal financial reality: The recession has forced many into unemployment, stripped away years of their savings or dramatically reduced incomes during what they had hoped would be their final high-earning years. "My generation thought that we were on easy street," says Irene Froehlich, 61, who lives in the Chicago area. "All of a sudden, we have been hit hard." Froehlich, who works at home as an advertising sales contractor for two magazines, saw her income drop 75% at the beginning of 2009 because of declining ad sales. With less money, she relied more on her credit cards, and the amount she owed jumped by 25%. She filed for bankruptcy in May.
Coming Boomer pension cuts - This site, Remapping Debate, by Colombia Review Journalism shows some promise for information. Here's a piece missing from the debate on the impact pension cuts on a consumer and credit driven economy (Coming boomer pension cuts...what impact on the economy, by Diana Jean Schemo) might have on the Great Recession. It is long and has great links: Over the last two decades, pension cutbacks have left relatively few private sector workers with defined benefit pensions plans. Now, with health and pension funds for state and local government employees said to be facing massive funding shortfalls, many are describing the guaranteed retirement benefits paid to teachers, police officers, street cleaners, and other public workers as overly expensive and sclerotic. These pensions, the argument goes, are unrealistic — they are throwbacks to another era that must now be curbed.
Making Do With Less is the 'New Retirement' - Your investments may not have gained as much as anticipated. Uncertainty about the future tax impact could further cut into returns. Meanwhile, health care costs continue to rise. Many Americans in their 50s and 60s are living for today, without thinking about the consequences. A survey released this week by the Society of Actuaries found that more than two-thirds of pre-retirees, ages 50 to 64, said they could manage only a 1 percent to 5 percent increase in annual health care costs during retirement. Yet, according to the latest estimates by the U.S. Department of Health and Human Services, heath care costs are expected to rise 6.3 percent annually, on average, until 2019. Longer life expectancies, rising health care costs and dwindling investment portfolios could be devastating to the personal finances of pre-retirees, unless serious changes are made in retirement planning.
Now 30 Year Olds Have Only A 13% Chance Of Getting Full Social Security Benefits - I wrote a piece on a federal retirement program that elicited some interesting comments. It was clear to me that there is already a negative bias toward the baby boomers. There is an understanding out there that the boomers are going to be sucking up a great deal of resources in the next decade or so. Some comments: We have witnessed the unprecedented lack of fiscal responsibility from the majority "Baby Boomer" voter base.We've met the enemy, and it is the emerging 'ruling class' pensioners of the Baby Boomer generation. ...get ready for AGE WARFARE As if on cue, the Congressional Budget Office has thrown out some numbers to fire up this emotive issue. The CBO report confirmed (to me) that age warfare is in our future. CBO looked at all of the scenarios regarding Social Security. They ran a total of 500 simulations that reflect the different variables of the puzzle. The analysis assumed that there would be no changes in current law on SS. The objective of the exercise was to quantify the probabilities of which generation would most likely not get the benefits they were (A) paying for, (B) entitled to and (C) expecting.
Social Security is Not The Problem: Part MMDCXXVII - In an article in the New York Times Week in Review section on Britain’s new austerity measures, David Herszenhorn reinforces fallacies about Social Security and the U.S. budget that facts just can’t seem to kill. He writes that over the long-term, Social Security and Medicare will be “pushed to the edge of collapse,” that the nation’s long-term fiscal problems are “stemming from Medicare and Social Security,” and that “the real challenge for federal officials is dealing with the long-term solvency of Social Security and Medicare.” So, to set the record straight yet again, the forecasts of high and rising federal debt into the 2020s and beyond is attributable entirely to expectations of rapidly rising health care costs. High medical inflation -- which has plagued both America’s private and public sector for decades -- in combination with the aging of the population, are the reasons why the Medicare and Medicaid programs are expected to make the nation’s long-term fiscal condition unmanageable absent change. That prospect was one of the central rationales for the newly enacted health care legislation, which includes numerous reforms that have the potential to significantly reduce Medicare’s rate of growth in the decades ahead.
The Big Lie About Social Security- With the midterm elections days away, Republicans and quite a few Democrats have once again been attacking Social Security for running up the federal deficit. The president’s own deficit commission is likely to make Social Security reform a priority. In view of all the rhetoric, voters may be surprised to find out how little Social Security will actually contribute to the future budget gap. In fact, most would probably be stunned. The Congressional Budget Office, which produces dry, cautious budget projections, recently reminded Congress that Social Security as a percent of GDP will rise from 5 to 6 percent in 2035 and simply stay at that level for the foreseeable future. In other words, the much decried shortfall amounts to only 1 percent of GDP over three decades. And this may be exaggerated. As some observe, much will depend on the flow of young immigrant workers to America. The more workers contributing to Social Security, the smaller any future deficit will be. And the CBO projections tend to make overly conservative estimates about such immigration in the decades to come.
ObamaCare IS Working – That’s WHY It’s a Problem - There’s a reason for this. After the (wholly justified, understated) bitterness of my last post, a moment of cheer: An old friend of mine is in the process of losing his job. Now, normally I wouldn’t celebrate anyone—let alone a friend—losing a job, but, you see, he sells medical insurance in Texas and Indiana. And he’s been told that over the next three years, his income will be reduced, and basically eliminated entirely ca. 2015. Translation on a macro level: insurance companies—far from acting as if they are “uncertain”—are cutting the commissions they are paying to agents in preparation for greater competition as the phases of the PPACA come into effect.
A reminder of where we are -As the rhetoric heats up before the election, I’d like to give you a quick reminder* of why we needed (and still need) health care reform: That thick red line is the United States. For the record, we’re beating Mexico, Turkey, and Chile. But every other OECD country – every single other one listed there – has figured this out. I’ve been spending a lot of time recently talking about the cost and quality of the health care system, but let’s not forget access. We’re terrible. There are so many countries bunched near 100% that you can’t see them all; picking out the very few that aren’t is easy. Say what you will about the PPACA, but it was designed primarily to get at this issue. It’s not perfect, and it won’t get us to 100% insured, but it will get us closer. Our goal at this point should be to keep pushing to get us up with everyone else, not to return us to this. *This is from OECD data
Does Competition Benefit Health-Insurance Subscribers? - How does competition work in the health insurance market? Do more competitors in a market area — say, a state — invariably mean a better deal for the insured?These questions are germane as regulators are busy implementing the Affordable Care Act, which imposes a series of stringent new regulations on the market for health insurance, particularly the market for small-group or individually purchased insurance. After months of hard work, for example, the National Association of Insurance Commissioners on Oct. 21 submitted to Kathleen Sebelius, the secretary of health and human services, its recommendations for defining the minimum loss ratio that health insurers must meet as of Jan. 1. As I noted in two earlier posts on the ratio, it expresses what portion of the premiums collected by insurers must be paid out in the form of “medical benefits.” For insurance sold in the small-group or individual insurance market, the portion must be at least 80 percent. For insurance sold in the large-group market it must be at least 85 percent.
U.S. Says Genes Should Not Be Eligible for Patents - Reversing a longstanding policy, the federal government said on Friday that human and other genes should not be eligible for patents because they are part of nature. The new position could have a huge impact on medicine and on the biotechnology industry. The new position was declared in a friend-of-the-court brief filed by the Department of Justice late Friday in a case involving two human genes linked to breast and ovarian cancer. “We acknowledge that this conclusion is contrary to the longstanding practice of the Patent and Trademark Office, as well as the practice of the National Institutes of Health and other government agencies that have in the past sought and obtained patents for isolated genomic DNA,” the brief said. It is not clear if the position in the legal brief, which appears to have been the result of discussions among various government agencies, will be put into effect by the Patent Office.
NIH supporters line up to file legal stem cell arguments - Numerous friends of human embryonic stem cell research are lining up to support the National Institutes of Health (NIH) in a major court case challenging the agency’s ability to fund the research. Tuesday, the Genetics Policy Institute (GPI), a Florida-based advocacy group and sponsor of the recent World Stem Cell Summit in Detroit, Michigan, asked the US Court of Appeals for the District of Columbia Circuit for permission to join an amicus, or friend-of-the-court, brief, filed on Monday by the University of Wisconsin. The GPI request came a day after a similar request from the Coalition for the Advancement of Medical Research (CAMR), an umbrella group of scores of patients organizations, universities, scientific societies and foundations.
Koch Leaves Federal Cancer Panel as Groups Urge Ethics Probe - Energy magnate David Koch ceded his spot on a National Cancer Institute (NCI) advisory board last month, but green advocates are taking aim at the conservative mega-donor nonetheless by calling for a review of federal ethics policies that allowed him to sit on the panel despite a potential conflict of interest. Koch Industries Inc., the privately held company run by Koch and his brother Charles, burst onto the political scene this year thanks to multimillion-dollar contributions the duo steered to right-leaning groups that help fuel the tea party movement. But David Koch’s membership on the National Cancer Advisory Board, which advises NCI, became a flashpoint of its own after The New Yorker magazine last month reported that a Koch-owned company lobbied against designating formaldehyde as a known human carcinogen while he sat on the panel.
Food and Finance - The dominant ideology of food in the United States is nutritionism: the idea that food should be thought of in terms of its component nutrients. Food science is devoted to identifying the nutrients in food that make us healthy or unhealthy, and encouraging us to consume more of the former and less of the latter. This is good for nutritional “science,” since you can write papers about omega-3 fatty acids, while it’s very hard to write papers about broccoli. What does this all have to do with finance? Roughly speaking, read academic finance for nutritionism; the financial sector for the food industry; subprime loans, reverse convertibles, and CDOs for highly processed food claiming to improve your health but actually killing you; current disclosure laws for the FDA-approved health claims on corn oil; thirty-year fixed-rate mortgages and index funds for the neglected, unsubsidized, unadvertised fruits and vegetables in the produce section; the OCC and OTS for the FDA; and the long-term increase in obesity and diabetes for the long-term increase in household debt.
Starved for Attention: A Double Standard - A collaboration between Doctors Without Borders and the VII photo agency recently produced two documentary segments in a series titled Starved for Attention: "The U.S. Standard" and "A Double Standard." The first segment praises the U.S. WIC program for women, infants, and children. The second segment criticizes the corn/soy blend long used in U.S. food aid packages. For some additional background on efforts to reformulate international food aid, the Doctors Without Borders site includes related 2008 conference materials, including presentations and discussion by my Friedman School colleagues Patrick Webb and Dan Maxwell. Taken together, the thesis of the paired documentary segments may be that U.S. and European food aid programs should provide high quality nutrition supplementation throughout the world, rather than treating their own children better. The accompanying petition says, "This double standard must stop."
USDA says food inflation 'to accelerate" into 2011 - Food inflation will "accelerate" during the final months of 2010 and into the first six months of 2011, the U.S. Agriculture Department said Monday. "Although inflation has been relatively weak for most of 2009 and 2010, higher food commodity and energy prices are now exerting pressure on wholesale and retail food prices," USDA food economist Ephraim Leibtag said. In its monthly update, the USDA left its 2010 forecast unchanged for food prices to increase 0.5% to 1.5% -- the lowest rate of annual inflation in 18 years. The USDA further kept its 2011 forecast for food prices to rise 2% to 3% over 2010
First They Came for the Raw Milk, And I Did Nothing - I’ve never drank raw milk, but it’s my right to do so. Humanity has done so for tens of thousands of years. On a broader level, we have a human and constitutional right to grow and produce our own food and distribute it among ourselves as citizens. When you read the history books few things stand out as so emblematic of tyranny as feudal designations of all the produce of the land and the farmer as belonging to the king or the nobles. Therefore it’s a metric of our recrudescence into a new feudalism that a new King, in the form of corporate agriculture and its government lackeys, is trying to proclaim itself the total lord of the food demesne, with the full force of law and the full violence of armed robbery. Since it’s a “fringe” culture, raw milk is ground zero for the government’s war on food freedom. Corporatism thinks that if it can make raw milk persecution the template, and establish here the legal, political, and tactical precedents, it can from there launch a broader assault on all production and distribution of food outside the corporate system.
Trick or Treat – Walmart and Local, Sustainable Food - America needs millions more small farmers. The imperatives are economic, political, and physical. We need food relocalization, our own structures, our own farmers’ markets, garden markets, CSAs, distribution networks. We need to organize, manage, and of course own all this ourselves, completely outside the corporate system. One word used to encompass all of this is sustainability. It’s not just corporate production which is destroying our democracy and health, but corporate distribution. Therefore a prospect like Walmart allegedly emphasizing local foods is a great danger. Gandhi famously said, “First they ignore you, then they ridicule you, then they fight you, then you win.” He didn’t add, “then they try to co-opt you”, but it goes in there somewhere between ridicule and where we win. It proves we’re on the right track, that what we’re doing has “profit” potential, and even better that it’s a significant rival to corporate practice.
McDonald's Intends to Raise Prices -U.S. restaurant chain McDonald's said it was preparing to raise prices to cover higher costs of commodities. McDonald's has not raised prices since late 1990, Media Post News reported Friday. The firm said it expected commodity costs to rise up to 3 percent in 2011. The price hikes are expected in Europe and the United States, but the firm did not release details.
Buying Junk Food With Plastic - When we pay in plastic, credit or debit, we’re more likely to buy unhealthy food, according to research in the forthcoming Journal of Consumer Research In recent years, the use of credit and debit cards has ballooned. So have American waistlines. The average American carries 4.4 cards in her wallet and a third of U.S. adults are obese these days, up from 23% in 1988. But does the mode of payment make a difference when it comes to buying unhealthy food? According to these researchers, the answer is yes.
Global Food Crisis Forecast As Prices Reach Record Highs - Rising food prices and shortages could cause instability in many countries as the cost of staple foods and vegetables reached their highest levels in two years, with scientists predicting further widespread droughts and floods. Although food stocks are generally good despite much of this year's harvests being wiped out in Pakistan and Russia, sugar and rice remain at a record price. Global wheat and maize prices recently jumped nearly 30% in a few weeks while meat prices are at 20-year highs, according to the key Reuters-Jefferies commodity price indicator. Last week, the US predicted that global wheat harvests would be 30m tonnes lower than last year, a 5.5% fall. Meanwhile, the price of tomatoes in Egypt, garlic in China and bread in Pakistan are at near-record levels. "The situation has deteriorated since September,"
The Food Shock of 2011 – Fact is; the food crisis of 2008 never really went away. True, food riots didn’t break out in poor countries during 2009 and warehouse stores like Costco didn’t ration 20-pound bags of rice…but supply remained tight. Prices for basic foodstuffs like corn and wheat remain below their 2008 highs. But they’re a lot higher than they were before “the food crisis of 2008” took hold. Here’s what’s happened to some key farm commodities so far in 2010…
- Corn: Up 63%
- Wheat: Up 84%
- Soybeans: Up 24%
- Sugar: Up 55%
Plastics: There And Back Again - Plastics were once regarded as wonder-materials. They are still ubiquitous, but find less favour than they used to because of the very stability and persistence that won them plaudits in the first place. Persistence is not a quality to be desired in something that gets thrown away, and so much plastic is used in packaging, and in articles that are disposable, that many people now see conventional petrochemical plastics as a nuisance and a threat. The search is on, then, for biodegradable alternatives. One possibility has recently been explored by David Schiraldi of Case Western Reserve University, in Ohio, and his colleagues. They propose to reach back into history and revive the use of a feedstock that was used to make some of the first plastics invented: milk.
Bat disease threatens ecological catastrophe - Scientists and conservationists have been astonished by both the virulence and viciousness of the disease. When a cave becomes infected 75 per cent of the bat colony is likely to be wiped out during the first winter hibernation. After the next winter 90 per cent of the original colony will have succumbed. This savage fatality rate threatens to destroy one of North America's top predators, leaving a gaping hole in the continent's food chain with as yet incalculable knock-on ecological effects. One senior US wildlife official has gone so far as to describe the massacre as "the most precipitous decline of North American wildlife caused by infectious disease in recorded history".
South Pacific fisheries 'close to collapse' - South Pacific fisheries, valued at $2.6 billion and home to 25% of global tuna stock, face collapse within 25 years without immediate action, a report says. "This will have severe economic consequences and will make food security impossible in a region where the population is projected to increase by 50% by 2035," said the report released by the Secretariat of the Pacific Community in Noumea. The report said overfishing of bigeye tuna was at dangerous levels and there was increasing pressures from foreign fishing fleets seeking access to the South Pacific's 22 island nations.
Brazil’s Amazon region suffers severe drought (Reuters) – A severe drought has pushed river levels in Brazil’s Amazon region to record lows, leaving isolated communities dependent on emergency aid and thousands of boats stranded on parched riverbeds. The drought fits a pattern of more extreme weather in the world’s largest rain forest in recent years and is, scientists say, an expected result of global warming. Last year, the region was hit by widespread flooding and in 2005 it endured a devastating drought. The level of the dark Rio Negro, a tributary to the Amazonas river and itself the world’s largest black-water river, fell to 13.63 meters (45 feet) on Sunday, its lowest since records began in 1902, according to the Brazilian Geological Service. Only last year it hit a record high of 29.77 meters (98 feet).
Terrifying Drought Projections - Kevin Drum put out a post Our Coming Mega-Drought, which briefly commented on a recent scientific review by Aiguo Dai, Drought Under Global Warming: A review. The paper really caught my attention and I read it several times this weekend, as well as reading various references and background materials. This post, as well as a follow-on tomorrow, summarizes my understanding at this point, as well as raising a few issues that I don't understand. I make my standard disclaimer: I am not a climate scientist and may get a few things wrong. Given my alarm level after reading this, I will probably do a bunch more research on the issues in coming days and weeks and develop a better understanding. To begin to understand this paper, we need some background on something called the Palmer Drought Severity Index. This is an old idea from the 1960s:
US firm to ship Alaskan water to Middle East via Mumbai - In a commercial scheme that attempts to rectify some of the inequalities inflicted by the beginnings of climate change, water from a lake in Alaska will be sent to a new, yet-to-be-built water hub in Mumbai and then exported to arid cities in the Middle East. A San Antonio, Texas, based company has announced plans to export 12 billion gallons of water per year from the Blue Lake Reservoir in Sitka, Alaska, to a new, yet-to-be-built water hub on the west coast of India. There's trillions of litres of water in a three mile-long reservoir near a town called Sitka in the archipelago off the western coast of Canada.It's named Blue Lake, and fewer than 9,000 people live nearby, meaning that there's very little local pressure on the water supply. The water in the lake is pure enough to drink without any treatment, and a local bottling business has for some time siphoned small quantities out for thirsty people around North America.
Water -- The New Oil: Should private companies control our most precious natural resource? (Newsweek) The transfer of water is nothing new. New York City is supplied by a web of tunnels and pipes that stretch 125 miles north into the Catskills Mountains; Southern California gets its water from the Sierra Nevada Mountains and the Colorado River Basin, which are hundreds of miles to the north and west, respectively. The distance between Alaska and India is much farther, to be sure. But it’s not the distance that worries critics. It’s the transfer of so much water from public hands to private ones. “Water has been a public resource under public domain for more than 2,000 years,” “Ceding it to private entities feels both morally wrong and dangerous.” Everyone agrees that we are in the midst of a global freshwater crisis. Around the world, rivers, lakes, and aquifers are dwindling faster than Mother Nature can possibly replenish them; industrial and household chemicals are rapidly polluting what’s left. Meanwhile, global population is ticking skyward. Goldman Sachs estimates that global water consumption is doubling every 20 years, and the United Nations expects demand to outstrip supply by more than 30 percent come 2040.Proponents of privatization say markets are the best way to solve that problem: only the invisible hand can bring supply and demand into harmony, and only market pricing will drive water use down enough to make a dent in water scarcity. But the benefits of the market come at a price
Masters: “Strongest storm ever recorded in the Midwest smashes all-time pressure records” - 'Weather bomb' hits Midwest with power of major hurricane - But let’s start with meteorologist Jeff Masters, who puts this staggering superstorm in context and examines the climate change angle: The mega-storm reached peak intensity late yesterday afternoon over Minnesota, resulting in the lowest barometric pressure readings ever recorded in the continental United States, except for from hurricanes and nor’easters affecting the Atlantic seaboard. So far, it appears the lowest reading (not yet official) was a pressure of 28.20″ (954.9 mb) reduced to sea level reported from Bigfork, Minnesota at 5:13pm CDT. Other extreme low pressures from Minnesota during yesterday’s storm included 28.22″ (956 mb) at Orr at 5:34pm CDT, 28.23″ at International Falls (3:45pm), and 28.23″ at Waskuh at 5:52pm. The 28.23″ (956mb) reading from International Falls yesterday obliterated their previous record of 28.70″ set on Nov. 11, 1949 by nearly one-half inch of mercury–a truly amazing anomaly. Duluth’s 28.36″ (961 mb) reading smashed their old record of 28.48″ (964 mb) set on Nov. 11, 1998. Wisconsin also recorded its lowest barometric pressure in history yesterday, with a 28.36″ (961 mb) reading at Superior. The old record was 28.45″ (963.4 mb) at Green Bay on April 3, 1982. The previous state record for Minnesota was 28.43″ (963 mb) at Albert Lea and Austin on Nov. 10, 1998.
All that hype won't sell electric cars - If you thought electric cars were about to take over the world's highways, a new report by auto analysts at J.D. Power Associates says, "Not so fast."By 2020, the vast majority of new cars sold around the world will run on gasoline, not electricity, according to the report "Drive Green 2020: More Hope Than Reality." In ten years, just 7.3% of passenger vehicles sold globally will be hybrids or plug-in cars of some kind, the study predicts.
A good grade on a possible gasoline tax - The Wall Street Journal reports about a possible compromise tax proposal being pushed by the American Association of State Highway and Transportation Officials: Democrats might agree to an extension of all the Bush tax cuts if Republicans agree to convert the gasoline tax from a specific excise of 18.4 cents per gallon to an "ad valorem" tax set as a percentage of the price of gas. Gas taxes wouldn't be any higher today but they would rise over time with gas prices; Congress would use the added revenues to fund an expanded highway bill. On its face, this sounds like the classic Washington compromise: Democrats will agree to cut taxes if Republicans agree to increase spending. But the idea deserves consideration. As I have written before, Congress should be extending all the Bush tax cuts for a limited period, so that we can complete the coming fiscal adjustment all at once, when the economy is stronger, and avoid raising taxes while the economy is fragile. Meanwhile, a change to ad valorem gas taxation would allow for stealth gasoline tax increases in years to come - which is a good thing.
CAFE vs Gas Tax - A new paper from Resources for the Future summarizes the literature: …gasoline taxes are a far more cost-effective policy than CAFE standards because they exploit more margins of behavior for reducing gasoline use. Austin and Dinan (2005) and Jacobsen (2010a) estimate that CAFE standards are about 2–3 times more costly than a gasoline tax for a given long-run reduction in fuel consumption. In Jacobsen’s (2010a) study, total welfare costs average about $2 per gallon of fuel saved for a 1 mpg increase in the CAFE standard, while a gasoline tax that saves the same amount of fuel imposes welfare costs of about $0.80 per gallon. The cost disadvantage of fuel economy standards is even more pronounced in the short run, as fuel taxes give all motorists an immediate incentive to save fuel by driving less, while new vehicle standards only permeate the vehicle fleet gradually. Yet despite their much higher cost, CAFE standards are more popular than gas taxes. Our desire to have costs hidden from us is a very expensive preference. The Obama administration was able to pass aggressive CAFE increases in 2009, in contrast both democrats and republicans were campaigning on a gas tax cut in the 2008 election.
Companies want EPA to keep some global warming information secret in first-ever inventory - Some of America's largest emitters of heat-trapping gases, including businesses that publicly support efforts to curb global warming, don't want the public knowing exactly how much they pollute. Oil producers and refiners, along with manufacturers of steel, aluminum and even home appliances, are fighting a proposal by the Environmental Protection Agency that would make the amount of greenhouse gas emissions that companies release — and the underlying data businesses use to calculate the amounts — available online. As the EPA prepares to regulate greenhouse gases, the data companies are being required to submit will help determine what limits eventually are put in place and whether they are working. The companies say that disclosing details beyond a facility's total emissions to the public would reveal company secrets by letting competitors know what happens inside their factories. More importantly, they argue, when it comes to understanding global warming, the public doesn't need to know anything more than what goes into the air.
Nature’s backbone at risk - The most comprehensive assessment of the world's vertebrates confirms an extinction crisis with one-fifth of species threatened. However, the situation would be worse were it not for current global conservation efforts, according to a study launched today at the 10th Conference of the Parties to the Convention on Biological Diversity, CBD, in Nagoya, Japan. The study, to be published in the international journal Science, used data for 25,000 species from The IUCN Red List of Threatened Species, to investigate the status of the world's vertebrates (mammals, birds, amphibians, reptiles and fishes) and how this status has changed over time. The results show that, on average, 50 species of mammal, bird and amphibian move closer to extinction each year due to the impacts of agricultural expansion, logging, over-exploitation, and invasive alien species.
Study finds trees not so large carbon sinks - While trees initially seem to grow faster or larger as carbon dioxide (CO2) levels increase, the higher growth rates cannot be sustained because the availability of soil nutrients remains finite, suggests the study by US and Australian scientists published in the journal Proceedings of the National Academy of Sciences.The study, led by Dr. Richard Norby of the Oak Ridge National Laboratory, Tennessee, included Professor Ross McMurtrie of the UNSW School of Biological, Earth and Environmental Sciences. It updates a long-running experiment in a deciduous forest stand in Tennessee that has been exposed to elevated CO2 levels about 25% above the current atmospheric concentration – effectively exposing the trees to what that ambient CO2 concentration is expected to be in about 2050.
Warming ‘destabilises aquatic ecosystems’ - Researchers said warmer water affected the distribution and size of plankton - tiny organisms that form the basis of food chains in aquatic systems. The team warmed plankton-containing vessels by 4C (7F) - the temperature by which some of the world's rivers and lakes could warm over the next century. The findings appear in the journal Global Change Biology."Our study provides almost the first direct experimental evidence that - in the short-term - if a [freshwater] ecosystem warms up, it has profound implications for the size structure of plankton communities," said lead author Gabriel Yvon-Durocher from Queen Mary, University of London. "Essentially, what we observed within the phytoplankton (microscopic plants) community was that it switched from a system that was dominated by larger autotrophs (plants that photosynthesise) to a system that was dominated by smaller autotrophs with a lower standing biomass."
Arctic sea ice loss linked to severe U.S. winters - Last winter's record wallops of heavy snow had many in the mid-Atlantic wondering what happened to global warming. If the planet were warming as scientists say it is, shouldn't we be receiving less snow? (Not necessarily, I reported at the time.) Now comes word that, paradoxically, cooler winters with heavier snowfall in regions such as the mid-Atlantic may be connected to rapid warming and sea ice loss in the Arctic. In other words, Arctic climate change, which studies have concluded is likely due in part to human activities, could favor cooler and snowier winters in places far removed from the far north. Of course, this would not hold true in every winter, since multiple natural climate factors, such as El Nino in the Pacific Ocean and the North Atlantic Oscillation (NAO) in the Atlantic, compete for influence over the region's weather, in addition to longer-term climate change. But a new "Arctic Report Card" released last week by the National Oceanic and Atmospheric Administration (NOAA) and prepared by an international team of researchers contains curious insights into how Arctic climate change, which may at first seem disconnected from events here at home, may be influencing weather patterns in the northern mid-latitudes.
Konrad Steffen: Greenland’s contribution to sea level rise is increasing - In this astonishing video, Jason Amundson captures the calving of a gargantuan iceberg from the face of the Jakobshavn Glacier in Greenland in the summer of 2007. (The video starts just with the sound of the event.) As the berg — which is hundreds of feet thick — calves from the glacier, it turns over and floats off, producing waves in the fjord more than 10 feet high. (Amundson and his colleagues describe a series of events like this in a Geophysical Research Letters paper.) Today, a new report warns that Asian megacities like Bangkok are at increasing risk from flooding due to rising sea level in an increasingly warmer world. And on Tuesday, NOAA issued its “Arctic Report Card” for 2010, which found, among other things, that ice in Greenland is melting faster now than ever before, helping to increase the rate of sea level rise.
The science behind increasing Antarctic sea ice - Sea ice around Antarctica has been increasing over the last few decades that satellites have been measuring sea ice extent. Consequently, you often hear the refrain “Antarctica is gaining ice”. First of all, it’s worth remembering that sea ice is not to be confused with land ice. This distinction might seem obvious, but the two are often confused in media reports. Sea ice is frozen seawater floating on the surface, whereas land ice is a layer of snow that has accumulated over time on a landmass. Antarctica is losing land ice at an accelerating rate. However, it is clear that the extent of sea ice around the coast of the continent is growing. Why? The first explanation which comes to mind is that the Southern Ocean must be cooling. But on the contrary, the Southern Ocean has warmed by around 0.5°C in the three decades since satellites began measuring sea ice trends. The true reasons for the increasing ice are a complex set of factors. One factor is an increase in precipitation over the Southern Ocean, which means more snowfall. However, this trend is expected to reverse in coming decades as the Antarctic continues to warm.
U.S. Environment Agency Is Urged by Oil Group to Delay New Ozone Standards - The Obama administration should postpone issuing restrictive ozone standards that would cost $10 trillion and more than 7 million jobs, the oil and gas industry- funded American Petroleum Institute said today. The Environmental Protection Agency has proposed reducing the U.S. air-quality limit for ozone, a main ingredient in smog, to 60 to 70 parts per billion, from 75 parts per billion under President George W. Bush in 2008. EPA Administrator Lisa Jackson has said tighter standards are “long overdue” and will help lower health risks. API faulted the agency for revisiting the rules sooner than five years as required by law. Most U.S. counties that monitor for smog would be unable to meet the new limit and a study co- sponsored by API shows the rule would cost $1 trillion a year from 2020 to 2030, said Howard Feldman, the group’s director of regulatory affairs.
EPA defends planned rules over power concerns - The Obama administration is defending its plans to crack down on industrial pollution after a report from a utility group found proposed regulations may result in tighter U.S. power supplies. The North American Electric Reliability Corp released a study on Tuesday that found four possible Environmental Protection Agency rules could “accelerate the retirement of a significant number of fossil fuel-fired power plants”. Utilities may have to replace or make efficiency gains for up to 70 gigawatts, or about 7 percent, of U.S. power generation by 2015, the study said. The EPA disputed those findings on Wednesday, saying the report by the industry group relied on faulty assumptions.
Solar Power Projects Face Hurdles - The long-promised solar building boom in the desert Southwest is finally under way. Here in the Mojave Desert, a dice throw away from the Nevada border, giant road graders and a small army of laborers began turning the dirt for BrightSource Energy’s $2 billion Ivanpah project, the first large-scale solar thermal power plant to be built in the United States in two decades. The Ivanpah plant is the first of nine multibillion-dollar solar farms in California and Arizona that are expected to begin construction before the end of the year as developers race to qualify for tens of billions of dollars in federal grants and loan guarantees that are about to expire. The new plants will generate nearly 4,000 megawatts of electricity if built — enough to power three million homes. But this first wave may very well be the last for a long time, according to industry executives. Without continued government incentives that vastly reduce the risks to investors, solar companies planning another dozen or so plants say they may not be able to raise enough capital to proceed.
South Africa unveils plans for ‘world’s biggest’ solar power plant - South Africa is to unveil plans this week for what it claims will be the world’s biggest solar power plant – a radical step in a coal-dependent country where one in six people still lacks electricity. The project, expected to cost up to 200bn rand (£18.42bn), would aim by the end of its first decade to achieve an annual output of five gigawatts (GW) of electricity – currently one-tenth of South Africa’s energy needs. Giant mirrors and solar panels would be spread across the Northern Cape province, which the government says is among the sunniest 3% of regions in the world with minimal cloud or rain. The government hopes the solar park will help reduce carbon emissions from Africa’s biggest economy, which is still more than 90% dependent on coal-fired power stations. In April, the World Bank came in for sharp criticism from environmentalists for approving a $3.75bn (£2.37bn) loan to build one of the world’s largest coal-fired power plants in the country.
In Athens, New Beginnings - — I’ve just attended a remarkable gathering here, which displayed politics at its best. Launching a new Mediterranean Climate Change Initiative, the leaders of Greece, Turkey and their neighbors pledged to surmount the current crisis the right way: by investing together in the long-term health of the Mediterranean economy and environment. Greece might seem an unlikely leader of such a long-term strategy. The country spent much of the past decade racking up enormous debts and using the services of investment banks such as Goldman Sachs to keep the growing debt burden hidden and off the books
Governor bans new gas wells on state land - Gov. Edward G. Rendell of Pennsylvania signed an executive order on Tuesday effectively banning further natural gas development on state forest lands. Mr. Rendel, a Democrat, said the moratorium was needed in part to prevent the unchecked industrialization of public lands in a state that has seen a boom in natural gas development unparalleled there. Much of Pennsylvania, along with large swaths of New York and West Virginia, sits atop the Marcellus Shale, a potentially vast natural gas resource that has only recently proved accessible through the use of advanced but environmentally contentious drilling techniques.
A New Path to a Low-Carbon Economy - The solution to manmade climate change depends on the transition to electricity production that, unlike burning oil, natural gas, and coal, emits little or no carbon dioxide – the main greenhouse gas responsible for global warming. Low-carbon electricity can be produced by solar, nuclear, and wind energy, or by coal-burning power plants that capture and store their CO2 emissions. The policy problem is simple. Coal is a cheaper and more easily used energy source than the alternatives. It is cheap because it is plentiful. It is easier to use than wind or solar power because it can produce electricity around the clock, without reliance on weather conditions. To save the planet, we need to induce power suppliers to adopt low-carbon energy sources despite coal’s lower price and greater ease of use. The obvious way is to tax coal, or to require power plants to have permits to use coal, and to set the tax or permit price high enough to induce a shift towards the low-carbon alternatives.
BP and Halliburton knew cement was unstable — used it anyway to ’seal’ Macondo well - Halliburton and BP knew weeks before the fatal explosion of the Macondo well in the Gulf of Mexico that the cement mixture they planned to use to seal the bottom of the well was unstable but still went ahead with the job, the presidential commission investigating the accident said on Thursday. We’ve long known that the three underlying causes of BP’s Titanic oil disaster were Recklessness, Arrogance, and Hubris. Back on May 9, I noted that an expert reviewer found the well’s cement seal “was probably faulty” and inadequately tested (to save money). Now we have a better handle on the proximate cause, thanks to a new report from the presidential commission investigating the disaster. As the NYT editorializes today: The report has plenty of blame to go around. And it leaves the clear impression that two of the most important players in the risky world of deep-water drilling were doing their job on the cheap.According to the report, Halliburton conducted three tests on the cement mixture it planned to use. All showed the mixture to be unstable and thus vulnerable to the high-pressure pool of oil and gas at the bottom of the well. It said Halliburton provided the results of one of these tests to BP on March 8 and that BP failed to act on it: “There is no indication that Halliburton highlighted to BP the significance of the foam instability data or that BP personnel raised any questions about it.”
The Petroleum Broadcast System Owes Us an Apology - Tonight, my dog Pluto and I watched the PBS 'Frontline' investigation of BP, "The Spill."PBS has uncovered a real shocker: BP neglected safety! Well, no shit, Sherlock! Pluto rolled over on the rug and looked at me as if to say, Don't we already know this? Then PBS told us — get ready — that BP has neglected warnings about oil safety for years! That's true. But so has PBS. The Petroleum Broadcast System has turned a blind eye to BP perfidy for decades. If the broadcast had come six months before the Gulf blow-out, after the 2005 BP Refinery explosion in Texas, after the 2006 Alaska pipeline disaster, after the years of government fines that flashed DANGER-DANGER, I would say, "Damn, that Frontline sure is courageous." But six months after the blow-out, PBS has shown us it only has the courage to shoot the wounded.
Guest Post: Gulf Oil Spill … Mission Accomplished or Ongoing Crisis? - The corporate media has almost entirely stopped covering the Gulf oil spill. Many have tried to say that the effects of the spill are not nearly as bad as feared, and that everything is pretty much cleaned up and back to normal. But today, it is widely being reported that there are currently massive stretches of weathered oil spotted in the Gulf of Mexico . And websites like Florida Oil Spill Law (FOSL) have tirelessly been reporting on the Gulf oil spill this whole time.
Toxicologist now dealing with at least three autopsies in Gulf — “People who’s esophaguses are dissolving” (Full video at bottom of post) Transcript Summary Worker on Grand Isle dropped over dead. I am dealing with about 3 or 4 autopsies right now. I know of people with 4.75% of lung capacity and with an enlarged heart. I know people who’s esophaguses are dissolving and disintegrating. All these people have oil in their bodies, upper 95th percentile.
Vast stretches of oil still contaminate the Gulf - Following news headlines that the oil had “largely disappeared” by August, nearly all of the Gulf waters closed to fishing have been reopened, and the Coast Guard has declared “very little recoverable oil” remains. However, as Brad Johnson explains the disaster is not over: Just three days after the U.S. Coast Guard admiral in charge of the BP oil spill cleanup declared little recoverable surface oil remained in the Gulf of Mexico, Louisiana fishers Friday found miles-long strings of weathered oil floating toward fragile marshes on the Mississippi River delta. New Orleans Times-Picayune photojournalist Matt Hinton confirmed the sightings in an overflight of Louisiana’s West Bay:
Oil Supertankers Not Looking So Super - Supertanker owners are facing the longest stretch of unprofitable rates in 17 years as the supply of new vessels increases nine times faster than demand for oil. Shipping companies are making $3,155 a day for a single voyage, 90 percent below the $30,900 Frontline Ltd., the biggest operator, says it needs to break even. Morgan Stanley estimates the tanker fleet will expand almost 13 percent next year and the International Energy Agency says oil use will grow 1.4 percent. Ships ordered before rates plunged from $177,036 in July 2008 are swelling the fleet of about 526 supertankers. Owners have responded by cutting average speeds 9 percent since March and anchoring 24 percent more vessels since January ...The global oil-tanker fleet will expand by 86.5 million deadweight tons in the next two years, equal to about 27 percent of existing capacity, Morgan Stanley estimates. The extra ships, being built by yards including Shanghai Waigaoqiao Shipbuilding Co. and Dalian Shipbuilding Industry Co., would exceed the previous record of 79.8 million deadweight tons set in 1974 and 1975, according to the research unit of Clarkson Plc, the world’s largest shipbroker. More here.
Alaska reserve holds one-tenth of oil scientists had estimated, agency says - Recent drilling results indicate that the National Petroleum Reserve-Alaska contains roughly one-tenth of the oil that federal scientists had previously estimated, the U.S. Geological Survey announced Tuesday. Instead, the federal agency said, natural gas is the dominant energy resource in the 23 million-acre reserve across northern Alaska, and in nearby state waters. The findings are based on more than 30 wells drilled and other exploration in the NPRA over the past decade. The agency's findings are in sync with declining investment by some oil companies, which have shed more than 1 million acres of leases in the reserve and are spending much less money on purchasing new ones.
Alaska's untapped oil reserves estimate lowered by about 90 percent -- The U.S. Geological Survey says a revised estimate for the amount of conventional, undiscovered oil in the National Petroleum Reserve in Alaska is a fraction of a previous estimate.The group estimates about 896 million barrels of such oil are in the reserve, about 90 percent less than a 2002 estimate of 10.6 billion barrels. The new estimate is mainly due to the incorporation of new data from recent exploration drilling revealing gas occurrence rather than oil in much of the area, the geological survey said."These new findings underscore the challenge of predicting whether oil or gas will be found in frontier areas," USGS Director Dr. Marcia McNutt said in a statement. "It is important to re-evaluate the petroleum potential of an area as new data becomes available."
Algeria says 2011 energy output to fall (Reuters) - OPEC member Algeria expects its energy production and exports to shrink in 2011, pushing earnings from oil and gas down 4.5 percent on the forecast for this year, the finance ministry said. Revenues from oil and gas sales abroad are set to decline to $42.2 billion from the $44.2 billion forecast for this year, according to a document drafted by the finance ministry, which was obtained by Reuters. The forecasts in the document for 2010 and 2011 are both made on the basis of a nominal average price for crude oil of $60 per barrel, excluding the influence of price fluctuations on the forecast revenues.Asked to explain the forecast drop in earnings for 2011, Finance Minister Karim Djoudi told Reuters: "It's because, regarding quantities, production and exports will decline." Algeria supplies about a fifth of Europe's energy needs and is also the world's eighth largest crude exporter.
Saudi Arabia plugs cheap oil supply talk - The national reported that Saudi Arabia has rejected claims that the era of cheaply produced oil is over, saying the world's largest field in the kingdom's eastern province still holds more than many countries. Many of the largest oilfields in Texas and the North Sea have passed their prime forcing companies to target more costly prospects such as bitumen deposits in Venezuela, Canadian tar sands and ethanol. Mr Ali Al Naimi oil minister of Saudi Arabian pointed to the Ghawar field's 88 billion barrels of remaining reserves and the kingdom's large cushion of spare pumping capacity as signs that oil was still abundant.
Subsidies Seen Endangering OPEC Prosperity -- Member countries of the Organization of Petroleum Exporting Countries are thriving on oil export revenue but, in many cases, eroding their export capacities by subsidizing domestic consumption, warns the Centre for Global Energy Studies, London. In its Industry Watch report, CGES calculates that OPEC producers have generated almost $5 trillion in oil-export revenue since 1998, a year of unusually low revenue when the average crude price was only $12.30/bbl. Group production during 1998-2010 increased by an average of only 0.6%/year. Export growth was even lower at 0.2%/year. Rapid growth in domestic consumption has lowered export rates in many OPEC countries. While global oil demand growth averaged 1.2%/year, demand in most OPEC countries increased by more than 3%/year during 1998-2010, CGES says.
Raising Competitiveness: Recipe for Tapping into the Middle East’s Growth Potential - IMFdirect - With the global economy on the mend, countries in the Middle East and North Africa are witnessing a pickup in trade and economic growth. Aided by rising oil prices and production levels and supportive fiscal policies, economic growth for the region as a whole is projected to exceed 4 percent in 2010, almost double what it was in 2009. In contrast, and unlike many emerging markets elsewhere, the region’s oil-importing countries saw only a mild slowdown in economic growth last year to 4½ percent and are likely to see growth nudge up to around 5 percent this year. However, as our October 2010 Regional Economic Outlook for the Middle East points out, that growth rate is well below the average of 6½ percent a year required to create the 18 million jobs needed over the next decade to absorb new labor-market entrants and eliminate chronically high unemployment.A key factor in this predicament is that the region’s oil-importing countries in particular still lag behind other countries on most indicators of ‘competitiveness.’ This implies that they are missing out on opportunities to boost economic growth and employment
IEA: Unclear If Oil Reserve Growth Will Contribute to Future Supply - Recent increases in oil reserves in Iraq, Iran and Venezuela are "good news," but it remains unclear whether they will contribute to future supply, Nobuo Tanaka, executive director of the International Energy Agency, or IEA, said Monday. "To have more reserves is certainly good news, because it gives us a more precise prediction of costs and necessary investments," Tanaka told Dow Jones Newswires at an energy conference in Moscow. "But the issue is how much investments will happen to develop these reserves, how this will increase production capacity. "Until then, we're not sure whether it will contribute to future supply," Tanaka said
Surging Price Of Oil Forces U.S. Military To Seek Alternative Energy Sources - It's a secret just how much oil the US military uses, but estimates range from around 400,000 barrels a day in peacetime – almost as much as Greece – to 800,000 barrels a day at the height of the Iraq war.This puts a single nation's armed forces near Australia as an oil consumer and among the top 25 countries in the world today. Either way it is by far the world's largest single buyer of oil and the last thing any admiral, general or under secretary of defence has had to be been concerned about is whether there's gas in the tanks or that the navy's carbon emissions are a bit extravagant. But there are signs of change. Every $10 rise in the price of oil costs the gas-guzzling US air force around an extra $600m each year. Just keeping one US soldier in Afghanistan with the world price of oil at $80 a barrel now costs hundreds of dollars a day in fuel alone.
U.S. Navy Completes Successful Test On Boat Powered By Algae It looked like a pretty ordinary day on the water at the US naval base in Norfolk, Virginia: a few short bursts of speed, a nice tail wind, some test manoeuvres against an enemy boat. But the 49ft gunboat had algae-based fuel in the tank in a test hailed by the navy yesterday as a milestone in its creation of a new, energy-saving strike force. The experimental boat, intended for use in rivers and marshes and eventually destined for oil installations in the Middle East, operated on a 50/50 mix of algae-based fuel and diesel. "It ran just fine," said Rear Admiral Philip Cullom, who directs the navy's sustainability division.
Jim Puplava interviews Stoneleigh, Part 2 - Stoneleigh did another interview with Jim Puplava at Financial Sense this week, and since Puplava has asked her, after the first talk, to come on once a month, it looks like there will be more installments.This episode primarily addresses peak oil issues, and there are very few people in the world better versed in these issues than Stoneleigh is. This has to do with both her academic background and her experience in running an energy producers association. Which makes this interview a must-hear: Stoneleigh can pinpoint with great accuracy where the problems in our energy supply will be going forward, even if we realize very well that many voices out there will not agree with her views.One of those voices is Jeff Rubin, who's in the second half of the show. You may have heard that Rubin was very dismissive of Stoneleigh's talk at the recent ASPO-USA conference. Now, I wasn't there, but in the first few minutes of Rubin speaking here, it becomes grindingly clear where he misses the boat.
Energy: Turning up the Power The world's thirst for oil (and our sluggish investment in alternative energy) means we will be caught short when global crude production reaches its limits — and some experts say it has already happened. That's the forecast of the Peak Oil scenario, which posits that the sharp decline in oil supplies will trigger a sudden economic collapse. "The era of happy motoring is over," says social critic James Howard Kunstler; his 2005 book, The Long Emergency, describes a grim post-oil world. Bottom line: Buy sturdy shoes, because you'll be walking a lot. "Life in the U.S.A. will become deeply local and austere," Kunstler says. Ominously, he adds, "The younger generation will punish the boomers for destroying their future."
The Peak Oil Crisis: The Midterms - It has been obvious to anyone who cared to look at the issue that for the last six or seven years something has been seriously wrong with the global supply of oil. Prices have moved to up from their traditional $10-20 a barrel range to roughly four times higher. Looking behind this number, it does not take long to learn that world oil production has been static for the last five years and that demand for oil in China, India, the oil-exporters, and a few other developing countries is moving up rapidly. Indeed, a few knowledgeable observers are beginning to say that it was the rapid increase in oil prices and the concomitant inflation and higher interest rates between 2002 and 2006 that started the ball rolling towards our current global recession. The great oil price spike to $147 a barrel in the summer of 2008 was the icing on the cake. The great financial/credit bubble that had been growing in the U.S. and Europe for several decades began to deflate.
Peak Oil — Where Do We Stand? - On October 14, 2010, Aaron Task interviewed Chris Martenson at Yahoo's Tech Ticker (video below). Martenson, fresh off of attending ASPO-USA's annual peak oil conference, told Aaron that "conventional oil" peaked "around 2005." Aaron had no way to assess this statement, so he ran with it. It was then that I decided to write this post in a futile attempt to get everybody on the same page about future oil production. IMHO, anybody with a vested interest in the world's future oil supply—that would be almost everybody on Earth—should read this post. Realistically, my expectations are somewhat lower First things first. Conventional oil refers to crude oil plus lease condensate according to the Energy Information Agency (EIA). That's as good a definition as any, and I will use EIA data today. All liquids refers to conventional oil taken together with natural gas liquids, refinery gains and biofuels, but today I will stick with conventional oil. In July, 2010 the world produced 73.691 million barrels per day (b/d) of conventional oil. The all-liquids total for that month was 86.474 million b/d. You can see that conventional oil by far makes up the largest share of the total liquids supply.
Economist charts new oil realities - JEFF Rubin says he believes that regardless of the scientific debate about how much oil might be left in the ground, its price will continue to escalate -- maybe even back to $100-plus per barrel level in a matter of weeks. For 26 years Rubin was chief economist for the CIBC, until he published a book in 2009 (recently revised and updated) called Why Your World is About to Get a Whole Lot Smaller about how world economies are going to change as the price of oil goes up. Not surprisingly, the publication of that book required his resignation from the bank.
Oil and The Death of Globalization - Canadian Economist Jeff Rubin is known for his prescient calls in the oil markets over the past few decades. His most recent book, Why Your World is About to Get a Whole Lot Smaller, explains why continuously rising oil prices will mean the end of globalization. We caught up with Rubin at the Global Wealth Management seminar in Copenhagen to talk about how rising oil prices will affect everything from home loans to the price of Salmon.
Chicken Little, peak oil and Y2K - At the recent conference of the Association for the Study of Peak Oil & Gas-USA in Washington, D.C., an unknown person hired two people to dress as Chicken Little and walk around outside the conference venue. The trouble with Chicken Little is that he neither had a practical plan to address the problem of the falling sky nor the sense to discern the intentions of Foxy Loxy who ultimately devoured Chicken Little and his friends before they could reach the king to tell him that the sky is falling. As such, Chicken Little gives us poor guidance about the effect that the efforts of those involved in the peak oil movement will likely have. A better analogy would be the so-called Y2K problem.
The Next Oil Shock? - The US Department of Energy (DoE) calls oil “the lifeblood of modern civilization”.1 Around 86 million barrels (13.7 billion litres) are consumed each day. Oil supplies 37 percent of the world’s energy demand,2 including 40 percent of New Zealand’s energy demand.3 It powers nearly all of the world’s transportation, without which production and trade would grind to a halt. Studies have shown that GDP growth is very strongly related to increased use of oil.4 When the price of oil increases, the cost of nearly all economic activity rises. This often induces recessions. High oil prices have been associated with three major periods of economic recession in the past 40 years, including the lead-up to the recent global economic crisis.5 The world’s oil production capacity may not be sufficient to match growing demand in coming years. The potential for short-falls arises from geological, infrastructure, and political/economic constraints limiting the ability of world oil production capacity to grow while demand continues to rise. If oil supply cannot meet demand a price spike may be triggered, with major detrimental effects on economies, especially those heavily dependent on oil imports like New Zealand.
Engine Trouble - MANY factors were responsible for the industrial revolution. But the use of fossil fuels was clearly vital in driving a step change in rates of economic and population growth. So the current rise in the cost of extracting such fuels should be the subject of considerable concern. Until the 18th century mankind’s output had been restricted by the amount of physical force that humans (and domesticated animals) could exert and by the amount of wood that people could chop down. Fossil fuels delivered a massive productivity boost. It was only natural for mankind to exploit the cheapest energy sources first, such as easy-to-extract oil reserves under Saudi Arabia. The problem now is not that the world is running out of energy but that the new sources of energy are more expensive to exploit. The key ratio is “energy return on energy invested”.
Nissan Exploring Alternative Sources of Rare Earths on China Restrictions - Nissan Motor Co., Japan’s third largest carmaker, is exploring alternative sources of rare earth minerals as China restricts shipments. While Nissan has sufficient stockpiles of rare earths, it is “very concerned” about the supply situation, Chief Operating Officer Toshiyuki Shiga told reporters in Yokohama today. Nissan will also try to reduce the amount of rare earths it uses in motors for hybrid cars and explore recycled materials, he said. Restrictions by China, which produces more than 90 percent of the world’s rare earths, have drawn criticism from U.S. lawmakers and officials in Japan and Germany. China reduced its second-half export quota for the minerals by 72 percent in July, the Ministry of Commerce said. It is now further restricting exports, according to industry participants.
Obama May Raise China Rare Earth Issue At G20 - U.S. President Barack Obama could raise the issue of Chinese control of rare earth minerals with Beijing at the G20 meeting next month, the White House said on Tuesday. "I think we are likely to see (Chinese) President Hu (Jintao) on the trip at the G20," said White House spokesman Robert Gibbs. He said the president's national security and economic advisers were monitoring reports China may be exploiting its grip on rare earth metals, crucial in the making of everything from portable phones to wind turbines. "If it is something that the security and economic teams think is important...certainly, we wouldn't hesitate to bring it up," Gibbs said.
Germany Says Severely Hit By Rare Earth Scarcity - Germany is severely hit by the global shortage of rare earths, and the government should guard against speculation in raw materials, Economy Minister Rainer Bruederle said on Tuesday."We are severely affected when it comes to energy resources and ... rare earths which are growing scarce," he said at a raw materials conference in Berlin. "When speculation is rife, you lose the foundation in the economy," he said. "And that is detrimental for the producing industries. Pricing frameworks must remain on our agenda."
German auto sector voices concern over rare-earth spat - German industrialists are concerned over supplies of rare earth minerals needed for a wide variety of products after companies said access to the raw materials was restricted by China. "Supply difficulties or sharp price increases for these metals affect the competitive position of our companies," the head of the German auto federation VDA, Matthias Wissmann, told AFP on Monday. "That is why we need a strong committment by political leaders in charge of the question to be assured of the raw material's availability," he added
Rare-Earth Demand Will Grow 9% a Year on Magnets, Batteries, Producer Says - Global demand for rare earths will increase by an average of 9 percent a year to 2014, led by greater use of the materials in magnets and batteries, Lynas Corp. Ltd. said today. Total demand for the group of elements, used in everything from industrial magnets, breaking systems of Toyota Motor Corp. Prius cars and flat screen TVs, is set to grow to 190,100 metric tons in 2014, from an expected 136,100 tons this year, Sydney- based rare earths developer Lynas said in a presentation. China, producer of more than 90 percent of the world’s rare earths, reduced its second-half export quota for the minerals by 72 percent in July and is now further restricting exports, according to industry participants. Global supply would only grow to 170,000 tons by 2014 according to company estimates, Lynas said, leaving the market with a 20,000-ton shortfall. The price of lanthanum oxide, used in hybrid car batteries among other applications, has risen almost sevenfold to $50 a kilogram, compared with the second quarter this year, according to Lynas’ website.
U.S. and Europe Urged to Join Forces on Rare Earth Metals - The United States and Europe should work together with industry to reduce dependence on China for crucial minerals because global trade bodies are ill-equipped to solve the problem of withheld supplies, officials and executives said Tuesday at a high-level conference. Germany has been the most vocal country in Europe in raising concerns about the potential economic impact of shortfalls of rare earth and other metals, and its economy minister was a featured speaker at the conference, organized by the Federation of German Industries. The consensus among attendees, who included representatives from industry as well as the European Union, the World Trade Organization and the World Bank, was that trade rules were inadequate when it came to responding to China’s decision to cut back export quotas of such materials. China dominates the mining of these metals, which are crucial for high-tech industries. “The fact is that the existing rules do not appear to be commensurate to the problem we face,”
Chinese Rare Earths: Less Muscle, More Growth - China’s move to reduce exports of rare earths may be less about political muscle-flexing and more about feeding its economic growth. The Asian giant has come under serious flack from the international community for cutting back on the amount of rare earths it sends to consumers around the world. China produces about 97% of the materials used extensively in the high-tech sector, meaning there are few immediate alternative sources when there’s any disruption to supplies. The price of some of the 17 rare earth materials has risen as much as 10-fold in the last two months alone. It’s not exactly China’s fault it is in this monopolistic position. It may produce most of the world’s rare earths, but it only has roughly a third of their known reserves. The rest are spread around the globe in countries like South Africa, India, Brazil, the U.S. and Australia, all of which stopped producing rare earths when prices fell, allowing China, a much lower-cost producer, to take over. So far, China’s recent rare earths policy has managed to upset just about all of the superpowers.
Race to Replace China’s Rare Earths May Take Decade - China’s decision to curb exports of rare earths is set to spark a global race for alternative sources that may still take a decade to secure sufficient supplies, the head of the German commodities agency said. More rigid environmental standards in the European Union and ethical questions over sourcing raw materials from developing nations mean there can be no quick fixes in finding viable alternatives to China, producer of more than 90 percent of the world’s rare earths, said Volker Steinbach, who heads the Hanover-based government agency. Stepping up global pressure on the Chinese government to resume exports may be the best short- term option, he said. “We’re faced with a gap in rare-earth supplies that cannot be plugged overnight,” Steinbach said by phone ahead of a conference in Berlin today on securing commodity resources. “Realistically, bringing rare earths in volume to markets from new sites like Mongolia, Africa and Greenland may take five to 10 years.”
US Faces Substantial Obstacles to Increasing Rare Earths Production - Yves Smith - Reader James S. highlighted a useful article at the MIT Technology Review, “Can the U.S. Rare-Earth Industry Rebound?” In fact, the while the article does discuss US versus foreign engineering expertise in rare earths mining, it describes in some detail how difficult rare earths mining is in general (more accurately, not the finding the materials part, but separating them out) and the considerable additional hurdles posed by doing it in a non-environmentally destructive manner. Thus the rub is not simply acquiring certain bits of technological know-how, but also breaking further ground in reducing environmental costs.And this issue has frequently been mentioned in passing in accounts of why rare earth production moved to China in the first place. It’s nasty, and advanced economies weren’t keen to do the job. China was willing to take the environmental damage. For instance, the New York Times points out: China feels entitled to call the shots because of a brutally simple environmental reckoning: It currently controls most of the globe’s rare earths supply not just because of geologic good fortune, although there is some of that, but because the country has been willing to do dirty, toxic and often radioactive work that the rest of the world has long shunned.
Oh Jeez, The Rare Earth Bubble Is About To Go Into Overdrive - We've been writing a lot lately about the mania for rare earth stocks.Companies like MolyCorp and Rare Elements are surging despite having no revenue (let alone income).All that moves them are headlines. Every time China reduces exports to Japan, they surge. When a German economic minister mentions that his country is at the whim of China, they surge. And now, there's a new reason they can surge: A rare earth ETF. Gone is the need to do any research or anything like that. Just buy the Market Vectors Rare Earth/Strategic Metals ETF (REMX), which will begin trading tomorrow, and your work is done. So long as the bubble continues, you're in good shape.For a background on why everyone is going rare-earth crazy, see here >
China’s Rare Earth Embargo Changes Incentive for Toxic Work - When Japanese mineral traders learned in late September that China was blocking shipments of a vital commodity, the word came not from a government announcement but from dock workers in Shanghai. And on Thursday, the traders began hearing that the unannounced embargo of so-called rare earth minerals was ending — again, not from any Chinese government communiqué, but though back-channel word from their distributors. Throughout the five weeks of the embargo, even when China expanded the rare earth shipping halt to include the United States and Europe, Beijing denied there was a ban. The episode alarmed companies around the world that depend on rare earths, minerals that help make a wide range of high-tech products, including smartphones and smart bombs. China currently controls almost all of the world’s supply of rare earths, for which demand is soaring.
China Drops Rare Earths Ban - Yves Smith - Here’s the update, per the New York Times: The Chinese government on Thursday abruptly ended its unannounced export embargo on crucial rare earth minerals to the United States, Europe and Japan, four industry officials said.The embargo, which has raised trade tensions, ended as it had begun — with no official acknowledgment from Beijing, or any explanation from customs agents at China’s ports. Note that while the ban has been reversed, the supply interruption has led to a price spike, and that may persist if China keeps supplies tight. There are two different ways to read this little contretemps, and readers can no doubt come up with other interpretations:1. This was a successful shot across the bow of the US: The Treasury has backed off its pressure on China to have the renminbi appreciate more quickllyand is now supporting the idea of China coming up with longer term goals to rein in its trade surplus 2. This was a shot across the bow that failed. China only banned raw materials exports; it wanted to
force encourage its trade partners to buy products manufactured in China with rare earths content. But instead, Japan immediately started to focus on recycling rare earths and redesigning products to use less of them...
Estimating the impact of transportation infrastructure - How large are the benefits of transportation infrastructure projects, and what explains these benefits? To shed new light on these questions, this paper uses archival data from colonial India to investigate the impact of India's vast railroad network. Guided by four predictions from a general equilibrium trade model, I find that railroads: (1) decreased trade costs and interregional price gaps; (2) increased interregional and international trade; (3) increased real income levels; and (4), that a sufficient statistic for the effect of railroads on welfare in the model (an effect that is purely due to newly exploited gains from trade) accounts for virtually all of the observed reduced-form impact of railroads on real income in the data. I find no spurious effects from over 40,000 km of lines that were approved but - for four different reasons - were never built.
US intensifies trade row with China - US treasury secretary Timothy Geithner today intensified his row with the Chinese authorities after he called on G20 countries to agree a cap on their trade surpluses. In a thinly veiled attack on Beijing, Geithner told the G20 nations to stop manipulating their currencies to prevent "excessive volatility" and a global currency war. Only with an agreed framework for trade surpluses and currency values could the world economy recover in a sustainable fashion, he said. The warning came before a meeting of G20 finance ministers in South Korea and followed a report by the World Bank that argued a full-scale currency war risked a return to the protectionism of the 1930s.
Lessons from Beijing - Following her chat with Glenn Hutchins at the Quebec City Conference about how globalization is changing corporate strategy, Chrystia interviewed NYU Economics Professor A. Michael Spence about how globalization is bringing about structural change in the world’s leading economies. Spence, a 2001 winner of the Nobel Prize, chairs the Commission on Growth and Development, a multilateral effort to determine the practical conditions developing nations need to implement in order to achieve high growth. Given his expertise in emerging markets, it comes as no surprise that he thinks their future is bright. Spence was impressed with emerging markets’, especially China’s, brisk comeback following the capital flight and collapse in world trade that resulted from the financial crisis, and he thought they would be able to sustain their current growth rates:
Chinese Supercomputer Wrests Title From U.S - A Chinese scientific research center has built the fastest supercomputer ever made, replacing the United States as maker of the swiftest machine, and giving China bragging rights as a technology superpower. The computer, known as Tianhe-1A, has 1.4 times the horsepower of the current top computer, which is at a national laboratory in Tennessee, as measured by the standard test used to gauge how well the systems handle mathematical calculations, said Jack Dongarra, a University of Tennessee computer scientist who maintains the official supercomputer rankings. Although the official list of the top 500 fastest machines, which comes out every six months, is not due to be completed by Mr. Dongarra until next week, he said the Chinese computer “blows away the existing No. 1 machine.” He added, “We don’t close the books until Nov. 1, but I would say it is unlikely we will see a system that is faster.”
China's Auto Sales Run Hot - China's domestic auto market could reach sales of more than 17 million vehicles this year and 19 million next year, said a senior General Motors Co. executive, outpacing home-market sales for several Western auto brands. Daimler AG Chief Executive Dieter Zetsche on Friday separately said he expects Chinese consumers to become the biggest buyers of Mercedes Benz cars in the next three to five years. Volkswagen AG's Audi unit expects its sales in China to surpass German sales next year. With China's booming economy raising personal income, the country's auto market will likely continue to offer a "tremendous upside potential," said Kevin Wale, GM's head of operations in China. He predicted China is likely to hold on to its newly acquired status as the world's largest auto market for the foreseeable future.
GM Set to Sell More Cars in China Than U.S. - SHANGHAI (WSJ) -- "China's domestic auto market could reach sales of more than 17 million vehicles this year and 19 million next year, said a senior General Motors Co. executive, outpacing home-market sales for several Western auto brands . The sales forecasts are up sharply from the 13.7 million vehicles that auto makers sold in China last year (see chart) as the country's auto market grew about 50% to surpass the U.S. as the world's biggest." Also:
1. Daimler expects Chinese consumers to become the biggest buyers of Mercedes Benz cars in the next three to five years.
2. Volkswagen AG's Audi unit expects its sales in China to surpass German sales next year.
3. GM's sales in China will surpass that of its parent company in the U.S. according to GM's Kevin Wale (source)."
China ‘to focus on promoting electric cars’ - Chinese authorities have agreed to promote electric cars to address the country’s intensifying energy and pollution concerns, as auto sales surge, an official said Thursday. The Ministry of Industry and Information Technology and other government agencies have studied the future of China’s auto industry, Zhu Hongren, the ministry’s spokesman, told reporters. “The basic consensus is to take electric cars as the main strategic direction for the transformation of China’s auto industry,” Zhu said. Efforts will be made to develop better batteries, engines and electric control technology with the aim of mass producing electric vehicles and plug-in hybrid cars, he said. China overtook the United States last year to become the world’s largest auto market in terms of units sold.
G20 vows to avoid currency war Finance ministers from the Group of 20 nations have promised to refrain from “competitive devaluation” of their currencies, heading off the prospect of a currency war. In a final statement after two days of heated negotiation, the G20 said it would “move towards more market-determined exchange rate systems” and that the International Monetary Fund would “deepen” its supervision of exchange rates. “This language calms everything down and gives us a route map forward,” said George Osborne, the Chancellor of the Exchequer. “Obviously this colourful language about currency wars has got everyone excited,” he added.
G-20 Vows To Avoid A Currency War - Moving to shore up the “fragile and uneven” recovery, officials from the world’s 20 biggest economies promised Saturday to refrain from weakening their currencies, agreeing to let the markets exert more influence in setting foreign exchange rates. The officials also decided to give fast-growing countries a greater say at the International Monetary Fund, which monitors nations’ fiscal and monetary policies, an acknowledgment that the fund’s credibility required more representation from these nations. They also strengthened the I.M.F.’s role in assessing whether G-20 members were meeting their commitments. The finance ministers and central bankers were at a two-day meeting in Gyeongju, South Korea, and their actions represented another step in the effort to bridge the diverging priorities of the leading economies and ease the strain of simmering disputes.
G20 fails to agree concrete agenda on imbalances - No binding targets for current account surpluses, or deficits; no co-ordination of exchange and monetary policies; euro shoots back up to over $1.40; the only agreement achieved by the G20 was a reform of the IMF, as part of which the Europeans are losing two seats, and voting power shifts by 6pp to emerging economies; Lex says financial globalisation is stilling running ahead of political globalisationMerkel is ready to accept changes to Art. 125 – the no bailout clause – but only if embedded in a tough resolutions regime; ; Germany wants bondholders to participate in rescue costs; FT Alphaville calculated that bail-ins would lead to a significant increase in interest rates; French senate adopts pensions reform; Sarkozy likely to reshuffle cabinet any time now; the Portuguese governments and the opposition have started a new round of budget talks; Karl Whelan does the math on Irish deficit reductions, and says the government is, once again, underestimating; Fred Mishkin calls for the adoption of an inflation target; Wolfgang Munchau, meanwhile, says the EU is obsessed with the stability pact, even though public sector finances are not the main economic problem of the eurozone. [more]
Germany And Brazil Torpedo Currency Deal At The G20 - If you were wondering who to blame for the meek G20 result look no further than Brazil and Germany, according to the Financial Times. South Korea and the United States had agreed to a plan to limit trade surpluses and deficits. The limits weren't too strict, at 4% of GDP either way. China even felt they were acceptable. But Brazil and Germany said no because their exporters wouldn't have it, according to the FT. So if Brazil starts complaining about hot money flows from QE 2, or Germany about the yuan-euro exchange rate, it is likely to fall on deaf ears.
Who’s In Charge Here? Not The G20 by Simon Johnson - Most accounts of the ministerial meeting last weekend of the Group of 20 — 19 nations plus the European Union that represent the world’s wealthiest economies —implied that it continued to perform sterling service – heading off currency wars, keeping explicit protectionism under control and deftly managing the process of reforming governance at the International Monetary Fund. Post-financial crisis, middle-income countries continue to rise in economic importance, and the recent shift in global leadership from the Group of 7 to the G-20 is commonly supposed to accommodate the growing claims of “emerging markets” on the world stage. This interpretation is correct as far as it goes, but it also misses the main story, which is that emerging markets have two primary goals that are increasingly at odds with each other. These goals – to hold large stocks of American dollars and to stave off a flow of capital from abroad – add up to wanting to retain the emerging markets’ recently achieved status of collective net creditors (i.e., being owed more than they owe). Unfortunately, this contributes to the serious vulnerability of the world economy as we head into the next credit cycle.
Emerging Nations Gain in G-20 —The world's 20 biggest economic powers decided Saturday to give emerging countries a bigger say in the International Monetary Fund and confront the currency turmoil roiling the global economy by tackling large trade imbalances.The finance ministers and central bankers of the Group of 20 leading industrial nations ended a two-day meeting saying they remain committed to creating a sustained and balanced recovery from the economic downturn that began in 2008. But, in their final communiqué, they described the recovery as "fragile and uneven" with emerging economies faring better than advanced ones. The agreement to reshape IMF governance acknowledged the growing importance of fast-rising countries like Turkey, Brazil and China that are underrepresented on it. And, with their currency-related decision, the G-20 countries took a first step -- though not as big as countries like the U.S. and others sought -- at defining the "balanced" portion of the recovery framework.
The One-Sided Compromise - Last weekend, the G-20 finance ministers met in South Korea to find areas of agreement in preparation for the main G-20 gathering in November. The Chinese rebuffed renewed American pleas for them to revalue their yuan. They rejected Secretary Geithner's suggestion of a four percent cap on current account surpluses. However, in return for accepting America's continued dollar debasement, the Chinese did agree to "look into" a revaluation of the yuan and the management of trade surpluses. They also agreed to an international self-policing regime to curb currency manipulation. This 'one-sided' compromise was hailed in the Western media as a triumph for Mr. Geithner. The US stock markets and dollar rallied. All looked good for the election season in November. Unfortunately, compromises are never one-sided; they are only construed as such. Though the reporting failed to emphasize it, Mr. Geithner actually agreed to a massive shift of monetary power in exchange for China's empty concessions. The shareholdings and board composition of the huge and powerful International Monetary Fund (IMF) have now been shifted.
Geithner pressures emerging economies over currency moves - U.S. Treasury Secretary Timothy Geithner on Saturday pressed emerging economies to allow “gradual appreciation” in their currencies following the Group of 20’s agreement to refrain from competitive devaluation. He also urged major surplus countries to increase domestic demand to help rebalance the global economy. He made the remarks after the Group of 20 issued a joint statement pledging to “move toward more market determined exchange rate systems’’ and “refrain from competitive devaluation of currencies.”“These commitments should help reduce some of the pressure being experienced by those emerging economies that are appropriately running more flexible exchange-rate systems and have already seen their currencies move significantly higher,” Geithner said.
U.S. Says China 'Must Move' On Currency Exchange Rate - THE White House underscored overnight its hope that China will re-evaluate its currency, which the US believes has been kept artificially low to favour Chinese exports. "China must move," spokesman Robert Gibbs said of Beijing's currency policy."And that is communicated in our dealings with - with the Chinese Government, whether it is in a meeting with the President, whether that is with Secretary (Tim) Geithner or National Security Adviser Tom Donilon," Mr Gibbs told reporters.China's state media have accused the US of "double standards" and blamed the loose monetary policies of the world's biggest economy for triggering global currency tensions.
Dollar printing feeding China inflation: minister - Rampant issuance of dollars by the United States is saddling China with "imported inflation", Chinese commerce minister Chen Deming was quoted as saying by state media on Wednesday. "Given the current situation, companies have thought ahead and prepared for exchange rate fluctuations as well as an increase in labour costs," Chen said, according to the state-run China Business News. "But because the issuance of dollars is out of control, and international commodities prices are continuing to rise, China is confronted with imported inflation, which has created major uncertainties for businesses," he said.
Roach calls U.S. China-bashing 'pathetic' - And while China badly needs to boost domestic consumption to drive that transition, those who would blame a still export-hungry China for U.S. job losses are missing the point, said Stephen Roach, a leading China specialist who is nonexecutive chairman of Morgan Stanley Asia."The idea that we in the West can blame China for our own shortcomings is pretty pathetic," said Roach.He said the United States last year ran trade deficits with 90 countries. Roach suggested that it is only common sense that causing the renminbi to appreciate against the dollar, in a bid to boost the cost of Chinese imports, will leave those other imbalanced relationships unaddressed, while causing unintended consequences throughout the global economy. "It doesn't take a rocket scientist to figure out you can't fix a multilateral problem with a bilateral exchange rate," said Roach. But he bemoaned the tone of public opinion, noting in an apparent reference to economist Paul Krugman that "even Nobel Prize winners who write columns for the New York Times can't seem to figure this out."
It isn't easy being green- The seemingly imminent and inexorable rise of the renminbi as a major, even dominant, reserve and trading currency, has been almost as widely heralded as the equivalent rise of the Japanese yen just twenty years ago. Even my normally skeptical friend Nouriel Roubini seems to think so. Here is an article from last year’s Telegraph:The Chinese yuan is preparing to overtake the US dollar as the world’s reserve currency, economist Nouriel Roubini has warned. Professor Roubini, of New York University’s Stern business school, believes that while such a major change is some way off, the Chinese government is laying the ground for the yuan’s ascendance. As my reference to the Japanese yen might suggest, I am pretty skeptical about the likelihood of this happening, at least with some of the more excited predictions. So, by the way, is the ADB, whose recent report suggests that by 2035, the RMB may comprise about 3 to 12 per cent of international reserves. This is a pretty reasonable prediction, in my opinion, and far from the more feverish claims we see reported almost daily.If the renminbi ever becomes a major trading or reserve currency, it is going to take a long time for this to happen and will require a radical transformation of the Chinese economy and the role of the government. This may seem like a surprising statement. After all nearly every week we see reports about a new breakthrough for the renminbi, and almost every day someone important somewhere speculates publicly about what the world will be like when (never if) the renminbi displaces the dollar.
Andy Xie: Hot Money Flows Into Emerging Markets Will Go 'From Boiling To Molten' - Andy Xie's latest is to urge emerging market nations to throw any notion of free market economics to the wind and simply protect themselves from speculative capital flows at all cost. Emerging markets have already been swamped by capital, as their asset markets can likely attest. Yet it's just beginning, says Mr. Xie: Caixin: Emerging economies need to and will likely increase interest rates and tighten capital controls. The G-20 ministerial meeting in Seoul didn't solve any problems. The communique promised that the G-20 countries would not engage in competitive devaluations and limit current account surplus. But the source of the global currency market instability is the U.S.'s strong preference for using monetary policy to solve economic problems, effective or not, and the dollar is the currency of global trade and for commodity pricing. Political trends in the U.S. are moving in a direction less favorable to the strength of the dollar and, hence, the global currency market instability. The Republican Party is likely to win control of the House in the November mid-term elections. With the Democrats in control of the Whitehouse and the Republicans, the House, no meaningful policy can be achieved to address the U.S.'s structural problems. The Fed will come under more pressure to stimulate the economy. As long as inflation remains low in the short term, the Fed has the excuse to stimulate more, even though it's really driven to do so under political pressure.
`Every Man for Himself' as Emerging Markets Curb Currencies… Finance chiefs from South Korea to South Africa signaled they may act to slow gains in their currencies, just four days after the Group of 20 vowed to soothe trade tensions in the $4 trillion-a-day foreign-exchange market. Asian currencies fell to a one-week low after Bank of Korea Governor Kim Choong Soo said today that measures to mitigate capital flows could be “useful.” Hours later, the rand dropped as South African Finance Minister Pravin Gordhan said his government will use part of higher-than-expected tax revenue to build foreign reserves as it attempts to weaken the currency. The shifts suggest G-20 members will keep trying to defend their economies from the slide of the dollar and capital inflows even after the group promised Oct. 23 to refrain from “competitive devaluation” and to increasingly embrace market- determined currencies. “The G-20 made a vague pledge not to manipulate currencies much, but there was no mechanism to ensure that each country will not keep taking unilateral measures,” said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman & Co. in New York. “It’s every man for himself.”
Bank of Japan to Buy Lowered-Rated Corporate Debt - The Bank of Japan brought forward the date of its next policy meeting, a move to accelerate stimulus for a slowing economy that prompted a jump in Japanese bond prices on speculation of further easing steps. The BOJ also said it will buy corporate debt with lower credit ratings than it previously purchased, including BBB rated corporate bonds and a-2 commercial paper, according to a statement today in Tokyo. Board members will meet on Nov. 4-5 to discuss purchases of exchange-traded funds and real-estate investment trusts, more than a week earlier than scheduled. Governor Masaaki Shirakawa’s decision to change the meeting date to follow the Federal Reserve’s Nov. 2-3 gathering signals he wants scope to react to any Fed easing, said economist Hideo Kumano. New York Fed President William Dudley set expectations of about $500 billion in bond purchases by the U.S. central bank, a step that may spur the yen and pose risks to Japan’s growth. “The surprise was that the BOJ changed its schedule for the monetary policy meeting to right after the FOMC, indicating they are ready to address any market movements, especially in currencies,”“They are ready for a currency-devaluation race.”
BOJ Should Buy Government Bonds to Ease Yen Gain, Merrill's Kichikawa Says - The Bank of Japan needs to do more to curb the yen’s advance by increasing its purchases of government bonds with longer maturities, according to Merrill Lynch Japan Securities Co. “Currency intervention isn’t the leading player in halting the yen’s gain -- monetary policy is the only way to go,” Masayuki Kichikawa, chief economist at Merrill Lynch in Tokyo, said in an interview yesterday. He said the central bank should buy between 20 trillion yen ($245 billion) and 25 trillion yen in 10-year and 20-year government bonds, which would lower long- term borrowing costs and help stoke inflationary expectations. The Japanese currency is approaching a postwar record of 79.75 against the dollar, threatening the nation’s export-led recovery. Efforts by the Finance Ministry to halt the yen’s gains with more than 2 trillion yen of currency intervention and the Bank of Japan’s credit easing have been unsuccessful, with the currency gaining 5 percent since authorities sold the yen on Sept. 15.
BOJ Should Consider Buying Foreign Assets To Ease Yen's Gain, Minister Says - The Bank of Japan may want to consider buying foreign-currency assets to help ease the yen’s appreciation, Economic Minister Banri Kaieda said. “Such purchases can be an option for the central bank over the medium- to long-term,” Kaieda said in an interview in Tokyo on Oct. 22. “They would be effective” in curbing the Japanese currency’s gains, he said. While the Bank of Japan could consider making purchases at some point, it’s not an option now because it might be regarded as a form of currency intervention, two central bank officials said on condition of anonymity. At a time when global policy makers are discussing how to avoid competitive devaluations, the bond buys may not appear appropriate, one of the officials said.
Japan Needs 100 Trillion-Yen `Helicopter' Drop, Citigroup Economists Say - The Bank of Japan’s 5 trillion-yen ($62 billion) asset-purchase fund is too small and ought to be as large as 100 trillion yen to rid the economy of deflation, according to Citigroup Inc. Chief Economist Willem Buiter. “Japan will likely need ‘helicopter money drops’ to ensure a full escape from the Great Deflation,” Buiter and other Citigroup economists including Tokyo-based Kiichi Murashima said in a note to clients dated Oct. 28. “The scale of the quantitative easing that is required is an order of magnitude larger than what has been announced.” The Bank of Japan’s inflation forecast shows it won’t meet its own guidelines for price stability, a prediction that signals policy makers may need to add further money into the economy. The central bank on Oct. 5 pledged to keep a “virtually zero rate policy” and created the fund to purchase assets including corporate bonds and exchange-traded funds.
South Africa Wants Weak Rand To Aid Growth Despite G20 - South Africa said on Tuesday that it would weaken its rand currency to boost economic growth, threatening a deal to refrain from competitive devaluations reached by the Group of 20 major nations just three days ago. The statement by South African presidency minister Collins Chabane appeared to mark a policy shift by President Jacob Zuma's government, which previously had resisted calls by labour unions to stimulate exports by weakening the rand. Chabane, describing a new long-term growth plan for South Africa, said it "entails a careful balancing of more active monetary policy interventions to achieve growth...through a more competitive exchange rate and a lower cost of capital."
Brazil's Meirelles: Too soon for new inflows actions (Reuters) - Brazil Central Bank Governor Henrique Meirelles said on Tuesday that all the necessary actions are being taken to prevent a bubble from occurring due to capital flows into the country. Meirelles, asked about possible new measures to slow inflows that have caused Brazil's currency to strengthen, said authorities needed to see the effect of measures already taken. "The market is volatile, precisely because of these measures. The market is reacting to news based on anonymous sources. So we have to wait for a while to see the effect of these measures to wait for the market to stabilize," Meirelles said on the sidelines of the Buttonwood Gathering, sponsored by The Economist magazine.
Taiwan Dollar Retreats From Two-Year High on Intervention (Bloomberg) -- Taiwan’s dollar fell, after reaching a two-year high, on signs the central bank intervened to check appreciation that may hurt exports. The monetary authority bought the U.S. currency in the final minutes of trading, according to two traders familiar with the matter who declined to be identified. Taiwan’s dollar rose as much as 0.7 percent as overseas investors purchased a net $207 million of Taiwanese equities, pushing the Taiex Index of shares to the highest level since January. “Foreigners are buying as the stock rally is supported by economic growth,” said Eric Hsing, a bond trader at First Securities Inc. in Taipei. “The central bank will continue to rein in the currency’s gain.”
Indonesia May Impose Controls as US Eases, Deutsche Bank Says - Indonesia may impose capital controls to limit appreciation in the rupiah should the U.S. ease monetary policy, because of the rising cost of intervening in the foreign-exchange market, according to Deutsche Bank AG. Indonesian regulators may extend the minimum holding period for foreign investors in government bonds from the current 28- days, Taimur Baig, chief economist at Deutsche Bank in Singapore, wrote in a research note today. Taxing short-term capital gains and other financial transactions are also possible, he added. Federal Reserve Chairman Ben S. Bernanke said on Oct. 4 that pumping funds into the banking system, known as quantitative easing, is likely to benefit the U.S. economy.
Carney Says Bank Has Options If Currency Risks Growth -- Bank of Canada Governor Mark Carney said today Canada could conduct transactions in the market for the country’s currency if the exchange rate poses a serious risk to the economy.Carney was testifying before a Parliamentary committee. The central bank hasn’t intervened in currency markets since September 1998 for the Canadian dollar and September 2000 for the euro, according to the bank’s website.“There are heightened tensions in currency markets,” Carney told members of the Commons Finance Committee, adding the central bank and government “maintain considerable options to control the situation if that is necessary.”
Government Goes Soft On Capital Control (India) The government today said it did not want to put in place capital controls, as it wanted to use a surplus on the capital account as an insurance against the rising current account deficit.Finance Minister Pranab Mukherjee told the Economic Editors’ Conference that inflows of $45-50 billion through the portfolio investment route were necessary, as they acted as “an insurance against the current account deficit”. The minister said the current account deficit would be in the region of 3-3.5 per cent of the gross domestic product (GDP) this year. Some economists have predicted it could reach as much as 4 per cent of GDP. The current account deficit more than trebled to $13.7 billion during the quarter ended June from $4.5 billion a year ago due to lower invisible surplus and larger trade deficit. At the same time, the capital account surplus rose to $17.5 billion, as against $4.6 billion in the corresponding period last year. It was mainly driven by short-term credit, external commercial borrowings, external assistance and banking capital.
Malaysia To Intervene If Ringgit "Disorderly" Central Bank - Malaysia's central bank will intervene in currency markets if movements in the ringgit MYR= become "disorderly", its governor Zeti Akhtar Aziz said on Tuesday. The ringgit has risen 10.5 percent against the dollar this year as investors pump cash into higher yielding emerging market assets, making it Asia's third-best performer among the currencies monitored daily by Reuters. "It (the ringgit) is dependent on the inflows or outflows and the central bank is well positioned to undertake any sort of... intervene in the market if conditions become disorderly or very excessive movements taking place within a very short period of time," Zeti told reporters. Zeti added there will be volatility and uncertainty in major currencies, not just in the ringgit.
"Currency war" may lead to a second round of crisis: Thai economist (Xinhua) -- A looming currency war and efforts by some big countries to ease monetary policy to reduce deficits could lead to a second round of crisis, a Thai economist said Monday. Sompop Manarungsan, President of Panyapiwat Institute of Technology, a college focus on business said in an interview with Xinhua that it is quite possible that the currency or exchange rate confrontation between the more developed and less developed countries will be escalated or expanded in the near future. He noted that many countries injected much more capital into the financial market under the second round of the QE policy while other countries feel afraid that their currency could be highly appreciated and thus harm their economy. "So, if most countries around the world doing the same thing, I think it is very dangerous for the bubble boom to expand the global trade imbalance," he said. "It may cause a second round of crisis which will be more serious than the subprime crisis."
FT.com - The currency wars explained - Explore the background and actions in the so-called currency wars, with this interactive guide looking at the economic and political basis of the key countries’ actions. Financial Times interactive graphic / audio.
How to end the currency war – Competitive devaluation is no longer a possible danger – it is already here. Many people are worried that, after global stock market crashes and a collapse of most of the world’s banking system, a war over exchange rates completes a sequence of events that looks awfully like a rerun of the 1930’s. There is however one crucial difference. The Chinese role certainly makes matters more complicated, though it is as yet unclear whether it makes the outlook better or worse. The key point to understand about the belligerents is this. In the context of purely self-interested beggar-my-neighbour economic policy, devaluation makes good sense for the Eurozone countries as a whole, the British, the Japanese, Swiss, Koreans… for everyone except the Americans. Whether they are deficit countries, like Britain, or surplus countries, like Switzerland, Korea or Japan, devaluation will increase demand for their exports and make their imports more expensive, giving a boost to their output and employment. And if other countries retaliate by counter-devaluation, they can tell themselves that their situation would have been worse if they had not taken the initiative and got their retaliation in first.
Are capital controls good for the world economy? - I can understand why South Korea, Thailand and Brazil would use capital controls. With the Federal Reserve expected to take aggressive steps to resurrect the fading recovery in the U.S., the world could well flood with dollars, pushing up currencies everywhere. If the countries of the emerging world need to protect themselves from asset bubbles or destabilizing “hot money” flows, they should be allowed to do so. The world economy shouldn't become a defenseless victim of U.S. policy. But that's not what's going on, at least not yet. Instead, we're getting protectionism by another name. The more countries that take such steps, the greater the likelihood that others will follow.So though I'm not opposed to capital controls in principle, I am opposed to employing them as part of a free-for-all in which countries throw up barricades to capital and manipulate currencies to forward their own economic interests versus their trading partners. As I've mentioned before, it's up to the G20 to stop such an ugly scenario from taking place. We'll see what happens in November in Seoul. But with the host nation becoming part of the problem, the outlook doesn't look good.
Geithner Expects China to ‘Continue to Move’ on Yuan - U.S. Treasury Secretary Timothy F. Geithner expects China will allow the yuan to strengthen because officials there understand it’s in the interest both of domestic growth and global economic stability. “They recognize it’s important to the world,” Geithner said in an interview on Oct. 23 with Bloomberg Television, after a meeting of finance ministers and central bankers in Gyeongju, South Korea. As China’s currency stance affects more countries, “China recognizes that, and I think we’re going to see them continue to move.” Geithner made the comments a day before an unscheduled visit to China for talks with Vice Premier Wang Qishan to discuss relations between the world’s two largest economies. Under pressure from Congress to combat what Geithner says is an undervalued yuan, the Obama administration used this weekend’s meetings to secure an agreement among the Group of 20 officials to avoid weakening their currencies. They also vowed to increase efforts to reduce trade imbalances. Chinese officials still have a “ways to go” on loosening the yuan’s ties to the dollar, the Treasury chief said.
Have the US and China Kissed and Made Up? - Yves Smith - The recent jousting between the US and China had the look of a full on row. And the spectacle at last weekend’s G20 seemed to offer further confirmation, with Geithner proposing a cap on current account surpluses that was aimed at China above all. But now the Financial Times tells us that relations are already on the mend:China and the US have the basis for an agreement at the summit of the Group of 20 leading nations next month on setting targets to cut trade imbalances, according to an adviser to the Chinese central bank.Li Daokui, a member of the central bank’s monetary policy committee, said on Tuesday there had been “good progress” at the weekend meeting of G20 finance ministers”. The Financial Times does point out that Li is not a government official, but the article contend that his remarks point to a real movement. Or do they? The US was never going to push China hard. Not that it couldn’t; various analysts have suggested the US holds the better cards were things to get ugly. But it’s well known Team Obama blinks in any staredown. China was bound to prevail if it talked tough enough. And it isn’t clear Treasury had its heart in this fight. Geithner has consistently upped his rhetoric in response to Congressional pressure and dialed it back down as soon as possible.
Investing in a Rebalancing of Growth in Asia - IMF direct - Continuing my travels through Asia for the launch of our October 2010 Regional Economic Outlook: Asia and Pacific, I am writing to you today from Singapore. In my last post, I focused on the near-term outlook and challenges for Asia. Today, I turn to the key medium-term challenge—the need to rebalance economies in the region away from heavy reliance on exports by strengthening domestic sources of growth. This is against a backdrop of the need to rebalance global growth that was emphasized over the weekend by the ministers of the Group of Twenty industrialized and emerging market countries. Heavy reliance, arguably over-reliance, on exports is a common challenge across Asia. Yet, the policies to address it will differ among the countries in the region. Much of the public discussion focuses on ways to increase consumption, and this is something the IMF has written about extensively in the past. But the role of investment in rebalancing growth is equally important and something that should not be overlooked.
India and Japan eye a glowing partnership India for years actively sought closer ties with Japan - but Tokyo expressed little interest. This has changed slowly but surely amid a shifting regional landscape and momentum in bilateral ties this week gathered pace. During his three-day official visit to Tokyo starting October 24, Prime Minister Manmohan Singh and his Japanese counterpart, Naoto Kan, issued a joint statement covering a wide-range of issues. While these included worthy issues such as expansion of the East Asian Summit to include the United States and Russia, and reform of the United Nations, all eyes were fixed elsewhere. Progress of two important bilateral matters: an India-Japan Comprehensive Economic Partnership Agreement (CEPA) and cooperation on civilian nuclear technology captivated attentions. While a deal is sealed on the first, negotiations will continue on the second.
The "Fifth BRIC" – This country:
- Is a member of the 20 wealthiest nations on earth: the G-20
- Is the world’s third largest democracy, after India and the US
- Has the world’s fourth-largest population of 240 million people
- Has a stock market that has gone up nearly 44% in the past year
- Has doubled its economy in the past five years
The place I’m talking about is Indonesia. You’ve heard of the BRIC economies – Brazil, Russia, India and China. These are the “big guns” in the emerging markets world. Jim O’Neil, a well-known Goldman Sachs analyst came up with the term back in 2001 in a paper titled “The World Needs Better Economic BRICs.” O’Neil’s point: The BRICs would become the world’s four dominant economies by 2050.Think of Indonesia as the “fifth BRIC.”Indonesia is slightly smaller than Mexico. Or about three times the size of Texas. The bulk of the population lives on just five major islands: Sumatra, Java (the location of the capital city Jakarta), Sulawesi, Borneo and New Guinea. But the country’s land mass is spread over an archipelago of 17,508 islands, of which about 6,000 are inhabited.This string of islands is on a strategic location slap bang in the middle of major sea-lanes linking the Indian and Pacific oceans.
Where are the biggest “imbalances?” - I decided to investigate where these so-called international “imbalances” are actually located. Keep in mind that I don’t think imbalances are of any importance. But others clearly do—so at least we ought to be aware of the stylized facts being discussed. I used data from the back page of The Economist, and divided the world up into key regions:
- 1. Nordic region: Population 125 m. CA surplus = $397.3 b. (Of which Germany is nearly 2/3 the population, but less than 1/2 the surplus.)
- 2. China: Population 1350 m. CA surplus =$289.1 b.
- 3. Japan: Population 127 m. CA surplus = $180.9 b.
- 4. Five dragons: Population 110 m. CA surplus = $153.3 b.
- 5. Russia: Population 145 m. CA surplus = $84.2 b.
- 6. Club Med: Population 255 m. CA deficit = $266.3 b.
- 7. Anglo bloc: Population 420 m. CA deficit = $556.0 b. (Of which the US is roughly 3/4s of both categories.)
German surplus good, Chinese surplus bad - ANYTHING said on global imbalances by Axel Weber, president of the Deutsche Bundesbank (and the man who still has a shot at becoming the next president of the European Central Bank) is bound to attract attention. Not least because Germany, one of the world’s leading exporters, also happens to be running a particularly large current account surplus. Moreover it has been helped in its export drive not just by wage restraint at home over the past few years, but also by the fact that through the euro it is yoked to some chronic deficit countries. Were it not sharing a currency with Spain and Greece, among others, currency appreciation would be pricing it out of quite a few export markets. Mr Weber, perhaps unsurprisingly, argues that: For countries with an ageing population like Germany, it is a matter of rationality to save more than to invest domestically since the number of investment projects with good prospects is declining, whereas households want to maintain their level of consumption in old age. Because of those pesky global imbalances, however, not everyone can run a large surplus. And they should especially not do so if they are a developing country.
What will the world look like in 2030? - Developing countries have enjoyed strong economic performance over the past decade – often growing twice as fast as OECD economies. This column asks whether developing countries will continue to outpace rich countries over the coming two decades. Updating Angus Maddison’s famous projections, it forecasts a world starkly different from today’s. The worlds’ poor countries will account for nearly 70% of global GDP in 2030.
Fiscal Obsessions - Krugman - Wolfgang Munchau marvels at the European obsession with a revived and strengthened stability pact — that is, with tougher constraints on budget deficits. The real irony is that the pact, in whatever form, is not even relevant to the eurozone’s future. This may be a shocking statement. But look at the evidence. Contrary to popular narrative, fiscal profligacy played only a minor role in the eurozone’s sovereign debt crisis.…As for Spain and Ireland, they did not breach the rules ever, and would thus never have been subject to sanctions, automatic or otherwise. What Munchau doesn’t say, but I suspect he understands, is that this is in large part an extension of the case of the boy with a hammer, for whom everything is a nail. Bankers and economists love, just love, being fiscal scolds; deficits are something they understand, plus denouncing deficits is an easy way to sound all moral and responsible. Rather than facing up to the complexities of our current problems — how do you get out of a liquidity trap? how do you rein in shadow banking? — many Very Serious People would much rather lecture governments on the evils of red ink.
Global house prices: Floor to ceiling | The Economist - THIS time last year, The Economist’s survey of global house prices was a sea of negative numbers. That was then. Of the 20 markets tracked in our latest survey, only four still posted year-on-year declines and only Ireland’s property catastrophe has worsened. (America’s FHFA index, which excludes houses that are financed with large mortgages, was also down, but the country’s Case-Shiller national and ten-city indices rose modestly.) Asia’s price rises lead the way, as they did when the data were last published in July. Singapore, Hong Kong and Australia boast the gaudiest year-on-year price increases, even if the rate of appreciation is down a bit from the summer. House prices in China rose by 9.1% in the year to September, compared with a 12.4% rise in May. Our analysis of “fair value” in housing, which is based on comparing the current ratio of house prices to rents with its long-run average, suggests that China has less to worry about than the likes of Australia, which is again the most overvalued of the markets we track. That makes it all the more surprising that Australia’s central bank opted not to increase its benchmark interest rate this month.
In Spain, Homes Are Taken but Debt Stays - Mr. Marbán does not own either anymore. The bank foreclosed on both properties last April, and he is waiting for the courts to issue the eviction notices. For many Americans facing foreclosure, that would be the end of it. But for Mr. Marbán and thousands of others here, it is just the beginning of their troubles. When the gavel falls on his case, he will still owe the bank more than $140,000. “I will be working for the bank for the rest of my life,” Mr. Marbán said recently, tears welling in his eyes. “I will never own anything — not even a car.”
Strike paralyses Greek rail network - Greek railway workers called a three-day strike on Monday against plans to privatise the loss-making national rail system (OSE) - paralysing train travel across the country and cutting off service between its northern neighbour Bulgaria. The strike caused the cancellation of all train service across Greece, including the rail link to Athens' International airport. All international passenger and cargo trains travelling between Bulgaria and Greece were also cancelled because of the strike. Greece's Socialist government is looking to restructure and privatise parts of the loss-making rail system. The plan would split the OSE public rail company which has posted losses of more than 10 billion euros per year into two separate entities.
Greece Said to Be Falling Short of Deficit-Cutting Goals - With economic conditions weaker than expected, tax revenue is coming up short of projections in parts of Europe. Greece, for one, looks as if it will run a budget deficit for 2010 greater than the 8.1 percent of gross domestic product it agreed to as part of a rescue package from the International Monetary Fund and the European Union that amounted to more than $150 billion, according to a person briefed on the matter but not authorized to speak about it. The adjustment, at worst, would result in a deficit of 8.9 percent of Greece’s output, this person said. Normally, such a small difference would not be cause for alarm. But after the latest upward revision in Greece’s 2009 deficit — to about 15.5 percent from 13.5 percent of output — the miss has spurred investor fears that the Greek government will be unable to close the gap and that Greece may ultimately be forced to restructure its mountain of debt with foreign investors.
Greek yields soar - Greek 10-year bonds tumbled for a third consecutive day; yield jumped 58 bips 10.34% according to Bloomberg. The EU revised Greek budget deficit above 15% of GDP. In a leading contender for understatement of the year, Finance Minister George Papaconstantinou said the nation had serious tax compliance issues. Thus, the ongoing European drama between Greek tax scofflaws, German Industrial financiers, England/Ireland recession continues to play out — pressuring futures, widening spreads, and to leading towards the eventual denouement. Its hard to see how Greece avoids a Restructuring — which, truth be told, is merely a polite word for Default. The calculus about any Greek default restructuring is the Moral Hazard threat. If the terms are too easy, it may encourage the remaining PIIGS — Portugal, Italy Ireland Spain — towards default restructuring their debts. I place the survival of the EU in its current form at 50/50 . . .
Greek Issues Continue to Churn - As we’ve noted, the Greek issue won’t really go away, as much as euro-zone policymakers would like it to. This morning Greek spreads are widening and the cost to insure against a Greek default is on the rise. Several reasons for this recent spate of bad Greek news. For starters, Mohamed El-Erian, CEO and CIO of bond king Pimco, forecast that Greece would default on its debt within three years. Now bond guys tend to paint a dark picture of the world (that’s because grim tidings tend to help bonds), but Mr. El-Erian is saying what is on many people’s minds already. His view is that the eurocrats will kick the can down the road for a bit and then do some sort of restructuring.
Greek fiscal adjustment plan on the verge of collapse - 2009 Greek deficit revised upwards from 13.6% of GDP to 15.5%; revenues are coming in lower than projected, risking a severe undershoot of the 2011 deficit target; the fiscal slippage is making it more likely that Greece will end restructuring its debt; the budget talks in Portugal have broken down, as the opposition is taking the dispute to the brink; EU leaders descend on Brussels today for a summit dominated by Germany’s request for a Treaty Change; EU officials and several EU leaders have categorically rejected the notion of another treaty amendment; Olli Rehn says crisis resolution mechanism does not even need a Treaty change; several commentators point out that fears over the German constitutional court are behind Merkel’s position; Klaus Dieter Frankenberger wonders for how long Sarkozy is willing to follow Merkel; Jean Quatremer says EU leaders will try to find a compromise as part of which the treaty change can occur without a referendum in Ireland; Merkel rejects any proposals to place limits on current account surpluses; the Bank of Spain, meanwhile, express concern about extremely high deposit rates, offered by Spanish banks to lure savers.[more]
Checking in on the Hellenic Patient - Vital signs have suddenly taken a turn for the worse. Chart of the yield spread between 10-year Greek government bonds and German bunds, courtesy of Bloomberg (click to enlarge): So Greek yields are back over 10 per cent. Again. Greece five-year CDS widened sharply on the day too, according to Markit. And what’s amazing is how little it’s taken to upset the patient. There have been a few Greece-related rumbles in recent days, but the immediate trigger appears to be this revelation from the Greek finance minister, concerning the post-bailout bid to fix Greek finances (via the Athens News Agency):
Greece Likely to Default Within Three Years, El-Erian Says - Greece is likely to default over the next three years because budget-cutting won’t be enough to reduce the nation’s debt burden, Pacific Investment Management Co. Chief Executive Officer Mohamed A. El-Erian said. It’s in Greece’s interest to default “as long as you can contain the contagion to other countries and it is done through orderly restructuring and repricing to retain competitiveness,” El-Erian said at a conference sponsored by the Economist magazine in New York yesterday. Like Latin America’s “lost decade” in the 1980s, “the alternative doesn’t promise growth and employment generation,” he said. The extra yield, or spread, investors demand to hold Greek debt instead of similar-maturity German bonds jumped to a two- week high today. The European Union and International Monetary Fund approved a 110 billion-euro ($153 billion) aid package on May 2 in exchange for Greece agreeing to cut public-sector wages and pensions and raise taxes on fuel, alcohol and cigarettes.
Betting on Debt Restructuring in Europe - In a rebuke to European policy makers, many investors remain convinced that Greece and other so-called peripheral countries in the euro zone will eventually have to restructure their debts or even default, according to a questionnaire submitted to money managers by Barclays Capital. The finding suggests that massive efforts by the European Union, European Central Bank and International Monetary Fund to prop up Greece, Portugal, Spain and Ireland have provided only temporary relief from the market turmoil their problems have caused.The questionnaire sent to 582 Barclays clients, including traders, hedge fund managers, and corporate money managers, found that 82 percent expect either a debt restructuring in one of the peripheral countries, an outright default or a deeper crisis that could lead to the breakup of the euro zone.The result is surprising considering that euro countries have agreed to guarantee bonds worth as much as 500 billion euros ($695 million) to aid members in fiscal distress. The International Monetary Fund is also providing financial and technical support, while the European Central Bank has helped stabilize the market for European government bonds by buying debt worth 63.5 billion euros since May.
China, Would-Be Saviour of Troubled EU PIGS - For those of you who doubt China's increasing clout in the global political economy, this new phenomenon may make you think again. It is no secret that the European PIIGS of Portugal, Ireland, Greece and Spain have some fiscal issues to work out. However, such concerns may be assuaged somewhat when the world's largest reserve holder indicates that it is willing to buy some euro-denominated debt from them. Ever so aware of the situation in countries he visits, Premier Wen Jiabao now makes boilerplate statements about China considering the purchase of public debt to prop up any number of PIGS. Earlier this month, we had Greece trying to get on China's good books if and when it starts issuing longer-dated paper again: China offered on Saturday to buy Greek government bonds when Athens resumes issuing, in a show of support for the country whose debt burden pushed the euro zone into crisis and required an international bailout. Premier Wen Jiabao made the offer at the start of a two-day visit to Greece, his first stop on a tour of Europe, and also said he wanted to boost shipping and trade ties with Athens, underscoring Beijing's use of economic strength to win friends.
Amid Strikes, French Leader Vows Order - President Nicolas Sarkozy vowed Tuesday “to guarantee order,” restore fuel supplies and crack down on “troublemakers,” as a quarter of France’s gas stations ran dry and other disruptions built from nationwide protests and strikes. His comments marked a hardening of the government’s resolve to hold to its program of reforming the indebted pension system despite the job actions by public workers at refineries and railways and in other key sectors. The final parliamentary vote on the plan may not come until early next week. The gas stations ran out of supplies because of transport problems; stocks remained adequate. Furious drivers waited in lines for expensive fuel and worried openly about their plans for the pending two-week school break. Numerous flights were canceled, railway travel was disrupted and garbage went uncollected in some major cities. Some truckers staged “escargot,” or snail protests, driving in teams very slowly on the highways; others blocked fuel depots or vowed to stop distributing cash to A.T.M.’s.
France strikes: 10,000 TONS of waste pile up on streets of Marseilles | Mail Online - Industrial action is costing country up to £350 million a day Nearly 10,000 tons of rubbish has piled up in the streets of Marseilles as French strikes and blockades continued. All of the country's 12 oil refineries remained closed today after nearly two weeks of industrial action which is costing the country up to £350 million a day. During the disruption French President Nicolas Sarkozy's opinion poll ratings have collapsed and he is now the least popular leader in the history of the Fifth Republic.
Militant trade unionists reclaim France's biggest oil refinery -- Strikes against President Nicolas Sarkozy’s plan to raise the retirement age are costing the French economy between 200 million and 400 million euros ($280- $561 million) a day, Finance Minister Christine Lagarde said. “Beyond the costs, which are difficult to measure, it damages the attractiveness of France,” Lagarde said in an interview on Europe1 radio. France had a gross domestic product of 1.91 trillion euros in 2009. The national statistics office Insee reports third-quarter GDP on Nov. 12. All of France’s oil depots are now open as police dismantle barricades, the refiners’ group Union Francaise des Industries Petrolieres said today. Still, about a quarter of the country’s 12,300 service stations are dry, the UFIP said. About four- fifths of France’s high-speed trains will run today, the national railroad said.
Sarkozy’s Perfect Storm: French Fury Goes Beyond Pensions – SPIEGEL -The word has spread in France that the contributory pension system can only remain viable if it is modified to conform to demographic and financial necessities. The current situation is, roughly speaking, comparable to the situation in Germany before the changes of recent years. The legal retirement age is 65 (and is expected to increase to 67), and the contribution period is 40.5 years (and is expected to increase to 41.5 years). The fact that the numbers 60 and 62 are constantly appearing in news reports is the result of confusing terminology, cultural differences and an attempt to stultify the positions of the unions and the Socialists. In fact, 60 is merely the earliest possible retirement age for workers who have been paying into the system for at least 40 years. Anyone who retires at 60 in France without having completed the full contribution period must accept substantial reductions in benefits. The only problem is that Sarkozy clearly has no interest in initiating a socially accepted reform that has the support of the unions.
Irish Bondholders Suffer Pain Again as Budget Cuts Take Toll: Euro Credit - Bond investors are losing faith in Ireland’s plan to lower the deficit as spending cuts threaten to undermine economic growth, reducing government revenue. Irish 10-year bond yields climbed within 50 basis points of the 454 basis-point record spread, set Sept. 29, relative to similar-maturity German bunds. Portugal’s spread fell about 1 percentage point against the German benchmark in the past month, the Greek-German yield gap narrowed 102 basis points and the Spanish spread was close to the lowest level since Aug. 10. Ireland was the first euro-region nation to announce budget reductions in 2008 in response to the sovereign debt crisis. The bond market responded with yields on 10-year Irish securities falling to a low of 4.43 percent in April. Investors now question whether austerity measures will push the economy back into recession. Yields have increased to 6.45 percent.
Exclusive: Ireland urged to use pension fund to buy bonds-source (Reuters) - Ireland's finance minister has been urged by some senior advisers to allow the country's 24 billion euro ($33 billion) state pension fund to buy Irish government bonds to support demand, an Irish official said on Wednesday. The senior official, who declined to be named but is familiar with financial policy discussions in the Irish government, said no decision to take such action had been made. A spokesman for Ireland's department of finance, contacted by Reuters, said: "There are no proposals to do this."Tapping the fund, set aside to pay the state old-age pensions as well as pensions for Irish civil servants, could meet stiff political opposition. Roughly 10 billion euros of it are already earmarked to buy stakes in struggling Irish banks.
ECB bought Irish bonds, traders say – The European Central Bank bought Irish bonds today, according to three traders and strategists with knowledge of the transactions. The ECB purchased debt maturing between 2011 and 2020, one of the traders said, under condition of anonymity because the deals are confidential. A central bank spokesman declined to comment when contacted by telephone in Frankfurt. ECB council member Axel Weber, who is also president of Germany’s Bundesbank, said on October 12 that the ECB’s "securities purchases should now be phased out permanently." ECB President Jean-Claude Trichet countered that an "overwhelming majority" of policy makers supported maintaining the bond-buying program, with Austria’s Ewald Nowotny also rejecting the demand.
Irish bond yields top 7% as deficit contagion fuels fears - IRISH BOND yields reached a new peak above 7 per cent yesterday as contagion from Portugal and Greece added to investors’ fears that the Government’s plans to cut €15 billion from the Irish economy would not stabilise the deficit. The cost of borrowing by the State later eased after the European Central Bank stepped in to buy Irish bonds. The ECB’s intervention followed a spike in bond yields on Wednesday, which continued yesterday morning. The rise in the yield on Ireland’s 10-year bonds to more than 7 per cent may also have acted as a trigger for the move. The amount of bonds bought by the central bank under confidential deals is not understood to be high.
Cosmopolitan social democracy —Angela Merkel’s recent denunciation of German multiculturalism marks another step in the tightening of ties between the market-liberal right and ethnic-national tribalism, evident in other European countries and in the US (most obviously with the rise of the Tea Party). In part at least, this is a result of weakness. The positive appeal of market liberalism has declined a fair bit since the triumphalist decades of the 1980s and 1990s, and the global financial crisis exposed the failure of its theoretical basis. But there are obvious problems for social democrats in responding to this development. I’ve been thinking about this for a while, and have come to the view that it’s better to put up some half-thought ideas for discussion (and maybe debunking) than to wait for a perfect formulation.
International Labor Comparisons (ILC) - Charting International Comparisons of Hourly Compensation Costs in Manufacturing. On This Page:
- Index of hourly compensation costs for all employees in manufacturing, 2008
- Wages and benefits for all employees in manufacturing, 2008
- Percent change in hourly compensation costs (measured in national currencies and U.S. dollars) and
exchange rates for all employees in manufacturing, 2007-2008
- Annual percent change in hourly compensation costs for all employees in manufacturing,
national currency vs. U.S. dollars, 2007-2008
- The Americas: Annual percent change in hourly compensation costs for all employees in manufacturing,
2007-2008 and 2000-2008 (measured in U.S. dollars)
- Europe: Annual percent change in hourly compensation costs for all employees in manufacturing, 2007-2008
and 2000-2008 (measured in U.S. dollars)
- Asia and Oceania: Annual percent change in hourly compensation costs for all employees in manufacturing,
2007-2008 and 2000-2008 (measured in U.S. dollars)
Unemployment rates in Europe: improving ever so slightly - Rebecca Wilder - Going forward, I plan to update the European employment trends as they are released on the Eurostat website. Generally this data is about one month lagged from the national statistics offices, since Eurostat harmonises the employment data for seasonalities and adheres to the International Labour Organisation (ILO) recommended definition . The current release is for August 2010; September will be released in two days. The first notable shift is that the 3-month moving average ending in August of the unemployment rate (the average across three months) fell compared to that ending in May (a sort of proxy of quarters) across 52% of the sample illustrated in the chart below (many EU economies plus Japan and the US). The average percentage drop (not drop in percentage points) was fairly small, though, -3.5% over the two periods (i.e., the green dot hovers around the outside end of the blue bar). For the September release, we will see the quarterly shift in Q3. In the Eurozone, the Eurozone 16 that is, the shift in the unemployment rate over the last year is down for just 5 economies: Finland, Italy, Germany, Malta, and Austria.
Eurozone unemployment rate up in September - Rebecca Wilder - Today Eurostat released the September unemployment rate figures for the European Union and the Eurozone. From the release: The euro area1 (EA16) seasonally-adjusted2 unemployment rate3 was 10.1% in September 2010, compared with [downward revised] 10.0% in August4. It was 9.8% in September 2009. The EU27 unemployment rate was 9.6% in September 2010, unchanged compared with August4. It was 9.3% in September 2009. The Eurozone unemployment rate has been above the EU (27) unemployment rate by an average 045% since the outset of 2007. Spanning the Eurozone 16 countries, just 5 have seen their unemployment rates fall since October 2009 (I use the teilm020 table at Eurostat, which limits the time series to this time frame). Note that the unemployment rate in Italy rose over the month (8.1% to 8.3%), so unemployment rate is now unchanged since last year.
VW Leads Issuers Facing $1 Trillion Refinancing, Moody's Says - Volkswagen AG and Daimler AG lead European companies that must repay more than $1 trillion of maturing debt in the next four years, raising the risk of borrowers struggling to refinance as interest rates rise, according to Moody’s Investors Service. Investment-grade companies in Europe, the Middle East and Africa have about $380 billion of bank debt and $650 billion of bonds maturing from 2011 to 2014, Moody’s analysts led by Jean- Michel Carayon in Paris wrote in a report published today. Volkswagen, Europe’s largest carmaker, and rival Daimler have the most debt coming due, with $46.2 billion and $39.9 billion, according to the New York-based ratings firm. Non-financial borrowers sold 92.1 billion euros ($127.7 billion) of investment-grade debt in Europe this year following a record 279.3 billion euros of issuance in 2009, according to data compiled by Bloomberg.
German boom creates ECB policy nightmare as south lags - Blistering growth in Germany is aggravating the growing gap between the eurozone's North and South and may force the European Central Bank to tighten monetary policy long before the high-debt states are ready, Standard & Poor's has warned.A separate report by Simon Ward from Henderson Global Investors said eurozone indicators are showing "unprecedented divergence", with the M1 money supply booming at double-digit rates in Germany but contracting in Spain, Ireland, and Greece. S&P said Germany has been able to lever recovery off the emerging market boom, leaving Southern Europe behind. German exports – mostly machines and cars – account for 47pc of all EU goods shipped to China. France is a distant second at 10pc.
Why Germany is different - THIS week, The Economist reflects on Germany's position within Europe and the world, given its status as one of the few rich world economies experiencing a solid recovery and one of still fewer rich economies without a substantial deficit crisis on its hands. As the piece notes, Germany's position has generated awkwardly conflicting attitudes within Germany and without. Much of the European continent, while resenting Germany's strength and irritation at others' weakness, respects its fiscal discipline and export competitiveness. Germans, on the other hand, seem uncomfortable with their good fortune and wary of its sustainability. The contrasting views may have something to do with the chart at right. Germany's reputation as a fearsome export is deserved, but its particular strength seems to be its exposure to emerging markets. As you can see, Germany has been responsible for a sizable chunk of all EU exports to the BRICs over the past half decade, and this share has been steadily rising, approaching 40% in 2009.
ECB’s Weber Pledges to Stay True - Germany’s top central banker, Axel Weber, late Monday vowed to remain true to his principles, even if that meant spoiling his chances for taking the European Central Bank’s top job, coming open next October. “I have been an outspoken stability-oriented politician over the past three decades, and I am not going to change this,” Weber said at an event in Stuttgart, Germany. “If that’s going to have implications for my future career, then I’d be happy to live with those consequences,” he said. Weber is seen as one of two leading contenders for the ECB presidency, along with fellow ECB board member Mario Draghi. He had sparked controversy earlier this month when he said the ECB’s bond-buying program has been ineffective in easing strains in financial markets and called on the ECB to phase out the program now.
Merkel’s eurozone proposals likely to fail - Small countries in revolt over Franco-German attempts to bulldoze through a treaty change; Germany insists that EFSF will end in 2013; FT Deutschland criticises Merkel’s EU diplomacy as ineffectively; Frankfurt Allgemeine is outraged at attempts to undermine the No Bail Clause; the FT has a story according to which senior French officials are questioning the Franco-German compromise over a debt resolution regime; the ECB has not bought any government bonds for the second week running; Papandreou promises new investment drive, ahead of local elections; inflationary expectations in the US are rising, as US Treasury issues Tips with negative yield; euro/dollar rate continues at around $1.40; Lucas Zeise, meanwhile, argues that the combination of a stability pact and the EFSF is threatening the longevity of the eurozone. [more]
Angela Merkel faces uphill battle to revise EU’s rules on bailouts - Angela Merkel, the German chancellor, was struggling tonight to win widespread support across Europe for a major revision of EU law to underpin the multibillion-pound bailout of Greece. A series of countries spoke out at tonight's EU summit in Brussels against Merkel's demand for voting rights to be withdrawn from member states that fail to meet strict eurozone fiscal rules. The opposition, which came as David Cameron abandoned a campaign for a freeze in the EU's £107bn budget for next year, means that Merkel is expected to win only a small revision of EU law. The German chancellor, who had been hoping for a wholesale treaty revision, is expected to secure, at best, a change under a process known as the simplified revision procedure. This needs the agreement of all 27 EU member states but not a full inter-governmental conference, the usual process for revising treaties.
A (conditional) triumph for Merkel - Merkel gets what she wants in an other late-night session: EU Council asks van Rompuy to draw up a limited treaty change by December; but the No Bailout clause is not going to be watered down; calculation is to find a compromise that satisfied the German Constitutional Court, and other EU member states; hope is to avoid referendum, by tagging the minimal treaty change on to a technical treaty; European Council effectively throws out Merkel’s request for a withdrawal of voting rights; Merkel said permanent crisis resolution mechanism designed to kick in only if stability of the eurozone as a whole is concerned; van Rompuy says new mechanism must be conditional, and avoid moral hazard; Spiegel calls the summit result a triumph for Merkel; FT Deutschland says crisis in Greece, Portugal and Ireland will last a very long time, which alone will necessitate a permanent crisis-resolution mechanism; Greek bond spreads, meanwhile, rose yesterday as the markets react to the country’s worsening outlook.[more]
Why the stability pact is irrelevant - It happened the day after a controversial decision to subject sanctions to a political vote. I was sitting in the office of a well-known European central banker, who was jumping up and down. The eurozone would now not have any means to control fiscal profligacy, he said. That was in 1998. Not much has changed. The French and the Germans have once again been discussing whether sanctions should be automatic or not. And central bankers are just as furious. For Jean-Claude Trichet to issue an official note of disagreement – after European Union finance ministers last week drafted a watered-down sanctions package – is extraordinary on several levels. The president of the European Central Bank had demanded a great leap forward. But the French and the Germans are not leaping. They go round in circles. Since the start of the euro, the world has suffered its worst financial crisis ever and the worst recession in 70 years – and the eurozone’s political leaders are still obsessed with the minutiae of the stability pact, which is supposed to police government debt and budget deficit levels. The real irony is that the pact, in whatever form, is not even relevant to the eurozone’s future.
The EU has not yet solved its banking problem - For whom is the financial crisis over? This column argues that the US response has been far more effective at reassuring investors than that in Europe. It says that stress tests have failed to trigger the needed recapitalisation and restructuring of Europe’s troubled banks. Europe’s leaders, it argues, must tackle these problems head-on.
Ministers plan huge sell off of Britain's forests - Caroline Spelman, the Environment Secretary, is expected to announce plans within days to dispose of about half of the 748,000 hectares of woodland overseen by the Forestry Commission by 2020. The controversial decision will pave the way for a huge expansion in the number of Center Parcs-style holiday villages, golf courses, adventure sites and commercial logging operations throughout Britain as land is sold to private companies. Legislation which currently governs the treatment of "ancient forests" such as the Forest of Dean and Sherwood Forest is likely to be changed giving private firms the right to cut down trees. Laws governing Britain's forests were included in the Magna Carta of 1215, and some date back even earlier.
Frankly you are frightening people - The policy changes of the British government’s recent spending review are set out in a Treasury report. Attached as an appendix is a ‘distributional analysis’. You can get the whole thing here. The Treasury has also published an equality impact assessment. It has to be said it looks like a pretty poor effort. Since 2006, it’s been a legal requirement for the government to assess its own measures in this way. As it happens, the coalition didn’t bother to carry out any sort of equality impact assessment for the post-election budget; as a consequence – and thanks to the efforts of Yvette Cooper and the Fawcett Society – we may now see a judicial review of the budget. This Guardian story has more details. Perhaps the coalition saw it as having potential to persuade us that the cuts will be fair. If so, it hasn’t worked very well: you don’t need to do any sums to see that the Treasury analysis omits to include the impact of cuts to housing benefit, disability benefit(s), tax credits and council tax benefit. The IFS has been doing some of the hard work with numbers – taking account of all the things just mentioned that should have been in there to begin with – and you can see their preliminary findings here. In short, the government says that their spending review is progressive, but they’re wrong: it’s regressive.
Pound foolish - I'M ALWAYS a little mystified by the tendancy among pundits to treat currencies as something much more than they are—something talismanic, or the insubstantiation of the national spirit. Listen to Larry Kudlow and you'd think that the dollar was nothing less than an index of the American destiny; if it rises, America's future looks bright, while if it falls, doom beckons. In fact, a currency is nothing special. For domestic consumers, it's just a means of exchange. And its value against other currencies is merely a measure of the state of capital and goods flows around the world and a mechanism to help them balance out over time. But the personification of a currency is difficult to resist. Bloomberg imagines sterling to be in actual agony as it sinks against other currencies ("Pound Faces Pain as Cameron Cuts Send King to Printing Press"). And the story is almost mournful in tone:
Pound Set for Pain as Cuts Push King to Print Money -- The only major currency rivaling the dollar’s decline since July is the pound, and foreign-exchange strategists say the worst is yet to come for Britain’s legal tender. Sterling has depreciated 5.1 percent against a basket of the nine other most-traded currencies, including last week’s 1.29 percent drop. Strategists are the most pessimistic on the pound versus the euro since the ruling Conservative-Liberal Democrat coalition came to power in May, according to data compiled by Bloomberg.The decline suggests investors are losing confidence in Prime Minister David Cameron’s ability to restore growth while promising the deepest spending reductions in British history to shrink the biggest deficit in the Group of 20. His 81 billion pounds ($128 billion) of cuts through 2015 will force Bank of England Governor Mervyn King to print cash through so-called quantitative easing to prevent a new recession, overwhelming demand for sterling, according to UBS AG.
Will someone please shut Krugman up – Telegraph Blogs - I see old Kruggers, Nobel prize winner and New York Times columnist, is at it again. Not content to lecture his own country’s administration about how they are not spending enough, Professor Krugman lambasts Britain’s coalition government in his latest column for its deficit reduction plan, which he reckons will condemn the UK to a depression. Here’s a taste: “What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it”. Good stuff, and who knows? Maybe he’s right. Yet the idea that you can more or less indefinitely keep putting off deficit reduction until the economy is firing on all cylinders again just looks like an excuse to me for continuing to spend at unaffordable levels.
George Soros is just as irritating as Bono - Every time I see George Soros holding forth on television, I reach for the sick bag. I do actually agree with some of his liberal causes. And I have no problem with his chosen career – currency speculation – even if he did make $1 billion out of the misery of the British taxpayer. What rattles me is just how arrogant he’s become. Soros would have been nobody without capitalism, yet he is determined, in the manner of a philosopher-king, to pontificate about the supposed evils of the free market. He denounces “market fundamentalism”, even though no one in power advocates this: the state sector in every developed country, even America, is huge. And he claims that markets are “inherently unstable”, forgetting that long recessions are always down to politicians, and that they were shorter before the rise of the welfare states that he supports. He may know how to trade currencies, but he’s ignorant about capitalism.
Slump in household spending highlights the effect of austerity measures on consumers – The Government's plans to return Britain to growth have been dealt a severe blow after it emerged that household spending fell in October at its fastest pace since January while debt levels are on the rise for the first time in nine months. As David Cameron prepares to deliver a speech to business body the CBI on Monday, in which he will call on companies to create a "new economic dynamism", new figures highlight the effect austerity measures are having on the UK consumer. Over a quarter of the 1,500 households surveyed by research house Markit said their finances had deteriorated since September, against just 7pc who saw an improvement. The survey's headline balance was 40.0 – where anything below 50 indicates a decline in finances – slightly worse than September's figure of 40.2.
Britain's economic policy deficit - Little brothers exist to be abused by their older siblings. The United Kingdom has willingly played the role of abused sibling for the United States for decades. . And now the new Conservative-Liberal Democrat government is taking the lead in trying to use government austerity to restore prosperityThose of us who oppose austerity in the United States are delighted. The UK is jumping out front to lay off public sector workers, raise taxes and cut government programs and supports across the board. It is doing this at a time when the economy has nearly 8% unemployment and considerable excess capacity in almost every sector of its economy. This drive to austerity comes at a time when the short-term rate set by the Bank of England is 0.5% and the rate on 10-year bonds is just 3.0%. The timing is also perfectly wrong in that most of the UK's major trading partners are also suffering from weak economies and therefore unlikely to provide strong export markets. Nor are they likely to tolerate a substantial devaluation of the pound against their currency.
The Humiliation of Britain - Even though the British government’s credit is still solid gold, Prime Minister David Cameron’s administration is about to embark on what may be the largest sustained fiscal contraction ever: a plan to shrink the government budget deficit by 9% of GDP over the next four years. Cameron’s government used to claim that its policies would produce a boom by bringing a visit from the Confidence Fairy that would greatly reduce long-term interest rates and cause a huge surge of private investment spending. Now it appears to have abandoned that claim in favor of the message that failure to cut will produce disaster. What is so bad about continuing to run large budget deficits until the economic recovery is well established? Yes, the debt will be higher and interest on that debt will have to be paid, but the British government can borrow now at extraordinarily favorable terms. When interest rates are low and you can borrow on favorable terms, the market is telling you to pull government spending forward into the present and push taxes back into the future.
The end of Britain's post-imperial ambition - Britain is turning in on itself. Cool Britannia, self-confident globalism and liberal internationalism – all belong to a bygone era. Finance has gone out of fashion. The time has come to pull up the drawbridge and pay the bills. Introspection and austerity are the leitmotifs of the new age. Things are going to get grim. This week David Cameron's coalition government unveiled its plans to repair the large hole in the nation's public finances. The prescription is for public spending cuts bigger that anything seen since the end of the second world war. The task? To eliminate a budget deficit of about 10 per cent of national income. Taxes are going up and living standards are set to fall. Half a million public sector jobs are to be lost. Pay is to be frozen and pensions reduced. Investment in the physical fabric of the nation – roads and railways, schools, hospitals and housing – has been slashed. The BBC will be shutting down channels. George Osborne, the chancellor of the exchequer, was not exaggerating when he told the House of Commons that closing the deficit would be painful.
UK spending review: how did the banks get off so lightly? - Two years ago this month, a pale and visibly shocked Gordon Brown promised that "irresponsible behaviour" by Britain's bankers would be "punished". The prime minister was angry at the level of public money needed to support banks, which eventually ran into hundreds of billions, after the credit-fuelled system expanded out of control in the run-up to the banking crisis of October 2008. Two years on, as the taxpayer endures more pain while the government that replaced Brown's axes £81bn from public spending, the banks have returned to practices they enjoyed in the good years, seemingly bearing few scars of the punishment promised. "Those who caused the recession will be cracking open the champagne today, while the full extent of the attacks on the living standards of poor and middle income Britain are starting to sink in," said Brendan Barber, general secretary of the TUC. Referring to MPs who endorsed the cutting of benefits in the chancellor's spending review, Barber said: "With government MPs cheering cuts in support for some of the most vulnerable in society, it looks like we have gone back to the 1980s 'greed is good' culture."
Coalition claims of 'pulling Britain back from the brink' are nonsense - Last week, the UK Government delivered its long-awaited Comprehensive Spending Review (CSR). Domestic and international news outlets dubbed it "extraordinary", "unprecedented" and "extremely ambitious". None of these descriptions is true. In reality, Wednesday's CSR speech, while a compelling parliamentary occasion, told us little we didn't already know. More seriously, the proposed fiscal retrenchment still looks inadequate, given the scale of the UK's problem. No one is denying that Britain's Coalition government is about to implement a significant spending squeeze. The leaderships of both the Conservatives and the Liberal Democrats are now speaking openly about the UK's chronic fiscal position and putting forward measures designed to address it.
Johann Hari: Protest works. Just look at the proof - There is a ripple of rage spreading across Britain. It is clearer every day that the people of this country have been colossally scammed. The bankers who crashed the economy are richer and fatter than ever, on our cash. The Prime Minister who promised us before the election “we’re not talking about swingeing cuts” just imposed the worst cuts since the 1920s, condemning another million people to the dole queue. Yet the rage is matched by a flailing sense of impotence. We are furious, but we feel there is nothing we can do. There’s a mood that we have been stitched up by forces more powerful and devious than us, and all we can do is sit back and be shafted. This mood is wrong. It doesn’t have to be this way – if enough of us act to stop it. To explain how, I want to start with a small scandal, a small response – and a big lesson from history.
This Is What Accounting Identities Look Like - I have been periodically raging against the ignorance of those who would slash fiscal deficits without regard to fundamental accounting identities. Such “serious” people somehow think that public and private debt levels can be lowered simultaneously, without a substitution of foreign assets in domestic portfolios (a current account surplus). It does not occur to them that one person’s debt is another’s asset—too confusing, I guess. What this means is that, if the private sector is collectively paying down its debts, and the government tries to pare its deficits at the same time, either there is an increase in net exports to finance all of this, or it just doesn’t happen. That’s how it is with identities. Unlike other kinds of rules, they are not made to be broken. Which brings us to this morning’s news about public finances in Europe: despite the earnest efforts of the austerians, fiscal deficits are not declining. Rather, tax receipts are going down, so that the ex post identities remain in force. As long as the private sector continues to deleverage, further efforts to produce “responsible” fiscal deficits will just lead to lower tax revenues and further spending cuts, in a downward spiral of pointless misery.
Accounting Identities –Krugman - The background to the world economic crisis is that we went through an extended period of rising debt. Now, one person’s liability is another person’s asset, so rising debt made the world as a whole neither richer nor poorer. It did, however, leave the borrowers increasingly leveraged. And then came the Minsky moment; suddenly, investors were no longer willing to roll over, let alone increase, the debts of highly leveraged players. So these players are being forced to pay down debt. The process of paying down debt, however, must obey two rules: 1. Those who pay down debt must do so by spending less than their income. 2. For the world as a whole, spending equals income. It follows that 3. Those who are not being forced to pay down debt must spend more than their income. But here’s the problem: there’s no good mechanism in place to induce those who can spend more to do so. Low interest rates do encourage spending; but given the size of the debt shock, even zero rates are nowhere near low enough. So since the world economy can’t raise the bridge, it is lowering the water: without sufficient spending from those who can, the only way to make the accounting identities hold is for incomes to decline — specifically, the incomes of those not constrained by debt must decline so as to create a sufficiently large gap between their (unchanged) spending and their incomes to offset the forced saving of debtors. Of course, the mechanism here is an overall global slump, so the debtors are squeezed as well, forced into even more painful cuts.
The Wet Blanket on the World Economy - Slowly but surely some economists are beginning to come around to reality and wrap their head around the true problem facing the world economy (especially the OECD countries). It is DEBT. We have reached a mathematical endpoint in which net growth in debt is greater than net growth in world GDP. If there is $188 trillion in global debt with a (optimistic) 3% weighted annual interest rate then we can begin to grasp at the problem. Let's compare that to global productivity or GDP. World GDP is approximately $61 trillion. The average real growth rate for world GDP for the past 30 years has been around 3%. Even without discounting the flaws involved with comparing debt to GDP alarm bells should be going off in your head right now. These two amounts are growing/expensing at about the same rate, yet one is 3 times larger! That's right, global debt is 300% of global GDP and if the weighted average interest rate is even a minuscule 3% for all of that debt then we have a serious problem. So if you do the math the annual interest expense right now (not involving any compounding) of the global debt comes to about $5.64 trillion. Meanwhile if global GDP grows at its 30 year average, plus inflation which is running in the neighborhood of 1% right now in the U.S., it will add about $2.44 trillion nominally. When the debt compounds it absolutely dwarfs the growth potential for global GDP. All of this debt is acting like a wet blanket, or as Michael Hudson has described recently a parasite, that is weighing down the global economy. The world economy cannot possibly grow fast enough, especially when factoring in resource constraints, to outrun the world's debt load.