Fed Assets Rise $31.1 Billion to $2.35 Trillion on Treasuries - The Federal Reserve’s total assets increased $31.1 billion to $2.35 trillion as the central bank expanded its portfolio of U.S. Treasury debt. Holdings of Treasuries rose by $27.6 billion to $901.2 billion as of Nov. 24, according to a weekly release today. Mortgage-backed securities on the balance sheet fell by $475 million and federal agency debt securities fell by $816 million. The Fed transferred $56.5 billion to the U.S. Treasury from January until September from interest earned on its securities portfolio, the central bank said in a report Nov. 24. U.S. central bankers on Nov. 3 decided to increase their balance sheet with $600 billion in additional purchases of U.S. Treasury bonds. M2 money supply fell by $3.1 billion in the week ended Nov. 15, the Fed said today. That left M2 growing at an annual rate of 3.1 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.
US Fed Total Discount Window Borrowings Wed $46.69 Billion - The U.S. Federal Reserve's balance sheet expanded in the latest week as the central bank stepped up its Treasury purchases. The Fed's asset holdings in the week ended Nov. 24 rose to $2.349 trillion from $2.318 trillion a week earlier, the Fed said in a report released Friday. The Fed's balance sheet has stayed around the $2.3-trillion mark for months, but is poised to begin rising toward $3 trillion as the central bank embarks on a bond-buying plan intended to stimulate the U.S. economy. The Fed earlier this month said it would buy $600 billion in U.S. Treasury securities in an effort to drive down interest rates. The Fed also plans to invest proceeds from another $250 billion to $300 billion in maturing mortgage- backed securities it bought earlier into additional Treasury holdings. The Fed's Treasury holdings on Wednesday increased to $901.24 billion, Friday's report said. That compares with $873.62 billion the prior week. The Fed's holdings of mortgage-backed securities remained little changed at $ 1.038 trillion. Meanwhile, total borrowing from the Fed's discount lending window decreased to $46.69 billion on Wednesday from $47.00 billion a week earlier.
Federal Reserve policies focused - Atlanta Fed's macroblog - On Nov. 3, the Federal Open Market Committee (FOMC)—the group within the Federal Reserve charged with formulating monetary policy for the United States—announced its plans to purchase, over the course of the next eight months, up to $600 billion worth of longer-term Treasury securities.In many circles (maybe including yours), this decision has generated some controversy. A good deal of the controversy revolves around the view that this monetary policy decision is aimed at buying up government debt for the purpose of making it easier for the country to continue on the path of deficit spending. This view is inaccurate. I understand the concerns that are triggered when the Fed announces a significant Treasury purchase program at a time when the fiscal situation is so challenging and unsettled. Generating government revenues via the printing press is a policy that is often referred to as "monetizing the debt." I think the emphasis in that sentence should be on the word policy.
Fed lowers economic expectations for 2011 - Top Federal Reserve officials expect the unemployment rate to remain around nine percent at the end of next year and eight percent at the end of 2012, according to internal forecasts that drove the central bank to take new efforts to boost the economy three weeks ago.The 18 top leaders of the central bank expect the U.S. economy to grow at a 3 to 3.6 percent pace next year, which by their calculations will be enough to bring joblessness, currently at 9.6 percent, down to the 8.9 to 9.1 percent range in late 2011. In projections made in June, the same officials had been more optimistic, forecasting 3.5 to 4.2 percent growth in 2011 and an unemployment rate that would decline to the 8.3 to 8.7 percent range. Taken together, the new projections, released Tuesday alongside minutes of the much-scrutinized policy meeting Nov. 2 to 3, show the diminished economic expectations that shaped the Fed leaders' decision to buy $600 billion of Treasury bonds in a bid to lower long-term interest rates and encourage growth. Those forecasts are supposed to assume "appropriate" monetary policy, meaning that the continued high unemployment is expected even with the new measures in place.
FOMC Minutes: Forecasts revised down again, Disagreement on outlook -From the November 2-3 FOMC meeting. The Fed revised down their forecasts again: So the Fed expects slower growth, higher unemployment and about the same rate of inflation. The big changes were the increase in the forecast unemployment rates for 2011 and 2012, and the decrease in GDP for 2010 and 2011. There was apparently some significant disagreement: Participants generally agreed that the most likely economic outcome would be a gradual pickup in growth with slow progress toward maximum employment. They also generally expected that inflation would remain, for some time, below levels the Committee considers most consistent, over the longer run, with maximum employment and price stability. However, participants held a range of views about the risks to that outlook. Most saw the risks to growth as broadly balanced, but many saw the risks as tilted to the downside. Similarly, a majority saw the risks to inflation as balanced; some, however, saw downside risks predominating while a couple saw inflation risks as tilted to the upside
FOMC considered offering unlimited quantitative easing to target long-term interest rates - The Federal Reserve’s Open Market Committee met in secret by videoconference on October 15th to hash out policy issues ahead of the official November 2-3. The most extraordinary development at that meeting was discussion around whether the Federal Reserve should target long-term interest rates with an unlimited supply of liquidity. Eventually, the committee settled for the less spectacular sum of $600 billion. The Fed released the minutes of those two meetings yesterday. There were a number of surprising admissions in the minutes. But first, here is what the Fed said regarding the October 15th discussion
Fed’s Kocherlakota: Policy Makers Would Prefer to Cut Rates - Federal Reserve policy makers would have rather cut the central bank’s key target rate to spur growth, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said, but with that target already set essentially at zero, the central bank’s economic kick-starting options were limited. “Inflation and employment are both too low, and the pace of recovery is too slow,” Kocherlakota said. “Economic growth is low and softening further. I think it is safe to say that, given this situation, the FOMC would have liked to have been able to cut its target interest rate. But this option is not available.” Kocherlakota doesn’t have a voting role on this year’s Federal Open Market Committee, but will ascend to voting-member status next year
Bernanke Reviews Fed Communications Amid Backlash on Purchases - Federal Reserve officials are undertaking their broadest review of public communications in three years while confronting backlash from some politicians and foreign governments over a $600 billion monetary stimulus. Central bankers are weighing whether Chairman Ben S. Bernanke should hold regular press conferences and where to draw the line between confidential policy discussions and officials’ public comments, the Fed said yesterday in minutes of its Nov. 2-3 meeting and an Oct. 15 videoconference held by governors and regional presidents. Holding press conferences and setting clearer limits on officials’ remarks may let Bernanke better communicate his message on the benefits of a record Fed balance sheet, said Drew Matus, a former New York Fed staffer. Yields on 10-year Treasuries have risen since the decision, and the political assault on the Fed has prompted some economists to speculate that it may be reluctant to complete or expand the purchases.
Thoughts on QE2 - Expansionary open-market operations featuring long-term Treasury bonds (QE2) might be expansionary. However, this operation is equivalent to the Treasury shortening the maturity of its outstanding debt. It is unclear why the Fed, rather than the Treasury, should be in the debt-maturity business. The most important issue, of which the Fed is keenly aware, involves the exit strategy for avoiding inflation once the economy has improved and short-term nominal interest rates are no longer zero. The conventional exit strategy relies on contractionary open-market operations, but the worry is that this strategy would hold back an economic recovery. The Fed believes that paying higher interest rates on reserves gives it an added instrument that will help the economy recover more vigorously while avoiding inflation. I think this view is incorrect.
What’s Really Behind QE2? -- The deficit hawks say QE is massively inflationary; that it is responsible for soaring commodity prices here and abroad; that QE2 won’t work any better than an earlier scheme called QE1, which was less about stimulating the economy than about saving the banks; and that QE has caused the devaluation of the dollar, which is hurting foreign currencies and driving up prices abroad. None of these contentions is true, as will be shown. They arise from a failure either to understand modern monetary mechanics (see links at The Pragmatic Capitalist and here) or to understand QE2, which is a different animal from QE1. QE2 is not about saving the banks, or devaluing the dollar, or saving the housing market. It is about saving the government from having to raise taxes or cut programs, and saving Americans from the austerity measures crippling the Irish and the Greeks; and for that, it may well be the most effective tool currently available. QE2 promotes employment by keeping the government in business. The government can then work on adding jobs.
Japan's Monetary Policies Provide History Lesson - Nearly a decade after Japan's central bank first experimented with QE, the country remains mired in deflation, a general decline in wages and prices that has crippled its economy. And just as politicians in the U.S. are criticizing the Fed for veering beyond traditional monetary policy and are threatening to curtail the bank's independence as a result, lawmakers in Japan say they'll do the same to the BOJ as punishment for its failure to cure the scourge of falling prices.Japan's experience offers a case study in the possibilities and limits of quantitative easing, in which a central bank effectively prints money to spur economic activity. The BOJ began doing quantitative easing in 2001. It had become clear that pushing interest rates down near zero for an extended period had failed to get the economy moving. After five years of gradually expanding its bond purchases, the bank dropped the effort in 2006.
Fed Hawks To Get A Boost On 2011 FOMC - Dissenting voices at the Federal Reserve are set to get a boost in the 2011 voting rotation for the Federal Open Market Committee.Every Fed policymaker, including regional bank presidents, get a voice at the table during FOMC meetings. But regional bank presidents draw more attention than usual when they’re voters, as Kansas City Fed President Thomas Hoenig has found with his dissents for all seven votes this year. Four presidents of regional Fed banks will step into the rotation at the Fed’s policy meeting in late January: Charles Evans of Chicago, Charles Plosser of Philadelphia, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis. They’ll join the eight permanent voters on the FOMC: seven Fed governors (one of which is now vacant) and the New York Fed president. In the 2011 lineup, Evans will bring a dovish voice to the FOMC table, arguing for strong action from the Fed to combat a deflation threat. Most attention among regional bank presidents will likely go to Plosser and Fisher, two policymakers who have not been shy about casting dissenting votes. Fisher dissented five times in 2008, joined twice by Plosser, as inflation pressures emerged with the spike in oil prices.
Criticism Hinders Fed's Easing Plan - Criticism of the Federal Reserve's latest bond-buying program, both from insiders and from U.S. politicians, is muting the plan's potential benefits for the economy. Amid widely publicized skepticism about the efficacy and wisdom of the bond buying, investors and traders are questioning whether the Fed would be able to expand its bond purchases beyond $600 billion—even if inflation continues falling and unemployment remains high. Those doubts have contributed to an increase in yields on U.S. Treasury bonds since the Fed announced the program on Nov. 3, they say. The criticism "has raised questions about the Fed's ability and resolve to control the yield curve," said Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, the bond-fund giant. "The criticism has unsettled markets naturally inclined to worry about the politicization of the Fed and its loss of autonomy," he said. The success of the latest round of quantitative easing, or QE2 as it is known, hinges on shaping public and market expectations. The more the public and investors believe the Fed is likely to keep buying bonds to depress long-term interest rates until the economy comes back, the more likely the markets are to keep long-term rates from rising.
Frank Assails Republican Fed Criticism - Departing House Financial Services Chairman Barney Frank (D., Mass.) Monday defended the Federal Reserve’s efforts to boost the U.S. economy, which have come under attack at home and abroad. In one of the few signs of support for the U.S. central bank, Frank said he wasn’t surprised to see Chinese and German officials criticize the Fed’s plan, which is aimed at spurring the economy by buying $600 billion of government bonds through June in an effort to keep borrowing rates low. “What did disappoint me was to see conservative economists, high-ranking officials of previous Republican administrations, and Republican Congressional leaders share the attack” by foreign officials, Frank said in a statement.
Frank: ‘Republicans Join Central Bank of China -’Rep. Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, accused Republicans on Monday of siding with Chinese central bankers in their attacks on the U.S. Federal Reserve. “The Republicans are joining the Central Bank of China in criticizing [Fed Chairman] Ben Bernanke,” Mr. Frank said Monday during an interview on Bloomberg Television. “This is really distressing to me.” Mr. Frank was defending this month’s decision by the Fed’s policy committee, the Federal Open Market Committee, to buy as much as $600 billion in Treasury debt, a move that has been criticized by central bankers in other countries. “I wish we had more fiscal stimulus,” Mr. Frank said. “In the absence of that, given inflation, (Mr. Bernanke) is doing a very reasonable thing.”
Geithner Says Obama Opposes Depriving Fed of Employment Mandate - U.S. Treasury Secretary Timothy F. Geithner said the Obama administration would oppose any effort to strip the Federal Reserve of its mandate to pursue full employment and warned Republicans against politicizing the central bank. “It is very important to keep politics out of monetary policy,” “You want to be very careful not to take steps that hurt our credibility.” The Republican congressional leadership, including John Boehner, nominated as the next House speaker, has criticized the Fed’s plan to buy $600 billion in assets, saying it would fuel inflation and asset bubbles. Senator Bob Corker, a Tennessee Republican who serves on the Banking Committee, said he favors confining the Fed’s mandate to promoting price stability.
Sabotaging QE - Krugman - When short-term interest rates are up against the zero lower bound, whatever power the Fed has to influence the economy comes largely from its ability to affect expectations. This is true even for Bernanke-style quantitative easing: you can’t really push down longer-term yields unless the market believes that you’re going to keep buying until the rates are where you want them. It’s even more true when it comes to credibly raising expected rates of inflation. So if a large political faction begins yelling and screaming as the Fed attempts QE, this will have the effect of undermining the policy’s effectiveness. And so it’s proving.
Krugman, China and the role of finance - Here’s the quandary that the U.S. economy is in: The Fed’s quantitative easing policy– creating more liquidity so that banks can lend more – aims at helping the economy “borrow its way out of debt.” But banks are not lending more, for the simple reason that a third of U.S. real estate already is in negative equity. The deteriorating situation prompted a group of Republican economists and political strategists to publish an open letter to Federal Reserve Chairman Ben Bernanke criticizing the Fed’s policy of Quantitative Easing (QE2), flooding the economy with liquidity spilling over into foreign exchange markets to push the dollar’s exchange rate down. Enter Paul Krugman, one of the most progressive defenders of Democratic Party policy. His New York Times op-eds usually rebut Republican advocacy for Wall Street and corporate interests. But he also indulges in China bashing. By blaming China, he not only lets the Federal Reserve Board and its Wall Street constituency off the hook, he blames virtually the entire world that confronted Obama’s financial nationalism with a united front in Seoul two weeks ago. Sadly, Krugman’s “Axis of Depression” column on Friday, November 19, showed the extent to which his preferred solutions do not go beyond merely marginalist tinkering. His op-ed endorsed the Fed’s attempt at quantitative easing to re-inflate the real estate bubble by flooding the markets with enough credit to lower interest rates. He credits the Fed with seeking to “create jobs,” not mainly to bail out banks that hold mortgages on properties in negative equity.
The politics of the Fed - On November 3rd the Fed said it would buy $600 billion-worth of Treasury bonds over the next eight months with newly printed money. This second round of quantitative easing (QE), the Fed hopes, will nudge down long-term interest rates, thus stimulating spending and fending off the threat of deflation. Republicans and “tea-party” activists erupted in criticism. “Cease and desist,” cried Sarah Palin, a former vice-presidential candidate. “Currency debasement and inflation,” declared a gaggle of conservative economists and commentators in an open letter published as a full-page ad in leading newspapers. Republican leaders in Congress wrote to Ben Bernanke, the Fed chairman, to express “deep concerns”; and two of their colleagues proposed stripping the Fed of its statutory responsibility to promote growth and employment, leaving it to occupy itself only with controlling inflation.
Fed Adopts Political Tactics to Fight Critics - Faced with unusually sharp ideological attacks after its latest bid to stimulate the economy, the Federal Reserve now faces a challenge far removed from the conduct of monetary policy: how to defend itself in a hyperpartisan environment without becoming overtly political. Caught off guard by accusations from Congressional Republicans, Sarah Palin, Tea Party activists and conservative economists, the central bank and its chairman, Ben S. Bernanke, are pushing back, making their case on substantive grounds but also haltingly adopting the tactics of Washington battle, like strategically placed interviews, behind-the-scenes assuaging of opponents and reaching out to potential allies on Capitol Hill. The stakes are high. Last week, one House conservative announced legislation to strip the Fed of its mandate to promote jobs and have it focus solely on containing inflation. The attacks, coupled with criticism from foreign officials, have introduced enough uncertainty into global financial markets to potentially undercut the Fed’s plan to drive down interest rates, which rise or fall as investors anticipate Fed action.
More bits on whether we need a Fed - As I read the debate, Alex's response post shows that the case against the Fed is weaker than I had thought. There is more beneath the fold... In Alex's response there are various criticisms of me, but you can read both of his posts and you don't find a reason why free banking would offer an advantage over post WWII central banking (combined with FDIC and paper money). That's long been the weak spot of the anti-Fed case. Ask yourself: do we want a countercyclical money supply, and is central banking or free banking more likely to provide that? Once you take income effects, credit quality, and bank runs into account, the answer is obvious. It takes a good deal of imagination to believe that the Fed's periodic overreaches outweigh the benefits it provides through countercyclicality, even if, as Scott Sumner suggests, they don't always go far enough. The short rates of 2001-2004 weren't the root cause of Armageddon, even if they were one factor of many feeding into what was essentially a private sector bubble. If the Fed were shut down, over time the new base money would not be gold, "Hayeks," or a commodity bundle. It would be T-Bills. (Better not balance the budget!)
Faith in the Fed- my last word - In his response to my critique, Tyler calls the Federal Reserve the "saviour institution," a most un-Tyler like phrase although consistent with his earlier plea that all will be well if we just put our faith in the Fed. I said the case for the Fed is weak, Tyler responds that the case for free banking is weak--this is not a rebuttal. The point is more than rhetorical since there are many alternatives to the Fed as we know it, Scott Sumner has relentlessly made the case for nominal-GDP targeting (with futures markets), Kotlikoff makes the case for limited purpose banking, Tyler and Randy Kroszner once made the case for a similar idea, mutual fund banking (Tyler is less favorable today), Selgin and White make the case for free banking, and of course there are also commodity standards such as a gold standard and the BFH system (e.g. see this piece by Bill Woolsey). Since the case for the Fed is weak, I see work on all these alternative institutions as important and valuable.
The Fed's communication problem -The start of the FOMC's November meeting is described in the minutes released yesterday as follows: The meeting opened with a short discussion regarding communicating with the public about monetary policy deliberations and decisions. Meeting participants supported a review of the Committee's communication guidelines with the aim of ensuring that the public is well informed about monetary policy issues while preserving the necessary confidentiality of policy discussions until their scheduled release. Governor Yellen agreed to chair a subcommittee to conduct such a review. Here I provide some suggestions for Governor Yellen's subcommittee to consider.The Fed's traditional policy tool is control of the overnight interest rate. But once the Fed brought this rate essentially down to zero at the end of 2008, the Fed's main power has become irrelevant. According to economic theory, one of the most important ways in which the Fed might still be able to help the economy in such a setting is by successfully communicating today the strategy that it intends to follow in the future once it returns to targeting this rate at some value above zero.
Kucinich Calls QE2 Hearing - Rep. Dennis Kucinich, a consistant critic of the Federal Reserve, has scheduled a hearing next week to investigate the central bank’s latest round of debt buying, giving the Ohio Democrat an official forum to assail a policy backed by President Barack Obama. The hearing will examine the Fed’s decision earlier this month to buy up to $600 billion in long-term Treasury debt “in light of massive unemployment and the seeming inability of government to invest in infrastructure or to intervene to stop the loss of jobs,” according to a Kucinich press release. Mr. Kucinich backed legislation that called for an official audit of the central bank, and would like Congress to have more say over monetary policy. The congressman locked horns with Fed Chairman Ben Bernanke last year over whether the Fed knew about mounting losses at Merrill Lynch before it oversaw the investment bank’s shotgun marriage with Bank of America in the fall of 2008.
Fed Adopts Washington Tactics to Combat Critics - Faced with unusually sharp ideological attacks after its latest bid to stimulate the economy, the Federal Reserve now faces a challenge far removed from the conduct of monetary policy: how to defend itself in a hyperpartisan environment without becoming overtly political. The situation forms an odd corollary to the early 1980s, when Paul A. Volcker, sharply raised interest rates, setting off back-to-back recessions in a painful but effective war on inflation.
Liberals attacked Mr. Volcker, a Democrat, as an inflation-fighting zealot who disregarded the plight of the unemployed. Now conservatives are portraying Mr. Bernanke, a Republican, as trying too hard to stimulate growth and underestimating the risk of inflation.
The Question Isn’t Whether the Fed Should Be Stripped of Its Mandate to Maximize Employment … The Question Is Whether the Fed Has Too Much Power - The Fed says that unemployment will remain high for years. Some Republican congressmen are trying to take away the goal of ensuring full employment from the Fed. See this and this. Conservatives argue that the relationship between inflation and unemployment – as represented in the Phillips Curve – is false, and therefore the rationale behind the dual mandate makes no sense. See this, this and this. Liberals like economist James, Galbraith, congressmen Jerry Nadler and Alan Grayson and Senator Bernie Sanders are defending the Fed’s mandate to maximize employment. But I think that all of their arguments pro or anti the Fed’s dual mandate are missing the point. The Fed has had this full employment mandate all throughout this economic crisis. But it is indisputable that the Fed’s actions have been increasing unemployment. See this and this. Indeed, John Williams puts the current real unemployment rate at around 23%. The Fed had the mandate in 2007, 2008, 2009 and 2010 … but it acted to save the big banks instead of the American worker.
Mark Thoma on IOR - Mark Thoma recently made the following comments on the Fed’s interest on reserve program:There’s been a lot of talk lately about the Fed’s policy of paying interest on reserves with many claiming that this has caused banks to retain reserves that might have otherwise been turned into loans, and thus the policy has depressed aggregate activity. However, paying interest on reserves is a safety net for the Fed that allowed them to do QEI and QEII. If the Fed wasn’t paying interest on reserves, QEI would have likely been smaller, and QEII may not have happened at all.First, on whether paying interest on reserves is a constraint on loan activity, the supply of loans is not the constraining factor, it’s the demand. Second, I doubt very much that a quarter of a percentage interest — the amount the Fed pays on reserves — is much of a disincentive to lending Third, this a safety net for the Fed with respect to inflation. I agree with much of what Thoma has to say, but would add a few comments.
Why I don’t believe in liquidity traps - I’ve been asked to summarize my views on liquidity traps in one place, so brace yourself for a long post. For simplicity, I’ll define the term ‘liquidity trap’ as a situation where a fiat money central bank with a freely floating currency is unable to boost nominal spending because nominal interest rates have fallen to zero. There may be some cases where central banks are limited by laws regulating the sorts of assets they are allowed to purchase, but I know of no real world cases where that was a determining factor. Indeed I know of no case where a central bank that wished to boost inflation and/or NGDP was unable to do so. Nor do I think we need ever worry about that scenario actually occurring. On the other hand, I do think the zero rate bound is a real problem for real world central banks. Because central banks are used to using short term rates as their primary policy tool, policy may well become sub-optimal once rates hit zero. But that would not be because an economy is “trapped” at a zero bound, rather it is because central banks are reluctant to aggressively use alternative policy tools, including tools that would be much superior to fed funds targeting even if the economy were not up against the zero bound
Fed Weighed Setting Inflation Target, Minutes Show - Nearly three weeks before they announced a $600 billion effort to shore up the economy, Federal Reserve officials debated whether to adopt formal targets for inflation and long-term interest rates, and whether the Fed chairman, Ben S. Bernanke, should “hold occasional press briefings.” The ideas were not acted upon, but the discussion suggested a desire among Fed officials to at least discuss altering how the central bank approached monetary policy in a sluggish economy, and how it communicated with the public. The ideas are likely to be debated again against the backdrop of a political maelstrom that has followed the Fed’s recent decision to resume large-scale purchases of Treasury securities to jolt the weak recovery. On Tuesday, the Fed released minutes of the Nov. 2-3 meeting of its Federal Open Market Committee, during which it approved the asset-purchase strategy. The minutes also included a video conference the committee held on Oct. 15, the first such unannounced meeting since May 9, when officials met to discuss the European debt crisis.
Two percent or a bit below - In recent speeches, Ben Bernanke has referred to a(n) (implicit) target of around 2% for inflation in the US. The U.S. Federal Reserve, together with the Bank of Japan, is one of the few central banks in advanced economies without an explicit inflation target. Bernanke’s reference to this number is in the context of concerns that QE2 (second round of quantitative easing) will increase inflation in the US and with this message he wants to reassure the public that inflation will remain low. The exact words that he is using are “FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below.” It is interesting that the expression “2 percent or a bit below” happens to be almost identical to the way the ECB currently refers to its mandate for price stability.
Behind the Numbers: PCE Inflation Update - FRB Dallas = Apart from yet another sharp increase in the price of gasoline, inflationary pressures in October were as muted as we’ve seen in quite some time. Both the core PCE price index and the trimmed mean registered essentially zero inflation rates in October, each posting annualized rates of just 0.1 percent. The 12-month core rate fell 0.3 percentage points to 0.9 percent, and the 12-month trimmed mean rate, which had been fairly stable around 1 percent for the past six months, ticked down to 0.8 percent. To be sure, the headline PCE price index did increase at a 2.0 percent annualized rate in October, but about 90 percent of that gain is accounted for by the price index for gasoline, which jumped 4.7 percent from September to October (or about a 73 percent annualized rate of increase). So, gasoline aside, are we seeing a downshift in the underlying trend in consumer price inflation? While today’s release certainly points in that direction, one never wants to make too much out of any one month’s numbers. In inflation updates over the past few months, we’ve stated our view that the underlying trend in inflation was stable, albeit at an extremely low level.
There is No Food Inflation; the BLS Made Sure of That - It went unnoticed how the Bureau of Labor Statistics (BLS) relieved the volatile food and energy prices of volatility. The BLS also relieved the CPI of “extreme values and/or sharp movements [of prices] which might distort the seasonal pattern [which] are estimated and [are] removed from the data.” So out went milk, cheese, oil, and cars from the CPI, if they did not meet the BLS volatility criteria. (The excisions also include non-edibles and non-combustibles, including cards, trucks and textbooks.) Below are some monthly lists of items removed from the monthly Consumer Price Index Summary calculation and the excuses for doing so. (The lists were cut-and-pasted from the BLS website at the time. It looks as though the BLS only posts tables (no words) from the monthly CPI releases prior to May 2007.) There is nothing particular to the months shown. The reader may note the lists stop in 2006. This is because the BLS stopped releasing the list of items after December, 2006; possibly because the deception was so clear as to show the entire CPI calculation is a fraud. This is suggested without much conviction since there weren’t ten people outside of the BLS or Federal Reserve who knew it existed, possibly because critics of BLS methods had so many other fish to fry: hedonic adjustments, geometric averaging, substitution bias, owners’ equivalent rent, and on and on it goes. This prescribed method of stupefying the public successfully deterred me from attempting to understand the changes to food and energy prices. And, as mentioned above, there are so many other distortions to the CPI that one is better off to assume the consumer price index is rising 5% to 10% a year and to adjust one’s life (and investments) accordingly. John Williams, author of the Shadow Government Statistics website, calculates that if the BLS used the same methodologies for compiling the CPI today that it employed in 1990, the government’s number would be 4.5%. If the BLS used the same methodologies as in 1980, the official CPI would be 8.5%.
Fed Is Rather Hoping for a Bubble - The Federal Reserve is not only boosting U.S. equity prices, it is indifferent to the risks that it is forming a bubble. That’s because the Fed has learned two things during the series of bubbles formed over the past decade.One is that an equity bubble helps to reinforce strong economic growth, at least in the short term. Two, that when a bubble pops, the fallout is manageable as long as it hasn’t been inflated by leverage. The bursting of the tech bubble was relatively mild, not just because of the Fed’s aggressive monetary policy and commitment to “lower for longer” but because the bubble had been built on relatively little leverage, most of which was concentrated in the telecoms industry. Firms died and went bust and there was certainly overcapacity for a while, but the wider economic repercussions were easily manageable.
Kicking the Fed -SOMETIMES IT SEEMS as if nobody loves the Fed. At the moment, the hostility emanates mainly from Republicans, who charge that Chairman Ben S. Bernanke's plan to boost the economy through $600 billion in asset purchases will bring on inflation and currency debasement. Senior Republicans are talking seriously of amending the 1977 law that gave the Fed responsibility for maximizing employment as well as stabilizing prices. But only 10 months ago progressive Democrats, seeking scapegoats for Republican Scott Brown's win in Massachusetts, were threatening Mr. Bernanke's appointment to another four-year term. Moveon.org charged that "after taking extreme measures to save the banks, Bernanke has shown no interest in helping regular folks who can't find jobs, even though ensuring 'full employment' is explicitly part of his mandate." A lot of this is just politics, of course. Perhaps New York Times columnist Paul Krugman is right that the GOP's "real fear is not that Fed actions will be harmful, it is that they might succeed," thus boosting President Obama's reelection chances.
Bruce Krasting: It’s the ‘Bernank’ that done it! - A very small percentage of the population actually understands what the Fed is doing. Far more people have watched the YouTube cartoon explanation of QE than have listened to/read Bernanke. But a great number are aware that the Fed is engineering some inflation. So when they get hit in the head with some big price increase the first thing they are going to say is, “It’s the ‘Bernank’ that done it!”Consider me as a case in point. I already pay a ridiculous $1,629 a month for health insurance. But today I get this nice letter from United Health telling me that the good folks at the NY State Insurance Commission have approved a 12.5% increase for just the next six months. I am looking at a 25% YoY increase in healthcare cost.That NY State is granting 25% rate increases is a crime in my opinion. That Obama Care created a three-year window of maximum gouge opportunities for the likes of UNH is also a crime. The problems with health care and the cost of insurance can’t really be blamed on Ben and the Fed. But I suspect that many folks are going to blame him anyway. After all, he’s the one who wants inflation, so when we get it, the fingers of blame are going to be pointed in his direction.
Bernanke Does Not Have a Magical Commodity Price Wand - A few weeks back, Paul Krugman made the case that surging commodity prices do not necessarily mean U.S. inflation is about to take off: A bit more on commodity prices: among other things, all of those pointing to rising commodity prices as a sign of runaway U.S. inflation seem oddly oblivious to the fact that commodity prices are a global phenomenon, driven by world demand... recovery in the emerging world has led to a recovery in commodity prices, which had plunged in 2008. How much does all this have to do with Ben Bernanke, or U.S. policy in general? Not much. The key point being made here is that commodity prices are influenced by many factors, not just U.S. monetary policy. Therefore, it would be difficult to draw any conclusions about expected inflation from them. I decided to do a quick check on these claims by looking at the relationship between the year-on-year percent change in commodity prices and the year-on-year percent change in industrial production for both emerging economies as whole and the United States for the period 2007:12 - 2010:8. The data comes from the IMF and the Netherlands Bureau for Economic Analysis. What I found is that the the emerging economy group rather than the Unite States was more closely associated with changes in commodity prices: (Click on figure to enlarge.)
Hamilton on Printing Money - In response to the infamous bunnies James Hamilton says Actually no money is going to be printed. The Fed will pay for these purchases by crediting accounts that banks have with the Fed. Although it is true that banks could ask to withdraw these funds in the form of green currency, they currently are showing no interest in doing so. And before banks did start to want to withdraw these funds as money, the Fed plans to sell the assets off to bring the reserves back in. There is no plan now or in the future to "print a ton of money" I understand Hamilton’s rationale for responding this way. He wants to assuage fears that we are headed towards some sort of Zimbabwean hyperinflation. However, it doesn’t attack the misunderstanding head on. It is a tougher slog but a more productive one, in my opinion, to explain that traditional monetary policy involves printing money. If you didn’t fear that we were entering the last refuges of a dying economy when Paul Volker was cutting rates in the mid 1980s then you shouldn’t fear it now.
The Truth about Quantitative Easing - Governments have been "manufacturing" money for as long as there has been cash. Since 1950 the amount of money in circulation has doubled every 15 years or at a rate of 5.7% per annum. The excuse for this has always been that the extra money was needed to accommodate growth and inflation. However, what it did was to provide the State with a regular source of new money year on year. The first organization that gets to use any new money is the State. After it has passed into circulation most new cash flows back to the Exchequer through the taxation system. Having the ability to create another 5.7% of money every year was a considerable boost to the Government. In the early 1980's the Government component of GDP was about 33%. If a churn factor of three is accepted on any new money, then introducing 5.7% of new cash into the economy was in fact about 17% of GDP. In other words, it represented about half the money that the State was expending in the early 1980's.
The Political Economy of the Inflation Hawks - Brad DeLong asks an interesting and very pertinent question: what are the motives behind those who are screaming that the Fed is stoking the fires of inflation?Today we have next to no hard-money lobby, for nearly everybody has a substantially diversified portfolio and suffers mightily when unemployment is high and capacity utilization and spending are low. Why then does there appear to be such a powerful, well-healed constituency for restrictive monetary policy in the face of persistent high unemployment? I don’t claim to know the answer, but here is my speculation:1. Bonds continue to play a very important role in the portfolios of the well-to-do. Hard money remains a significant desideratum for them, although it might be offset in other respects.
Guns, Butter, and Bonuses (MMT, Money, and Deficits) Part 2 - In part 1 I discussed some of the core lies of neoliberalism: That money creation is based on deposits; that we need the banks in order to create money; that money creation without risking runaway inflation is constrained by anything other than the capacity utilization of the economy; that under today’s Depression circumstances America faces any “deficit problem” at all other than the political one created by the criminals who are looking for a pretext to steal yet more trillions under the rubric of “austerity”. Modern Monetary Theory (MMT), the latest incarnation of a much older idea once called producerism, greenbackerism, chartalism, and other names, teaches these truths. So in these senses MMT is objectively subversive of the particular status quo which afflicts us today. It means the banks have no legitimacy and shouldn’t exist at all. Money creation is a sovereign power of the people, and a core responsibility of government if we’re to have a government at all. Whether done directly by the government or through the middleman of the banks, money creation is done out of thin air, simply by crediting the account of a loan or payment recipient. The most direct, efficient, rational, and productive way to do this is for government to directly issue money, directly credit accounts.
Fed's Hidden Agenda of Driving U.S. Into a Second Great Depression - Ben Bernanke has said that the Fed is trying to promote inflation, increase lending, reduce unemployment, and stimulate the economy. However, the Fed has arguably - to some extent - been working against all of these goals. For example, as I reported in March, the Fed has been paying the big banks high enough interest on the funds which they deposit at the Fed to discourage banks from making loans. Indeed, the Fed has explicitly stated that - in order to prevent inflation - it wants to ensure that the banks don't loan out money into the economy, but instead deposit it at the Fed: Why is M1 crashing? Because the banks continue to build up their excess reserves, instead of lending out money: These excess reserves, of course, are deposited at the Fed. Why are banks building up their excess reserves? The New York Fed itself said in a July 2009 staff report that the excess reserves are almost entirely due to Fed policy:
Monetary Policy Confusion - An editorial in the WaPo yesterday - and some recent emails I've received - indicate there is some confusion on the difference between monetary and fiscal policy. From the WaPo yesterday: Kicking the Fed [B]uying hundreds of billions of dollars worth of federal debt in a deliberate effort to lower long-term interest rates and boost employment looks to many economists, market participants and politicians like fiscal policy by another name. Well, these "economists, market participants and politicians" are confused. The NY Fed's Terrence Checki provided a succinct description of monetary policy in a speech last Friday: Challenges Facing the U.S. Economy and Financial System Monetary policy works by influencing the level and shape of the domestic yield curve. In normal times, the Fed does this by buying and selling Treasury securities at the short end of the curve, thereby influencing short-term rates. The Fed's purchase of Treasury bonds (under quantitative easing "QE" or LSAP) simply extends classic open market operations to longer duration securities, to produce similar results: a shift in the yield curve consistent with desired financial conditions. That is monetary policy, not fiscal policy which is related to government revenue collection and expenditures.
Economic Code Words - I was just having an argument/debate about quantitative easing. Marshall Auerback, Randy Wray and I all have posts here at Credit Writedowns which explain that quantitative easing does not create new net financial assets and is merely an asset swap which has no direct effect on the real economy. Nevertheless, there is a vast difference in the terminology we use to describe these matters. Why is that? Much of this has to do with Economic Code Words and the neo-liberal orthodoxy which has controlled the economics profession for the past generation. This orthodoxy is the one responsible for the increasing reliance of the US economy on the financial sector as anti-regulatory and pro-incumbent business policies gained sway ideologically. The result has been a leveraging up in the U.S. in a way that has benefitted the more well-to-do than average Americans and a financial system which is extremely prone to systemic crises.
O Deflation, Where is Thy Sting? – Mauldin - First, we find that inflation for all items is 1.2% over the last year. All items less food and energy, or core inflation (which the Fed pays attention to), is only 0.6%. That is getting dangerously low, isn’t it? Maybe not. What you find is that inflation when you take out housing costs is a jaunty 1.9%. Right in the Fed target range of 1.5-2%. Even “core” inflation, when you take out housing, is 1.5%. That is not exactly something we should be worried about. That flat equivalent-rent number is showing a deflation risk that is simply not there. But the Fed is worried about deflation and other things, so they are going to embark on a $600-billion quantitative easing, which among other things is going to help devalue the dollar and has already caused a rise in commodity, energy, and food prices. We may in fact get some inflation, but precisely where we do not want it. While the Fed may prefer to look at core inflation, the rest of us live in a world where we buy food and consume energy. And for those in the lower part of the income spectrum, the rising cost of food and energy is disproportionately high. It acts like a tax on disposable income, which will hurt retail sales, which is PRECISELY what we do not need.
Secular Deflation - My last post posited a future world where technology-driven production and consumption lead to a secular drop in demand, and with it a drop in employment, resulting in what I called a consumption trap: This world creates consumption trap because we are not consuming enough to generate full employment. And such a world comes with a corollary: secular deflation.We all know that technology is perpetually in deflation mode. On a per unit of consumption basis – whether measured by the cost of processing one instruction or storing one bit of data – the cost of speed and storage is cut in half every year or so. That makes even roaring inflation look like a crawl. And, it makes life difficult for the Bureau of Labor Statistics folks who have to figure out CPI. This deflation in technology can overwhelm the inflation in other areas of the economy, where a ten or twenty percent rise is something of note. There are two ways the BLS can keep the relentless price deflation in technology from dominating CPI.
Faith in the Fed: QE2 Will Not Spur Inflation - Why are conservatives so opposed to the Fed’s plan to help the economy? As is clear from the 23 economists who signed a letter protesting the Fed’s move, the main concern is inflation. Worries about inflation are also behind a proposal from Rep. Mike Pence of Indiana to change the Fed’s dual mandate of stabilizing both inflation and employment to a single mandate of price stability. The Fed’s plan, called QE2, requires printing new money and using it to purchase long-term Treasury securities from the private sector. The increase in the money supply that results from these purchases is potentially inflationary. However, inflation won’t be a problem until the economy recovers. So long as the economy continues to struggle, there will be little demand for loans to finance new investment or the consumption of durables, and the new money the Fed creates will simply pile up in banks as idle balances. This means that the inflation problems the GOP is worried about can be avoided if the Fed reverses its policies once the economy improves, something it has assured us it will do. The worry about inflation is really a worry that the Fed won’t reverse course and undo the quantitative easing once the economy begins doing better.
Paul Ryan, Arpit Gupta on Monetary Policy - This Paul Ryan article from the Milwaukee-Wisconsin Journal Sentinel, Ryan leads opposition to Fed’s economic efforts, is scary if this is an accurate picture of the future of the Right on monetary policy. Ryan said he has pushed for years to rewrite the Fed’s statutes in favor of a single mandate to control inflation and preserve the dollar as a store of value, making the Fed more like the European Central Bank. Is his argument that the Federal Reserve shouldn’t print money at all? Right now the Federal Reserve isn’t hitting either mandate, and it is far, far away from spurring inflation solely to get unemployment down. Projections have inflation at 1% through end of next year, which is far less than the (low) 2% that most Fed policymakers say is consistent with stable prices. Someone needs to ask Ryan if he also agrees with a return to the gold standard. Separately, Arpit Gupta has a great post catching people up to the QEII debate (my bold):
Paul Ryan’s Monetary Economics - Paul Ryan says that “monetary policy was always my first love” but he doesn’t seem to know very much about it: “There is nothing more insidious that a government can do to its people than to debase its currency,” Ryan said. Just as harmful, Ryan warns, is that the proliferation of newly printed dollars inevitably unleashes inflation and throws the economy out of kilter in other ways. “Inflation is a killer of wealth. It wipes out the middle class. It eviscerates the standard of living for people who have retired or are living on fixed incomes,” he said. “Name me a nation in history that has prospered by devaluing its currency.” [...] To Ryan, the root of the problem is the Fed’s dual mandate, which calls on the central bank to promote employment as well as throttle inflation. Ryan said he has pushed for years to rewrite the Fed’s statutes in favor of a single mandate to control inflation and preserve the dollar as a store of value, making the Fed more like the European Central Bank. Fighting inflation and boosting employment often are diametrical goals, he said. “Basically the Fed is driving a car with two feet, one on the brakes and one on the gas pedal, and it’s a real jerky ride,” he said. So to sum up, right now inflation is running lower than it was in the 1990s and 2000s. What’s more, in the 1990s and 2000s it was running lower than it was in the 1980s. And what the Fed is trying to do is to bring inflation back not to the levels of the Ronald Reagan Era, but to the rate we enjoyed in the 1990s and 2000s.
Why Central Banks Should Not Lean Against the Wind - The Cato Institute held its 28th Annual Monetary Policy Conference on the theme of ‘Is Monetary Policy Responsible for Bubbles?’ Adam Posen (a social democrat rather than a classical liberal) presented a paper titled ‘Do We Know What We need to Know in Order to Lean Against the Wind?’ This was his conclusion:even the seemingly least controversial assumption required for leaning against the wind to succeed – that central banks can discern destabilizing booms with sufficient notice to pre-empt them – will be invalid. Since this argument is solely about the ability of monetary policymakers to recognize and react to asset price booms, and not about the viability of their means to affect asset prices, this should concern advocates of discretionary macroprudential policymaking as well, even when using non-monetary tools. Posen wrote an even more thorough critique of using monetary policy to manage asset prices that can be found here. My own effort in this regard can be found here.
Chicago Fed: Economic Activity picked up slightly in October - This is a composite index based on a number of economic releases. From the Chicago Fed: Index shows economic activity picked up in October Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index increased to –0.28 in October from –0.52 in September. ...The index’s three-month moving average decreased to –0.46 in October from –0.33 in September, reaching its lowest level since November 2009. October’s suggests that growth in national economic activity was below its historical trend for the fifth consecutive month. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.
Federal Reserve lowers outlook for economy through 2011 – Federal Reserve officials have become more pessimistic in their economic outlook through next year and have lowered their forecast for growth. The economy will grow only 2.4 percent to 2.5 percent this year, Fed officials said Tuesday in an updated forecast. That's down sharply from a previous projection of 3 percent to 3.5 percent. Next year, the economy will expand by 3 percent to 3.6 percent, the Fed said, also much lower than its June forecast. Fed officials project that unemployment won't change much this year, averaging between 9.5 percent and 9.7 percent. The current unemployment rate is 9.6 percent. Progress in reducing unemployment has been "disappointingly slow," the central bank said, according to the minutes of its Nov. 2-3 meeting. The darker view helps explain why the Fed decided at its meeting earlier this month to launch another round of stimulus. The central bank plans to buy $600 billion in Treasury bonds over the next eight months in an effort to lower interest rates and spur more spending.
Federal Reserve Foresees Slow Growth, High Unemployment Through 2012 - Assuming the latest forecast from the Federal Reserve is accurate, the recovery from the 2008-09 recession is going to be very meager indeed: The Federal Reserve slashed its outlook for the U.S. economy for this year and 2011 and projected that it could take several years for the economy to return to health. According to minutes from the Fed’s November 3 meeting released Tuesday, more than half of the central bank’s policymakers thought it would take about five or six years for unemployment, growth and inflation to return to more normal levels. Other Fed members warned the full recovery could take even longer than that. The Fed now expects the economy to grow between 2.4% to 2.5% this year, compared to an earlier forecast of growth between 3.0% and 3.5%. The Fed also trimmed its 2011 forecast to growth of between 3% and 3.6%. Its earlier estimate was for growth of 3.5% to 4.2%. The central bank also said the unemployment rate is now expected to average out between 9.5% and 9.7% this year. The jobless rate was 9.6% in October. And the Fed now forecasts unemployment will only fall to between 8.9% to 9.1% in 2011, well above the 8.3% to 8.7% unemployment rate it previously predicted for 2011.
Q3 real GDP growth revised up to 2.5% annualized rate - From the BEA: Gross Domestic Product, 2nd quarter 2010 (second estimate) The upward revision came from PCE (revised up from 2.6% to 2.8%), from net exports (added 0.25 percentage points to growth), and state and local government expenditures (revised up from -0.2% to 0.8%). As expected, non-residential structure investment was revised down from 3.9% to -5.7%. This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The current quarter is in blue. The dashed line is the median growth rate of 3.05%. The current recovery is still below trend growth.
Gloomy Fed employment forecast overshadows upbeat GDP data - The American economy grew faster in the third quarter this year than previously estimated, but that bit of encouraging news was overshadowed by a grim new forecast from the Federal Reserve that predicted unemployment would remain at about 9% next year and stay high for years to come. The pessimistic long-term outlook underscored the possibility that the United States — after years of good times that cast a rosy glow over the American dream and raised personal expectations for the future — may now be headed for a grayer, more financially constricted decade or more. In fact, some Fed policymakers on Tuesday raised the specter of a permanently higher jobless rate for the U.S. economy, suggesting that many more workers will struggle to get back on their feet even as the economy continues to grow.
Forecasters See U.S. Economy Still Sluggish in 2011 - Economic forecasters expect the U.S. economy to remain sluggish next year, weighed down by high public debt, unemployment and business regulation. The National Association for Business Economics said in a survey released Monday that U.S. gross domestic product, the broadest measure of economic activity, should grow by 2.6% in 2011. That’s the same forecast NABE released at its annual meeting Oct. 11, but below the May projection that called for a 3.2% GDP increase next year. In recent weeks, economic reports have shown the job market improving in October and retail sales rising going into the holiday season, while the Federal Reserve took renewed steps to spur growth. But the 51 NABE professional forecasters expect the unemployment rate to stay high and consumer spending moderate next year as companies and families continue to feel the pain of the worst recession in decades.
America's revival will take years: Fed Reserve - America's central bank has slashed its outlook for the US economy projecting that jobless rate could exceed 8 percent for two more years and it could take several years for the economy to return to health. According to minutes from the Federal Reserve's Nov 3 meeting released Tuesday, more than half of the central bank's policymakers thought it would take about five or six years for unemployment, growth and inflation to return to more normal levels. Other Fed members warned the full recovery could take even longer than that. The much weaker forecast is the major reason that policymakers decided earlier this month to announce a plan to try and jumpstart growth by pumping an additional $600 billion into the economy through the purchase of long-term bonds, according to CNNMoney..
Optimal Monetary and Fiscal Policies In a Search Model -When is regulation more efficient than competition? This column provides a theoretical framework for thinking about these issues and explores its implications using electricity data from the US. It argues regulation can be more efficient than competition when investment inducement is salient, and that deregulation can be inefficiently implemented when consumer groups are too politically powerful.
When is regulation more efficient than competition? - In this paper we study the optimal monetary and ﬁscal policies of a general equilibrium model of unemployment and money with search frictions both in labor and goods markets as in Berentsen, Menzio and Wright (2010). We abstract from revenue-raising motives to focus on the welfare-enhancing properties of optimal policies. We show that some of the inefﬁciencies in the Berentsen, Menzio and Wright (2010) framework can be restored with appropriate ﬁscal policies. In particular, when lump sum monetary transfers are possible, a production subsidy ﬁnanced by money printing can increase output in the decentralized market and a vacancy subsidy ﬁnanced by a dividend tax even when the Hosios’ rule does not hold.
Quantitative Easing and the Renminbi, by Martin Feldstein - The United States Federal Reserve’s policy of “quantitative easing” is reducing the value of the dollar relative to other currencies that have floating exchange rates. The Fed’s goal may be to stimulate domestic activity in the US and to reduce the risk of deflation. But, intended or not, the increased supply of dollars also affects the international value of the dollar. But the market forces that cause currencies to appreciate do not work on the renminbi, because China has only very limited capital-account convertibility. The People’s Bank of China determines the renminbi’s exchange rate.So the relevant question is how the Chinese government will choose to respond to the Fed’s quantitative easing and the impact of the Fed’s policy on other currencies. Between 2008 and June of this year, the Chinese held the renminbi at a fixed rate of 6.8 to the dollar. In June of this year, the Chinese authorities decided to allow the renminbi to appreciate at a moderate pace, as it had done between 2006 and 2008. Indeed, in the five months since that announcement, the Chinese government has allowed the renminbi to appreciate by 3.1% – not much less than the average rate of appreciation that it allowed between 2006 and 2008.
Dollar War in Detail - Yes, the currency crisis is caused by what’s called Quantitative Easing (QE) – flooding the economy with credit, and specifically Ben Bernanke’s and Tim Geithner’s threat to create another $1 trillion worth of new Federal Reserve credit over the next twelve months. The Financial Times reports that all of the last $2 trillion the Fed created has gone to the BRIC countries (Brazil, Russia, India and China) and to Third World raw materials exporters. Since the start of 2009 this speculative dollar outflow has pushed up the Brazilian real by 30 percent, from 2.50 to 1.75 per dollar.This has created a bonanza for speculators in the carry trade. Arbitrageurs can borrow from U.S. banks at 1% interest (and banks don’t have to pay anything on their own gambles), buy a Brazilian bond and get almost 12%, and pocket the difference. And as this carry trade pushes up non-dollar currencies, the speculators gets not only more than the 10 point interest-rate difference but also the currency revaluation as the Brazilian real (R$) is pushed up against the dollar.Meanwhile, the export trade is destabilized. If Brazilian exporters had contracts denominated in dollars, they receive less of their own currency. Their aircraft and other manufactures become more costly relative to products of dollar-linked countries. This hurts their markets, and squeezes profits. This is why Brazil’s finance minister (Guido Mantega) said that the currency war is turning into a trade war.
China, Russia quit dollar - China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday. Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies. "About trade settlement, we have decided to use our own currencies," Putin said at a joint news conference with Wen in St. Petersburg. The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities. The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said.
Bernanke hints dollar standard is flawed - Blink and you may have missed it. But last Friday, Ben Bernanke probably made his most important speech since his ‘helicopter money‘ talk almost eight years ago. According to author and economist Richard Duncan this is the first time the Federal Reserve chairman has publicly pointed out that the international monetary system may have a structural flaw. In the dollar standard. As Duncan told FT Alphaville this weekend: In it he conceded the Dollar Standard is flawed. He said, “As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances.”
A Wile E. Coyote Moment - Paul Krugman has teamed up with NY Fed economist Gauti Eggertsson to produce a new working paper: Debt, Deleveraging, and the Liquidity Trap. Krugman provides a bit of background about this project on his blog. I see that at least a couple of people have already commented on paper; e.g., Nick Rowe and Steve Williamson. Eggertsson and Krugman (henceforth, EG) certainly have a way with words. The imagery is splendid; my favorite, of course, being the Wile E. Coyote moment (or the Minsky moment) as reflecting the shock that unexpectedly slips the rug out from underneath the financial system. O.K., so it's fun. But is it progress? I think it is. In particular, it's encouraging to see that the authors (Krugman, in particular, I suppose) are starting to take seriously the notion that agent heterogeneity and financial market frictions may be important elements to include in a theory of the business cycle. It should go without saying these latter two properties are the sine quibus non of modern macroeconomic modeling methodology. As EG say in their abstract: "Making some agents debt-constrained is a surprisingly powerful assumption...". Yep, it's a real eye-opener alright. (For a few other surprises relating to the power of this assumption, see my entry here).
China PBOC Advisor: Sell Tsys In Response To QE2 - State TV- China could sell down some of its holdings of U.S. Treasuries in response to the Federal Reserve's decision to expand its quantitative easing program, an advisor to the People's Bank of China has suggested. Li Daokui, a Beijing-based economist and member of the central bank's Monetary Policy Committee, told China Central Television that the $600 billion program will trigger U.S. inflation and create losses for China. "In order to rescue its economy, the U.S. government printed a lot of paper and once their monetary easing takes effect, they need to consider compensating other countries," he said. "We can sell some of our Treasury bonds." The latest data from the U.S. Treasury Department showed China increased its holdings of long-term securities in September by $15 billion to $883.5 billion, though its agency holdings fell.
Fed Sends $56.5 Billion to US Treasury From Income on Assets - The Federal Reserve transferred $56.5 billion to the U.S. Treasury from January until September from interest earned on its expanding securities portfolio, the central banks said in a report. The Fed’s total assets stand at $2.32 trillion, up from $883 billion at the end of November 2007 when the financial crisis began to unfold. U.S. central bankers decided to increase their balance sheet further Nov. 3 with $600 billion in additional purchases of U.S. Treasury bonds. The Fed released its monthly balance sheet report for November in Washington today, 11-24.
Pimco Buys Mortgages And Cuts US Government Debt - The world’s largest bond fund at Pacific Investments Management Co. run by Bill Gross, is cutting government –related debt holdings to its lowest level since July 2009 and buying more mortgages in October. According to data on Pimco’s Newport Beach, California-based website, there was a fall to 28 percent of assets in the $256 billion Total Return Fund’s investment in government debt. Mortgages were boosted to their highest since July 2009 as they rose from, 28 percent to 39 percent of assets. Direct comments on monthly changes in portfolio holdings are not made by Pimco. A renewal of purchased assets by the Federal Reserve is likely to show an end to the 30-year bull market in bonds, said Gross, who made a reduction for the fourth consecutive month of government-related debt.
The Beginning Of The Ponzi End: As Of Today, The Biggest Holder Of US Debt Is Ben Bernanke - Well, folks, it's official - mark November 22, 2010 in your calendars - today is the day the Ponzi starts in earnest. With today's $8.3 billion POMO monetization, the Fed's official holdings of US Treasury securities now amount to $891.3 billion, which is higher than the second largest holder of US debt: China, which as of September 30 held $884 billion, and Japan, with $864 billion. The purists will claim that the TIC data is as of September 30, and that as the weekly custodial account shows UST buying continues the data is likely not correct. They will be wrong: with the Fed now buying about $30 billion per week, or about $120 billion per month, for the foreseeable future and beyond, it would mean that China would need to buy a comparable amount to be in the standing. It won't. In other words, the Ponzi operation is now complete, and the Fed's monetization of US debt has made it not only the largest holder of such debt, but made external funding checks and balances in the guise of indirect auction bidding, irrelevant. For what tends to happen next in comparable case studies, please read the Dying of Money.
Betting In The Endgame - Capitalism, a system of credit and debt that produced 300 years of growth is now dying. The bankers’ debt-based money has created such levels of debt that even 0 % credit can no longer induce growth. In the endgame, the problem is not the lack of credit—it’s the excessive amount of debt. Capitalism’s problem has always been debt, the inevitable byproduct of credit-driven expansion. In times of economic growth, merchants of debt, i.e. bankers, sell debt to those seeking returns; but, in the endgame when economies contract, IOUs cannot be repaid as defaulting debt overwhelms the ability to pay what is owed. Today, central bankers are caught in a trap of their own making. Removing gold from the international monetary system in 1971 allowed governments and bankers to expand their balance sheets to historic heights. The price, however, was the debasement of their currencies, a price which is now being exacted.
Debt Delenda Est - Debt was the market’s bête noire, this week and last. In Europe, it snatched up the Irish and carried them off. Then it attacked the Portuguese. Everyone knew the periphery states were going broke. Their cost of borrowing soared. Then, when the search parties reached them, the Irish turned them away. Debt has it usefulness, the Irish figured. They held out until Wednesday, apparently negotiating terms of their own rescue. In America, municipal debt collapsed by nearly 10% over the last two weeks. It became more and more obvious that state and local governments were headed for default too. California might get a bailout…but California, like Ireland, is a sovereign state. It could refuse. Borrowers worried that Californians and the Irish might prefer to default like honest incompetents rather than submit to the rescuers’ demands. Debt is underrated. For one thing, it is more reliable than asset values. The crisis of ’07-’09 wiped out about a third of the world’s equity and property wealth. And it disappeared 7 million jobs in America alone. But debt survived intact.
Rise in 30-Year Yield Shows Faith in Fed, Pimco's McCulley Says -Rising long-term Treasury yields indicate investors are betting the Federal Reserve will be able to lift inflation and stimulate economic growth, Pacific Investment Management Co.’s Paul McCulley said.Thirty-year bond yields have risen since the Fed last week began buying $600 billion of Treasuries to expand its record stimulus measures in an attempt to reduce 9.6 percent unemployment and keep inflation from slowing. Fed Chairman Ben S. Bernanke restarted the unconventional monetary policy known as quantitative easing after purchases of $1.7 trillion of securities completed in March and near zero interest rates for two years failed in stoked sufficient hiring and price rises.The yield on the 30-year Treasury bond, among the security the Fed has pledged to buy the least of in its purchase program, has risen to as high as 4.42 percent from 4.04 percent on Nov. 3 when the central and announced its plans.
Bair Warns of Unsustainable Spending, Need to Tackle Debt - Federal Deposit Insurance Corp. Chairman Sheila Bair warned in a Washington Post op-ed that the next financial crisis could come from out-of-control spending in Washington and urged lawmakers to put aside partisan differences to tackle the debt. She outlined a number of areas where she felt the debt was under heavy pressure. She said retiring baby boomers would live longer, putting more pressure on spending. She called defense spending “unsustainable” and referred to the tax code as “riddled with special-interest provisions that have little to do with our broader economic prosperity.” Her op-ed comes less than a week before the National Commission on Fiscal Responsibility and Reform votes on whether it can reach enough consensus to recommend changes in U.S. policy that would reduce the debt. Their recommendations are due Dec. 1.
Assets matter just as much as debt - That the challenge of fiscal consolidation is large is indisputable. The new Economic Outlook from the Organisation for Economic Co-operation and Development argues that “merely to stabilise debt-to-gross domestic product ratios by no later than 2025 requires strengthening the underlying primary balance from the current position by more than 5 per cent of GDP in the OECD area on average. Tightening by more than 8 per cent of GDP is called for in the US and Japan, with the UK, Portugal, Poland, Slovak Republic and Ireland all requiring consolidation of 5 to 7 percentage points of GDP.” It is inescapable, too, that much of the consolidation will – and should – fall on spending. This has now turned out to be unsustainably high, given reductions in potential income. Yet governments should not sacrifice the future to the pressures of the present. What is the sense of cutting spending today if the result is a poorer country tomorrow? This point turns on its head the refrain that we should at all costs avoid burdening the future with additional debt. We should indeed avoid burdening the future with unproductive debt. Yet productive debt is not a burden, but a blessing.
All Is Not Lost - Paul Krugman states Seriously: there’s nothing wrong with [Bernanke asking for Fiscal Stimulus], but the time when saying it might have done some good was maybe a year ago. Now there’s no chance whatsoever of getting more stimulus through Congress. I understand why Bernanke was cautious about seeming to insert himself into the political debate — but it’s unforgivable all the same. The inadequacy of the policies we have to reduce unemployment to less-than-catastrophic levels has been obvious for a long time; and everyone who might have been in a position to do something played it safe, until it was too late to do anything. I am clearly sympathetic to what Paul is saying. Though, if we are all going to be honest here it should be pointed out that much larger but nonetheless progressive tax cuts probably could have been passed in lieu of ARRA. Instead, there was a push for more direct spending on multiplier grounds when we could have gotten a much larger stimulus through tax cuts.
Why the federal deficit reminds me of Enron. - Erskine Bowles and Alan Simpson, co-chairmen of the bipartisan National Commission on Fiscal Responsibility and Reform, got a chilly reception to their draft proposal on how to fix our deficit. House Democratic leader Nancy Pelosi, D-Calif., said the plan's proposed budget cuts were "simply unacceptable," while the right-leaning nonprofit Americans for Prosperity said that the plan's proposed tax increases were not "prudent or reasonable." I don't know whether Bowles and Simpson have arrived at the right solution. But Washington's failure to arrive at any solution as the deficit problem gets worse and worse reminds me of Enron, the much-admired Houston-based energy giant that crashed and burned nine years ago, uncovering the gaudiest business scandal of the aughts. The United States isn't going to disappear like Enron, of course. But it's not inconceivable that global investors who hold our debt could lose their faith, and begin dumping Treasury bonds, or refuse to buy new ones, thereby sending our interest costs sharply higher and our economy into shock.
Obsessed with the Deficit — and Ignoring the Economic Mess…The release of another budget-balancing proposal, this from the Obama deficit-reduction commission's co-chairmen, has unleashed a volcanic eruption of hurrahs from the Olympian peaks of the Establishment — and reflexive harrumphs from the left and right. In the past, I've been a reliable hurrah monger. We do have a long-term structural deficit problem. The largest items in the budget — old-age entitlements, especially — are likely to grow in the future, and we have to pay for them. The solution to this problem is simple: pay for them. Bill Clinton proved the relative ease of starting along this path. He raised taxes on the wealthy and balanced the budget, with the help of a strong economy. So you'll excuse me if I muffle my deficit-reduction cheerleading this time. There is much of value in the co-chairs' proposal. I like the fact that Social Security solvency is mostly achieved by increasing taxes on the wealthy and that there are additional benefits for the working poor. I don't like the fact that the chairs would limit the earned-income tax credit, which benefits those same working poor. We could go through the proposal line by line — but why waste the lines? There is a larger problem: Why are we spending so much time and effort bloviating about long-term deficits and so little trying to untangle the immediate economic mess that we're in?
The Budget Deficit isn't a Math Problem - I'm as encouraged as the next Serious Person to talk about the intricacies of budgetary math. What do you non-economists think we do on Friday nights, anyway. So the report of President Obama's budget commission is the perfect Thanksgiving feast. For an abbreviated summary, I recommend Kevin Hassett, Felix Salmon, and the pointers provided by the ever reliable Mark Thoma. My take is that the deficit commission is fine economics. I do think capping the amount of federal tax revenue is key, so I like that aspect greatly. Such a guarantee is a minimum to get a serious political conversation. Capping federal spending, which the report also endorses, is also essential. But I think the whole of the entrepreneurial community won't like treating capital gains as income. The public might understand this better if we just described cap gains as startup gains. Or maybe growth gains. As Uncle Miltie says, you tax more of something, you get less of it. Do we really want fewer startups? That said, I tend to view the process skeptically. A good friend on Capitol Hill laughs every time a commission is announced. There's simply no better way to play political dodgeball than to assemble a blue ribbon commission, which kicks the issue down the road a year or more.
Deficit Reduction Plan Is Realistic - Imagine that there is some activity — say, snipe hunting — that members of Congress want to encourage. Senator Porkbelly proposes a government subsidy. “America needs more snipe hunters,” he says. “I propose that every time an American bags a snipe, the federal government should pay him or her $100.” “No, no,” says Congressman Blowhard. “The Porkbelly plan would increase the size of an already bloated government. Let’s instead reduce the burden of taxation. I propose that every time an American tracks down a snipe, the hunter should get a $100 credit to reduce his or her tax liabilities.” To be sure, government accountants may treat the Porkbelly and Blowhard plans differently. They would likely deem the subsidy to be a spending increase and the credit to be a tax cut. Moreover, the rhetoric of the two politicians about spending and taxes may appeal to different political bases. But it hardly takes an economic genius to see how little difference there is between the two plans. Both policies enrich the nation’s snipe hunters. And because the government must balance its books, at least in the long run, the gains of the snipe hunters must come at the cost of higher taxes or lower government benefits for the rest of us.
Department of "Huh"? (Why Oh Why Can't We Have a Better Press Corps? New York Times Edition) -What Greg Mankiw writes: Deficit Reduction Plan Is Realistic: Erskine B. Bowles and Alan K. Simpson, the chairmen of President Obama’s deficit reduction commission, have taken at hard look at these tax expenditures — and they don’t like what they see. In their draft proposal, released earlier this month, they proposed doing away with tax expenditures, which together cost the Treasury over $1 trillion a year. Isn't it worth saying that it looks as though Simpson-Bowles is an average $7000/year tax cut for the top 1% and an average $600/year tax increase for the working and middle classes? "Progressives who are concerned about the gap between rich and poor should be eager to scale back tax expenditures" just does not cut it, does it?
Department of "Huh"? (Why Oh Why Can't We Have a Better Blogosphere? Brad DeLong Edition) - Brad DeLong objects to my recent NY Times column by displaying some Tax Policy Center data that, he says, shows the Bowles-Simpson tax plan is hard on the poor and easy on the rich. Progressives, he concludes, should oppose the plan. The problem, however, is the benchmark used in this particular table: current law as of 2015. Under current law, all of the Bush tax cuts expire, and millions of new taxpayers are hit by the AMT. That is an outcome that has never been in effect and that neither political party endorses. It is an artifact of legislative history. A better benchmark, as noted by Howard Gleckman of the Tax Policy Center, is current policy. Here are those results. The implication is exactly the opposite. All income groups take a hit, particularly those at the top of the distribution.
Problems With The Presidential Debt Commission - On the near right is the preliminary proposal of the co-chairs of the president's deficit commission, Erskine Bowles and Alan Simpson. It is a deeply conservative document that would make sharp reductions in Social Security, Medicare and Medicaid while also cutting and flattening income tax rates. As is, it would do a lot of harm, but at least it takes the deficit seriously. Then there are Republicans in Congress whose top priority is to force through legislation making the Bush-era tax cuts for the best-off Americans permanent, thus expanding the deficit by about $700 billion over the next decade. So on the one hand, we have to cut, cut, cut because fiscal catastrophe is looming. On the other, we have to make the problem worse by shoveling more money to the rich because ... well, because taking care of those with tidy incomes is contemporary conservatism's highest purpose. How can the two right hands be forced to work in tandem?
There Will Be Blood, by Paul Krugman -Former Senator Alan Simpson is a Very Serious Person. He must be — after all, President Obama appointed him as co-chairman of a special commission on deficit reduction. So here’s what the very serious Mr. Simpson said on Friday: “I can’t wait for the blood bath in April. ... When debt limit time comes, they’re going to look around and say, ‘What in the hell do we do now? We’ve got guys who will not approve the debt limit extension unless we give ’em a piece of meat, real meat,’ ” meaning spending cuts. “And boy, the blood bath will be extraordinary,” he continued. Some explanation: There’s a legal limit to federal debt. And since nobody, not even the hawkiest of deficit hawks, thinks the budget can be balanced immediately, the debt limit must be raised to avoid a government shutdown. But Republicans will probably try to blackmail the president into policy concessions by, in effect, holding the government hostage; they’ve done it before. Now, you might think that the prospect of this kind of standoff, which might deny many Americans essential services, wreak havoc in financial markets and undermine America’s role in the world, would worry all men of good will. But no, Mr. Simpson “can’t wait.”
Beggar-Thy-Country Hawks - Maxine Udall - Paul Krugman on the rational and disturbing aims of irrationally exuberant GOP deficit hawks: So here’s what the very serious Mr. Simpson said on Friday: “I can’t wait for the blood bath in April. ... When debt limit time comes, they’re going to look around and say, ‘What in the hell do we do now? We’ve got guys who will not approve the debt limit extension unless we give ’em a piece of meat, real meat,’ ” meaning spending cuts. “And boy, the blood bath will be extraordinary,” An insightful post by Peter Dorman on the political economy of inflation hawks that suggests that people hold ideas in their intellectual portfolios for many reasons, some of which may derive from history, context, and experience, and that may or may not reflect proximate or even long-term economic self-interest: The natural selection of beliefs, like that of species, operates in the context of structural factors—the interrelationship between concepts/traits—and does not necessarily optimize over each individual element. Yes, absolutely. But how to account for the middle class's "intellectual orientation" as apparently revealed in the last national election when it comes to taxing the wealth-holding class.
Reagan Advisor Bruce Bartlett Rips ‘Starve The Beast’ Republican Ideology - Bruce Bartlett, domestic advisor to President Ronald Reagan, Treasury official under the first President Bush and Ron Paul (R- Texas) staffer on the House Banking Committee, is not a liberal. But he’s becoming increasingly critical of his party’s ideology. In a Fiscal Times article entitled ‘Starve the Beast: Just Bull, not good Economics,’ Bartlett does a good job dismantling and exposing this slogan’s emptiness. “It ought to be obvious from the experience of the George W. Bush administration that cutting taxes has no effect whatsoever even on restraining spending, let alone actually bringing it down. Just to remind people, Bush inherited a budget surplus of 1.3 percent of the gross domestic product from Bill Clinton in fiscal year 2001. The previous year, revenues had been 20.6 percent of GDP, spending had been 18.2 percent, and there had been a budget surplus of 2.4 percent. When Bush took office in January 2001, we were already well into fiscal year 2001, which began on Oct. 1, 2000. He immediately pushed for a huge tax cut, which Congress enacted. In 2002 and 2003, Bush demanded still more tax cuts, even as the economy showed no signs of having been stimulated by his previous tax cuts. The tax cuts and the slow economy caused revenues to evaporate.
Starve the Beast: Just Bull, not Good Economics, by Bruce Bartlett - A prime reason why we have a budget deficit problem in this country is because Republicans almost universally believe in a nonsensical idea called starve the beast (STB). By this theory, the one and only thing they need to do to be fiscally responsible is to cut taxes. They need not lift a finger to cut spending because it will magically come down, just as a child will reduce her spending if her allowance is cut — the precise analogy used by Ronald Reagan to defend this doctrine in a Feb. 5, 1981, address to the nation. It ought to be obvious from the experience of the George W. Bush administration that cutting taxes has no effect whatsoever even on restraining spending, let alone actually bringing it down. Just to remind people, Bush inherited a budget surplus of 1.3 percent of the gross domestic product from Bill Clinton in fiscal year 2001. When Bush took office in January 2001,... He immediately pushed for a huge tax cut, which Congress enacted. In 2002 and 2003, Bush demanded still more tax cuts. Spending did not fall in response to the STB decimation of federal revenues; in fact, spending rose from 18.2 percent of GDP in 2001 to 19.6 percent in 2004, and would continue to rise to 20.7 percent of GDP in 2008.
Bipartisan Policy Center Debt Plan Shifts Benefits to Childless Workers - The debt reduction and tax reform plan proposed this week by the Bipartisan Policy Center does more than cut the deficit. The task force, chaired by former GOP Senate Budget Committee Chair Pete Domenici and former top congressional and White House budget official Alice Rivlin, also deals workers who have no kids at home a better hand by extending the EITC to more of them. The EITC is the nation’s largest cash-transfer program targeted at low-income working families, rivaling the Supplemental Nutrition Assistance Program (SNAP – or Food Stamps) in total benefits. EITC payments rise with income, plateau, and then decline as earnings surpass a set amount. In 2010, the maximum credit ranges from $457 for families without children living at home to $5,666 for families with three or more kids. The EITC gets flack for offering almost nothing for low-income workers without children at home. Left out in the cold are some people who don’t have children, some whose children are older, and some whose children live elsewhere (say, with a divorced parent). Another complaint is that the credit penalizes marriage: two low earners who marry stand to lose the EITC.
Social Security, Medicare Face The Age Of Austerity - With Republicans taking over the House, and the president's deficit commission ready to report, the country's two biggest entitlement programs — Medicare and Social Security — are in the cross hairs. The co-chairs of the deficit commission, Alan Simpson and Erskine Bowles, have proposed a series of dramatic changes to the two programs: among them, higher retirement ages and premiums, and lower benefits and more taxes for the wealthy. Promises to "cut spending" are simple, resolute and popular on the campaign trail. But a deeper look at reform possibilities — specifically for the country's ballooning entitlement programs — raises complex questions. Two men facing those questions right now are Charles Blahous and Robert Reischauer. Each was appointed by the president as a public trustee of Social Security and Medicare. And each tells NPR's Guy Raz that he's worried about an impending day of reckoning.
The Shock Doctrine Push To Gut Social Security and Middle Class - Today's Washington Post has punch two of a one-two punch. Punch one was the Simpson/Bowles "plan" to cut Social Security, cut middle-class tax breaks and programs (and dramatically cut taxes on the rich.) Punch two is pushing this plan hard with headlines claiming this solution is actually popular, while shutting out voices who explain why we shouldn't do this. This is full-on Shock Doctrine, wait for an emergency like the terrible recession so people are in shock and want solutions, and then change everything so fast they can’t respond while telling them how this is good for them. This is how they do it, folks, demonstrated by this story in today's Washington Post: Consensus is forming on what steps to take in cutting the deficit, After an election dominated by vague demands for less debt and smaller government, the sacrifices necessary to achieve those goals are coming into sharp focus. ... Smaller Social Security checks and higher Medicare premiums. [. . .] the plan unveiled this month by co-chairmen Erskine B. Bowles ... and Alan K. Simpson ... has been respectfully received with a few exceptions by both parties.
Consensus is forming on what steps to take in cutting to cut the deficit… After an election dominated by vague demands for less debt and smaller government, the sacrifices necessary to achieve those goals are coming into sharp focus. Big cuts at the Pentagon. Higher taxes, including those on home ownership and health care. Smaller Social Security checks and higher Medicare premiums. A debate is raging over the size and shape of those changes, particularly the wisdom of cutting Social Security benefits. But a surprisingly broad consensus is forming around the actions required to stabilize borrowing and ease fears of a European-style debt crisis in the United States. As a presidential commission struggles to build political momentum for such a package, even Republicans who initially opposed the commission's creation are still at the negotiating table.
WaPo (inaccurately?) reports "consensus forming" on deficit -The buildup in the corporate media supporting the corporatist wishlist on budgeting is growing. First there was the clamor about the Bowles-Simpson road map to conquering the deficit--depicted as a reasonable, middle-of-the-road approach. Then there was even more clamor about the more "radical" plan put forward by Alice Rivlin and cohorts. Rivlin is another neo-liberal Clintonite who is perfectly willing to sacrifice the New Deal to get the neo-deal. Obama doesn't seem willing to fight any fight. He quits before he starts, disgusting liberals who understand that a democracy cannot survive based on the kind of "free market capitalism" espoused by the oligarchs who benefit from it. So it is perhaps not so surprising that the WaPo is already declaring that a "consensus is forming on what steps to take in cutting the deficit." Story by Lori Montgomery takes the pundits and neo-con/neo-lib descriptions as god's truth as she describes "a surprising consensus" around "the sacrifices necessary to achieve those goals [of less debt and smaller government]" Once again, the neo-con faction has used its corporate-owned media to hone its message that there is no choice (false note of sadness) but to cut those deficit-causing "entitlements" like Social Security and Medicare. The awful deed is required, she suggests, to avoid a "European-style debt crisis." No real analysis is there. Once again we see the proof in the pudding: the corporate media has discovered that it can deliver press releases and paid interpretations of events much more cheaply than it can do investigative journalism with smart journalists paid a decent salary and provided decent benefits.
The Washington Consensus That Excludes the Overwhelming Majority of the Public - A front page Washington Post editorial touted the "accord seen in debate over deficit." It begins by telling readers that: "the sacrifices necessary to achieve those goals are coming into sharp focus." Included in the Post's list of sacrifices are cuts to Social Security. It never mentions the fact that poll after poll continue to show that the vast majority of the public strongly opposes cuts to Social Security. It is only the select group of Washington insiders that the Post chose to cite that is agreeing on the "sacrifices necessary." It is also worth noting that the Post did not even mention plans by the Bowles-Simpson and the Pew-Peterson deficit commission to cut the annual cost of living adjustment. This change would reduce benefits by an average of 0.3 percentage point for each year that a worker receives benefits. This means that after 10 years their benefits will be 3 percent lower as a result of this cut. After 20 years the cut will be close to 6 percent. If the average beneficiary receives benefits for 20 years this means that the average benefit cut will be close to 3 percent.
Consensus???!!! - Consensus is hard to find in Washington these days. There wasn't that much just before before this month's election, and there is a lot less after it. President Obama is willing to compromise on extending the Bush tax cuts and on cutting spending, but many Democrats won't follow his lead. Similarly, any deals by soon-to-be House Speaker John Boehner are likely to run afoul of newly elected Tea Party Republicans or of a filibuster by their compatriots in the Senate. It's going to be very difficult to find 60 votes in the Senate for anything controversial during the next two years. The middle has gone out of American politics, and the extremes work against compromise. Failure to govern can be a good thing if the ship of state is on a safe and sustainable course, but it isn't.
To solve the deficit, the numbers add up - but not the votes - The sudden proliferation of deficit-reduction plans is a reminder that the deficit is, at its heart, a math problem. To get the budget into "primary balance" in 2015 - that's wonk-speak for a balanced budget before interest payments, and it's the target everyone is trying to hit - we need $225 billion in savings and new revenue. And you know what? That's not so hard. You get there by adding taxes and subtracting spending. As the differences between the various plans suggest, there are a lot of ways to do that. Resolving the deficit, however, requires a different sort of math. The equation is almost insultingly simple: 218 + 60 + 1. That's a majority in the House plus a supermajority in the Senate (though you could do this through budget reconciliation, meaning you only need a majority) plus a signature from the president. This math problem, however, is almost impossible to solve. That's because the politicians don't agree, and perhaps more important, neither do the people.
Krugman Fears 'Making America Ungovernable' - I'd noticed recently that some credible political observers have been making the same uncomfortable point about congressional Republicans: they may be tempted to keep the economy down on purpose to advance partisan goals. Matt Yglesias, for example, said the Obama White House should be prepared for "deliberate economic sabotage." Budget expert Stan Collender has predicted that Republicans perceive "economic hardship as the path to election glory." Paul Krugman noted in his column last week that Republicans "want the economy to stay weak as long as there's a Democrat in the White House."I tied all of this together in an item on Saturday, noting that their collective points are at least worthy of discussion. The response from the right was less than kind -- the post generated far more conservative anger than I'm usually accustomed to dealing with. (My personal favorite: Washington Post columnist Michael Gerson passing along a message on Twitter calling me an "idiot.") With all of this in mind, I was glad to see Paul Krugman return to the general subject in his print column today, embracing a line similar to mine. In fact, Krugman seemed at least as intemperate about the issue as I was, insisting that the Republican Party "isn't interested in helping the economy as long as a Democrat is in the White House."
Mad Men vs. Math Men - Almost half of the public is either misinformed or subject to unanswered right wing narratives. Even Jon Stewart and Stephen Colbert have limits to their ability to de-program those who have been indoctrinated by conservative orthodoxy. Changing minds is more of an art than a science. Polling and focus groups are reasonably accurate at determining how people already feel, but the idea that every message to educate or convert can be mathematically tested is illusory. As David Bromwich recently wrote in New York Review of Books, “You can learn from them why the wrong ideas are funny, but you cannot learn why the wrong ideas are wrong.”
Return on investment from government research? - In 1977 or so, I was one of a number of social scientists who got a freebie from the U.S. government: use of a portable teletype machine that would allow me to send messages to other social scientists over something called “ARPAnet” – the Defense Department’s Advanced Research Projects Agency computer network. It looked sort of like the device to right. I could type out messages on a roll of paper and someone else on the “net” – whatever that was – could get my machine to type their answers back to me. The purpose of the loan was to see if scientists could put this kind of communication systems to good use, to find out if this “electronic mailing” technology would accelerate scientific collaboration and discovery. Given the expense of the device, I was to share it with the professor next door, Ron Burt. I didn’t have much to write over the ARPAnet, but Ron did, so he mainly held on to the device. Thus, I was a minuscule – and not too helpful – part of a federal project that eventuated in the “World Wide Web,” the Internet, online commerce like Amazon and Zappos, social networks like MySpace, and cute kitten videos on Youtube. Our tax dollars have paid off. But for whom?
Since When Is a Payroll Tax Holiday Fiscally Responsible? Since Alice Said So. - I have to admit that when I first heard about the payroll tax holiday part of the Rivlin-Domenici (Bipartisan Policy Center) deficit reduction package, I gasped with disbelief and said “what?!” Nearly $700 billion in deficit-financed tax cuts in one year is part of a plan to get back to fiscal sustainability? But then I saw the other tax policy components of the BPC plan, including the thorough and progressive pruning of tax expenditures and the add-on consumption-based tax, and I realized: this is certainly not a plan that shies away from the need to raise more revenue. Here are a few reasons why I think the payroll tax holiday actually adds to the level of “fiscal responsibility” encouraged by the overall BPC plan:
Deficit Hawks, Tax Chickens - Most politicians refused to get specific about the federal budget until after the election, then stood around waiting for bipartisan groups to stick their necks out. We have now heard from the chairmen of President Obama’s bipartisan deficit reduction commission and the Bipartisan Policy Center, and the feathers are flying. Both plans propose cuts in taxes on individual and corporate tax rates, counterbalanced by elimination of some big tax breaks. Both also propose taxing at least one liquid whose consumption we want to discourage: gasoline or sugary drinks. The Bipartisan Policy Center would also impose a 6.5 percent national sales tax. Both plans also propose cuts in military spending, Medicare and Social Security. A concise overview in USA Today described the response this way: “near-unanimous opposition from right and left.” While this characterization seems accurate, it elides important differences in the reasons for opposition...
Did The Rich Cause The Deficit? - Washington is inundated with deficit commissions. The country has piled up a huge debt because we cut taxes for the wealthy and borrowed to make up the difference. But everyone says we can't fix the problem by raising taxes on the rich in a recession because taxes "take money out of the economy." Is there a factual basis for this idea, or is it just one more corporate/conservative-generated piece of "conventional wisdom" bamboozlement? A brief budget history since the 80's: We cut taxes, increased military spending and cut investment in our infrastructure, and the result was huge budget deficits and slower economic growth. Then in the 90's we raised taxes on the rich and increased investment in the country and we had big budget surpluses and the economy was growing at a good clip. Then in the 00's we again cut taxes on the rich and raised military spending and cut back on investing in the country, and went back to huge deficits ("incredibly positive news'') and feeble economic growth culminating in the financial crash.
Deficit Plans Cut Marginal Tax Rates, But Raise Average Rates, for High Earners - Liberal critics of the deficit reduction and tax reform plans that surfaced over the past couple of weeks have been blasting them for the sin of cutting tax rates for the rich at the same time they’d slash spending for the rest of us. I understand why the left would object to cuts in government benefits and services, but their complaints about the tax cuts are way off base. Here is Paul Krugman writing in The New York Times about the plan offered by Erskine Bowles and Alan Simpson, the co-chairs of President Obama’s fiscal commission: “So how, exactly, did a deficit-cutting commission become a commission whose first priority is cutting tax rates, with deficit reduction literally at the bottom of the list?” First, you need to know the code. Krugman is talking about marginal tax rates—the rate you pay on the last dollar of income you earn. And it is true that both Bowles and Simpson and a second deficit panel chaired by Alice Rivlin and Pete Domenici would cut marginal tax rates for the rich (and, as many critics never quite mention, for most everyone else as well). But both plans raise average tax rates for high-earners, and by quite a bit.
Deficit Puzzle: Where's the Fair Tax? - Yesterday’s Week in Review section published a whole bunch of charts showing how Twitter users chose to cut the deficit using our deficit puzzle. In an accompanying article, I also mentioned a few options that readers and bloggers told us they wish we had included in the puzzle. Among the common reader questions I didn’t address in the article were these three:
- Why didn’t we include a gas tax? - But we did! The carbon-tax option effectively includes a gas tax. A carbon tax is broader, covering not only gasoline but also other forms of oil and other energy sources whose use produces carbon dioxide.
- Why didn’t we include the Fair Tax? - The Fair Tax, as one of the Web sites promoting it explains, would replace “all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax.” We did include a national sales tax, but a much smaller one — one that would not raise nearly enough to replace the income tax. As I mentioned in this post, political viability was one factor in our decisions about what to include.
- Why didn’t we include a financial-transactions tax? - Again, in some ways, we did. The revenue estimate for our bank tax is based on an Economic Policy Institute analysis of a proposed financial-transactions tax. It would raise about seven times more per year than the bank tax proposed by the Obama administration (and not adopted by Congress). One could imagine a combination of the various types of finance taxes that would raise more money than our option.
Schemes of the Rich and Greedy -“Let me tell you about the very rich. They are different from you and me.” The 30-year campaign of the wealthy to rig our economic system – especially the tax component – for their own benefit will accelerate with the GOP capture of the House of Representatives and the likely capture of the presidency and Senate in two years. For a foreshadowing of what is to come, a dress rehearsal has been conducted in Latvia, Iceland, Ireland and other financially strapped countries. Latvia has been burdened with the world’s most regressive tax system, while Iceland and Ireland have become record setters in tapping taxpayers to bail out financial crime syndicates, a.k.a. banks. The Irish bailout will encumber its people with perhaps as much debt as a $9 trillion bailout would be here in the United States. The Irish also are expected to also gut unemployment insurance, their minimum wage and similar social safety nets while boosting interest rates and home property taxes to pay tribute to the European creditor agencies that have “rescued” them. They will relinquish ownership of much of Ireland to their creditors, capped by ownership of government policy-making. The new banks will be owned by foreigners, who will put Ireland on a debt treadmill to transfer its taxable surplus to mainland Europe and Britain. The key to the success of the wealthy is their ability to hold the economy hostage (dependent of course on the government’s willingness to be unnecessarily held hostage). This dictates the fiscal and financial strategy of the super-rich: to create a crisis and then present their demands. I expect the U.S. Congress to be plunged into this situation next spring
Next Up: a “Flat Tax” for the Rich - All governments have to levy taxes – that is, they have to tax somebody. Naturally, the super-rich would like this tax to be shifted off their shoulders onto those who have to work for a living. This tax shift already has been underway for the past thirty years. It has doubled the proportion of the returns to wealth (interest, dividends, rents and capital gains) enjoyed by the wealthiest 1 per cent, from a reported one-third in 1979 to an estimated two-thirds of the U.S. total today. The details are much more regressive than seem at first glance. The flat tax actually would tax wage earners much more steeply than the wealthy, whose income it would largely exempt! The flat tax is supposed to fall on employment, not returns to wealth. Employees and their employers would pay the tax, as they pay today’s 12.4 per cent FICA paycheck withholding, but the flat tax would not be levied on financial and property income. The flat tax is supposed to be accompanied by a European-style regressive value-added tax (VAT). By taxing “value,” it essentially falls on labor – as in “the labor theory of value.” The tax does not fall on “empty” pricing in excess of value – what the classical economists termed “economic rent,” that element of price (and income) that has no counterpart in actual cost of production (ultimately reducible to labor) but is a pure free lunch: land rent, monopoly rent, interest and other financial fees, and insurance premiums. This economic rent is the major return to wealth. It is grounded in the finance, insurance and real estate (FIRE) sector.
The Great Tax Cut Debate - Myths and Facts - In the lame-duck Congress agenda, perhaps the most substantive debate is over whether to continue tax breaks for the rich. President Obama and most Congressional Democrats want to extend the Bush tax cuts for 98 percent of Americans, everyone making under $250,000. Republicans want to extend the tax cuts for everybody despite Bush's tax bill enacted in June 2001 to suspend the tax cuts at the end of 2010 in order to restore needed revenue. If nothing is done, everyone's taxes will rise. There is room to maneuver - Ohio's John Boehner, the House Republican leader and soon to be speaker, said he'd vote for tax breaks for the middle class without the wealthy if that's the only choice. There is consensus by both parties that the sluggish economy makes this the wrong time to raise taxes on the middle class. In the Senate, current Leader Reid said he will press for a vote.
45 'Patriotic Millionaires' Call for Bush-Era Tax Cuts to Expire - Forty-five people have signed a letter to President Obama asking him to allow the Bush-era tax cuts to expire at the end of this year. The president gets many letters like that. But what was unusual about this petition was who signed it -- including the Grammy Award-nominated DJ, MOBY, as well as Jerry Cohen of Ben-and-Jerry's-Ice-Cream fame. All the signatories happen to be millionaires -- who stand to lose financially if they get their way. "The Patriotic Millionaires for Fiscal Strength" wrote a 155-word letter saying they hope their taxes will increase beginning in January. Its text is posted at FiscalStrength.com. It says: "For the fiscal health of our nation and the well-being of our fellow citizens, we ask that you allow tax cuts on incomes over $1,000,000 to expire at the end of this year as scheduled. We make this request as loyal citizens who now or in the past earned an income of $1,000,000 per year or more."
America the Rich - Will Wilkinson who I agree with overwhelmingly on the topic at hand and in particular in this post states If we take a moment to note that the United States contains 40% of the world’s billionaires, and stop to see how America’s wealthiest people came by their fortunes, it’s easy to conclude that American institutions are unsually conducive to innovation and the creation (as opposed to the expropriation) of immense wealth. I do worry that America’s nexus of political and financial institutions in particular have made it too easy for a small class of people to hoover up massive amounts of cash while producing little of value to the rest of us. But it’s worth noting that the people at the top of the Forbes list have grown rich mostly by making useful stuff, or making or selling useful stuff more efficiently.At the same time, the fact that innovation is so richly rewarded in America surely has something to do with why America produces so much of it. I am less and less sure of this. Would Jobs had said “Aw fuck it, why boher” if the Apple turn around only made him $200 Million rather than billions.”
Warren Buffett: 'Trickle Down' Theory Hasn't Worked (VIDEO)…Billionaire Warren Buffett said that the Bush tax cuts should be allowed to expire for the richest Americans and that the "trickle down" economic theory hasn't worked. "If anything, taxes for the lower and middle class and maybe even the upper middle class should even probably be cut further," Buffett told ABC News in an interview set to air later this week. "But I think that people at the high end -- people like myself -- should be paying a lot more in taxes. We have it better than we've ever had it." "The rich are always going to say that, you know, just give us more money and we'll go out and spend more and then it will all trickle down to the rest of you. But that has not worked the last 10 years, and I hope the American public is catching on," Buffett said in the clip from ABC News' "This Week with Christiane Amanpour."
Call Their Bluff, Mr. President - Republican congressional leaders have said they will let all of the Bush tax cuts expire unless the president bows to their demand that the top 3 percent of Americans be included in any tax cut extension. Obama should call their bluff. I don't think the Republicans are so stupid that they would let all the Bush tax cuts expire if they cannot continue tax cuts for ... the affluent... But let's assume that the Republican leaders on Capitol Hill are that dumb... This is a fight that Obama can win, and win handily, if he has the backbone to stand up for the vast majority and sound tax policies, and to take on the antitax billionaires who are piling up huge gains while unemployment, debt, and fear stalk our land. A sudden reduction in take-home pay in January would seriously damage our fragile economy, not to mention provoke widespread anger and fear. The economic news would be so awful that a president half as eloquent as Obama could easily focus attention on the Republican all-or-nothing tax policies as the cause of this universal pain.
In U.S., Tax Issues Rank as Top Priority for Lame-Duck Congress - Americans are most likely to say it is important for Congress to pass legislation to keep the estate tax from increasing significantly next year and to extend the income tax cuts passed under George W. Bush before the end of the year. Just under half say it is important for Congress to extend unemployment benefits for the long-term unemployed. The Nov. 19-21 USA Today/Gallup poll asked Americans to rate the importance of six possible actions Congress may take between now and the end of the year, during its "lame duck" session prior to the new Congress' taking office at the beginning of 2011. Of these, taxes appear to be Americans' highest priority. That could be in part because tax rates would change significantly for 2011 if Congress does not act by the end of this year. The income tax cuts that were a centerpiece of the Bush economic plan are set to expire at the end of this year unless Congress acts to extend them. Most in Congress seem to support at least a temporary extension, though there is disagreement as to whether any extension should apply to upper-income Americans
How to Improve the Financial-Reform Law - Now that the Dodd-Frank financial-reform bill has become law, the real battle begins. Despite the law’s 2,000 pages—or possibly because of them—there is much ambiguity about what its eventual impact will be. The Wall Street Reform and Consumer Protection Act, as the law is officially known, grants the Federal Reserve enormous regulatory power. The Fed can now unilaterally decide that any financial institution is “systemically important”—meaning that its failure could destabilize the financial system itself—and impose any sort of regulation on it, such as requiring that it hold more equity capital, limiting the amount of short-term debt it can issue, forcing it to write up a living will, and so on. Unfortunately, the law does not adequately define what “systemically important” means. The largest banks can in theory be exempted from the classification (though this is unlikely), while the smallest hedge funds—should many of them pursue similar strategies, meaning that they might all fail simultaneously—can fall under it. The lack of a clear criterion will likely make the designation difficult to appeal; it’s really up to the feds to decide. For many institutions, the “systemically important” label could amount to a regulatory death sentence, without a fair trial.
Multitudes of lobbyists weigh in on Dodd-Frank Act - The Dodd-Frank Wall Street Reform Act has generated more work for lawyers and lobbyists since being signed into law than during even the frenzied days leading up to its passage in the House and Senate last summer. That's because a host of federal regulatory agencies are now in the process of trying to write the rules that will turn the law into reality. Work has begun on drafting 243 rules and on 67 separate studies by the likes of the Treasury Department, the Securities and Exchange Commission, the Commerce Department, the Commodities Futures Trading Commission and other regulatory agencies, "In a way, during the run-up to the legislation, while it was very active, there was a limit to how much people could really influence the statute," "The implementation phase is really industry's opportunity to influence what the final product looks like."
Market Failure Cannot Be Resolved Without Regulation - I am all for free markets and not mucking them up with government intervention. But the economic theory of regulation tells us that if there is a market failure, it cannot be resolved privately. The public sector must get involved. The most illustrative examples of such failures in U.S. financial markets were the frequent financial panics from the 1850s until the Great Depression. Those episodes taught us that when illiquid, asset holdings (e.g., loans) of the financial sector are financed short-term (e.g., by deposits), and are hit by a severe macroeconomic downturn, failures of financial firms can lead to system-wide runs on deposits. This in turn leads to a massive disruption of the system that provides credit to households and corporations. When economists bandy about the term systemic risk, this is the type of event they are referring to. The market failure here is that, although each financial institution may have been behaving optimally on an individual basis, the firm had no incentive to take into account the effect of their actions on the system as a whole.
Elizabeth Warren and HR 3808, The Notary Fraud Condonation Act of 2010 - I want to make sure this great story didn’t get lost in the Thanksgiving shuffle. Shahien Nasiripour, Huffington Post, Elizabeth Warren Helped Shoot Down Bill That Would Have Sped Foreclosures, Calendar Shows. The bill, which Adam Levitin referred to as the The Notary Fraud Condonation Act of 2010, is exactly the kind of formality legislation that could have passed Congress without anyone noticing it. If you look at some of big financial deregulations – Phil Gramm sneaking a 262 page bill, the Commodity Futures Modernization Act, onto an 11,000 page omnibus appropriation bill during the lame duck session in December 2000 – Congress voted for the change without realizing its significance. The only people who do are usually the lobbyists, and they are the only ones that can get a voice in explaining to elites what this stuff does.
GOP Takes On Consumer Agency -House Republican lawmakers fired the opening salvo Monday in a war they plan against the Consumer Financial Protection Bureau created by this year's overhaul of financial regulations. Republican Reps. Spencer Bachus of Alabama, the leading contender to take the reins of the House Financial Services Committee, and Illinois Rep. Judy Biggert, the top Republican on the panel's oversight and investigations subcommittee, sent letters to the inspectors general of both the Treasury Department and the Federal Reserve, directing them to conduct an investigation into the work being done to establish the new bureau. GOP lawmakers have also sent letters to regulators on the legal bills incurred by former executives of government-controlled mortgage finance giants Fannie Mae and Freddie Mac and the economic impact of the financial-overhaul rules being written by the Securities and Exchange Commission. The letters are the strongest signals yet of how the new House Republican majority plans to use its oversight powers to hobble elements of the Obama agenda.
GOP Wants 'Rigorous' Oversight Of Consumer Agency - In a challenge to the recent financial reform legislation, House Republicans sent letters asking inspectors to exert "rigorous" oversight on the new Consumer Financial Protection Bureau. Reps. Spencer Bachus (R-Alabama) and Judy Biggert (R-Illinois) sent letters to the inspectors general at the Treasury and the Federal Reserve, the Wall Street Journal reports. The letters, which ask for information about how the agency is being set up, are the first major example of how Republicans, who now control the House but not the Senate, plan to challenge the summer's financial reform through non-legislative means. "History indicates that the process of setting up a new government agency is extraordinarily challenging and difficult," the two lawmakers wrote, according to Bloomberg. "To date, we know very little about the activities being undertaken by the Treasury to establish the Bureau."
Republicans Criticizing Elizabeth Warren's Lack Of Transparency Had No Problems With Dick Cheney - Far be it from anyone to defend the Obama Treasury against charges that it lacks transparency. From its handling of its feckless homeowner-aid program, sold as a fix to the foreclosure crisis, to its administering of the Wall Street bailouts begun by its predecessors, this Treasury has been a maddening and combative model of misinformation, evasion and outright dishonesty. Again and again, it has sided with Wall Street over the public’s right to know, protecting Goldman Sachs and Bank of America in much the same way Dick Cheney lavished his nurturing ways on Halliburton and Exxon. But this idea that Republicans in Congress are now pursuing the public interest in challenging Warren’s authority, trying to derail her devious plot to make the world safe for people with credit cards and bank accounts, is nothing short of hilarious. It is a brazen exercise in what regular people call balls, one that must be admired for its sheer, breathtaking nature.
The continuing fight against overdraft fees - Even before the Consumer Financial Protection Bureau gets up and running, other branches of the government are fighting the good fight against excessive overdraft fees. First came the Fed, of course, which forced banks to get their customers to opt in to the fees, at least when it comes to ATM and POS transactions: no longer can they charge them automatically. But then something very odd happened. Moebs had some data on the number of bank customers who had decided to opt in: About 90 percent of overdraft revenue comes from frequent users. The Moebs study noted frequent users, those with 10 or more overdrafts in a year, almost all opted in. For all consumers, consent varied between 60 percent and 80 percent with a median of about 75 percent. This astonishes and depresses me no end. Most banking customers are relatively unharmed by overdraft fees; by far the greatest damage to consumers, and the greatest profits for banks, came from the poorer customers who could least afford it. Essentially, overdraft fees were a way for the banks to monetize the naiveté and imprudence of their least-sophisticated customers, and the Fed rule was meant to put an end to such predatory price-gouging. Evidently, it failed: Moebs reckons that banks’ total overdraft revenue will hit $38 billion in 2011, a new record high.
Let Wal-Mart be a Bank - One of the side effects of the "great recession" is damage to credit records and banking relationships for many people who get in financial trouble. Many of them will have trouble reestablishing banking relationship (that the banks caused the recession is irrelevant, of course) because the bank computers have them on a reject list, even for a savings account. Several years ago Wal-Mart starting actively talking about becoming a bank, and the banking industry and their lobbyists went all postal insane on Congress (some Wal-Marts have a Wood Forest bank branch). Truth is, for many people, the customer service counter at WM is already their de facto bank. They use it to pay bills, transfer money, cash checks, and use prepaid debit cards and gift cards for many purposes. So, since Wal-Mart is already a de facto bank for millions, why not let it be a bank? The other banks do not want the business anyway.
"Systemically Important" Nonbank Financial Firms - Interesting story in Dealbook about how large nonbank financial firms are arguing to the Financial Stability Oversight Committee (FSOC) that leverage should be the key consideration in determining which nonbank firms should be deemed "systemically important," and thus subject to increased regulation by the Fed. (Dodd-Frank requires the FSOC to determine whether nonbank financial firms should be subject to Fed supervision based on a list of factors in § 113(a)(2), the first of which is "the extent of the leverage of the company.") I guess this makes sense: banks (and broker-dealers) are naturally the most highly leveraged financial institutions, so if the FSOC determines that leverage is the most important consideration, then almost every large nonbank financial firm could point to how much less leveraged they are than the banks. Obviously asset managers and private equity funds would love it if the FSOC focused on nonbank firms' leverage.
Ending Banks’ ‘Disco Inferno’ Will Involve Errors, Haldane Says - Bank of England official Andrew Haldane said that officials will need to show humility and may make mistakes as they adopt new regulatory tools to prevent future financial crises. “The state of macro-prudential policy today has many similarities with the state of monetary policy just after the second world war,”“Data is incomplete, theory patchy, policy experience negligible. Monetary policy then was conducted by trial and error. The same will be true of macro-prudential policy now.” Haldane argued for the need for so-called macro-prudential tools to prevent crises caused by the collective behavior of banks. Former Citigroup Inc. Chief Executive Officer Charles O. “Chuck” Prince, expressed the dynamic in 2007 by saying his institution would keep lending so long as it had access to liquidity, because “as long as the music is playing, you’ve got to get up and dance.” “Chuck Prince’s disco inferno causes murder on the dance floor,” said Haldane, who is the Bank of England’s executive director for financial stability. “The case for policy action may have grown over recent decades as competition in banking, and associated externalities, have intensified.”
Top Banks Face $100 Billion Basel Shortfall: Report - The new Basel III banking rules will leave the biggest U.S. banks short of between $100 billion and $150 billion in equity capital, with 90 per cent of the shortfall concentrated in the top six banks, the Financial Times said, citing research from Barclays Capital. The newspaper said the study by the investment banking arm of Barclays Plc assumes the banks will need to hold top quality capital equal to 8 percent of their total assets -- a one point cushion against falling below the effective global minimum of 7 percent set in September by the Basel Committee on Banking Supervision. The regulations mean banks may need to increase their capital through retained earnings or issuing equity or they can cut their risk-weighted assets by selling off assets and cutting back riskier business.
SEC Economist Vacancies May Aid Legal Challenges of Dodd-Frank… The U.S. Securities and Exchange Commission has begun drafting more than 100 rules required by the Dodd-Frank Act with a vacancy atop the office that helps ensure its regulations can withstand court challenges. The SEC has been without a chief economist since James Overdahl stepped down in March, and two candidates for the job that pays as much as $230,700 a year have fallen through, three people familiar with the matter said. As she presses the search, SEC Chairman Mary Schapiro is seeking recommendations from former agency chief economists and has reversed a decision she made in 2009 that reduced the position’s prestige. The office of the chief economist, which reviews potential regulations to determine whether benefits outweigh costs, may play a pivotal role as the SEC implements the financial-industry overhaul enacted in July. Much of the SEC’s work must be completed under tight deadlines. Missteps in considering the economic consequences of its rules could leave the agency vulnerable to lawsuits, former SEC officials said.
Insider Trading: 'Steal A Lot, They Make You King' - It feels perversely quaint that the national conversation is momentarily focused on the likelihood of insider trading cases dropping on a hive of nefarious and presumably well-connected individuals -- huge cases, we are told via breathless leaks from the federal cops on the beat, cases worth -- are you sitting down? -- tens of millions of dollars. With numbers like these, one can only imagine what's up next -- a crackdown on employees who brazenly pilfered office supplies from their jobs at publicly bailed-out institutions like Bank of America, perhaps? Don't get me wrong: Insider trading is unambiguously bad. It corrodes the working of the marketplace and shortchanges honest investors. People who engage in it ought to be prosecuted and forced to suffer consequences. But put this up against the multi-trillion-dollar financial shenanigans that turn out to be pretty much legal or so maddeningly nebulous that they render prosecution impotent, and insider trading seems, well, adorable.
Authorities may be close to filing insider trader cases (Reuters) - Federal authorities may file a series of insider trading cases against hedge fund traders, consultants and Wall Street bankers within weeks, several lawyers familiar with the situation said.Prosecutors and securities regulators are likely to file a number of cases targeting the $1.7 trillion hedge fund industry rather than a single spectacular case, said the lawyers, who have knowledge of the investigations but did not want to be identified since details have not been made public.The new round of prosecutions could start in the next few weeks or early next year, the lawyers said, but it is too soon to say whether they will rival last year's arrest of Galleon Group hedge fund manager Raj Rajaratnam and nearly two-dozen others, one of the largest insider trading cases ever.The Wall Street Journal reported in its Saturday edition that federal authorities, after a three-year investigation, were preparing insider trading charges against a host of financial players including investment bankers and hedge fund managers that could surpass any previous investigations.
Insider Trading, Or Not - Kid Dynamite - I actually kinda like talking about insider trading because it's a topic that can have a lot of gray areas in it and requires some legitimate careful thought. Despite having worked on Wall Street for many years, I'm well aware that insider trading questions are frequently not cut and dry, which is why we were usually trained on the maxim "If you have to ask, don't do it." I wrote a few posts on this topic earlier, but it's come back into play with a vengeance this week, with the crackdown on "expert networks." Now, I just want to clarify one thing - the point of expert networks is to allow people who want to do real due diligence to get the information they need by talking to people who know what they are talking about! The vast majority of the information in these sessions is almost certainly perfectly legal to share. It's also entirely possible that there are people who mistakenly disclose information that they should not be disclosing and are guilty of misappropriating material non-public information - but I'd guess that they are a minuscule minority. My point is only that expert networks are positively not inherently evil. In an ideal world, this is how everyone would do research - talk to experts. Instead, we rely on greed, the desire to make a quick buck, penny stock touts, and Cramer.
Insider Selling To Buying Ratio Approaches Five Digits, Hits Record 8,280x In Week Ending November 19 - In the first full week of the latest iteration of post-QE2 POMO, which was supposed to see a dramatic ramp in stocks, the only thing we have seen is the biggest insider buying to selling imbalance since the data has been tracked. Overall, selling by S&P500 insiders was 8,279.5x times greater than buying (per Bloomberg). There were 5 insider buys for a total of $150,673, and 117 sales for a total of $1,247,500,249. There is no point to even discuss what this data point indicates.
Visualizing Booming Profits - As noted in our news article, corporate profits reached a record high last quarter, at least in nominal terms. (The Commerce Department does not have a standard way of adjusting corporate profits for inflation, in part because profits can be affected by price changes everywhere in the world.) Corporate profits have been growing for seven consecutive quarters, too, even as the unemployment rate has been stuck around 10 percent. The chart below shows annualized corporate profits, both before and after taxes (blue versus pink, respectively), since 1947:
The Real Story Behind Those "Record" Corporate Profits - Corporate profits hit a new record in the U.S. in the third quarter of this year. At least, that was the headline after the data were released Tuesday. It was kind of a meaningless distinction: In a growing economy, even a fitfully growing one, corporate profits should hit new records on a pretty regular basis. Personal income hit a new record in the third quarter, too. Indications are that inflation-adjusted corporate profits are probably still slightly below the levels of before the Great Recession (the Bureau of Economic Analysis doesn't adjust the main corporate profit number for inflation, because — given all the profits that flow in from overseas — it doesn't know what inflation rate to use). It's easier and probably more meaningful to measure profits simply as a share of the economy. You can divide by either gross domestic product or national income — I do the latter below because it's more of an apples-to-apples comparison, plus it involves downloading fewer tables from the BEA. So here's the chart, going back to 1947, of after-tax corporate profits as a share of national income (click on the image to see a larger version):
More on the Damaging Implications of Corporate Cash-Hoarding - Yves Smith - John Authers of the Financial Times provides an update on corporate cash-hoarding. In brief, it’s getting worse due to probably-warranted executive nervousness about business prospects. As Authers puts it: Corporate chieftains the world over have lots of cash, and want to hold on to it. It is a critical symptom of a new Age of Anxiety, as the corporate world tries and fails to convince itself that the global financial crisis has blown itself out. As Richard Dobbs, head of the McKinsey Global Institute, puts it: “Companies are uncertain about where the world is going to go. Until they are sure, they don’t want to pay the money out.” In their drive for efficiency, companies have gone for operating too lean. There are two elements to this tale. One syndrome is well known, the now-infamous big company short-termism, which can easily come at the expense of longer-term results. But there is a second, related, but less well recognized aspect, that of operating with fewer buffers against risk. And as we wrote some months ago, we’ve hit the point where capitalists are no longer playing their proper role. The intuitive understanding most people have of how a proper economy works is that households save and businesses invest. But that is not how it has worked for quite some time.
FDIC: Press Releases – FDIC-Insured Institutions Earned $14.5 Billion in the Third Quarter of 2010, Up from $2 Billion a Year Ago -Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $14.5 billion in the third quarter of 2010, a $12.5 billion improvement from the $2 billion the industry earned in the third quarter of 2009. This is the fifth consecutive quarter that earnings have registered a year-over-year increase."The industry continues making progress in recovering from the financial crisis. Credit performance has been improving, and we remain cautiously optimistic about the outlook," said FDIC Chairman Sheila C. Bair. "Lower provisions for loan losses are driving bank earnings by allowing a larger share of revenues to reach the bottom line."
Bank Earnings Rise over 600% in 3rd Quarter! - The title of this piece is strange but true. The FDIC released its Quarterly Banking Profile for the 3rd quarter of 2010 this morning, trumpeting $14.5 billion in profits (up from only $2 billion in the year ago period, prompting our headline). Two quotes from the release caught our attention. The third bullet point on the lead page of the document states: “Lower loan-loss provisions remain key to earnings gains.” The next was a statement by Sheila Bair in the press release: “At this point in the credit cycle it is too early for institutions to be reducing reserves without strong evidence of sustainable, improving loan performance and reduced loss rates.” As is our habit, we take a look at the QBP with a few of our favorite recurring charts.
Biting the Hand that Feeds Me - Well, I suppose now that you're here, having arrived via direct or circuitous paths connected with John Cassidy's modestly incendiary article in The New Yorker, I should probably tender some sort of lukewarm welcome. Yes, I am that self-styled Epicurean Dealmaker whom Mr. Cassidy quotes toward the end of his measured assault against my industry. I am indeed an investment banker, of more than 20 years experience, all of which I have spent advising corporate clients on mergers and acquisitions and helping them raise financing in various capital markets. I am one of the good guys, if you please, or so I contend. Since you are here, you may have many questions about who I am, what I believe, and how the hell I have the nerve to take potshots at the business which has put varying amounts of bread on my table for lo these many years. Who I am is simple, mercifully brief, and—you will readily understand, given my temerity—likely to stay that way. Mr. Cassidy is correct to identify me as a "mid-level banker." While I am senior enough to be a Managing Director, with all the experience, battle scars, and inside understanding of the workings of the sausage factory that entails, I am not a senior executive, with vast numbers of minions at my command or a huge P&L to tend. Were I so, I would not be writing this blog, since whatever spark of independent or critical thought I might possess would have been beaten out of me—or, more likely, discarded by Yours Truly out of an instinct for intellectual and vocational self-preservation—long ago.
Why Wall Street won’t get shrunk - This week’s New Yorker features 8,000 words from John Cassidy on how financiers extract rents from the real economy rather than adding real value. His article features not only The Epicurean Dealmaker, star of blog and Twitter, but also Paul Woolley, a former fund manager who now runs the Woolley Centre for the Study of Market Dysfunctionality, a man who knows how to give great quote: “I realized we were acting rationally and optimally,” he said. “The clients were acting rationally and optimally. And the outcome was a complete Horlicks.” … “Mispricing gives incorrect signals for resource allocation, and, at worst, causes stock market booms and busts,” Woolley wrote in a recent paper. “Rent capture causes the misallocation of labor and capital, transfers substantial wealth to bankers and financiers, and, at worst, induces systemic failure. Both impose social costs on their own, but in combination they create a perfect storm of wealth destruction.” Cassidy is good at focusing on excessive pay in the industry:
S&P Downgrades Additional $8.05 Billion Of CDOs On Subprime Woes - Standard & Poor's Ratings Services downgraded $8.05 billion of collateralized debt obligations, citing credit deterioration and recent downgrades in underlying U.S. subprime residential mortgage-backed securities. The ratings agency has lowered ratings on hundreds of billions of dollars worth of RMBS and CDOs in the past year as estimates for the amount of losses in them continue to rise. CDOs, which use such sliced-and-diced assets as subprime-mortgage bonds to create customized securities offering various levels of risk, were at the heart of steep write-downs at big banks and brokerage firms.
Banks warned on loan-loss provisions (Reuters) - Banks showed further signs of recovery in the third quarter, helped by the lowest level of loan-loss provisions since before the 2007-2009 financial crisis, but drew a warning from a top regulator not to go too far. Federal Deposit Insurance Corp Chairman Sheila Bair said banks should not cut reserves too quickly given the fragile economy."Many institutions came into the recent crisis with inadequate reserve levels, and they need to exercise restraint in drawing them down now," she said. Bair gave her quarterly assessment of the industry just before rushing off to attend only the second meting of a new council of regulators designed to curb undue risk-taking by financial institutions. The Financial Stability Oversight Council (FSOC) took a step on Tuesday toward bolstering supervision of certain derivatives clearinghouses and giving them access to the Federal Reserve's emergency lending facilities.
Mark-to-Make-Believe Perfumes Rotten Bank Loans: Just when it looked like U.S. banks were starting to reveal the true values of their loans, it turns out there’s an accounting loophole they can exploit to keep bad news buried. Ever since new rules took effect last year, lenders have been required to disclose the “fair value” of their loans each quarter. The results have been something of a mystery, though. Some banks show large disparities between these numbers and the loan values on their balance sheets. Others don’t. One big reason: Thanks to the loophole, they don’t all have to follow the same definition of fair value. My guess is most investors don’t know this. Often lenders’ disclosures don’t clearly explain which approach they’re using, or that companies have a choice. Unsuspecting readers of their financial statements easily could be misled.
Westwood’s Alpert Says US Home Prices Will Fall Further - Dan Alpert, managing partner at Westwood Capital, thinks that banks are under-reserving and that this will come back to haunt them when house prices fall in "the final leg down" of the housing crisis. That is the right view if you read between the lines of the last post from Annaly Capital Management. I am in full agreement here that loan loss provisioning is artificially boosting earnings (and bonuses) when more prudence would be warranted. In an environment of permanent zero (PZ), this means trouble:As the long end of the yield curve comes in due to either QE or what I have been calling permanent zero (PZ), as zero rates become a permanent state of affairs, interest margins have compressed. Rates will compress even more the longer rates stay at zero percent because the expected future rates will start to come down (see here on bootstrapping the yield curve). What’s more is that PZ will be a big problem in a Shiller double dip scenario because banks will be set up for huge loan losses despite recent under-provisioning. Meanwhile they will have no way to make it back on net interest as long rates come down in a recession while short rates remain at zero percent, killing net interest margins.
Banks Start to Dig Out From Troubled Loans - AFTER several years of decline, this is shaping up to be the year in which the problems of America’s banks began to recede. The Federal Deposit Insurance Corporation reported this week that the proportion of troubled loans on bank books fell to 9.1 percent at the end of September, down by more than a percentage point from the record 10.3 percent figure posted at the end of 2009. “The industry continues making progress in recovering from the financial crisis,” said Sheila C. Bair, the F.D.I.C. chairwoman. “Credit performance has been improving, and we remain cautiously optimistic about the outlook.” The improvement was not across the board. Loans secured by commercial real estate became a little worse, and some smaller banks that specialize in such loans have reason to be worried. The number of banks labeled as troubled by the F.D.I.C. continued to rise.
Problem banks grew to 860 in third quarter, says FDIC - The number of problem banks in the U.S. grew in the third quarter to the highest level in over 17 years, the Federal Deposit Insurance Corp. said Tuesday, even as the banking industry reported another quarter of healthy profits. Banks insured by the FDIC reported a profit of $14.5 billion in the third quarter, the agency said, well above the $2.8 billion reported in the third quarter of last year but down from the $21.6 billion earned in the second quarter of 2010. The profit increase came as loan-loss reserves declined for the first time since the fourth quarter of 2006. The number of troubled banks rose to 860 from 552 a year ago, the highest since the 928 institutions in March 1993. In the second quarter of 2010 there were 829 problematic banks. The agency’s deposit insurance fund, meanwhile, remained in deficit at negative $8 billion.
Unofficial Problem Bank list increases to 919 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Nov 26, 2010. Changes and comments from surferdude808: The FDIC released its actions for October, which contributed to a notable increase in the Unofficial Problem Bank List. This week there were 17 additions and one removal leaving the list at 919 institutions with assets of $410.2 billion. Assets declined $9.4 billion during the week, but $11.6 billion, or more than 100 percent of the drop in assets, came from the release of 2010q3 financials. Thus, the net 16 additions this week added $2.2 billion of assets. For the month, a net 25 institutions were added and the list has 376 more institutions than it did a year ago.
F.D.I.C. Says Hundreds of Small Lenders Remain at Risk - Even as the nation’s biggest banks have rapidly recovered, hundreds of small lenders remain at risk, according to the government’s latest report card on the financial industry. The Federal Deposit Insurance Corporation said on Tuesday that its list of “problem banks” — those with the highest risk of failing — had grown to 860, or nearly one in nine lenders. Most are small community banks, saddled with bad real estate loans. Not all of the banks are destined to fail, but officials reiterated that they expected the number to peak later this year. The agency has shuttered more than 149 banks in 2010, with about 41 closing in the third quarter.
Moody's: Commercial Real Estate Prices increase in September - Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index increased 4.3% in September. This reverses the sharp decline in August. Note: Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices and make the index very volatile. Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Beware of the "Real" in the title - this index is not inflation adjusted. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes). From Bloomberg: Commercial Property Prices in U.S. Increase the Most on Record, Moody Says U.S. commercial property prices rose 4.3 percent in September from the previous month ... “Each of the summer months this year recorded declines in the 3 percent to 4 percent range, followed by this month’s sizeable uptick,” It is important to remember that the number of transactions is very low and there are a large percentage of distressed sales.
Low-Coupon Mortgage Bond Yield Spreads Climb to Highest in Year - Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates rose to the highest in more than a year relative to 10-year Treasuries. Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds climbed about 0.01 percentage point to about 0.95 percentage point more than 10-year U.S. government debt as of 5 p.m. in New York, the widest spread since October 2009, according to data compiled by Bloomberg. The gap was 0.76 percentage point on Oct. 29. Prices for the securities tumbled this month relative to Treasuries even as those of so-called agency mortgage bonds backed by higher-rate loans soared. Rising borrowing costs may cause the lowest-coupon debt to prepay more slowly than investors expected by reducing consumer refinancing and home sales. That would delay the time it takes for bondholders to recoup their principal.
New Lending Guidelines From Fannie Mae - NEW lending guidelines being rolled out by Fannie Mae will make securing a mortgage a lot easier for some borrowers but harder for others. The rules, effective on Dec. 13, will allow buyers to use gifts and grants from nonprofit groups for their minimum 5 percent down payment, which is the threshold set by Fannie Mae, the government-owned company that sets lending standards and buys mortgages from lenders. (Freddie Mac is considering similar new guidelines, said Brad German, a spokesman.) Previously, borrowers had to contribute a minimum 5 percent down payment from their own funds, but additional down payment money could be from a gift (though never from a home seller). The exception was for borrowers who put 20 percent down: all that money could come as a gift. Fannie Mae is getting tougher on debt-to-income ratios, or the amount of a borrower’s gross monthly income that goes toward paying off all debts. The maximum ratio for those seeking a conventional mortgage will drop to 45 percent from 55 percent under the new guidelines. But perhaps the toughest news from Fannie Mae concerns borrowers who have gone through foreclosure. They will be excluded from obtaining a Fannie-backed loan for seven years, up from four.
Freddie Mac says to hike fees on some mortgages - Freddie Mac, the second-largest provider of funding for U.S. home mortgages, will raise some fees on loans it finances, a sign it sees greater risks even for borrowers making regular payments. Among changes, Freddie Mac will generally raise fees by 0.25 of a percentage point to 0.75 percentage point on mortgages with a combination of high loan-to-value ratios and/or lower credit scores. However, even the most creditworthy borrowers would be affected unless they put 25 percent down, up from the 20 percent that has long been the minimum equity needed to escape the need for mortgage insurance.
If a lender applies a 0.25 point fee to an interest rate, it would add less than $10 to the monthly payment on a 5 percent, 30-year loan of $200,000, it estimated.
Fannie and Freddie on Foreclosed Homes: Resume all normal sales activity - From the Palm Beach Post: Fannie Mae, Freddie Mac give the 'go-ahead' to resume sales of foreclosed homes Fannie Mae and Freddie Mac gave the go-ahead this week to restart sales of their foreclosed properties ... Brokers received memos Wednesday from the government-sponsored enterprises saying that the homes could once again be marketed and sales finalized on properties already under contract. Fannie and Freddie halted some sales of already foreclosed properties (REO: Real Estate Owned), and they also halted some foreclosures in process. The above story was on sales of REOs. On a related point, Freddie Mac reported that the serious delinquency rate increased to 3.82% in October from 3.80% 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"): 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.
Foxes Now Minding Very Big Henhouse: Foreclosure Fraud Investigations Use Law Firm Deeply Involved with Major Servicer - Yves Smith - A Birmingham, Alabama law firm, Bradley Arant Boult Cummings, has been GMAC’s national counsel on real estate servicing matters for some time (see here for examples of some of the matters it has handled).Curiously, Bradley Arant is one of the firms that GMAC engaged to conduct an “independent review” after its use of robo signing became public. Given Bradley Arant’s long-standing and extensive involvement in GMAC’s mortgage business, how can it legitimately be part of the team conducting the review? It’s incentives will be to minimize any problems, for a host of reasons, the most important being so as not to ruffle a big meal ticket and to avoid the exposure of any issues that might create liability for the firm. But if that isn’t bad enough, get a load of this, courtesy Bloomberg: The Law Offices of David J. Stern PA have drawn scrutiny in Attorney General Bill McCollum’s investigation into the foreclosure of homes based on possibly fraudulent or improperly prepared documents….Fannie Mae, which has a $3.3 trillion book of business, has hired law firm Bradley Arant Boult Cummings LLP to review Stern’s processes and operations.
Treasury’s plan to fix the mortgage mess - Felix Salmon - Barr rattled off a laundry list of reviews which are being done by various arms of the government, including what he described as an “11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks”. That information is finding its way to the state attorneys general, in their review. Meanwhile, said Barr, an alphabet soup of regulators (OTS, OCC, FDIC) is looking at various financial services companies (MERS, along with lots of different servicers, trustees, and banks); HUD is holding everybody to FHA and HAMP guidelines; and the FTC is looking at non-bank lenders. And keeping everything coordinated is the new Financial Fraud Enforcement Task Force which has been put together under the leadership of Justice’s Tom Perrelli.
Foreclosure Task Force: Worse Than Stress Tests? - Yves Smith - Felix Salmon reports on a conversation with departing assistant Treasury Secretary Michael Barr on newly-commenced reviews of the practices of bank servicers. Barr’s patter might sound convincing to the uninformed. An “11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks”! Promises to hold miscreants accountable! Banks required to fix what’s broken! Felix was skeptical, noting that the reviews were effectively a “physician, heal thyself” approach to a part of the banking business that has proven to be unable to change behavior. But how many mortgage mod programs have the Bush and Obama administrations put into place, which each time led to embarrassingly inadequate results? Here, one can easily imagine more fundamental change might be warranted. Yet in the blogger meeting with Treasury last August, when pressed about the lousy results of HAMP, Geithner took pains to point out that Treasury had little authority over servicers. So how, pray tell, can they force changes in behavior?
Ostrich Oversight? - The stagecraft was impressive. The new Financial Stability Oversight Council held its second meeting Tuesday behind a large horseshoe-shaped table in the opulent Cash Room, the Carrara-marbled heart of the Treasury Department. To Geithner’s right sat Federal Reserve Chairman Ben Bernanke; to his left, Sheila Bair, head of the Federal Deposit Insurance Corporation. But there was a jarring disconnect as soon as Geithner turned to the first order of business, the mortgage foreclosure crisis. Outgoing Assistant Treasury Secretary Michael Barr delivered a report on the “widespread and inexcusable breakdowns” in the system, saying that regulators were expected to complete their “on-site field work” by the end of the year and to draft a report by late January. What's odd is that many of the council members have already been saying for weeks that the mortgage mess posed no grave threat to the financial system. And Barr, in a short interview with National Journal after the meeting, said there was little ”evidence” thus far that the untold number of mortgages with erroneous and often fraudulent documentation could cause another financial meltdown.
Elizabeth Warren Helped Shoot Down Bill That Would Have Sped Foreclosures, Calendar Shows - Elizabeth Warren was the first senior Obama administration official to recognize the potentially incendiary impact of a bill that would have made it significantly easier for mortgage companies to foreclose on homes, and her subsequent warnings played a crucial role in persuading the President to veto the measure, according to freshly released documents and people familiar with the deliberations.The disclosure that Warren was instrumental in halting a bill that would have streamlined the foreclosure process comes as she confronts fierce criticism from Republicans on Capitol Hill for the way she was appointed to construct a new consumer financial protection bureau, and characterizations that she is inclined to take an overly punitive tack with Wall Street.A long-time advocate for greater regulation of the financial system and a prominent critic of predatory lending, Warren now finds herself at the center of an intensifying debate over the relationship between the Obama administration and the business world.
Mortgage File Missteps Extend Past Securitization, Cantor Fitzgerald Says - Banks seeking to clean up their balance sheets by selling U.S. mortgages made during the real- estate lending boom are encountering documentation problems, Cantor Fitzgerald LP said. In some cases faulty files are lowering loan prices or extending the time it takes to complete sales, said Jason Kopcak, the head of whole-loan trading at the New York-based broker. Residential and commercial mortgages owned by banks looking to sell often lack the papers required by buyers, including documents needed to foreclose, Kopcak said. “They were never looking to sell the assets,” “It wasn’t just securitizations, it was across the industry.” Bank acquisitions of other lenders are one reason for incomplete files that may take as long as nine months to resolve before loans can be sold, Kopcak said. About 2 percent of the time, complete packages can’t be created, forcing the sales to be conducted on an “as is” basis at lower prices, he said.
Countrywide Admits to Not Conveying Notes to Mortgage Securitization Trusts - Yves Smith - Testimony in a New Jersey bankruptcy court case provides proof of the scenario we’ve depicted on this blog since September, namely, that subprime originators, starting sometime in the 2004-2005 timeframe, if not earlier, stopped conveying note (the borrower IOU) to mortgage securitization trust as stipulated in the pooling and servicing agreement. Professor Adam Levitin in his testimony before the House Financial Services Committee last week described what the implications would be: If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever. The chain of title concerns stem from transactions that make assumptions about the resolution of unsettled law. If those legal issues are resolved differently, then there would be a failure of the transfer of mortgages into securitization trusts, which would cloud title to nearly every property in the United States and would create contract rescission/putback liabilities in the trillions of dollars, greatly exceeding the capital of the US’s major financial institutions….
Tom Adams: Failure to Transfer Notes a Serious Issue for Countrywide and Its Trustee - On Sunday, the New York Times reported on a recent case known as Kemp vs. Countrywide. In it, the judge in his decision states that for the mortgage loan in question in the case, a Countrywide employee testified that the mortgage note had never been delivered to the trustee, as required under the securitization documents. In addition, the Countrywide employee testified that it was the company’s practice not to deliver the notes. These facts were so extraordinary that I felt compelled to track down the underlying legal documents to the securitization to see what was going on... it appears that not only did Countrywide fail to properly convey the mortgage loan, it didn’t even bother to deliver it. Based on my review, Countrywide failed to comply with the terms of the agreement for the delivery of the mortgage notes. In addition, importantly, the trustee also failed to comply with the terms As a result, if Countrywide actually failed to deliver all of the mortgage notes to the trustee, as the judge describes in the Kemp case, then
- (1) This is a problem for the trustee proving it has standing for foreclosures or bankruptcies, as in the Kemp case,
- (2) It seems like investors in the certificates issued by CWABS 2006-8 would have a good case to pursue claims against both Countrywide and the Bank of New York, as trustee, for failing to perform as required under the agreement,
- (3) By stating that the notes had been delivered and certifying all of the notes had been received, Countrywide and the trustee seem to have misrepresented the transaction to investors, by creating the impression that the trust had secured the collateral, and
- (4) The trustee’s annual certification under Reg AB that the mortgage loan documents were safeguarded and secured may open the parties up to additional liability for misrepresentation to investors, despite the fact that three-year statute of limitations may have expired for misrepresentations made in the offering statement for the transaction.
Countrywide Never Sent Mortgages to Trust, Now With Helpful Chart - Wow. Stopforeclosurefraud finds testimony from New Jersey bankruptcy court case indicating that Countrywide was not passing along notes as part of the securitization process: Both Yves Smith and David Dayen have write-ups of this news that you should read. Why is this a big deal? It might be helpful to go back to the diagram we used for Part 1 of the Foreclosure Fraud for Dummies series that explained the chain of securitization. Let’s update it for the Countrywide situation. As you can see, at each point conveying and transferring the note plays a crucial part of creating these mortgage-backed securities (please click through for larger, easier to read, image):
The Give and Take of Liar Loans - Did you hear the one about Countrywide Financial demanding that mortgage originators buy back many of the so-called stated-income loans that it had purchased from them during the late great housing bubble? It boggles the mind. This, after all, is Countrywide we’re talking about: Countrywide, which came to represent, in the public mind, the dirtiest of all the subprime lenders. Countrywide, which handed out fraudulent stated-income loans — they were often called “liar loans” — like candy. Countrywide, whose former chief executive, the disgraced Angelo Mozilo, once actually admitted to analysts, “I believe there is a lot of fraud in stated-income loans.” This same company is now insisting that other lenders that made stated-income loans — loans that Countrywide eagerly bought to fatten its balance sheet — must repurchase them on the grounds that, golly, the loans turned out to be fraudulent. The hypocrisy is breathtaking.
Flawed Mortgage Papers May Pose Economic Risk, Panel Says…KUDOS to the Congressional Oversight Panel for publishing a thoughtful and thorough report last week on the mortgage documentation mess. It argued that, yes, in fact, these paperwork problems may have significant implications for banks, investors and the stability of the financial system. But the mortgage paperwork problems aren’t blowing away, and the panel report analyzes their implications in fine detail. It also questions the view, held by some overseeing the Treasury Department’s loan modification effort, that mortgage documentation errors have no impact on the program. Phyllis Caldwell, chief of the Treasury’s Homeownership Preservation Office, articulated the Treasury’s view in her testimony before the panel, according to the report. She said false affidavits and other processing flaws weren’t problematic for the government’s modification plan, known as the Home Affordable Modification Program or HAMP. Ted Kaufman, the former Delaware senator who leads the panel, saw it differently on Thursday. “Financial institutions all say everything is fine, but prudence would dictate that we make sure,” he said. “Not that we don’t trust the banks, but let’s take a hard look at this thing.”
The Big Fail - Last week the US Bankruptcy Court for the District of New Jersey issued an opinion in a case captioned Kemp v. Countrywide Home Loans, Inc. This case looks like the first piece of evidence in what might turn out to be the Securitization Fail. Briefly, Countrywide as servicer filed a proof of claim for a mortgage in a bankruptcy case on behalf of Bank of New York as trustee for a securitization trust. The bankruptcy court denied the claim because there was no evidence that Bank of New York ever owned the mortgage. The mortgage note had never been negotiated or delivered to Bank of New York, despite the requirement to do so in the Pooling and Servicing Agreement (PSA) that governed the securitization of the loan. That meant that Bank of New York as trustee had no interest in the loan, so the proof of claim filed on its behalf was disallowed. This opinion could turn out to be incredibly important. It provides a critical evidence for the argument that many securitization transactions simply failed to be effective because non-compliance with the terms of the transaction: failure to properly transfer the mortgage meant that the mortgages were never actually securitized. The rest of this post explains the chain of title issue in mortgage securitizations and how Kemp fits into the issue.
Lots of Smart People Couldn't Possibly F*%! Up, Could They? - In relation to the chain of title argument on securitization, I have been repeatedly confronted (often unsolicited) with an argument that there's no way there were massive screw-ups because thousands of top Wall Street legal minds were working on securitization deals. Yes, and there's no way the underwriting was lousy on the mortgages themselves because thousands were being done. I tend to get this argument from people with a large financial stake in ensuring that securitizations don't fail. This is a really bad argument, so let me just debunk it now (and hopefully never hear it again):
- First, even smart people screw up sometimes. Anyone remember Long Term Capital Management? Weren't those the "Smartest Guys in the Room?"
- Second, this isn't generally a question of deal design, which is where the brain power in securitization was applied. .
- Third, the best legal minds in the country weren't doing diligence on endorsements on securitization deals. Those people who did the diligence faced lots of time and economic pressures militating against careful diligence.
- Fourth, it's pretty easy to imagine the way an error in the diligence process could occur, even with a diligent associate. Some deals do not require a full chain of endorsements, so there could be a path dependence problem where associates got diligence instructions based on that deal template and then mindlessly repeating the process on another deal that required the full chain of endorsements.
- Fifth, there was certainly no incentive for an associate to be overly diligent. Everyone wanted the deals to happen, no one wanted to stand in the way.
Aggressive lobbying defends mortgage-trading system - The financial services industry has launched an aggressive campaign on Capitol Hill to bolster the legality of the way companies have turned mortgages into securities and traded them across the globe in recent years. The companies have opened wide their wallets for lobbying and are flying top executives to Washington for one-on-one meetings with lawmakers. The focal point of their efforts is Mortgage Electronic Registration Systems, or MERS, the controversial, privately run electronic database that is used by practically every lending institution and investment company to track the transfer of the ownership of mortgages as they are packaged into securities and traded at lightning speed around the globe. But MERS does more than just track the trading of loans. In the vast majority of mortgage documents at local courts and offices across the country, it is listed as the holder of the loans. That allows the financial industry to trade mortgages as much as it wishes without spending the time and money to refile the paperwork.
Lots of Links on the Foreclosure Fraud Crisis - Chris Hayes has really been on the foreclosure crisis over at MSNBC. Here he is, (video)substituting for Lawrence O’Donnell, interviews noted foreclosure defense attorney Bubba Grimsley about servicer abuse. I can’t embed the video, but the link is here (also here). Here he is on Rachel Maddow also interviewing Matt Taibbi on the recent foreclosure fraud from the Florida “Rocket Docket.” I’m realizing I didn’t link to Matt Taibbi’s fantastic piece on the Rocket Docket, but you should definitely read it if you haven’t. Ed from ginandtacos gives an excellent follow-up. LPS is being sued by stockholders, and David Dayen has the goods. This is a lawsuit I’ve been waiting to see, as Lender Processing Services are the people long considered to be the go-to people for getting fraudulent documents for servicers. Can’t wait to see the depositions on that one! Yves Smith has a reaction to the current response from the regulators that things are moving in the right direction. I’ll have more on this...
Why MERS Needs to be Taken Out and Shot - Yves Smith - Some readers may have been unhappy with my failure to comment on a Washington Post article late last week about a push by the mortgage registry service, MERS, to “legalize” its activities. Even though the article indicates that dollars are being thrown at lobbyists to sell the MERS version of reality in DC, their approach seemed to be so unlikely to have much impact as to not merit comment. The surprising part is the focus of the efforts: The industry is seeking legislation that would effectively affirm MERS’s legality and block any bill that would call into question what MERS does. The latter bit, trying to block anti-MERS legislation, does have a shred of logic, given that the electronic database is coming under unfavorable scrutiny. Not only has Marcy Kaptur proposed legislation that would bar Fannie and Freddie from buying mortgages registered in MERS, but even Republican senator Richard Shelby, who once owned a title insurer, roughed up MERS president R.K. Arnold in hearings earlier this week. But the idea of passing a Federal statue to solve MERS’ growing state-level problems is a huge stretch. As the latest report of the Congressional Oversight Panel noted, In the absence of more guidance from state courts, it is difficult to ascertain the impact of the use of MERS on the foreclosure process. The uncertainty is compounded by the fact that the issue is rooted in state law and lies in the hands of 50 states judges and legislatures.
Time To Shut Down MERS - Every link of the home finance food chain promoted fraud—from mortgage brokers and appraisers who conspired to overvalue property to stick buyers with overpriced homes, to many mortgage lenders which preferred the riskiest mortgages to maximize interest and fees, on to the investment bankers that packaged them into securities that they bet would blow up, and to the credit rating agencies who conspired to certify the junk as triple A. We should not forget the hedge fund managers who worked closely with investment banks like Goldman to re-securitize the very worst stuff into CDOs, sold on to Goldman’s gullible customers, nor the mortgage servicers (who not coincidentally happen to be the same biggest banks that created the toxic mortgages) who now maximize late fees as they drag out foreclosures while preventing loan modifications. But that is not the end of the story, by any means. The next shoe that dropped was the recognition that the foreclosures, themselves are fraudulent. Heck, it wasn’t enough that banks are foreclosing on the wrong debtors, sometimes with two banks competing to foreclose on the same owner–they are also foreclosing on homeowners with no mortgages, who own their homes outright! Banks were caught hiring professional fraudsters to manufacture documents, including the “wet ink” notes that are required to prove that one is actually a creditor. Mere document forgery is not bad enough as bank management lies in court—committing perjury: they claim to have misplaced documents, lost them, cannot find them, looking for them, dog ate them, accidentally sent them through the wash. You know the drill if you have ever taught a class of freshmen. Yet, all is said to be in order—Bank of America claims to have reviewed its foreclosures and could not find a single improper action. After all, the homeowners are clearly deadbeats who are not making payments. A bunch of borrower fraud by clever high school dropouts that duped the nation’s most sophisticated “big boy” banks. Can the banks prove that? Uh, no, they have not kept adequate records to prove who owes what, who owns what, and who has paid what to whom. But they are sure the docs will show up, as soon as the banksters can forge them.
50 State Attorney General Mortgage Probe Rejects Idea of Global Settlement -- Yves Smith - Bloomberg provided a useful update on the 50 state attorney generals’ investigation into mortgage abuses. One key development is that the AGs are treating investors as parties whose interests need to be considered. This appears to be at odds with the approach taken by Federal regulators, who are devising and implementing exams of various sorts which look to be purposely superficial (well, of course, if the real agenda is to change things as little as possible, you don’t need to do much outreach). Another is that the AGs have rejected the idea of a global settlement and are instead looking at a bank-by-bank approach (although presumably there will be some common elements across all deals). But there are some inconsistencies in the piece, which suggests the spin is hot and heavy. For instance, the article does the reader the disservice of repeating the canard that principal mods hurt investors, although it finally offers this comment:
Bank of America, GMAC Suspend Foreclosures in Maine - Bank of America Corp. agreed it won’t complete foreclosures in Maine and Ally Financial’s GMAC Mortgage unit said it will halt sales of foreclosed homes in the state, Maine Attorney General Janet T. Mills said. Bank of America will not “proceed to judgment on any pending matters” in Maine until it has finished an internal review of its foreclosure procedures and reported the findings to Mills, the state attorney general said today in a statement on her website. GMAC agreed to temporarily halt sales of foreclosed homes until the end of negotiations in an attempt to resolve Mills’ concerns about the company’s foreclosure procedures, according to the statement. All 50 U.S. states are investigating whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures. The probe, announced Oct. 13, came after JPMorgan Chase & Co. and GMAC said they would stop repossessions in 23 states where courts supervise home seizures and Bank of America, the largest U.S. lender, froze foreclosures nationwide.
Linda Green Robo-Signing Shows Massive Document Fraud - One reason why lawyers were so quick to see the patterns in robo-signing and mortgage documentation problems was that the same names kept cropping up on every single mortgage assignment. And the names would be listed as a Vice President and Assistant Secretary of one mortgage company in one note, and another mortgage company in another. And the handwriting on the signatures would vary wildly. And the assignment dates would be wrong. In short, a lot of problems.Take a look at the case of Linda Green. She worked for a document processing company owned by LPS, the company sued by its own stockholders yesterday. But in various documents, she is listed as an executive at Bank of America, Wells Fargo, US Bank, American Brokers Conduit, American Home Mortgage, A-Minus Mortgage Corporation, Arbor Mortgage, National City Bank Indiana, and dozens more. And if you look at the various mortgage assignments, you see that Green’s signature is almost always different. Clearly someone at the company was signing Linda Green’s name to these documents, where she was attesting to being an executive at scores of different companies.
RealtyTrac Opines On The Coming Wave Of GSE Foreclosure Buybacks: "The Final Liability Will Be Enormous" - As if an insolvent Europe was not enough (and everything seemed so good one short month ago), foreclosure expert firm RealtyTrac opines on the issue of fraudclosure and just how big the impact will be on the GSEs, and thus, on the upstream lenders who sold Fannie and Freddie MBS that had material misrepresentations. Add this to the over 240,000 REO properties held by the GSEs, and one can see why Jim Saccacio, CEO of RealtyTrac says: "Not only do the GSEs have an REO problem, they also have a guarantee problem because they promised to make good on the securities they sold to mortgage investors. The potential liability of the GSEs is a matter of debate but there's little doubt that the final total will be enormous.” Oops.
Barron’s: Putbacks to Banks Could Be $134 Billion - During the housing boom, banks underwrote over $2 trillion in subprime, alt-A and option-adjustable rate mortgages underwriting could have losses as high as $700 billion, according to Amherst Securities research. The problem is, they weren’t particularly careful in how they performed their duties. Administrative and substantive errors, missing trust documents, misleading placement memorandums, all create a potential liability for the banks. The speed over quality underwriting procedures in securitizing and processing that $2 trillion in sketchy mortgages is well over $100 billion dollars. That’s according to an article in Barron’s this weekend, citing research from Compass Point Research & Trading, looking at potential putbacks to the banks. The folks who bought this mostly AAA rated junk as mortgage-backed securities are not simply going to swallow the losses quietly. These investors –including Fannie Mae, Freddie Mac, Pacific Investment Management (PIMCO) and BlackRock (BLK) are seeking redress. Under certain circumstances, the terms of their purchase agreements allow them to “put back the mortgages to the banks.”
Can HAMP Help in Bankruptcy? - About six months ago, the government rolled out guidelines for how HAMP should work for people in bankruptcy. Given that bankruptcy's historical role as a foreclosure prevention device, it never made sense to me why from its inception, HAMP did not envision ways for homeowners in existing chapter 13 cases to seek loan modifications and for people to try to obtain a loan modification as part of their chapter 13 bankruptcy. Putting aside all of the proclamations (which I too have uttered) about HAMP's huge weaknesses, what are the particular challenges to using HAMP in bankruptcy? As an initial matter, the guidance says that people in bankruptcy "must be considered fro HAMPif the borrower, borrower's counsel, or bankruptcy trustee submits a request to the servicer." This is weird. Surely the bankruptcy trustee cannot initiate a HAMP modification without the debtor's consent--right? Or is this supposed to basically give pro se debtor's the trustee as their attorney in pursuing HAMP modifications? And what is the incentive for chapter 13 trustee to do this? Ostensibly, it might be that a lowered mortgage payment frees up more income that a debtor can devote to unsecured creditors, but if this is all a shell game among creditors, why would a debtor consent?
Florida Kangaroo Foreclosure Courts: More Evidence of Favoritism Towards Banks - Yves Smith - Lisa Epstein of Foreclosure Hamlet sent an eye-opening letter from Christopher Meister, who ran for the sheriff of Lee County, Florida as an independent and lost. As much as I’ve read plenty of reports of dubious judicial behavior in Florida, I still find myself appalled when new stories crop up. The Meister letter provides specific examples of judicial misconduct. One involves a judge conferring openly with a bank lawyer on cases in which the lawyer had no involvement. I urge you read this letter in its entirety. Christian Meister Letter on Judicial Improprieties
Second-Mortgage Standoffs Stand in Way of Short Sales - Over the past year, real-estate agents, lenders and federal policy makers have pointed to short sales as one way to revive moribund housing markets while helping troubled borrowers avoid foreclosure. But for homeowners that took out second mortgages during the boom, getting a short sale approved is proving to be a nightmare. Most first mortgages, like Mr. Trujillo's, are guaranteed by government-controlled mortgage giants Fannie Mae and Freddie Mac or held by other investors in mortgage securities. Second mortgages and other junior liens are typically owned by banks and credit unions. Banks are reluctant to write down second mortgages because many are still current, even if the borrowers owe more than the value of their homes. They may also be able to pursue borrowers' assets after foreclosure.
Two Cords of Wood – An Intimate Look at Unnecessary Foreclosure - Back in September, I was asked to give some unusual advice to a client. This woman, a resident of rural Northwestern Maine, wanted to know if she should buy the two cords of wood that she needed to heat her $48,000 home for the winter. I had previously told her that my bag of legal tricks was empty, and that I could not stop KeyBank from completing a foreclosure of its $28,000 second mortgage on her home. She was having trouble accepting the fact that it would really evict her, since she owed $50,000 on her first mortgage to a local bank, a loan on which she was current in her payments, which meant that KeyBank could recover nothing by foreclosing on its second mortgage. I had to tell my client that she should not buy the firewood, as I knew that it was planning an eviction within days. I had managed to penetrate the executive offices in Cleveland, Ohio, telling the “Executive Client Relations” person in the “Office of the President” how foolish it was to evict this woman, who had reduced income but a real willingness to devote as much of that as she could to continued second mortgage payments. The letter that I received in response told me how much KeyBank “valued” this woman as a client, how it “is committed to providing her with excellent service,” and how it regrets “any inconvenience or frustration your client may have experienced.” The letter closed by telling me, “[W]e appreciate the opportunity to respond to your concerns with quality and integrity.”
LPS: Over 4.3 million loans 90+ days or in foreclosure - LPS Applied Analytics released their October Mortgage Performance data today. According to LPS:
• The average number of days delinquent for loans in foreclosure is a record 492 days
• Over 4.3 million loans are 90 days or more delinquent or in foreclosure
• Foreclosure sales plummeted by 35% in October (as a result of the widespread moratoria)
• Nearly 20% of loans that have been delinquent more than two years are still not in foreclosure
This graph provided by LPS Applied Analytics shows the percent delinquent, percent in foreclosure, and total non-current mortgages. The percent in the foreclosure process is trending up because of the foreclosure moratoriums. According to LPS, 9.29 percent of mortgages are delinquent, and another 3.92 are in the foreclosure process for a total of 13.20 percent.It breaks down as:
• 2.72 million loans less than 90 days delinquent.
• 2.24 million loans 90+ days delinquent.
• 2.09 million loans in foreclosure process.
Number of the Week: 492 Days From Default to Foreclosure - 492: The number of days since the average borrower in foreclosure last made a mortgage payment. Banks can’t foreclose fast enough to keep up with all the people defaulting on their mortgage loans. That’s a problem, because it could make stiffing the bank even more attractive to struggling borrowers. In recent months, the number of borrowers entering severe delinquency — meaning they missed their third monthly mortgage payment — has been on the decline, falling to about 700,000 in October, according to mortgage-data provider LPS Applied Analytics. But it’s still more than double the number of foreclosure processes started. As a result, banks are taking progressively longer to foreclose. The average borrower in the foreclosure process hadn’t made a payment in 492 days as of the end of October, according to LPS. That compares to 382 days a year ago and a low of 244 days in August 2007. In other words, people who default on their mortgages can reasonably expect, on average, to stay in their homes rent-free more than 16 months. In some states such as New York and Florida, the number is closer to 20 months.
Home Sales Fell 2.2% in October - Sales of previously owned homes fell in October amid weak demand and concerns about the foreclosure process, putting sales for 2010 on pace to close at their lowest level in 13 years. Existing-home sales declined to a seasonally adjusted annual rate of 4.43 million units last month, down 2.2% from September, the National Association of Realtors said Tuesday. The figures provide the first sign of the impact that suspensions of foreclosed property sales have had on the housing market. Several banks halted those sales in late September to address questions about the integrity of the foreclosure process.
October Existing Home Sales: 4.43 million SAAR, 10.5 months of supply - The NAR reports: Existing-Home Sales Decline in October Following Two Monthly Gains Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, declined 2.2 percent to a seasonally adjusted annual rate of 4.43 million in October from 4.53 million in September, and are 25.9 percent below the 5.98 million-unit level in October 2009 when sales were surging prior to the initial deadline for the first-time buyer tax credit. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in October 2010 (4.43 million SAAR) were 2.2% lower than last month, and were 25.9% lower than October 2009. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.86 million in October from 4.00 million in September. The all time record high was 4.58 million homes for sale in July 2008. Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory peaking in the summer and declining in the fall.
Sales of U.S. Existing Homes Fell as Moratoriums Held Back Market - Sales of existing homes probably dropped in October for the first time in three months as foreclosure moratoriums disrupted the U.S. housing market, economists said before a report today. Purchases fell to a 4.48 million annual rate, down 1.1 percent from September, according to the median of 71 estimates in a Bloomberg News survey. Another report may show the U.S. economy expanded at a revised 2.4 percent annual rate in the third quarter, up from last month’s estimate of 2 percent. An overhang of distressed properties and a jobless rate near 10 percent may restrain home sales, while concerns over faulty foreclosure proceedings threaten to delay the mending process even more. Minutes from the Federal Reserve’s meeting this month may help explain why policy makers decided to supply the world’s largest economy with an additional $600 billion in monetary stimulus. “There’s still a large amount of properties on bank balance sheets,”
New Home Sales decline in October - The Census Bureau reports New Home Sales in October were at a seasonally adjusted annual rate (SAAR) of 283 thousand. This is down from 308 thousand in September. The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted or annualized). Note the Red columns for 2010. In October 2010, 23 thousand new homes were sold (NSA). This is a new record low for October. The previous record low for the month of October was 29 thousand in 1981; the record high was 105 thousand in October 2005. The second graph shows New Home Sales vs. recessions for the last 47 years. The dashed line is the current sales rate.And another long term graph - this one for New Home Months of Supply. Months of supply increased to 8.6 in October from 7.9 in September. The all time record was 12.4 months of supply in January 2009. This is still high (less than 6 months supply is normal).
New-Home Sales Fall 8.1% in October -- Sales of newly built homes unexpectedly fell 8.1% in October to a seasonally adjusted annual rate of 283,000 the Commerce Department said Wednesday morning. The figure came in below expectations for a rate of 314,000 after a rate of 307,000 in September. The government report estimated that, at the current sales pace, there was an 8.6-month supply of new homes on the market at the end of October, up from a 7.9-month supply at the end of September. There were a total of 202,000 new homes available for purchase during October, the lowest level since June of 1968. The median sales price of a new home fell a record 13.9% in the month to $194,900, the lowest level since 2003.
Housing Drop: More Bad News for the Economy - It might be time to bring back the home buyer tax credit. On Wednesday, a day after the National Association of Realtors said sales of existing homes dropped 2.2% in October, the Census Bureau said that new home sales had dropped a full 80% below their peak. Just 23,000 new homes were sold last month. That was the worst October for housing sales on record. The previous low was set 29 years ago in October 1981, when 29,000 homes were sold. In 2005, 105,000 houses sold in October of that year, or more than 4 times the number sold last month. So how big a drag will housing be on the economy in 2011? Potentially a big one. Here's why: The construction industry, which is driven by new home sales, has been a major source of unemployment in the current recession. For a sense at how bad the industry has been hit consider this: While the construction industry typically employs about 5% of all workers, it currently makes up about 10% of all those who are now unemployed. In October, 1.4 million construction workers were without jobs. What's more, the unemployment rate among construction workers was the highest by far of any industry the Bureau of Labor Statistics tracks. The unemployment rate among construction worker is 17.3%.
Existing Home Inventory increases 8.4% Year-over-Year - Earlier the NAR released the existing home sales data for October; 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 from September 2010 to October 2010, inventory increased 8.4% YoY in October. This is the largest YoY increase in inventory since early 2008. The year-over-year increase in inventory is especially bad news because the reported inventory very high (3.864 million), and the 10.5 months of supply in October is far above normal. By request - the second graph shows existing home sales Not Seasonally Adjusted (NSA). The red columns are for 2010. Sales for the last four months are significantly below the previous years, and sales will probably be well weak for the remainder of 2010.
Shadow Inventory - The term "shadow inventory" is used in many different ways. My definition is: housing units that are not currently listed on the market, but will probably be listed soon. This includes: REOs, foreclosures in process and some percentage of seriously delinquent loans. This is the number CoreLogic is estimating.Unlisted new high rise condos. This also includes high rise condos that were converted to rental units with the intention of eventually selling the units. Note: these properties are not included in the new home inventory report and are not included in the CoreLogic report. These is no data for the number of units nationwide, and these have to be counted on a city by city basis (Las Vegas and Miami have many of these units). Homeowners waiting for a better market. This includes the "accidental landlords" who rented their properties and who will try to sell as soon as the market improves after the current tenant's lease expires. I expect CoreLogic to report 1.5 to 2.0 million units of pending supply, and that will put their combined months-of-supply metric in the stratosphere. Although the CoreLogic report is useful in estimating future supply, I think it is the visible supply that impacts prices.
Shadow Inventory Rises 10 Percent - The so-called shadow inventory of residential property increased 10 percent year-over-year, according to a report released today by CoreLogic. As of August, there were 2.1 million units, representing eights month of supply, of shadow inventory, up from 1.9 million units, or five months of a supply, a year ago. “With visible inventory remaining flat at 4.2 million units, the change in shadow inventory increased the total supply of unsold inventory by 3 percent,” the company said in a release. CoreLogic estimates its shadow inventory, sometimes referred to as pending supply, by adding up properties that are seriously delinquent (90 days or more behind in mortgage payments), in foreclosure, or owned by mortgage lenders but not currently listed on multiple listing services (MLSs). These properties typically don’t show up in official numbers released by the Census Bureau and other outlets, meaning housing supply is worse than it looks.
CoreLogic: Shadow Inventory Jumps More Than 10% in One Year - The industry’s ominous shadow inventory of REOs that have yet to hit the market and soon-to-be-REOs increased by more than 10 percent between August 2009 and August 2010, according to new figures released by CoreLogic Monday. CoreLogic defines shadow inventory as the number of properties that are seriously delinquent (90 days or more), in foreclosure, and bank-owned that are not currently listed for sale on multiple listing services (MLSs). Based on the company’s calculations, the shadow supply of residential properties reached 2.1 million units in August of this year – a volume that will take eight months to clear at today’s sluggish pace of home sales. That’s up from CoreLogic’s estimates a year ago of 1.9 million units, or a five-months’ supply when sales activity was stronger. Mark Fleming, chief economist for CoreLogic, said, “The weak demand for housing is significantly increasing the risk of further price declines in the housing market. This is being exacerbated by a significant and growing shadow inventory that is likely to persist for some time due to the highly extended time-to-liquidation that servicers are currently experiencing.”
CoreLogic: Shadow Housing Inventory pushes total unsold inventory to 6.3 million units - From CoreLogic: Shadow Inventory Jumps More Than 10 Percent in One Year, Pushing Total Unsold Inventory to 6.3 Million Units. This graph from CoreLogic shows the breakdown of "shadow inventory" by category. For this report, CoreLogic estimates the number of 90+ day delinquencies, foreclosures and REOs not currently listed for sale. Obviously if a house is listed for sale, it is already included in the "visible supply" and cannot be counted as shadow inventory. The total visible and shadow inventory was 6.3 million units in August, up from 6.1 million a year ago. The total months’ supply of unsold homes was 23 months in August, up from 17 months a year ago. Although it can vary and it depends on the market and real estate cycle, typically a reading of six to seven months is considered normal so the current total months’ supply is roughly three times the normal rate. The second graph from CoreLogic shows the total visible and pending inventory. Even though the visible inventory has declined slightly from the peak in 2007, the total inventory is at close to an all time high of 6.3 million units. Note: The term "shadow inventory" is used in many different ways.
Housing Supply: What do all the numbers mean? (6 charts) We are constantly bombarded with housing supply numbers: 3.86 million existing homes for sale, 10.5 month-of-supply, 2.1 million "pending sales", 7 million mortgages delinquent. NY Fed president William Dudley said "We estimate that there are roughly 3 million vacant housing units more than usual", and other sources have mentioned there are close to 19 million vacant housing units in the U.S.! What does it all mean? The number to start with is the "visible supply" reported monthly from the National Association of Realtors (NAR). At the end of October, the NAR reported there were 3.86 million homes for sale. CoreLogic reports the number of distress sales in their monthly US Housing and Mortgage Trends. . So both the level of visible inventory and the percentage of distressed sales is elevated - and that puts downward pressure on house prices. The next number is the "pending sales" of 2.1 million units. This was reported by CoreLogic this week. Some analyst have called the number of REOs and total delinquent loans as the "shadow inventory". This is incorrect The key numbers to follow for the housing market are 1) existing home inventory, 2) number of delinquent loans, and 3) the excess vacant inventory.
Moody's: Home prices to fall until mid-2011 - Moody's Analytics on Tuesday forecast that housing prices will decline though the middle of next year, with some areas harder hit than others. The worst declines will occur in markets with the largest supply of bank-owned homes like Las Vegas, Fort Lauderdale, Fla., and Riverside, Calif. The more moderate drops will come from Austin, Texas, and Albany, N.Y., where home prices have been more stable than the national average, Moody's said. Moody's Analytics expects the number of bank-owned homes will peak early next year at 971,000, an increase of 16 percent over 2010.
Delinquent borrowers would rather rent: Fannie Mae survey… Half of homeowners who are delinquent on their mortgages would rather rent than buy a home, according to Fannie Mae's third quarter national housing survey. This is the first time the rental preference has exceeded the percentage of people who would rather buy. Fifty percent said they would rather rent, up 10% from January, while 45% said they would buy a home, down 11% since January. According to the quarterly survey, 68% of Americans think it's a good time to buy a home, down 2% from the last survey conducted in June, while 29% of Americans think it's a bad time to buy a home, up 3% from June. Eighty-five percent of respondents said they think it is a bad time to sell a home, up 2% from June. “Consumer attitudes toward buying a home are more negative since last quarter,” said Doug Duncan, vice president and chief economist at Fannie Mae. “Our survey shows that Americans’ declining optimism about housing and their personal finances is reinforcing increasingly realistic attitudes toward owning and renting.”
Mortgage Borrowers Deleverage - The housing bubble that preceded the last recession left many borrowers overleveraged once the recession struck. According to the Board of Governors, from March of 2000 to September of 2007, the homeowner mortgage obligation ratio, which measures the outstanding value of mortgage payments as a percentage of disposable income, grew from 8.6 percent to 11.3 percent. However, since the peak of the last business cycle in 2007, consumers have begun to deleverage their balance sheets. This trend is evident in the housing market where consumers have been reducing their exposure to mortgage debt by financing more home purchases with cash and reducing both the loan-to-value ratios and the term to maturity of their mortgage debt.
The Just-in-Time Consumer - The Great Depression replaced a spendthrift culture with a generation of frugal savers. The recent recession, too, has left in its wake a deeply changed shopper: the just-in-time consumer.For over two decades, Americans bought big, bought more and stocked up, confident that bulk shopping, often on credit, provided the best value for their money. But the long recession—with its high unemployment, plummeting home values and depleted savings accounts—altered the way many people think about the future. Manufacturers and retailers report that people are buying less, more frequently, and are determined to keep cash on hand.
Comments on October Personal Income and Outlays Report - The BEA released the Personal Income and Outlays report for October this morning. Personal income increased $57.6 billion, or 0.5 percent ... Personal consumption expenditures (PCE) increased $44.0 billion, or 0.4 percent. Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in October, compared with an increaseof 0.2 percent in September.The following graph shows real Personal Consumption Expenditures (PCE) through October (2005 dollars). The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter. Even with no growth in November and December, PCE growth will be close to 2% in Q4, and it will probably be closer to 3% (annualized growth rate).Also personal income less transfer payments increased sharply in October. This increased to $9,285.7 billion (SAAR, 2005 dollars) from $9,252.2 billion in September. This measure had stalled out over the summer. This graph shows real personal income less transfer payments as a percent of the previous peak. This has been slow to recover - and is still 4.7% below the previous peak - but is recovering again.
Effects of the Financial Crisis and Great Recession on American Households - In this paper we present evidence from high-frequency data collections dedicated to tracking the effects of the financial crisis and great recession on American households. These data come from surveys that we conducted in the American Life Panel – an Internet survey run by RAND Labor and Population. The first survey was fielded at the beginning of November 2008, immediately following the large declines in the stock market of September and October 2008. The next survey followed three months later in February 2009. Since May 2009 we have collected monthly data on the same households. This paper shows the levels and trends of many of these data which summarize the experience and expectations of households during the recession. We find that the effects of the recession are widespread: between November 2008 and April 2010 about 39 percent of households had either been unemployed, had negative equity in their house or had been in arrears in their house payments. Reductions in spending were common especially following unemployment. On average expectations about stock market prices and housing prices are pessimistic, particularly long-run expectations. Among workers, expectations about becoming unemployed have recovered somewhat from their low point in May 2009 but still remain high. Overall the data suggest that households are not optimistic about their economic futures.
Number of Americans Ignoring Their Finances Doubled in 2010 - A survey released today by Javelin Strategy & Research, which serves financial institutions, found in August that nearly one in five Americans doesn't monitor or manage their personal finances. That rate is double what it was just a year ago. Despite the fact the recession has made it more important than ever to carefully track our money, when it comes to personal finances, 19% of Americans stuck their head in the sand. A year before, another survey had the figure at just 8%. More anxiety-induced news: The percentage of Americans who say they sometimes log onto their checking account balances with their banks' websites dropped to 46%, down 13 points from 59% a year ago. Even those who track their money by pen and paper dropped, from 50% to 46%. "It's a natural human reaction to stress: 'Maybe if I don't look at it, it will go away.'" "I think you have fewer people checking their finances online because they don't like what they're seeing. 'I'm going to be a financial sleepwalker. I'm not going to look.'"
Bankruptcy Comes With Social Stigma - Bankruptcy is still something of a scarlet letter even though a lot more Americans are seeking to shed their debts in court. Some $588 billion in consumer loans were wiped out in the past two years — both in and out of bankruptcy — but the stigma of shedding debts in bankruptcy remains strong while the stigma from walking away from a mortgage appears to have eased. A Society for Human Resource Management Survey showed a quarter of employers said a bankruptcy would make them unlikely to extend a job offer to a candidate. Just 11% said the same about a foreclosure. One reason for that is that bankruptcy is associated with profligacy, with over-spending and over-borrowing. A bankruptcy filing details how much the debtor owes and to whom, but not what the money was spent on, whether it was groceries or flat-screen TVs.
Winning the Class War - The class war that no one wants to talk about continues unabated. Even as millions of out-of-work and otherwise struggling Americans are tightening their belts for the holidays, the nation’s elite are lacing up their dancing shoes and partying like royalty as the millions and billions keep rolling in. Recessions are for the little people, not for the corporate chiefs and the titans of Wall Street who are at the heart of the American aristocracy. They have waged economic warfare against everybody else and are winning big time. The corporate fat cats are becoming alarmingly rotund. Their profits have surged over the past seven quarters at a pace that is among the fastest ever seen, and they can barely contain their glee. On the same day that The Times ran its article about the third-quarter surge in profits, it ran a piece on the front page that carried the headline: “With a Swagger, Wallets Out, Wall Street Dares to Celebrate.”
Hiding From Reality — Retail Sales And Inflation - According to CareerBuilder's latest survey, 77% of American households are living paycheck-to-paycheck. Graph courtesy of Money Musings. Also look at my post Living Paycheck To Paycheck. It follows that any rise in retail prices for food, energy, clothing, etc. will hit most households very hard. In the QE2/inflation/deflation debate, this CareerBuilder data is never cited. Never. Here are the latest retail sales data from the Census Bureau. The data are not inflation-adjusted. Looking at unadjusted retail sales, you would think Happy Days Are Here Again. Sales are at about the same level as they were at the beginning of 2007. Here's the real (inflation-adjusted) retail sales data. The data are "deflated" using the government's Consumer Price Index (CPI). Once retail and food service sales are adjusted for inflation, even when deflated using the suspect CPI, sales are nowhere near where they were at the beginning of 2007 (second graph above). Apparently, Happy Days Are Not Here Again, at least not yet.
Will Congress Let Jobless Benefits Expire Four Weeks Before Christmas? - Voters clearly want lawmakers to ease the nation's unemployment pain, but a sharply divided Congress is still balking at extending jobless benefits for those out of work a long time. Unless Congress acts by Nov. 30, an estimated 2 million people slated to receive extended benefits will not get them on time, if ever. And Congress is taking this week (Nov. 22-26) off for a Thanksgiving recess. Congress reconvenes on Nov. 29. If lawmakers don't extend the benefits, it will be the third time this year that they will have missed a deadline to do so, even though the nation's unemployment rate, at 9.6 percent, hasn't budged since May. Earlier this year, after Congress failed to extend benefits before deadlines, jobless workers got retroactive benefits once legislation was passed.
Weekly Initial Unemployment Claims decrease sharply - The DOL reports on weekly unemployment insurance claims: In the week ending Nov. 20, the advance figure for seasonally adjusted initial claims was 407,000, a decrease of 34,000 from the previous week's revised figure of 441,000. The 4-week moving average was 436,000, a decrease of 7,500 from the previous week's revised average of 443,500. This graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week by 7,500 to 436,000. This is the lowest level for the 4-week moving average since August 2008. This decline is good news.
Larger U.S. Companies Are Hiring; Smallest Are Not - Gallup finds that larger companies are hiring more workers while the smallest businesses are shedding jobs. More than 4 in 10 employees (42%) at workplaces with at least 1,000 employees reported during the week ending Nov. 14 that their company was hiring, while 22% said their employer was letting people go. At the other extreme, 9% of workers in businesses with fewer than 10 employees said their employer was hiring, and 16% said their employer was letting people go. This Gallup question about company size is new, so it is unclear whether this pattern is a continuation of, or a change from, the past.
ATA: Truck Tonnage Index increases in October - From the American Trucking Association: ATA Truck Tonnage Index Rose 0.8 Percent in October The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index rose 0.8 percent in October after increasing a revised 1.8 percent in September. The latest gain put the SA index at 109.7 (2000=100) in October from 108.9 in September.This graph from the ATA shows the Truck Tonnage Index since Jan 2006. The line is added to show the index has been mostly moving sideways this year.
U.S. Factory Orders Decline - Jobless Filings Drop - A string of reports released on Wednesday offered the latest look at an economy struggling to build some momentum. The Labor Department reported that weekly unemployment claims dropped by 34,000 last week to a seasonally adjusted 407,000. Wall Street analysts expected a much smaller drop. That was the lowest level since July 2008 and offered a hopeful sign that improvement in the job market is accelerating. Applications for jobless aid need to stay below 425,000 for several weeks to signal that hiring is accelerating, economists say. For the first 10 months of this year, claims mostly fluctuated around 450,000 until they began dropping in late October. They fell steadily last year from a peak of 651,000 in March 2009. While unemployment filings showed some improvement, the latest report on factory orders raised concerns about the manufacturing sector, which had been a strong point for the economy. The Commerce Department said that orders for durable goods dropped 3.3 percent in October, the largest decline in 21 months. Even excluding the volatile transportation sector, orders were down 2.7 percent, the biggest drop in this area since March 2009.
Retrained for green jobs, but still waiting on work - Anton said the classes, funded with a $2.9 million federal grant to Ocala's workforce development organization, have taught him a lot. He's learned how to apply Ohm's law, how to solder tiny components on circuit boards and how to disassemble rather than demolish a building. The only problem is that his new skills have not resulted in a single job offer. "I think I have put in 200 applications," said Anton, who exhausted his unemployment benefits months ago and now relies on food stamps and his dwindling savings to survive. "I'm long past the point where I need some regular income." With nearly 15 million Americans out of work and the unemployment rate hovering above 9 percent for 18 consecutive months, policymakers desperate to stoke job creation have bet heavily on green energy. The Obama administration channeled more than $90 billion from the $814 billion economic stimulus bill into clean energy technology, confident that the investment would grow into the economy's next big thing. But the huge federal investment has run headlong into the stubborn reality that the market for renewable energy products - and workers - remains in its infancy.
Firms See Long-Sought Goal in Sight: Major Pay Cuts - The outlines of a massive new structural downshift in wages are emerging more and more clearly. The largest wage-cutting wave since the Great Depression has already been sweeping the United States for the last couple years in response to the Great Recession. At small firms, many of these pay cuts have been viewed as a temporary means of reducing costs until the recession is fully ended. The pervasiveness of this trend undoubtedly leads much of the public to assume large corporations are merely seeking the same temporary relief as small firms when they demand concessions in high-profile negotiations. The workers' pay will surely rise back to previous levels when the situation improves for the company, as occurred during the 1980s, right? Not this time around.The recession camouflages a far more insidious and long-lasting corporate strategy: Instead of temporary pay cuts to get through a few tough months, major corporations have something very, very different in mind.
Town May Seize Factory to Prevent Dismantling by Vengeful Owner - Yves Smith - Huffington Post, via its daily political newsletter Huffington Post Hill, does some additional reporting on the very peculiar case of the battle between Esterline Technologies, its unions, and now the town of Tauton, Mass. Esterline is in the process of shuttering its Tauton manufacturing operation, Haskon Aerospace, which specialized silicone-rubber seals and gaskets for military planes and the airline industry. Even though the plant has always been profitable, Esterline is moving production to non-union operations in Mexico and California. Here’s where it gets ugly. Esterline had given the union, the United Electrical, Radio and Machine Workers union, the right of first refusal to buy the facility and operate it itself. But the company decided to renege on the deal when the union had to insist that the company obey Massachusetts law and pay for three months of medical care after employees were let go. Esterline started dealing in bad faith, and said it would cut the already-agreed-upon severance package by $143,000. That’s not kosher; it’s called “regressive bargaining” and the unions have filed charges with the National Labor Relations Board.
Can Energy Retrofit Loans Bring Wonderful Life to Economy? - Much as in the Pottersville scene from the movie, hopelessness and poverty are now spreading across America. The most inclusive U.6 jobless rate is at 17%, the alternate measure calculated by Shadow Government Statistics shows there are 22.5% jobless, ominously close to the estimated Great Depression peak of 25% unemployment. One in eight Americans are now on food stamps, the highest percentage since records began in 1969. While Congress debates extending tax cuts for the wealthiest Americans, unemployment benefits will expire for millions who still have no hope of finding work. Most families and businesses are simply "Maxed Out" and at the limits of their budgets. To create jobs, Americans must spend money, but that money has to come from somewhere. Energy saving and renewable energy projects can more than pay for themselves by cutting the energy expenditures of households and businesses. Though they take up-front dollars to implement, a steady monthly stream of utility bill savings pays off the cost of the project.
News from EPI: Jobless rates for American Indians have risen sharply during recession -A new Economic Policy Institute Issue Brief, Different Race, Different Recession: American Indian Unemployment in 2010, finds that the national unemployment rate for American Indians has increased 7.7 percentage points, to 15.2%, since the beginning of the recession. This increase is 1.6 times the size of that for white workers over the same time period. The report, by EPI researcher Algernon Austin, also finds that joblessness among American Indians is characterized by extreme regional disparities. Alaska Natives in Alaska and American Indians in the Midwest had the highest rates of unemployment in the first half of 2010.
5 Myths about hunger in America - 1 Hunger is supposed to happen in other places - in distant countries where droughts or storms or famine compel us to donate money and oblige our government to send relief workers and food aid. In reality, hunger also hits much closer to home. According to a new report by the U.S. Department of Agriculture, 17.4 million American families - almost 15 percent of U.S. households - are now "food insecure," an almost 30 percent increase since 2006. This means that, during any given month, they will be out of money, out of food, and forced to miss meals or seek assistance to feed themselves. Even those who get three meals a day may be malnourished. Americans increasingly eat cheap, sugary foods whose production is underwritten by government subsidies for the corn and dairy industries.
Diary of a Recession Baby: Thanksgiving is here, and so is hunger - This Thanksgiving I’m grateful to be living in Washington. It’s a fascinating city, a place filled with contrasts. The earnest and the devious meet here. The powerful walk the same halls as swarms of wannabees. However, the District of Columbia is also one of the clearest examples in the nation of massive inequality. While my family has been happy here, as we approach the holidays many of our neighbors are making do with far fewer resources. At least in my family, now is the time to think about our blessings and focus on how to help our neighbors. In the last few years in Washington, an average of about 13% of households have been “food insecure,” according to government statistics, meaning that at some point during the year those folks had difficulty providing enough food for all their family members. The picture is worse in the United States overall. The percentage of food insecure households rose to a record high 14.7% in 2009, although it was up only slightly from 14.6% the year before. The data go back to 1995.
Lies, Damn Lies, and Statistics. - The USDA’s Economic Research Service put out its latest figures for food insecurity hunger in the U.S. yesterday. From the press release: In more than a third of those households that reported difficulty in providing enough food, at least one member did not get enough to eat at some time during the year and normal eating patterns were disrupted due to limited resources. Think about that for a second. Of the roughly 17.4 million hungry households, at least 6.8 million had one person whose “food intake…was reduced and their eating patterns were disrupted at times during the year because the household lacked money and other resources for food.” We are the richest country in the world, at least 6.8 million of us can’t afford to eat on a regular basis. You’ll hear a lot of talk about access to healthy food, but the fact is that the U.S. hasn’t quite figured out basic access to food of any sort for an alarming number of people. The report also states that food insecurity (to use the USDA terminology, which I hate) is “substantially higher than the national average… among Black and Hispanic households.” Nearly 25% of all black households are food insecure as well as almost 27% of Hispanic households AND over 21% of households with kids under 18. (Puts that whole Child Nutrition Reauthorization fight in context, doesn’t it?)
Holiday hunger - This Thanksgiving, 42.4 million Americans – 13.7% of the population -- are receiving benefits from the Supplemental Nutrition Assistance (SNAP) program, more commonly known as Food Stamps. The number is up from 36.2 million last year and has risen by 15 million since the start of the recession in December 2007. People with limited assets are typically eligible for SNAP if they earn a poverty-level income. There are many reasons for the increase in the number of SNAP recipients. First, the American Recovery and Reinvestment Act passed last year widened eligibility for Supplemental Nutritional Assistance so that more adults without dependents could qualify. The Recovery Act also increased benefits, providing additional relief to some of the country’s poor individuals and families, while at the same time serving as an effective economic stimulus. The assistance provided by SNAP is like a direct cash transfer, which recipients spend quickly, returning to their local economies.
A Brief Snapshot of Hardship in America - Below are the most current figures available in five important areas.
- 1.6 million people were homeless in 2009 and spent at least part of the year in a shelter; nearly 325,000 of them were children.
- 15 million people were unemployed as of October, 6 million of whom had been looking for work for more than half a year.
- 44 million people were poor in 2009, 19 million of whom had incomes below half of the poverty line (half of the poverty line corresponds to an income of $5,478 for an individual and $10,977 for a family of four).
- 50 million people lacked access to adequate food at some point in 2009 because they didn’t have enough money for groceries. Nearly 18 million people lived in households where one or more people had to skip meals or take other steps to reduce their food intake because of lack of resources.
- 51 million people lacked health coverage in 2009.
Unemployment Benefits Lead to Higher Taxes, Loans - States are raising payroll taxes to pay for unemployment insurance, with some regions harder hit than others. A National Employment Law Project analysis found 41 states increased unemployment-insurance payroll taxes this year by an average of nearly 33.9%. The largest was a 168.5% boost from 2009 in Hawaii. As a weekend Journal article noted, states also are borrowing more from the federal government to help pay the high costs of unemployment insurance. Payroll taxes levied by states fund unemployment benefits for up to 26 weeks — and longer in some states. The federal government requires states to pay benefits even if their unemployment funds run out of cash. As in past periods of high joblessness, the federal government has paid for extended unemployment benefits, this time for as long as 99 weeks.
State Unemployment Rates in October: "Little changed" from September - This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate). Eight states now have double digit unemployment rates. A number of other states are close. From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were little changed in October. Nineteen states and the District of Columbia recorded unemployment rate decreases, 14 states registered rate increases, and 17 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Nevada continued to register the highest unemployment rate among the states, 14.2 percent in October. The states with the next highest rates were Michigan, 12.8 percent, and California, 12.4 percent. North Dakota reported the lowest jobless rate, 3.8 percent, followed by South Dakota and Nebraska, at 4.5 and 4.7 percent, respectively.
Unemployment in States Remains High - Unemployment rates were little changed in most states in October, as a recovery in the labor market remained sluggish across the country. The Labor Department reported that 19 states and Washington DC experienced jobless-rate decreases, while the rate rose in 14 regions and was unchanged in 17. States hardest-hit by the housing bust, such as Florida and California, continue to struggle with double-digit unemployment rates. Nevada remained the state with the highest unemployment rate in the nation — 14.2% — more than percentage point higher than the 12.8% recorded in second-place Michigan. In all, 13 states had rates above the 9.6% national figure released earlier this month. See the full interactive graphic.
How is the poor housing market affecting tax revenues? - According to a new paper from Byron Lutz, Raven Molloy, and Hui Shan from the Federal Reserve, the answer is “not as much as you might think”. Compared to the 1995-2002 trend, state tax revenues in 2009 were $31 billion below where they otherwise would be, which is 5% of total revenues. Looking at the short-run trend, the total 2005-2009 shortfall is only $15 billion. They identify five channels through which low house prices can affect state and local government tax revenues:
- 1) property taxes
- 2) home sales transfer taxes
- 3) sales taxes via spending on construction materials
- 4) sales taxes via impact on consumption of lower housing wealth
- 5) personal income tax
Another hit to states: Interest payments to Uncle Sam - The Great Recession has forced states to borrow $41 billion from a federal fund to cover unemployment checks for their jobless residents. Now the bill is coming due. Some 31 states will have to shell out an estimated $1.4 billion in interest payments on these loans next year. They had been spared this expense because of an obscure provision of the 2009 Recovery Act that expires on Dec. 31. The burden to cover this cost will fall mainly on businesses, who will see their unemployment taxes rise. But states will be hit too since the increased expense will likely deter companies from hiring new employees. "To escape the recession, we need economic recovery," "If local employers are facing increased taxes, they are going to say they can't afford to expand their businesses."
New Report: Bush Tax Cut Expiration Effects on the States - We've released a new report looking at how the expiration of the Bush tax cuts could affect state and local governments' budgets. Authored by Tax Foundation Staff Economist Mark Robyn, the report is Special Report, No. 187, "How Would Expiration of Bush-Era Tax Cuts Affect State and Local Budgets?"
Most state tax systems are linked to the federal tax system, so earthshaking changes in Washington cause waves downstream in state capitals. Many states would see more revenue if all the Bush-era tax cuts expire. Some of the reasons include:
- Linkage to federal AGI: expiration would cause AGI to grow, resulting in more taxable income at the state level;
- Linkage to taxable income: if child credits, earned income credits and itemized deductions shrink in value, taxable income will rise, raising state revenue.
- Linkage to revived federal estate tax: some states that have done without estate tax revenue since 2005 will once again pick up the revived state estate tax credit under a full-expiration scenario.
U.S. Governors Put `Everything' on Table for Cuts as Budget Deficits Loom - U.S. governors say everything from worker benefits to prisons to health-care spending may face reductions as they contend with a fourth year of budget deficits. For five days last week, at the Republican Governors Association meeting in San Diego and the nonpartisan National Governors Association rookie orientation in Colorado Springs, state leaders discussed a post-campaign reality in which they must choose which pain to inflict on their constituents. “Cutting is popular in the abstract,” “Cutting services is unpopular. Everything is on the table.” The longest recession since the 1930s caused the biggest decline in state tax receipts on record, according to the nonpartisan Center on Budget and Policy Priorities in Washington. States have filled more than $425 billion in funding gaps since fiscal 2009; the combined imbalance is likely to reach $140 billion in the next budget year, the center said. Meanwhile, 11 states had jobless rates of at least 10 percent in September, when the national average was 9.6 percent.
NC Governor Perdue Contemplating Massive State Budget Cuts - Gov. Bev Perdue's administration is weighing sharp and painful budget cuts next year that would include state park closures, tuition hikes at community colleges and major state layoffs. Faced with a projected $3.5 billion budget shortfall next year, Perdue asked the heads of state departments, agencies and colleges to develop plans for cuts ranging from 5 percent to 15 percent. The proposals are just the first step in what is likely to be a long and winding political path as the Democratic governor considers her options and then the new Republican legislature enacts a budget, probably some time next summer. But the options are the clearest indications yet, that the lives of millions of North Carolinians will likely be touched by a new wave of austerity in state government that has not been seen since the Great Depression of the 1930s.
Mayors measure effect of belt-tightening on quality of life - Recession-battered cities are moving beyond cutting or delaying major projects to close budget gaps and are slashing such quality-of-life functions as public safety services, library hours and after-school programs, a new survey of mayors shows. About four in 10 mayors say they have cut maintenance and services at parks and gardens or reduced hours and staff at libraries, according to the Reader's Digest-Harris Interactive survey of 54 mayors. Things will get worse before they get better, the mayors say: Nearly 70% say they will reduce maintenance or cancel projects on roads, highways and bridges; 63% will cancel or delay planned building projects, and 41% will cut services or staff in police and fire departments.
Urban and metropolitan problem solving -The issues that almost all large American metropolitan regions and cities are facing are important and messy. Here is a short list: racial segregation, concentration of poverty, poor health and nutrition, poor schools, crime and violence, and disaffection of young people. These problems are important because they hold back the personal lives of millions of Americans living in poverty and degraded urban neighborhoods. And they are messy because they are multi-causal and interconnected. Each problem feeds into another, and it is generally difficult to say what kinds of policy changes and plans would lead to eventual improvement. These are "wicked" problems (link) that require planners to work with complex and unpredictable processes in an effort to improve Cleveland, Chicago, Oakland, Miami, Houston, Kansas City, and Detroit.
Michigan to Curb Road Projects as Gas Tax Revenue Shrinks - Michigan could see half of its road construction budget disappear by 2012, taking with it scores of repair projects and thousands of jobs in a state that relies heavily on its freeways. A freefall in gas tax revenue over the last decade has the Michigan Department of Transportation projecting its repair budget for 2012 to be $626 million, a slice of the $1.4 billion spent in 2010. And Michigan barely escaped the same fate for 2011, said Bill Shreck, MDOT director of communications, when it faced an $84 million shortfall in its effort to qualify for federal matching funds.
Mount Clemens, Mich., Seeks Donations to Cover Deficit - A Michigan city is pleading with churches, schools and a hospital for donations to help cover its staggering budget deficit. The mayor of Mount Clemens, Barb Dempsey, sent a letter this week to 35 tax-exempt organizations asking them to voluntarily contribute to the city’s general fund, which pays for services like fire protection, streetlights and roads. Ms. Dempsey said the city has already drastically cut its expenses, having disbanded the police department six years ago, but still faces a $960,000 deficit that is projected to reach $1.5 million next year. “Those are all services that they utilize at no cost to them,” Ms. Dempsey said. “We figured it can’t hurt to send out letters. If you don’t ask, you never know.” Mount Clemens, about 25 miles northeast of Detroit, collects no taxes from 42 percent of the property within its borders. The 4.2-square-mile city has about 17,000 residents and is home to 26 churches, a hospital, several schools and the headquarters of Macomb County, the third largest in Michigan. If not exempt, the properties would pay at least $1.2 million, enough to wipe out the deficit, Ms. Dempsey said.
Expertise mission creep datapoint of the day - Last week, Chris Whalen appeared on Tech Ticker with Henry Blodget; he said, in the accurate if sensationalist words of the Business Insider headline, that CALIFORNIA WILL DEFAULT ON ITS DEBT. The interview was actually pretty intelligent and informative, by the standards of financial TV. Whalen talked about the politics of federal-state relations; about prior cases where states defaulted; about California’s pension obligations; about the ability of a Republican-controlled House to pass any kind of bailout bill—all things which are decidedly germane to anybody looking at California’s credit. But Brett Arends didn’t like what he was hearing, and decided to push back a bit. The results were much more illuminating than anything Whalen said on Tech Ticker. “My general comments have to do with my guess as to the impact of mounting foreclosures and flat to down GDP on state revenues,” Whalen replied.
Insurers May Lose $4 Billion If Munis Face `Extreme Stress,' Moody's Says - U.S. property and casualty insurers, a group that includes Allstate Corp. and American International Group Inc., may lose as much as $4 billion from holdings in municipal bonds, Moody’s Investors Service said. Losses of $2 billion to $4 billion wouldn’t be catastrophic, the ratings firm said in a statement today. Insurers hold $370 billion of municipal bonds, or about 27 percent of the industry’s invested assets, which may generate more than $10 billion in annual returns, Moody’s said. “While recognizing that public finance in the United States is under strain, we nevertheless view P&C insurers’ muni bond exposure as manageable,” Municipal credit quality is likely to remain “generally resilient even through a period of economic stress,” according to the statement. Municipal bonds have lost favor as state and local governments face a record $18.5 billion in budget deficits this year, according to a National Governors Association survey. States, seeking to cover jobless benefits, have borrowed $41 billion from the federal government, which has been providing cash without charging interest under the stimulus.
Report: City's Food Pantries, Soup Kitchens Cope With Higher Demands - TV video - According to a new study by the New York City Coalition Against Hunger, demand at New York City's more than 1,000 food pantries and soup kitchens increased about 7 percent this year, on top of the 20-percent increase in 2009. "There's been no recovery for hungry New Yorkers," said New York City Coalition Against Hunger Director Joel Berg. "The stock market has been going through the roof. Hungry New Yorkers are still flocking in record numbers to soup kitchens and food pantries." Staten Island was the hardest hit, with 100 percent of the borough's responding agencies saying they saw an increase in demands.
Poverty And Energy Prices Soaring In Tandem In California… In September the state of California hit a new high in food stamp benefits, crossing the 6 billion dollar mark on an annualized basis. Over the past year in California alone the total number recipients of the federal SNAP program (supplemental nutritional assistance program) rose by 16.3%. In many of the big counties of California however, food stamp usage rose even faster. As previous readers of this blog understand, it’s useful to look at the car dependent regions of southern California as they are emblematic of the state’s post peak-oil, economic breakdown. After all the food stamp program is really a food and energy program, which frees up household cash for gasoline. In San Bernardino County, for example, with its population of two million the number of SNAP recipients has now crossed the 300,000 level. Yes, a full 15% of that county is now on food stamps. But the growth rate in usage is even faster now at 22.7% since last year and has showed no sign of slowing down.
San Diego County Expanding Food Aid But Still Covers Less Than Half Of Those Eligible - For several years, San Diego had the reputation as the county with the lowest Food Stamp participation rate of any major urban area in the nation. But eighteen months ago, the County Supervisors resolved to do something to get food stamp participation up, and their efforts appear to be bearing fruit. Dale Fleming of the County’s Department of Health and Human Services says 207,000 San Diegans are currently enrolled in the County’s Food Stamp program, now known as “CalFresh.” It’s not easy to estimate the number of people who are eligible, but more than 480,000 San Diegans are living at or below the federal poverty level. That means the number of people enrolled in “CalFresh” has increased from below 30 percent to about 40 percent of people who are eligible.
Time-Lapse Video Shows Food Stamp Usage (News video) A new time-lapse video illustrates the depressing rise of food stamp usage throughout the United States since 2007. The video's creator, an online blogger, points to the alarming levels. Food stamps now feed a record 43 million. According to a recent Wall Street Journal report, food stamp usage has increased almost 60 percent since 2007.
Why We Shouldn't Cut Food Stamps to Pay for School Lunch - In the dying days of this Congress, food activists face an awful choice: Should we support the increased funding of children's school lunches, even if it means taking money from a family's food stamps? That is what's on the table in a version of the Child Nutrition Reauthorization Bill passed by the Senate, in which an improved school meal program will be paid for by cutting back $2 billion in funding for food stamps in 2013. No one disputes that poor children need to be better fed, but government food stamp entitlements are the last tatters of a safety net for many millions of people. Evidence? Earlier this month, the U.S. Department of Agriculture announced that 50.2 million Americans were food insecure in 2009, a mere 1 million more than the year before. Although that's still one in six people, the figure was a victory. Given the soaring rates of poverty and unemployment in 2009, there could have been considerably more food insecure people.
State of Working America Preview: Poor Children - More than one in five children under age 18, and almost one in four children under age six, were living in poverty in 2009. The Figure, from EPI’s forthcoming State of Working America Web site, shows how poverty rates for different age groups have changed in recent decades. Widespread job loss during the latest recession, along with reduced hours and slow wage growth, have all contributed to higher rates of poverty. Individuals are officially considered poor when their family income falls below the poverty threshold. The 2009 poverty threshold throughout most of the United States was an annual income of $14,570 for a family of two and $22,050 for a family of four (thresholds are higher in Alaska and Hawaii). The comparatively low poverty rate among the over-65 population is largely attributable to Social Security, which lifts millions of seniors out of poverty.
Flagstaff schools warn parents of overweight kids - The Flagstaff school district will be sending letters to parents whose elementary school children are overweight or headed in that direction. "These are serious, serious problems going on inside of these children now, and we have to do drastic things to make them better," pediatrician Nina Souders told the Flagstaff Unified School District board last week. Flagstaff physicians and nurses are reporting obesity-related diabetes in children as young as age 4. The school district's top nurse estimates about 50 percent of the district's elementary school students will be classified as overweight or bordering on overweight. Elementary school students will be weighed and measured this fall with help from Flagstaff Medical Center's Fit Kids staff and North Country HealthCare. The nonprofits will target education efforts, particularly to schools with more students with severe weight problems.
The Kindergarten Advantage - How everything you learned in kindergarten affects your salary, your chances of going to college and owning a home, and even your retirement savings “We found that everything comes back,” he said. “Our paper shows that investments in early childhood education have potentially very large payoffs. In the U.S., kids from disadvantaged families attend lower quality schools because of property tax financing. That system basically perpetuates income inequality. Disadvantaged kids end up not doing so well. We should think about improving schools at the lower end of the school distribution.” The bureau study, conducted by Friedman, Chetty and a team of four other economists from Harvard, Northwestern University and the University of California, Berkeley, draws on data from Project STAR, one of the most widely studied education experiments in the United States. The project included 11,600 students and their teachers in kindergarten through third grade across 79 schools in Tennessee from 1985 to 1989.Continue Reading the Article
Cleveland Schools Face $58 Million Budget Deficit in 2012 - Cleveland Schools CEO Eugene Sanders held the first of four forums this week to update the community on the district’s transformation plan and dismal budget situation. Sanders is still trying to garner community support for his academic transformation plan, a plan that has already closed 16 schools and shuffled students and staff around the district. At Monday’s meeting, Sanders said he has already identified sixty of the $72 million dollars needed for the plan through federal grants like the Race to the Top competition and stimulus dollars. However, that money can’t be used for operating costs, and the district is bracing for a $58 million budget gap in 2012. The impending shortfall is due to state funding cuts, declining tax dollars, and rising costs for staff salaries and benefits.
Saving Public Universities, Starting With My Own - Oregon's 25- to 34-year-olds are less likely than their parents to have college degrees. We have one of the worst-funded systems of public higher education in America: Oregon ranked 44th in the latest measurement of state funding per student.The easy response to decades of reduced funding is to simply ask the state for more. But with Oregon expecting a $3.3 billion budget shortfall for the coming biennium and a "decade of deficits," as Gov. Ted Kulongoski recently put it, asking for more money is futile. Twenty years ago, the state legislature appropriated $63.3 million for the University of Oregon. Our state funding for the current fiscal year has dropped to a projected $60 million. Adjusted for inflation, that's just $34.9 million in 1990 dollars. State funding currently makes up less than 8% of the university's overall budget, while tuition and fees now account for about 40%. A generation ago, state funding per student was twice the amount received in tuition. Because of a dramatic rise in enrollment and an equally dramatic decline in state funding, tuition has increased by an average of 7.5% each year for the past 38 years.
How Are the Kids? Unemployed, Underwater, and Sinking - Today, the kids’ outlook is almost as bleak as the housing market; they are unemployed, underwater on student debt, and out of luck from a reluctant political system. Currently, even after a slight boost in jobs growth, unemployment for 18-24 year olds stands at 24.7%. For 20-24 year olds, it hovers at 15.2%. These conservative estimates, using the Bureau of Labor Statistics U3 measure, do not reflect the number of marginally attached or discouraged young workers feeling the lag from a nearly moribund job market. The U3 measure also does not count underemployment, yet with only 50% of B.A. holders able to find jobs requiring such a degree, underemployment rates are a telling index of the squeezing of the 18-30 year old Millennial generation. While it appears everyone is hurting since the financial collapse, young adults bear a disproportionate burden, constituting just 13.5% of the workforce while accounting for 26.4% of those unemployed. Even with good credentials, it is difficult for young people to find work and keep themselves afloat. If companies are unwilling to hire bright young college graduates even at a relatively low salary and minimal benefits, will they ever be willing to hire anybody at all?
Is Student Debt the Next Front in the Consumer Debt Crisis? -- Yves Smith - The media has been so preoccupied with acute symptoms of the debt crisis – sliding home prices, foreclosure abuses, ongoing Euromarket bank/sovereign debt stress, ongoing battles over financial regulation implementation, unhappiness over the Fed’s QE2 – that lingering problems are not getting the attention they deserve. High on the list is the how the weak job market is affecting new college and advanced degree program graduates. We have an unspoken social contract: young people who get an education, particularly a “good” education (which means more elite universities, more serious courses of study, graduate degrees) are supposed to be rewarded by higher lifetime earnings. But this whole premise has started to go awry, and the huge uptick in unemployment has started to make matters worse. A guest post at Baseline Scenario by UMass-Amherst students Mark Paul and Anastasia Wilson outlines the grim conditions facing new graduates: Take note: half the recently-minted college grads are in jobs that do not require a college degree.
Student Loan Indenture - This morning at Naked Capitalism Yves asked the question, Is Student Debt the Next Front in the Consumer Debt Crisis? I’ve been meaning to write something about this, and the comment I made there is a good summary of my thoughts, so I decided to reproduce it here: I’ve already heard of a few cases of law students suing their law schools for having fraudulently represented the value of the degree and the jobs that would be available to them, and inducing them to take out student loans on that fraudulent basis. The moral soundness of such a suit is clear. This is a clear-cut case of predatory lending. You fraudulently represent an expensive asset as being an investment which will always appreciate in value, and induce the mark to take out a usurious loan in order to purchase it. The parallel with housing is clear, and the fraud is even more direct. In the case of mortgage lending fraud, the seller was usually technically the previous homeowner, with the banks and their flunkeys managing the sale (and the government only propagandizing for it). Here the school and the government themselves, along with the banksters, are active participants in the loan fraud.
Do You Want Fries With That US College Degree? - You've got to hand it to our American friends when it comes to exporting thigh-slapping, mock-serious deadpan humour. Take their econocomedian of a finance minister Tim Geithner with his utterly riotous "Strong Dollar" slapstick routine. Or, if you prefer something more tragicomic, consider the "American Dream" of home ownership that led to the subprime crisis that's messed up the world economy in the process. (Home prices never fall continuously, right?) For kicks, you can also try that Horatio Alger-ish "Land of Opportunity" howler in the OECD country with the second lowest level of income mobility next to one where they still call people "Sir," "Lord," and "Your Majesty." So, there are excellent reasons why Leslie Nielsen hails from America where they perfect this brand of deadpan humour given such patently absurd material to delude themselves with day in and day out. Today, however, let's consider another truism that will have you rolling on the floor laughing (unless you're a newly minted US college graduate), the "University is the Key to Lifetime Success" shtick. Noted labour economist Andrew Sum offers this lowdown on the prospects of college grads after the US-induced subprime fiasco:
Mayor Proposes Eliminating City Pensions - As time runs down in San Diego Mayor Jerry Sanders' tenure, his proposals to solve the city's financial crisis are becoming more drastic. This summer, he embraced a tax hike. Friday, he proposed 401(k)-style retirement accounts for most new city employees, and in turn, eliminating their pensions. Staring him and everyone else in the face is a $70 million-plus ongoing deficit, one that neither a tax increase or a pension elimination will fix. The tax hike won't work because voters said no. The pension elimination, which also needs voter approval, won't save any money for years and wouldn't go on a ballot until next year at the earliest. Sanders has two more years to solve the financial problem he was elected to fix. Sanders' proposals include the familiar: All the reforms tied to the Proposition D tax hike. They include the major: Consolidating departments and potentially privatizing the city's airports and golf courses. And they include the minor: Ending free trash pickup for 18,000 homes on privately owned streets and using more energy-efficient bulbs in street lights. But the mayor didn't know how much they'll save — and whether it will be enough to keep from cutting core services like police officers, firefighters, parks and libraries.
6 New Governors Seek to Kill Defined Benefit Plans; 8 of 9 CA Cities Vote to Reduce Benefits; Fraudulent Promises (and what to do about them) - Defined benefit pension plans are in trouble across the country, but politicians in states like Arizona and Illinois are reluctant to tackle the problem. Voters across the country however, have taken matters into their own hands by refusing to agree to tax hikes and by voting to reduce benefits. In California, voters in eight of nine cities or counties approved measures to reduce public-pension benefits. Moreover, six new governor-elects want to kill defined benefit plans. Finally, the speaker of the House in Arizona wants a constitutional amendment to lower pension benefits. Arizona Central covers these issues and more in a pair of articles. Let's start with a look at Pension reform a difficult task.
Raise Retirement Age and More Become Disabled - Most people are working and living longer, so it seems like a no-brainer to raise the retirement age to help close the long-term Social Security funding gap. But the move could backfire and not save as much as predicted. Why? Not all groups are able to work longer, a new report from the Government Accountability Office says. “Raising the retirement ages would likely increase the number of workers applying for and receiving disability insurance benefits,” which also comes out of Social Security, said the report. The report presented a sobering view of the health status of near-retirement age population. About a quarter of Americans aged 60-61 have a work-limiting health conditions, according to the report, and about two-thirds the ones who are still on the job report working in occupations that are “physically demanding.” Raising either the early or full retirement ages above where they are now would incentivize many more of those workers to seek disability coverage...people who are the most dependent on Social Security for retirement income are the ones most likely to go on disability if denied early retirement benefits.
Dying with debt: A dirty little retirement secret - Retired Americans are racking up credit-card debt like never before, be it for vacations or medical expenses, and a surprising number have no intention of paying it off before they die. Nearly 40% of retired Americans said they've accumulated credit-card debt in their twilight years — and aren't worried about paying it off in their lifetime, according to a survey released by CESI Debt Solutions. "At the end of the day, some people of a certain age say, 'It's too late in the game for me to do anything about it. I can't win. So I'm just going to stop playing the game,'" said Neil Ellington, executive vice president at CESI.But remember that this is the generation that frowns upon talking about money — and certainly would be embarrassed by any potential money problems. Add in a recession that slashed many retirement accounts in half and that leaves a generation sinking deeper into debt, with a diminishing timeframe to do anything about it — and too much pride to talk about it.
The Social Security Trust Fund - Yglesias has a post about the rhetoric of The Social Security Trust Fund, in response to a Planet Money podcast on the subject. The puzzle of the podcast is: how can there even be an argument about whether a giant Trust Fund exists or not? Shouldn’t that be sort of obvious? Yglesias is in the ‘it exists’ camp. And I think that’s right. Here’s the way to think about the Trust Fund, to make it seem it doesn’t exist. The Social Security Trust Fund takes in money that it socks away, for an elderly day, in the form of government bonds. But, since it’s all just the government, that’s your right hand loaning your left hand money. If I am poor, I can’t get rich selling myself a lot of ‘Holbo bonds’. That seems like double-counting in the worst way.Here’s the way to think about it, so it seems like the Trust Fund exists. The parents (government) agree that the child (Social Security) should have an allowance. The child wants to save the money. So the parents keep a running account. Every week, the parents write the child an IOU, which the child dutifully puts in a little box
Baby Boom to Bust: Time to Raise Retirement Age? (CBS) Social Security pays out more than $700 billion a year. But the system is headed for a crisis. "Americans are living longer, but they're retiring earlier and saving less," said Andrew Biggs of the American Enterprise Institute. "Something in that equation has to give." With 70 million baby boomers headed towards retirement, the government is confronting a painful reality. "We as a country have made promises we can't keep," said Erskine Bowles. Bowles and Alan Simpson, co-chairs of the president's bipartisan deficit commission, have proposed gradually raising the retirement age from 66 to 69. That proposal has ignited a debate on Capitol Hill. Congress may argue over how to reform the system, but there's no debating that we're running out of time. Under current projections, in just 27 years Social Security won't have enough money coming in to pay out benefits to everyone who is eligible.
The Social Security Deficit - The government pays Social Security benefits with the revenue collected from the payroll tax. For many years, the annual revenue coming in to the government has exceeded the amount it pays out. This extra money has been placed in a trust fund that earns interest.There are at least two ways to think about the long-term deficit facing the Social Security system. The first describes the point when the government will begin paying more in benefits than it collects in taxes each year. This will begin happening consistently in 2015, according to Social Security’s chief actuary. This calculation, however, does not give Social Security any credit for the surpluses it has built over the years. When you take those surpluses — that is, the trust fund — into account, Social Security is in better shape. It can cover its shortfall until 2025 with the interest it has earned over the years on the trust fund. Starting in 2025, the program has to begin dipping into the principal of the fund. It is projected to exhaust the entire trust fund in 2037.
The Strengthen SS Coalition shows 'Reform' in One Graph - Strengthen Social Security a coalition of progressive organizations determined to protect and strengthen Social Security, coordinated and hosted by Social Security Works (or maybe by now SSW is hosted by SSSC) produced the above graph. I didn't see it on their website and so grabbed it from Ezra Klein's post (which does credit SSSC) The Future of Social Security in One Graph. This doesn't tell the whole story, for one thing it shows wage indexed results which would seem to discount the actual gains in real benefits under the current schedule, and for another it would be interesting to see the results on the "if nothing is done" trendline if we added in the revenue effects alone of the other plans. But however you slice it clearly the goal of 'reform' is not to deliver an appreciably better result for workers, at best they are being asked for a significant giveaway from the current schedule.
Some States Weigh Unthinkable Option: Ending Medicaid - Huge budget shortfalls are prompting a handful of states to begin discussing a once-unthinkable scenario: dropping out of the Medicaid insurance program for the poor. Elected and appointed officials in nearly a half-dozen states, including Washington, Texas and South Carolina, have publicly thrown out the idea. Wyoming and Nevada this year produced detailed studies of what would happen should they withdraw from the program. Wyoming found that Medicaid accounts for 63% of the state's nursing-home revenue. Some states, in particular those led by Republicans, are calculating whether they'd be better off giving up the federal funding and replacing Medicaid with a narrower program of their own. Texas Gov. Rick Perry has proposed that his state get out of Medicaid in favor of a state-run system unburdened by federal mandates—including the one that prohibits states from reducing eligibility for the program if they want to qualify for the federal matching funds.
Doctors say Medicare cuts forcing them to shift away from elderly - Want an appointment with kidney specialist Adam Weinstein of Easton, Md.? If you're a senior covered by Medicare, the wait is eight weeks. How about a checkup from geriatric specialist Michael Trahos? Expect to see him every six months: The Alexandria-based doctor has been limiting most of his Medicare patients to twice yearly rather than the quarterly checkups he considers ideal for the elderly. Still, at least he'll see you. Top-ranked primary care doctor Linda Yau is one of three physicians with the District's Foxhall Internists group who recently announced they will no longer be accepting Medicare patients. Doctors across the country describe similar decisions, complaining that they've been forced to shift away from Medicare toward higher-paying, privately insured or self-paying patients in response to years of penny-pinching by Congress.
Medicare and Hospital Payments - In a previous post, I described how Medicare came to adopt price schedules for hospitals and physicians that are now derided as Soviet in origin. Actually, as I noted, this was a home-grown American idea that Presidents Ronald Reagan and George H.W. Bush embraced and introduced to Medicare. In this and the next post I would like to describe how this system works, starting with inpatient hospital services. I will draw on the excellent literature provided by Medpac, the independent Medicare Payment Advisory Commission established in 1997 by Congress to advise it on issues affecting the Medicare program.
Consumer Risks Feared as Health Law Spurs Mergers — When Congress passed the health care law, it envisioned doctors and hospitals joining forces, coordinating care and holding down costs, with the prospect of earning government bonuses for controlling costs. Now, eight months into the new law there is a growing frenzy of mergers involving hospitals, clinics and doctor groups eager to share costs and savings, and cash in on the incentives. They, in turn, have deployed a small army of lawyers and lobbyists trying to persuade the Obama administration to relax or waive a body of older laws intended to thwart health care monopolies, and to protect against shoddy care and fraudulent billing of patients or Medicare. Consumer advocates fear that the health care law could worsen some of the very problems it was meant to solve — by reducing competition, driving up costs and creating incentives for doctors and hospitals to stint on care, in order to retain their cost-saving bonuses.
Bailouts = Monopoly, Health Racket Version - I have a whole category dedicated to the fact that Bailouts Intensify Monopoly. We recall how, as soon as the TARP was on the books, Paulson and his people started saying, “our real intent is mergers and acquisitions, and we want the TARP and the rest of the bailout to help achieve this.” We want greater concentration, greater monopoly. We’re already receiving confirmation that this is a core goal of Obama’s extension of the FIRE bailout to the health rackets. We’ve seen it with insurers, we’ve seen it with waivers and exemptions as an indirect tool toward concentration in general, in all sectors. Now we’re seeing it with providers as well. Under the Orwellian name of “accountable care organizations”, hospitals and doctors in theory are supposed to combine to hold down costs and deliver better care. Under corporatist conditions, in practice this can only mean shift more costs onto patients and the people in general. Actually holding down costs is not a real goal; shifting them is. Indeed, the system encourages bloating costs. The smoking gun proof of this is that all “stakeholders” reject the one and only proven cost-cutting measure, Single Payer.
McConnell: Health Care Reform Leads America On A Path To Tyranny - Senate Minority Leader Mitch McConnell took another step toward embracing the Republican Party's new tea party mandate in a speech before the Federalist Society's annual convention in Washington this morning. Ripping a page right from the tea party hymnal, McConnell pledged to hold a vote on "full repeal" of the landmark health care law signed this year by President Obama, suggesting that unless Republicans can kill the legislation, America could be headed for a tyrannical police state. Fear of the health care law -- and more specifically, its individual mandate clause requiring the public to purchase health insurance as a way to bring down overall medical costs -- was a tea party mantra on the campaign trail, with conservative activists claiming it would lead to everything from out-of-control spending increases to government-run death panels that will decide who lives or dies. McConnell embraced some of that terror in his speech today.
Republican senators file brief supporting health care reform challenge - Thirty-three Republican senators filed an amicus curiae brief [text, PDF] on Thursday supporting state attorneys general in their legal effort [complaint, PDF; JURIST report] to have the Patient Protection and Affordable Care Act (PPACA) [HR 3590 materials; JURIST news archive] declared unconstitutional. The brief, filed in the US District Court for the Northern District of Florida [official website] supports the suit's proposed arguments that the PPACA violates the Commerce Clause [Cornell LII backgrounder] of the US Constitution. In making their argument, the senators attacked the individual mandate, arguing: Indeed, in more than 200 years of debate as to the proper scope of the Commerce Power, the Supreme Court has never suggested that the Commerce Power allows Congress to impose affirmative obligations on passive individuals, or to punish individuals for failing to purchase a particular product. To the contrary, every landmark Commerce Clause case has dealt with congressional efforts to regulate different kinds of activity under the Commerce power. In every significant Commerce Clause case the Supreme Court has always had to decide whether Congress may regulate a given form of activity.
Poll: Republicans Want Anti-HCR GOPers To Just Say No To Gov't Health Care | TPMDC - Republicans and independents have decided that incoming members of Congress who ran against health care reform and still take their government-funded benefits are hypocrites. Democrats, not so much. That's one conclusion from a new national poll from Democratic firm PPP, which shows big majorities of GOP and independent voters saying the politicians who ran against the health care reform law should forgo the health care benefits they're entitled to as employees of the federal government. Just 28% of Republican respondents said that new anti-reform members should take their federal benefits, while a whopping 58% said they shouldn't. Among independents -- who voted for the GOP in big numbers on Nov. 2 -- 56% say politicians who made health care repeal a cornerstone of their campaigns should deny themselves their government benefits. Only 27% said they should take them.
Affordable Care Act Repeal Unlikely, Unpopular: Nobody is head over heels in love with the Affordable Care Act, but McClatchy notes that much of the discontent is from the left and the public constituency for repeal is quite small: On the side favoring it, 16 percent of registered voters want to let it stand as is. Another 35 percent want to change it to do more. Among groups with pluralities who want to expand it: women, minorities, people younger than 45, Democrats, liberals, Northeasterners and those making less than $50,000 a year. Lining up against the law, 11 percent want to amend it to rein it in. Another 33 percent want to repeal it. Among groups with pluralities favoring repeal: men, whites, those older than 45, those making more than $50,000 annually, conservatives, Republicans and tea party supporters. Nothing surprising about the demographics here or the outcome. If you polled me on this, I’d count myself as someone who wants to expand the law. To give a more nuanced view, though, I think there’s room for both expansion and curtailment. .
Why is health care reform so difficult - If you think about it, health care surely is one of the basic human needs that we should try to ensure is met for every person, if at all possible. That's the idea behind universal health care--that is, that the US should have a system that covers everyone, not just the wealthy. That no one should have to give up home or job to have health care. That no one should die from an easily treatable illness simply because they didn't have enough money to pay a doctor. That our health system should work for the people, and not for corporate interests. That health insurers, if they are to be involved, should only be making a reasonable profit out of guaranteeing that the services we want are available--they should not be able to deny care, they should not be able to decide what kind of care is available, they should not be able to rip people off for exorbitant profits. Because they are providing a service that meets basic human needs, they are a quasi public utility and must be regulated as such, if they are to exist at all.
Mistakes Still Prevalent in Hospital Care, Study Finds - Efforts to make hospitals safer for patients are falling short, researchers report in the first large study in a decade to analyze harm from medical care and to track it over time. The study, conducted from 2002 to 2007 in 10 North Carolina hospitals, found that harm to patients was common and that the number of incidents did not decrease over time. The most common problems were complications from procedures or drugs and hospital-acquired infections. “It is unlikely that other regions of the country have fared better,” said Dr. Christopher P. Landrigan, the lead author of the study and an assistant professor at Harvard Medical School. The study is being published on Thursday in The New England Journal of Medicine. It is one of the most rigorous efforts to collect data about patient safety since a landmark report in 1999 found that medical mistakes caused as many as 98,000 deaths and more than one million injuries a year in the United States.
Will patients use performance data to choose their care? - Expectations are high that the public will use performance data to choose their health providers and so drive improvements in quality. But in a paper published on bmj.com today, two experts question whether this is realistic. They think patient choice is not at present a strong lever for change, and suggest ways in which currently available information can be improved to optimise its effect. Research conducted over the past 20 years in several countries provides little support for the belief that most patients behave in a consumerist fashion as far as their health is concerned, Although patients are clear that they want information to be made publicly available, they rarely search for it, often do not understand or trust it, and are unlikely to use it in a rational way to choose the best provider, they write.
Health Care Costs -- Paying More for the Same Services - The International Federation of Health Plans released its 2010 report today. (PDF here.) The good news is that the problem is clear: Americans pay too much for the same services. The bad news is (1) we've known that for years and (2) the factions who are gaining these excessive rents want to keep their sinecures. But I've said this before. That it remains true is as true as "that which cannot go on will not go on." How it ends—its eschaton, as it were—is what is being discussed. Hint to doctors: You are the farmers of the 2010s; you will lose either way. (Think 1994 all over again, this time with a vengeance.)
Passive smoking ‘kills 600,000′ worldwide - The first global study into the effects of passive smoking has found it causes 600,000 deaths every year. One-third of those killed are children, often exposed to smoke at home, the World Health Organization (WHO) found. The study, in 192 countries, found that passive smoking is particularly dangerous for children, said to be at higher risk of sudden infant death syndrome, pneumonia and asthma. Passive smoking causes heart disease, respiratory illness and lung cancer. "This helps us understand the real toll of tobacco," said Armando Peruga, of the WHO's Tobacco-Free Initiative, who led the study.
What Food Says About Class in America - According to data released last week by the U.S. Department of Agriculture, 17 percent of Americans—more than 50 million people—live in households that are “food insecure,” a term that means a family sometimes runs out of money to buy food, or it sometimes runs out of food before it can get more money. Food insecurity is especially high in households headed by a single mother. It is most severe in the South, and in big cities. In New York City, 1.4 million people are food insecure, and 257,000 of them live near me, in Brooklyn. Food insecurity is linked, of course, to other economic measures like housing and employment, so it surprised no one that the biggest surge in food insecurity since the agency established the measure in 1995 occurred between 2007 and 2008, at the start of the economic downturn. (The 2009 numbers, released last week, showed little change.) The proportion of households that qualify as “hungry”—with what the USDA calls “very low food security”—is small, about 6 percent. Reflected against the obsessive concerns of the foodies in my circle, and the glare of attention given to the plight of the poor and hungry abroad, even a fraction of starving children in America seems too high.
How small farmers defeated agribusiness on food-safety regulations - Most Americans' Thanksgiving tables will be filled on Thursday with the fruits of a fiercely efficient, competitive, centralized, and industrialized food-production system. That system provides a tremendous bounty year-round, and for cheap. But it comes with a steep price: It can get a lot of us sick. In August, for instance, the Food and Drug Administration ordered the recall of more than 500 million salmonella-contaminated eggs. Though distributed under more than 70 brand names in 26 states, the eggs came from just two companies. Every year, about 250,000 Americans go to hospital with a preventable food-borne disease. About 5,000 die from one. The Senate is currently considering a sweeping bill that aims to make our food safer. But the makers of "non-industrial" food—small, local, and family farms and processors—are fighting to preserve exemptions to regulations they say could put them out of business.
Public Policies and Rising World Food Prices Once Again - From 2002 to 2008 the prices of many foods, including corn, wheat, and rice, increased by a lot. For example, The World Bank’s index of food prices increased by over 100% from 2002-2008. Grains and other food prices fell rather sharply during the financial crisis, along with the fall in oil prices and those of other commodities. But food prices are marching up again mainly because the world economy is recovering from the crisis. Fast growing economies like China are increasing their demand for wheat, meats (animals use lots of grain as animal feed) and other foods that were formerly out of reach of the typical family in these economies. Reactions to the food price increases include Russia’s and Ukraine’s banning of wheat and some other grain exports “temporarily”, and China’s threat this past week to impose price controls on various foods, such as ginger and garlic, that are important in the Chinese diet, and have been rising rapidly in price. A little basic economics is useful in evaluating these and other proposals.
Global Crop Yield Map - I found the above map in a recent paper in PNAS. It shows average yield of all crops (in dry tons/hectare) across the globe. It makes fascinatingly clear where food comes from. You can click for a large version of this and the other maps below. The most obvious high-level point to be taken from this map is that high crop yields are associated with development (the US, western Europe, Japan) . There is some question about how correlation runs here. Certainly, yields have increased enormously in the twentieth century with mechanization and agricultural chemistry, so development increases crop yields. However, it's likely also true that development has historically proceeded furthest and fastest in places particularly congenial to agriculture, which now thus show both high yields and high levels of development.
Some Global Soil Deficiency Maps - Yesterday, I was wondering how much there might be scope, under climate change, to increase crop yields in places that were presently limited by either climate, or the absence of modern agricultural technology. Sharon Astyk suggested that agriculture moving poleward would be limited by poor soil quality. I don't personally know much about this issue, so I spent some time this morning hunting around to try and develop some better intuition for it. Recall that we were looking at this map of crop yields (which is a rather crude measurement of total crop weight averaged across all crops):Besides the possibility of better agro-forestry systems in the tropics, obvious questions looking at this map are whether more production can be had from Canada, Argentina, Scandinavia, and northern Russia as they warm up.
Study – RES would provide $14 billion for farming, forestry - The agriculture and forestry sectors would gain $14 billion in revenue by 2025 under a national renewable electricity standard that requires utilities to generate 25 percent of their power through wind, solar, biofuels and efficiency improvements, according to a new study from the University of Tennessee. An RES would create an overall boost of $215 billion in economic activity, create 700,000 jobs and add $84 billion to U.S. gross domestic product, the study says. The increase in bioenergy feedstock to meet the standard would not disrupt major crop and livestock prices, according to the study. But an RES would not lower carbon emissions from agricultural lands compared to either current policy or a scenario with compensation for limiting carbon emissions from land use, the report says. The study was requested by the 25x’25 coalition, a group of organizations pushing for meeting a quarter of the nation’s energy needs from renewable sources by 2025.
U.S. corn ethanol was not a good policy-Gore (Reuters) - Former U.S. vice-president Al Gore said support for corn-based ethanol in the United States was "not a good policy", weeks before tax credits are up for renewal. U.S. blending tax breaks for ethanol make it profitable for refiners to use the fuel even when it is more expensive than gasoline. The credits are up for renewal on Dec. 31. Total U.S. ethanol subsidies reached $7.7 billion last year according to the International Energy Industry, which said biofuels worldwide received more subsidies than any other form of renewable energy. "It is not a good policy to have these massive subsidies for (U.S.) first generation ethanol," "First generation ethanol I think was a mistake. The energy conversion ratios are at best very small. "It's hard once such a programme is put in place to deal with the lobbies that keep it going." He explained his own support for the original programme on his presidential ambitions.
What’s Really Wrong With the Smart Grid - The Smart Grid is rolling out lickety split because all the right interest groups love it: Utilities like the idea of cutting labor costs and being able to manage electricity usage; environmentalists want to integrate renewables onto the grid while stimulating energy efficiency; manufacturers want to sell appliances; regulators are trying to forestall the electrical outages that already cost our economy $119 billion a year; Congress and the DOE wanted to throw money at such an eminently popular, modern, "smart," concept. This enthusiasm covers up the fact that there is no coherent ideology there at all, never mind a green one. And that's the problem: Nobody has bothered to explain why the Smart Grid is good for you and me and then turn that into a policy.
Carbon emissions set to be highest in history - Emissions of man-made carbon dioxide in the atmosphere are roaring ahead again after a smaller-than-expected dip due to the worldwide recession. Scientists are forecasting that CO2 emissions from burning coal, oil and gas will reach their highest in history this year. Levels of the man-made greenhouse gas being dumped into the atmosphere have never been higher and are once again accelerating. Scientists have revised their figures on global CO2 emissions, showing that levels fell by just 1.3 per cent in 2009 – less than half of what was expected. This year they are likely to increase by more than 3 per cent, greater than the average annual increase for the last decade. The figures come after more than 20 years of dire warnings from scientists that governments need to begin curbing emissions drastically if the world is to avoid potentially dangerous climate change later this century.
Good riddance CCX - This just in over at Market Forces: The Chicago Climate Exchange, one of the first voluntary cap-and-trade programs, is shutting down next month. That's bad news for the planet, isn't it? Just take a look at today's Wall Street Journal editorial page for an apparent confirmation. There the news is being celebrated as "cap and retreat." Check. That should indeed be confirmation enough. Sadly, what's good for theJournal tends to be bad for the planet. Here that may not hold, although it's not for the reasons the Journal thinks. The full editorial is behind a firewall. That's just as well. The rest is as wrong as the beginning. Let's start with the only direct quote. The Journal opinionators say the CCX advertised itself as "North America's only cap and trade system for greenhouse gasses." In fact, CCX's own webpage says it's "North America's only cap and trade system for all six greenhouse gases." That makes all the difference. Carbon dioxide, the main greenhouse gas, is or will be covered in at least 15 states.
Republican asks to expand power of energy panel (Reuters) - A key Republican on Thursday asked lawmakers to consolidate energy oversight in the House of Representatives into one powerful energy committee. Doc Hastings, the expected incoming head of the House Natural Resources Committee, called for expanding his panel's jurisdiction to cover all energy policy. This expanded panel would be renamed the Energy and Natural Resources Committee. Currently the Natural Resources Committee shares authority over energy legislation with the Energy and Commerce committee. "This proposal would marry together our nation's broad energy policy with the vast majority of America's actual energy resources that are on our federal lands and offshore," Hastings said. Under the existing system the Natural Resources committee oversees energy development on public lands, while Energy and Commerce covers oversees general energy policy.
Air pollution exceeds safety limits in big Asian cities - Air pollution in major cities in Asia exceeds the World Health Organisation’s (WHO) air quality guidelines and toxic cocktails result in more than 530,000 premature deaths a year, according to a new report issued on Tuesday. Issued by the U.S.-based Health Effects Institute, the study found that elderly people with cardiopulmonary and other chronic illnesses were especially vulnerable and they tended to die prematurely when their conditions were exacerbated by bad air. “In general, those susceptible to air pollution are people who are older, who have cardiopulmonary disease, stroke, conditions often related to aging,” the institute’s vice president, Robert O’Keefe, said by telephone. “In Asia, the elderly will become more susceptible to air pollution and become more frail. The more frail are the ones dying prematurely from COPD (chronic obstructive pulmonary disease), cardiovascular disease,” he said.
Why the US Will Not Get China's High Speed Rail - Yesterday, we rode the high speed rail from Hangzhou to Shanghai. It took 45 minutes to go about 110 miles, and the ride was smoother than any US form of transportation. At dinner last night, the Chinese, justifiably proud, asked what we had thought. "I want it!" said one of my companions. Unfortunately, I don't think we're going to get it. For truly high speed rail, you need a long straightaway with few curves or inclines. That means it's very important to lay the rail in the best possible path, or near it. Trying to do this between, say, New York and Chicago would mean approximately a century of court battles with homeowners, environmental groups, local NIMBYs, and sundry others. Moreover, many desireable routes are occupied by our enormous network of highways, and only someone with a very rich fantasy life could believe that we are going to rip out the highways to put in a rail network.
Greenland's Massive Ice Sheet Is Restless - Interactive Graphic - NYTimes.com - Researchers studying Greenland note that its massive ice sheet appears to have become less stable. The movement of some glaciers has doubled or tripled in speed recently, possibly because of human-induced climate change. If the trend worsens, melting ice and icebergs falling into the ocean could raise global sea levels substantially
Permafrost melt shows significant acceleration in last 5 years, Siberia, Arctic Sea coast, leaking methane - Gas locked inside Siberia's frozen soil and under its lakes has been seeping out since the end of the last ice age 10,000 years ago. But in the past few decades, as the Earth has warmed, the icy ground has begun thawing more rapidly, accelerating the release of methane -- a greenhouse gas 23 times more powerful than carbon dioxide -- at a perilous rate. Some scientists believe the thawing of permafrost could become the epicenter of climate change. They say 1.5 trillion tons of carbon, locked inside icebound earth since the age of mammoths, is a climate time bomb waiting to explode if released into the atmosphere. "Here, total carbon storage is like all the rain forests of our planet put together," says the scientist, Sergey Zimov -- "here" being the endless sweep of snow and ice stretching toward Siberia's gray horizon, as seen from Zimov's research facility nearly 350 kilometers (220 miles) above the Arctic Circle.
The Warming of Antarctica -- A Citadel of Ice Begins to Melt - In 1978, when few researchers were paying attention to global warming, a prominent geologist at Ohio State University was already focused on the prospect of fossil fuel emissions trapping heat in the Earth’s atmosphere. His name was John H. Mercer, and when he contemplated what might be in store for the planet, his thoughts naturally gravitated to the biggest chunk of ice on Earth — Antarctica.“If present trends in fossil fuel consumption continue...” he wrote in Nature, “a critical level of warmth will have been passed in high southern latitudes 50 years from now, and deglaciation of West Antarctica will be imminent or in progress... One of the warning signs that a dangerous warming trend is under way in Antarctica will be the breakup of ice shelves on both coasts of the Antarctic Peninsula, starting with the northernmost and extending gradually southward.” Mercer’s prediction has come true, and a couple of decades before he anticipated. Since he wrote those words, eight ice shelves have fully or partially collapsed along the Antarctic Peninsula, and the northwestern Antarctic Peninsula has warmed faster than virtually any place on Earth.
Another extreme drought hits the Amazon, raising climate change concerns - "We know from simple on-the-ground knowledge that the 2010 drought was extreme, leading to record lows on some major rivers in the Amazon region and an upsurge in the number of forest fires. Preliminary analyses suggest that the 2010 drought was more widespread and severe than the 2005 event. The 2005 drought was identified as a 1-in-100 year type event." That’s from an email to CP by forest scientist Simon Lewis, a leading expert on the Amazon (see Scientists: “There are multiple, consistent lines of evidence from ground-based studies published in the peer-reviewed literature that Amazon forests are, indeed, very susceptible to drought stress”). The figure above is from the University College London Global Drought Monitor via a post by WWF’s Nick Sundt, that I am reposting below. The world’s largest rain forest has long been a bulwark of hope for a planet troubled by climate change. Covering an area the size of the continental United States, the Amazon holds 20 percent of Earth’s fresh water and generates a fifth of its oxygen. With the planet’s climate increasingly threatened by surging carbon emissions, the Amazon has been one of the few forces keeping them in check. But the latest scientific evidence suggests the forest may be unable to shield us from a hotter world.
China hits efficiency and pollution targets - China will have achieved its goal of a 20 per cent reduction of energy intensity and a 10 per cent cut in major pollutant emission against 2005 levels by the end of 2010, according to official figures reported yesterday. Success in meeting the goals is largely thanks to hefty government investment coupled with draconian threats for non-compliance towards the end of the 11th Five-Year Plan (2005-2010). The China Daily cited a study by the National Development and Reform Commission (NRDC) showing that government funding of more than 200bn yuan ($301 bn) for energy conservation, emissions reduction, and environmental protection measures unlocked over 2 trillion yuan ($30bn) in green investment from the private sector.
Shanghai Smog Syndrome and PRC Pollution - Aside from becoming the world's largest carbon emitter over the intervening years, China's problem with keeping its major cities liveable has taken many lumps. Beijing's famously bad air was dealt with by implementing fairly draconian measures like closing down adjacent factories and limiting automobile traffic during the 2008 Beijing Olympic Games. Shanghai put similar measures in place during the just-concluded Shanghai Expo 2010, some clamping down on construction activity. With that event coming to an end, however, it seems Shanghai is back to its old smoggy ways--and worse. From our favourite official publication, the China Daily: China's largest metropolis has suffered from high levels of pollution since early November, with pollution index figures far higher than those recorded during the six months of the World Expo. As of Wednesday, the city has witnessed its air pollution index passing 100 for eight days this month, the worst readings in the past five years. China's environmental standards rate a reading below 50 as "excellent", from 50 to 100 as "good" and above 100 as "polluted". The latest pollution occurred on Monday when the index reached 107. On Nov 13 it skyrocketed to 370, the highest level in the past decade.
Canada's climate bill flattened -“Spitting mad,” is how the Victoria Times Colonist described Andrew Weaver, a climate modeller at the University of Victoria in British Columbia, following the news that Canada’s climate change bill had been defeated in the Senate late on Tuesday. “Retiring with a bottle of Jack Daniel’s sounds good right now,” Weaver said. The Climate Change Accountability Act called for greenhouse gas emissions cuts with a short-term target of 25% below the 1990 level by 2020, and a long-term target of 80% below the 1990 level by 2050. For nearly a year and a half it had shuttled between the House of Commons and its environment committee before being passed by the House on 5 May, supported by all three of Canada’s opposition parties. It then languished in the Senate, until it was voted down 43-32 this week.
Countries Pare Ambitions for Talks on Climate Change - With the push to cap greenhouse-gas emissions all but dead in the U.S., world diplomats will meet in Mexico starting Monday to try to eke out a less-ambitious attack on global warming. At a two-week United Nations climate conference in the Mexican resort city of Cancun, negotiators will focus not on the stick of mandatory emissions limits but on the carrot of tens of billions of dollars in subsidies from industrialized countries to help developing nations grow on a greener path. Almost all growth in global greenhouse-gas emissions in coming years is expected to come from developing countries. The subsidies likely would, among other moves, help China build more-efficient coal-fired power plants, Brazil preserve forests, and an array of developing countries build wind farms and solar projects.
Norfolk, Va., on Front Line, Tackles Rise in the Sea -As sea levels rise, tidal flooding is increasingly disrupting life here and all along the East Coast, a development many climate scientists link to global warming. But Norfolk is worse off. Situated just west of the mouth of Chesapeake Bay, it is bordered on three sides by water, including several rivers, like the Lafayette, that are actually long tidal streams that feed into the bay and eventually the ocean. Like many other cities, Norfolk was built on filled-in marsh. Now that fill is settling and compacting. In addition, the city is in an area where significant natural sinking of land is occurring. The result is that Norfolk has experienced the highest relative increase in sea level on the East Coast — 14.5 inches since 1930, according to readings by the Sewells Point naval station here. “If sea level is a constant, your coastal infrastructure is your most valuable real estate, and it makes sense to invest in it,” Mr. Stiles said, “but with sea level rising, it becomes a money pit.”
Unavoidable Climate Change -- Past the Point of No Return - It's too late. The world has missed the opportunity to avoid serious, damaging human-induced climate change. For a variety of reasons ranging from ignorance to political ideology to commercial self-interest to inertia to intentional misrepresentations and misdirections on the part of a small number of committed climate deniers, the United States and the rest of the world have waited too long to act to cut the emissions of damaging greenhouse gas pollutants. We are now committed to irreversible long-term and inevitably damaging consequences ranging from rapidly rising sea levels, far greater heat stress and damages, disappearing glaciers and snowpack, more flooding and droughts, and far, far more.
Scary new best friend for politicians - HERE'S cold comfort. It would be impossible, according to the Swedish energy expert Kjell Aleklett, for us to emit enough greenhouse gas to warm the planet by six degrees: we don't have enough oil, coal or gas to burn. ''All the emissions scenarios that have been put forward over the last 10 years are wrong,'' says Aleklett, professor of physics at the University of Uppsala and the world president of the Association for the Study of Peak Oil. The UN's Intergovernmental Panel on Climate Change business as usual forecast to 2100, which would result in six degrees of warming, assumes worldwide production of coal could rise 10 times higher than today. ''That can never happen,'' says Aleklett, who is on an Australian speaking tour this month and was recently heard on the ABC's Science Show. Aleklett says coal production will peak about 2030, and China is peaking about now.
Are we living in the end times? - Al Jazeera interview - Is the world ignoring signs of the so-called "end times"? According to renowned philosopher Slavoj Zizek the capitalist system is pushing us all towards an apocalyptic doomsday. He points to the faltering economy, global warming and deteriorating ethnic relations as evidence. On Thursday's Riz Khan we speak with Zizek, who has been called the "most dangerous philosopher in the West", about his controversial theories and prognosis for the future.
Ecological Headstand - Footprint analysis indirectly implicates economic growth as responsible for ecological destruction because of the dependence of a growing economy on increased material throughput. Technological optimists argue that economic growth could become ecologically sustainable by finding a way to "dematerialize" economic production thus "decoupling" GDP growth from environmental damage. Critics of growth point out that although relative decoupling has been a staple of technological progress, it has not led to absolute decoupling. They cite the Jevons Paradox whereby an increase in the efficiency of using a resource, such as coal or petroleum, leads to a decrease in the price of its final products and thus to an increase in total demand for the resource. The same principle can be extended to environmental consequences. If a cleaner energy source can be employed at a lower cost (factoring in the prospect of "green" subsidies) than dirty energy, then expanded consumption will be enabled, offsetting the original advantage. There would appear to be no way around this dilemma, short of some sort of "breathairean" perpetual motion fantasy.
Toward an Economics of Stewardship, Humbly Thankful - I thank Mark Thoma for linking to a blog I haven’t seen before, the Ecological Headstand. Its most recent post reexamines the idea of our economy and our ecological footprint. Reading it this morning flipped my mental approach to this day of abundance. Rather than taking for granted the gifts that the lucky among us reap from the Earth, I think it’s important to examine our attitudes towards this abundance, and how our economics of abundance reflects this attitude. In the interest of evading nuance, I think there are essentially two approaches economics can take to the environment- an economics of Mastery, and an economics of stewardship. It’s curious that at introduction, most present economics as a study of scarcity, because when it comes to our environment and natural resources, our typical economics of Mastery seems to presume nearly boundless abundance. Any abundance, of course, can be overcome by our mastery of the environment- there will always be a better fertilizer, a new fuel cell, by which we can circumvent natural limits- until, of course, we simply can’t.
Scientists respond to ocean acidification doubts - Recent reports that ocean acidification is proceeding at worrying pace, particularly in Arctic waters, have led some environmental optimists to question the severity of the problem. Book author and blogger Matt Ridley, for example, argued in a 4 November opinion piece in the Times that ocean acidification may not be much of an issue. “Study after study keeps finding that, far from depressing growth rates of marine organisms, higher but realistic levels of carbon dioxide either do not affect them or increase their growth,” he wrote, citing a recent meta-analysis of 372 relevant papers. Funds for ocean acidification research were better spent on efforts to counter what Ridley thinks are greater threats to marine ecosystems, namely overfishing and nutrient runoff. Scientists with the UK Ocean Acidification Research Programme (UKOARP) have now released a detailed and well-balanced response. The briefing agrees that scientists should not overstate the threats of ocean acidification but makes clear that strong evidence does exist for severely negative impacts on a variety of marine species.
Profs: Wells pose threat – With the potential to release uranium and other hazardous materials, the process of Marcellus Shale drilling and hydraulic fracturing must be tightly regulated, university professors said Friday. During the “Health Effects of Shale Gas Extraction” conference at the University of Pittsburgh — located in the city whose council this week unanimously voted to outlaw Marcellus drilling within its boundaries — professors from numerous institutions spoke of the dangers associated with the process. Jane Clougherty, Pitt professor of environmental and occupational health, also noted some of the rural areas — such as those in Ohio, Marshall, Wetzel and Tyler counties that are seeing increasingly more drilling activity — may be used for the purpose of benefiting big cities. Many of the instructors, students and concerned residents in attendance heard professors speak on the dangers of both drilling the deep and horizontal wells required for Marcellus extraction, as well as the fracturing, or “fracking,” method used to break the shale to release the gas. “Uranium is being mobilized by the fracking process.”
Booming U.S. Gas Industry Becoming an American Energy Exporter - Last month the Chinese government owned energy company CNOC (you will recall CNOC's failed bid to take over Unocal in 2005) committed over a billion dollars to take an important stake in the Eagle Ford, shale gas acreage in Texas. In doing so they joined the Norwegian state oil company, Statoil, that had made an earlier investment in the Eagle Ford field as well. Major oil companies such as Exxon, Shell, Chevron and myriad other foreign entities have joined American gas producers such as Chesapeake Energy to invest tens of billions of dollars these past years to develop a stake in what is becoming a treasure trove of natural gas ranging from Texas and Louisiana to the vast Marcellus field of Western Pennsylvania, Ohio, West Virginia and upstate New York. With new drilling techniques the proven gas reserves of the United States have skyrocketed from bare subsistence levels by a factor of five and counting, with the shale play still in its infancy.
Putin Says EU Gas-Market Rules May Lead to Energy Crisis, Seeks Swap Deals - Russian Prime Minister Vladimir Putin reiterated his concern that new European Union rules to liberalize gas markets may lead to an energy crisis. “Ill-considered liberalization of financial markets largely provoked the financial crisis,” Putin wrote in an article published in Sueddeutsche Zeitung before a trip to Germany that begins today. “It would be undesirable if lapses in gas-industry regulation led to a new crisis, this time in energy.” The text was posted in Russian on Putin’s website. Putin said in Sofia on Nov. 13 that the EU’s plan to create independent gas-pipeline management that secures access for third parties would result in price increases for consumers and hinder development of Europe’s energy infrastructure. The rules would affect OAO Gazprom, Russia’s gas export monopoly, which meets about a quarter of European gas needs.
BP Controlling University Research, and Professor Who Downplayed Oil Spill Called a “Shill” By Fellow Professor - LSU professor and oil spill expert Ed Overton has been all over the news saying that fears of the BP oil spill were overblown. But as Raw Story reports, Overton has been a lead NOAA consultant for decades, and a fellow LSU professor calls him a “shill”: Overton’s prominent position as the chief chemist and principal architect of NOAA’s Hazardous Materials Response Division dating back to the early eighties, along with his tendency to provide rosier-than-average assessments of the effects of the Gulf oil spill since the catastrophe began –- opinions often in line with those of BP, NOAA and other federal officials –- have raised questions about the omission of his contracting work and the scientific objectivity of his public statements. A fellow senior sciences professor at Overton’s own LSU, also noted that Overton “does not appear to be an unbiased source of information” and found it laughable that the head of NOAA’s chemical hazard assessment team is purporting to provide public comments as an “independent scientist.”
Half of BP oil spill damages claims ‘inadequate’, says payout chief - BP's damages bill for the Gulf of Mexico oil disaster could be much smaller than expected after it was revealed that half the claims made so far to the $20bn (£12.7bn) compensation fund either have no supporting documents or "woefully inadequate" ones.Ken Feinberg, appointed by the White House to run the claims process, announced the figures today, adding that BP would be able to automatically challenge any individual claim of more than $500,000.Although BP has set aside $20bn to pay all "legitimate claims" from the biggest accidental offshore oil spill, privately it thinks that its final compensation bill will be significantly lower. Tuesday was the deadline for emergency claims covering the last six months. The fund will now start accepting final lump-sum claims, which require recipients to waive the right to sue BP.
Oil-Rich South Sudan Weighs Cost of Progress - — South Sudan officials are concerned at the environmental damage being caused by the oil industry and are promising a tough new line if the oil-rich region gains independence next year. Their potentially rich but grossly underdeveloped region is in a quandary. Its desperately poor people, mostly subsistence farmers and cattle grazers, need oil money but officials say livelihoods are being threatened by pollution. In January, southerners will have a chance to take a step towards redressing that problem, voting in a referendum on whether to separate from the rest of the country and form a new state. The oil industry will then, at least legally, be under their control, and they might be able to do something.
Mexico regulator rejects Pemex oil reserve estimate (Reuters) - Mexican regulators rejected a huge chunk of state oil monopoly Pemex's estimate of how much oil and gas the country has, calling into question the long-term sustainability of the industry. The National Hydrocarbons Commission ordered Pemex to produce more evidence to back up its claims of probable and possible oil and gas reserves in its northern region, in a ruling dated Sept. 30 but published on its website on Friday The commission, known by its Spanish acronym CNH, cited wide differences between what Pemex said it could recover from the area and studies by independent reserves auditors. Pemex estimated in March that the possible and probable reserves in the northern region, mainly at the controversial Chicontepec project, were more than 17 billion barrels of oil equivalent, more than 40 percent of the country's total.
Gross All Over - What a scary season! This is what it feels like to hit the wall of limits to everything the earth provides us. Our oil problems are for real and urgent, despite the arrant nonsense ("There Will Be Fuel") published last week in The New York Times - a news organization that runs a direct hose-line of smoke up its own ass from the oil industry's chief PR shop, IHS-CERA, The Times's sole source on the energy beat. Meanwhile, Europe is back to imploding financially again (with Ireland as the rotting head of the dead fish in the current rotation). The US housing sector has flat-lined, the banks are so lost in the "mortgage-gate" morass of lost and robo-forged documents that the ghost of Roy Cohen couldn't get them out of it alive - though Lloyd Blankfein and Jamie Dimon must pray to tiny gilded statuettes of old Roy in their late night sweats. Ben Bernanke is set to shovel huge transaction fees to the "primary dealers" (i.e. Lloyd's and Jamie's banks, et al) in his scheme to buy treasuries through them monthly at a whopping premium instead of directly from the source - with the side effect of making it an act of futility for ordinary Americans to save money the old-fashioned way, at interest. The fetid remains of decomposing CDOs line the vaults and stain the books of financial institutions everywhere. Accounting fraud is still the order-of-the-day in everything from Fannie and Freddie to your neighborhood HMO. Government at all levels is dead broke. Did I leave out endless war at endless cost (of money we don't have)?
It's Official: The Economy Is Set To Starve - Once a year, the International Energy Agency (IEA) releases its World Energy Outlook (WEO), and it's our tradition here at ChrisMartenson.com to review it. A lot of articles have already been written on the WEO 2010 report, and I don't wish to tread an already well-worn path, but the subject is just too important to leave relegate to a single week of attention. Because some people will only read the first two paragraphs, let me get a couple of conclusions out right up front. You need to pay close attention to Peak Oil, and you need to begin adjusting, because it has already happened. The first conclusion is mine; the second belongs to the IEA. The IEA has been producing annual reviews of the world energy situation for a long time and has not mentioned the term "Peak Oil" until this year's report. And not only did they mention it, they said that as far as conventional oil goes, it's in the rear view mirror: Crude oil output reaches an undulating plateau of around 68-69 mb/d by 2020, but never regains its all-time peak of 70 mb/d reached in 2006, while production of natural gas liquids (NGL) and unconventional oil grows quickly. WEO 2010 - Executive Summary
Clearly It Is Going To Suck.... I just caught up on a few of my favorite econ blogs. And of course we had the recent midterm elections. I am disturbed by the number of people who think that there is a way to avoid a drastic change of our current quality of life. We are thermodynamic thieves living wholly unsustainable lifestyles. With the magic of easy oil (and the remarkable generosity of outside entities lending us money to fuel astounding social programs) we have built a wonderland of greater and greater complexity. It has been stable for so long that it appears that many have mistaken it for nature; the natural order of things. Perhaps I should start the "Soft Landing" political party. We will seek the smoothest transition into national sustainability. Our motto will be "Clearly It Is Going To Suck, But Let's Try To Be Rational About It".
IEA's newly released "World Energy Outlook 2010": conventional oil production peaked six years ago - For two weeks now the peak oil portion of cyberspace has been abuzz with commentary on the International Energy Agency’s (IEA) newly released World Energy Outlook 2010. Without missing a beat and without much explanation, the world’s leading compiler of everything about energy has gone from denying that conventional oil production will peak in our lifetime to saying it happened six years ago. Will wonders never cease! The Agency, of course, did not predict an immediate cataclysm, as it managed to conjure up enough undiscovered, undeveloped, lousy quality, and very-expensive-to produce oil to keep the world sort of growing for another 25 years. Needless to say the conjuring was met with much derision from those who believe they can discern the possible from the impossible. Before getting into the implications of all this, it is well to remind ourselves that, in the case of this particular publication and set of forecasts, the IEA has a nearly impossible mission. Although in theory independent of the 28 national governments that support the Agency, in reality it has many political masters none of which are as yet ready to grapple with the myriad of problems that will occur when their peoples recognize that significant economic contraction is the only possible course ahead.
Peak Oil: why the Pentagon is pessimistic - “Twilight in the desert” is a book summing up the arguments of a Texan oil banker who suggests that Saudi Arabia is overestimating its future oil production capacity. I’ve learned through the American Department of Defense that this book is the source of two recent Pentagon reports envisaging a severe lack of oil starting in 2012 and continuing until 2015 at least. In the Joint Operating Environment 2008 report [p. 17 ] and JOE2010 [pp. 28, 29 ], one can read: “By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.” 10 million barrels per day is approximately the equivalent daily production of Saudi Arabia. If in 2015, in satisfying the world’s energy demand, there was really a gap equivalent to the Saudi production, the years to come would promise to be extremely delicate with effects spread throughout the world, affecting the economy, politics, and, especially, the military forces.
The Peak Oil Crisis: Did We Vote Ourselves to Extinction? - The disconnect between the American body politic and reality grows larger every day. In reviewing hundreds of pages of commentary on the election, one searches in vain for analysis that even come close to describing what is happening to the nation - i.e. we are in the midst of a massive deflating credit bubble and running short of affordable liquid fuels at the same time. There seems to be general agreement that the new balance of power in Washington means two years of gridlock. The trillions spent on bailouts and stimulation kept the illusion of recovery going for some months, but did little to increase employment or reverse the disintegration of the inflated housing market. Some polls show nearly half of US households have been seriously affected in some manner by the adverse economic conditions, yet the administration continued to express optimism rather than realism.
Neither apocalypse nor paradise - I know that industrial economies have already overshot their supply of resources, from oil to water to fish in the seas. I also know that we're quickly filling up all the places to put our pollution, particularly greenhouse gas emissions. And I know that the Earth cannot long sustain a population of seven billion humans and growing. I know that our societies cannot make peak oil or climate change go away with technology. I know that clean energy won't replace all the fossil fuels we use now. But I also know that unless we want to shiver in the dark, we'll need some source of power.I don't know exactly what the post-peak future will look like, and I am suspicious of people who claim that they do. I'm sure that both Nicole Foss and Jeff Rubin are aware of the moral responsibility that comes with giving financial advice. But since Foss says that families should prepare now for deflation and Rubin says they should prepare now for inflation, one of them will be wrong. Even as some people benefit from their advice, others will suffer.
Peak Oil Video - Here’s a video from the Post Carbon Institute which gives a good rundown on the history of fossil fuels. I could quibble with a few of the details, and there’s one major lapse where it says the Cold War was a showdown between market and planned economies. Of course, “the market economy” is in fact a planned economy. “Markets” is an ideological term and concept, not a neutral denotation. Assertions to the contrary are lies which are part of the market fundamentalist ideology. The video implicitly recognizes this, for example when it posits globalization as a sentient force which does this and that. That’s exactly right, but that’s because market globalization is a command economy.
Cuba deal boosts China's Latin American oil plans - – China is taking another great leap forward in its Latin American energy plans, raising Cuba's energy importance in the process, with a deal to lead a $6 billion refinery expansion project on the communist island, experts said this week. The project, to be funded mostly by China's Eximbank, is the latest of several significant moves in the region for the Asian power as it continues to expand its global influence. For Cuba, the refurbishing of its antiquated refinery in the coastal city of Cienfuegos will provide an outlet for oil it hopes to tap soon in the Gulf of Mexico, while also laying the groundwork for the island to possibly become a key oil transshipment point for the Caribbean basin.A unit of state-owned China National Petroleum Corp expects to begin work in early 2011 on the project that will more than double the refinery's capacity to 150,000 barrels daily and include construction of a liquefied natural gas terminal.
Chinese gas output from unconventional sources may double by 2015 - Bloomberg reported that China, the world biggest energy consumer may double its production of unconventional gas in five years to meet rising demand for cleaner-burning fuels. China National Petroleum Corp said in a statement that output of coal-bed methane and tight gas held between rocks may exceed 30 billion cubic meters in 2015 compared with an estimated 15 billion cubic meters this year. CNPC said China is seeking to triple the use of natural gas to about 10% of energy consumption by 2020 to help cut reliance on more polluting oil and coal. The country may hold as much as 380 trillion cubic meters of unconventional gas about 10 times the potential reserves of conventional gas.
Coal India Will Purchase Overseas Mines to Meet Import Demand… Coal India Ltd., the world’s largest producer of the fuel, is studying the acquisition of five mines in the U.S., Australia and Indonesia to meet the country’s demand for the fuel, Chairman Partha Bhattacharyya said. The state-owned company is examining a mine in Australia owned by Peabody Energy Corp., one in the U.S. owned by Massey Energy Co. and another in Indonesia, Bhattacharyya said, declining to name the third company. While Coal India hasn’t started due diligence on two more mines in Australia, it may appoint banks soon to evaluate offers, he said. “We are narrowing the gap of valuations with Peabody,” Bhattacharyya, 59, said in an interview in New Delhi yesterday. “We would like to invest because there are companies which want money for their mines or a market for their coal,” he said. “We have the money and there is a big market here.”
'Coal War' with Beijing Next Hit on U.S. Economy - The next serious crisis for Americans could be a lack of coal to run the power plants that light up computer screens, heat microwave dinners and turn on the big-screen televisions, according to experts on the issue. The situation is that hundreds of millions of people in nations like China are moving rapidly from the Stone Age to the 21st century as American dollars have flooded that part of the world, and officials have been struggling frantically to make enough power to run all of the gadgets the new lifestyle includes. Similar circumstances also are developing in India and places like Indonesia, and the demand is sending the expense of coal through the ceiling, making relatively insignificant President Obama's promise during his 2008 election campaign that he wanted to regulate those who build coal mines and coal-fired power plants until they were bankrupt.
The End of Cheap Coal? - As early as the mid-1990s energy forecasters warned about the demise of cheap oil. But was the world overlooking a potentially larger problem: the end of cheap coal? In a comment article in the Nov. 18 issue of Nature, Richard Heinberg and David Fridley of the Post-Carbon Institute in California argue that growing demand for coal—particularly in China, where it is needed for steel making.—cannot be met by global coal reserves because estimates of the amount of easily retrievable coal are outdated and optimistic. China, the world's biggest producer and consumer of coal, has coal resources of 187 billion metric tons, second to the U.S., according to data collected in the 2000-10 national resource survey by China's Ministry of Land and Resources. That's about 62 years' worth of coal, according to Heinberg and Fridley. But the duo are skeptical of that claim, and say that coal is often more scarce and more difficult to retrieve than current estimates.
Why China is an energy consumption hog - Over the next 15 years China is expected to build the equivalent of 10 New York Citys. That's a lot of concrete and steel, and it goes a long way in explaining why the country is using so much energy. Roads, bridges, rail lines, skyscrapers and factories all take tons of concrete, steel, chemicals and glass. "They are building massive amounts of infrastructure," said Lynn Price, a scientist in the China Energy Group at Lawrence Berkeley National Laboratory, a U.S. Department of Energy research lab. "It takes incredible amounts of these energy-intensive commodities." Earlier this year, the International Energy Agency said China surpassed the United States to become the world's largest consumer of energy. While China does have four times as many people, its economy is only a third the size. So where is all that energy going? Statistics from the DOE show it's China's industrial production, not its 1.3 billion people, that's using all this fuel. China's industrial sector accounts for over 70% of its total energy consumption. Meanwhile, the U.S. industrial sector accounts for just 33% of its energy consumption.
China's Rare Earth Exports Dropped 77% in October After Export Quota Cut - Rare-earth exports from China, the world’s biggest supplier, declined 77 percent in October from a month earlier after the government reduced shipment quotas for the second half. Exports were 830 metric tons last month compared with 3,660 tons in September, the General Administration of Customs said in an e-mail. Total exports were 32,990 tons in the first 10 months, according to the e-mail, which was sent yesterday. The export restrictions on the minerals, used in laptops, missile-guidance systems and hybrid cars, sparked a surge in rare-earth prices and highlighted global dependence on China for shipments. Commerzbank AG said that prices may advance further as supplies may dwindle, according to a Nov. 11 report
China Wants Concessions for Mercantilism in Return for Rare Earths -- Yves Smith -A story in Reuters signals that China is willing to soften its stance on rare earths. But of course, it has no reason to offer such a concession for free. The article indicates that China wants its trade partners to back off on their pressure on China to curb its abuses of international trade rules. One of the problems with our international trade arrangements is that trade agreement participants tolerated a certain level of cheating. No one minded much when everyone seemed to be benefitting overall when global growth rates were good. Now with expansion more sluggish, the eurozone under stress, and the US mired in high unemployment, many nations are feeling less charitable towards practices that are not kosher under various international agreements. The problem is that having tacitly approved of these actions in the past makes it hard to secure changes in behavior. China has come under pressure for its refusal to budge on some of its questionable practices, such as maintaining a currency peg at an artificially low level relative to that of many of its major trade partners. China’s latest trial balloon is that it want to trade some free passes on this front for easier access to so called rare earths, on which is has a stranglehold.
China feels the bite of food inflation – The lines of haggling housewives barely have time to blink before the sign is put back, but now it shows that a half kilo of eggs that cost the equivalent of 48 pence yesterday will cost them 49 pence today. This is China's spiking food-price inflation in action. The shoppers tut loudly at yet another price rise – eggs are up nearly 50pc since the summer – but as the stall-holder pays off her supplier she defends herself to her customers. "What choice do I have?" she says apologetically, "the supplier charges more, so I have to charge more. The farmer is complaining about the price of grain and the supplier is complaining about the price of diesel for transport, everyone's complaining." This kind of disgruntlement makes China's leaders very nervous.
Destination Inflation - Andy Xie - Caixin - Inflation has become a threat to social stability. The government is responding with a combination of monetary tightening and price controls. While these measures may calm inflation fears among the masses for the time being, the fear may come back with a vengeance if the measures fail to achieve the stated purposes. China has entered an era of inflation. How high inflation averages over the next five years will be mostly determined by the rippling effects of monetary expansion in the past decade. It is too late to try to push inflation back. What is needed is action to safeguard stability during this inflation era. The necessary policies for maintaining stability are (1) to increase interest rates to the expected average inflation rate over the next five years, (2) to increase allowances for the population on fixed payments (e.g., pensioners and students), (3) to accommodate market forces for wage increases, and (4) to decrease personal income tax rates to prevent rising tax burdens on inflation impact on nominal income.
Lessons from history in China’s inflation crisis –History makes clear why the Chinese are so twitchy about their rapidly rising consumer price inflation. The governments of poor countries (even ones that are getting rich as rapidly as China) know that hungry people are quick to take to the streets. Thirteen died in food riots in Mozambique in September, a worrying echo of the unrest two years ago on the streets of Mexico, Pakistan and many of the world's other poorer nations. Although headline prices in China rose by 4.4pc in October compared with a year earlier, the food component of the CPI (by far the most important in a low-income country like China) jumped by more than 10pc. Even that probably understates what is going on. The Xinhua news agency reported last week that a basket of 18 staple vegetables was 62pc higher in the first 10 days of November than in the same period last year.
Lessons for China from Dromesia and Essendonia - I just spent a few minutes getting to know the more obscure economies of Domestica, Essendonia, Coonawarra and Clintonstan.These imaginary lands with peculiar names illustrate the IMF's balance-of-payments textbook, a gripping read. I dipped into it in order to make sense of China's latest current-account figures, which show that its surplus soared to $102.3 billion in the third quarter, about 7% of third-quarter GDP. Recall that not so long ago, Yi Gang, a deputy governor of China's central bank, said that China aimed to narrow its surplus to less than 4% of GDP in 3-5 years. That prompted brief American hopes of a G20 agreement to limit current-account imbalances to that size. But even as it revealed a bumper third-quarter surplus, China revised down its figures for the first and second quarters by almost $25 billion. The State Administration of Foreign Exchange (SAFE) explained that it was no longer including the retained earnings of foreign-invested enterprises (FIEs) in its calculations of China's current-account surplus. Not counting them was consistent with international standards, it said.
It's All Going According to Plan - One of the people at the meetings we had today asked us what had surprised us most about China so far. I gave a lame answer that I cannot now recall, but I later realized that the thing which had actually surprised me most is the extent to which everything here is subsidized and directed by the government--and the fact that no one seems to wonder if that's a problem. Aside from the foreign ministry people and a few economists, everyone we've spoken to here has been either in the business of doling out subsidies, or in the business of collecting them: cheap bank loans, tax-advantaged development zones, various rural subsidies, and so on. When the government wants something done--whether it is miles of new housing in a Tier III city, or a coal liquification plant, it essentially points at the banks and the local authorities and says "Make it so!" It's not that I didn't understand that the government did this; it's that I didn't understand how pervasive it would be, or how popular this would be, at least with the folks we interview. Everyone--including most of the economists and NGOs--seems to think this is swell. No fiddling around with archaic, unplanned systems; just figure out what the country needs and do it!
Chinese exports to become a lot dearer - CHEAP imports of electronics, toys and textiles are at tipping-point. This is as production costs soar in China, wiping out any savings from a strong Australian dollar in the new year. After two decades of exporting deflation by cutting the cost of everyday items for consumers around the world, the tables have turned in Asia's industrial powerhouse. Wages, raw materials and other manufacturing costs in China are on the rise, forcing up prices for companies and consumers long accustomed to cheap clothing that costs less to buy new than to dry-clean. The return of inflation in China, coupled with its booming domestic demand and a massive economic restructuring plan over the next five years, is beginning to alter the Australian economy. Importers warn of sharp price rises and stock shortages next year, as Chinese factories begin to name their price and prioritise production for higher-volume customers in the US and Asia.
Can the Chinese Become Big Spenders? - In time, China would become the world’s next great consumer society. That term may have negative connotations in the United States, particularly after the last decade of debt excess. But the term means something very different for China. A Chinese consumer society would improve the lives of hundreds of millions of people. The benefits of the industrial boom that began in the 1980s would spread more rapidly beyond the country’s eastern coast. The service sector would grow, and the economy would no longer be quite so dependent on smoke-spewing factories. For the rest of the world, the Chinese consumer is one of the best hopes for future economic growth. In the years ahead, when the United States, Europe and Japan will have no choice but to slow their spending and pay off their debts, China could pick up the slack. Millions of Americans — yes, millions — could end up with jobs that exist, at least in part, to design, make or sell goods and services to China.
Is China Being Political or Just Plain Stupid? - With consumer prices in China up 4.4% this October over last year, the country has taken another move to avert inflation: price controls. There’s just one problem. Thirty years ago this would have been a viable policy alternative, but those days are long gone. In fact, the vast majority of economists agree that price controls do nothing to prevent inflation and only lead to shortages.This isn’t a wise insight from an obscure economist. It’s the view of even the most basic of microeconomics textbooks. China isn’t ignoring inflation; it simply isn’t using interest rates to solve the problem. And raising rates just happens to be best way of dealing with inflation – remember Volcker. So why not use the most effective policy tool, as opposed to laying on price controls – one of the very few policies that almost all economists can agree on as being wrong-headed. So is China being just plain stupid? Perhaps. After all, if Chinese economists really believe that price controls will effectively combat inflation, the country is headed for trouble, and fast.
Construction Bank Predicts Yuan Trade May Increase to $3 Trillion by 2015 - Trade transactions settled in the yuan may rise to $3 trillion a year by 2015 as China pushes for the wider use of its currency as an alternative to the dollar in business and finance, according to China Construction Bank Corp. “The renminbi market makes perfect sense for many reasons and we believe it will explode,” CCB International is a unit of China Construction Bank. China Construction Bank, which helped organize the biggest number of bond sales in China this year, forecasts an increase from the current $19 billion a year of yuan-denominated trade transactions, or commercial transactions primarily paid for and financed using the yuan that don’t involve the dollar. Demand for China’s currency is escalating as the economy grew 9.6 percent in the third quarter and Premier Wen Jiabao promotes the yuan’s role in trade. The currency has become more attractive since China ended a two-year peg to the dollar June 19, and investors bet on further gains beyond the 2.8 percent achieved so far versus the greenback.
PBOC Researcher Calls on U.S. to Sell Gold Reserves, People's Daily Says - The U.S. should cut its government spending and sell some gold reserves to balance its budget and fund its recovery, the People’s Daily overseas edition reported, citing Xia Bin, an adviser to the People’s Bank of China. The U.S. has to resolve its “twin deficits” in the government budget and the current account, Xia was quoted as saying. Three ways that may help the U.S. achieve that target include reducing military expenses, selling part of its gold reserves and relaxing some export limits on technology, he said. “The U.S. has more than 8,000 tons of gold reserves; why can’t it sell some of it since the country wants to raise funds for economic recovery but doesn’t want to add more burden to the fiscal deficit,” Xia told the newspaper. He didn’t mention whether China would be willing to purchase any gold from the U.S.
PBOC Adviser Li Says China Can Consider Selling US Treasuries - (Bloomberg) -- Chinese central bank adviser Li Daokui said China can consider selling U.S. Treasuries as a way to seek compensation for losses caused to its foreign exchange investments by the U.S.’s decision to undertake so-called quantitative easing. China could sell some of its Treasury holdings when the Federal Reserve buys the debt, Li said in an interview with state broadcaster China Central Television.
China Fails to Draw Enough Demand at Bill Sale for First Time Since June - China’s finance ministry failed to draw enough demand at a bill sale for the first time since June, reflecting a shortage of cash at banks after policy makers raised their reserve requirements twice this month. The ministry sold 11.6 billion yuan ($1.7 billion) of three-month securities, falling short of its 20 billion yuan target, according to a notice posted on the Chinabond website. The average winning yield was 2.7372 percent, compared with 2.52 percent on outstanding 91-day debt yesterday. The Export-Import Bank of China also failed to meet its sale target in a one-year note auction today, issuing 16.5 billion yuan versus the planned 20 billion yuan. The People’s Bank of China raised interest rates last month for the first time since 2007 and is tightening money supply to help curb inflation, which accelerated to the fastest pace in 25 months in October.
Currency war: the stakes for Africa - Quantitative easing (QE) adopted by the US Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan – printing hundreds of billions of dollars of electronic money – is the current weapon of choice in an escalating global currency war. Since the official interest rates set up by these central banks are close to zero, QE is flooding emerging market economies as investors search for higher yields. As a result, the exchange rates of their currencies are rising. This invokes the 1985 Plaza agreement, whereby the US pressurised Japan into an appreciation of the yen. Japan never recovered from the huge monetary expansion that followed. China is unlikely to follow in Japan's footsteps. With its huge population, immense foreign exchange reserves and capital control, Beijing still has considerable scope to thwart speculative capital inflows and expand domestic demand to ward off western currency bullying.Africa is being caught in the crossfire of this currency clash. In South Africa, the continent's biggest economy, capital inflows induced a rally in the rand, which last month rose to its highest level against the dollar in almost three years, undermining key export-led industries.
Brazil Monetary Policy Uncertainty Continues - Brazil press is reporting that President-elect Rousseff won’t ask central bank chief Meirelles to stay on after she takes office January 1, and repeats earlier speculation of changes to the economic team. We have been warning for quite some time that markets were too complacent about political risk under Rousseff, and we continue to think we are likely to see a shift in Brazil risk assessment in the coming months. If Meirelles were to be replaced, we think it would be taken very negatively by the markets. Lula correctly kept a hands off approach to monetary policy during his administration, but markets will need confirmation from Rousseff that she will do the same. Remember, the central bank does not have legal independence but has enjoyed practical independence under Lula and before that under Cardoso. Ultimately, we believe Rousseff will maintain orthodox policies, but uncertainty will likely weigh on the Brazil outlook near-term.
Ruble Debt Sales Rocked by Ireland, Weaker Exchange Rate: Russia Credit - Russia may cancel sales of domestic bonds for the second time this month and delay its first-ever offering of ruble-denominated debt abroad as concerns over the weakening currency and Ireland’s bailout curtail demand. The Finance Ministry’s auctions of 2015 and 2012 federal bonds, known as OFZs, may fail to garner enough bids to take place today as appetite for assets in local currency sours, according to VTB Capital and Trust Investment Bank in Moscow. A planned debut sale of ruble Eurobonds may be postponed because of “weak” market conditions, OAO Gazprombank said yesterday
Putin: More Trade with China in Local Currencies - Prime Minister Vladimir Putin says Russia and China have agreed to increase the use of national currencies in bilateral trade.After talks with Chinese Premier Wen Jiabao on Tuesday, Putin said Russia will start allowing trading in the yuan on Moscow's currency exchange next month. China has just allowed the yuan to start trading against the Russian ruble in its interbank market. Until now, the two nations have mostly traded in U.S. dollars. China has encouraged the yuan's use for cross-border trade to reduce its reliance on the dollar.
Ex-IMF Chief Economist: IMF HQ Will Soon Be in PRC - Former IMF Chief Economist Simon Johnson should be familiar to readers of the fine Baseline Scenario blog which he writes together with James Kwak. While visiting the Bloomberg website, I came across a rather intriguing op-ed in which he discusses the Ireland crisis. Aside from the usual European political-economic gyrations to consider, he makes a seemingly off-the-wall suggestion that had me thinking: Given that they are the world's new moneybags compared to the hard-pressed Europeans and subprime-addled Americans, he believes the Chinese are well-placed bail out troubled Eurozone economies. What's more, he says doing so should buy the PRC some breathing room from constant EU and US complaints over unfair trade practices: In fact, the Irish leadership has every incentive to delay until other countries can be dragged into turmoil. The crisis will become euro-zone wide, at which point all eyes will turn to some combination of the European Central Bank, the German taxpayer, and the IMF. But the ECB can’t pay and the German taxpayer won’t pay. As an alternative, Europe could place a call to Beijing to find out if China would like to commit some of its $2.6 trillion in reserves to keep European creditors whole.
The Hunt for Jobs Sends the Irish Abroad, Again - Just three years ago as Ireland’s economy boomed, immigrants poured in so fast that experts said this tiny country of 4.5 million was on its way to reaching population levels not seen since before the great potato famine of the mid-19th century. The conditions that prompted the Irish statesman Éamon de Valera to express the hope that Ireland’s children would no longer “like our cattle, be brought up for export” seemed like quaint history. That has abruptly turned around. Experts say about 65,000 people left Ireland last year, and some estimate that the number may be more like 120,000 this year. At first, most of those leaving were immigrants returning home to Central Europe. But increasingly, the experts say, it is the Irish themselves who are heading out — unsure that they will ever come home.
Ireland Sells Out Its People To UK, Germany Bankers, Will Apply For Rescue Tonight - And so the can has been kicked down the road one more time as Ireland's Brian Lenihan has just sold out his country to the IMF, the ECB and the Fed for a few extra years of puppet control. RTE reports that EU Finance Ministers are due to hold a conference call later this evening during which Ireland is expected to make a formal request for a financial rescue package. What is not discussed is how the Irish people, now likely furious at being manipulated over a lost cause will express their anger over being the latest sheep used to bail out Europe's ever more insolvent banking system. They can at least sleep soundly, that they won't be the last. After today's rescue of Ireland, the vigilantes will focus their undivided attention on Portugal and Spain - perhaps these two countries will be a little less timid when it comes to rescuing Germany's banking oligarchy.
Ailing Ireland Accepts Bailout - Ireland finally sought tens of billions in bailout money from the European Union and the International Monetary Fund after weeks of bickering that has exposed the limits of Europe's attempt to restore financial markets' confidence in the stability of its single currency. The deal between Ireland and the EU took shape Sunday as EU finance ministers backed Ireland's request for a three-year package of loans totaling roughly €80 billion ($110 billion), according to people familiar with the matter. The size of the package could change, as talks with Ireland are still at an early stage, the people said. The Irish rescue marks the latest escalation in Europe's effort to keep its 16-member common currency from unraveling
Ireland: Rotting republic of greed? - As the Irish bailout moves ahead, two rather stinky aspects have been underplayed: The country’s corrupt political culture and the reported vast tax avoidance by multinational corporations that Dublin has encouraged. “The civic morality that underlies the social cohesion of so many democratic societies seems to me to have been absent in Ireland in recent decades,” says former Taoiseach (prime minister), Garret FitzGerald. He calls it the legacy of British rule: “A society under alien rule cannot be expected to develop a sense of civic responsibility.” “Corruption and tax evasion have gone largely unpunished," says the Sunday Business Post. "The courts are for little people, because state institutions will generally avoid dragging anyone of substance before them.”
Ireland Asks for Aid From Europe, Minister Says -— Ireland has formally applied for a bailout from the European Union and the International Monetary Fund, Brian Lenihan, the country’s finance minister, said Sunday. Speaking on RTE radio, Mr. Lenihan said the application would be approved at a cabinet meeting later Sunday in Dublin. The bailout would be in the tens of billions of euros, he said, adding that the final figure was subject to negotiations. Analysts and politicians have suggested that the size of the package may well approach €80 billion, or $109 billion
Lenihan to seek Cabinet approval for financial bailout - Minister for Finance Brian Lenihan said he would seek Cabinet approval today for a financial bailout from the International Monetary Fund (IMF) and the European Union. Following sevaral days of negotiations with IMF/EU officials in Dublin, Mr Lenihan said he would recommend the State applies for an unspecified bailout loan. The minister said he had reviewed the negotiations last night and decided that the time was right to make an application for loans for both the State and the banking system.
When Irish Banks are Ailing - $130 Billion! That's how much money Ireland will be getting in the bailout package they said they didn't need as recently as Friday. I just want to make it perfectly clear that I also DO NOT need a bailout of tens of Billions of dollars so whatever you do - DON'T give me a bailout this weekend. Let's hope that works! The U.K. and Sweden may contribute bilateral loans, the EU said in a statement. Irish Finance Minister Lenihan declined to say how big the package will be, saying that it will be less than 100 billion euros but Goldman Sachs said yesterday the government needs 65 billion euros to fund itself for the next three years and 30 billion euros for the banks. Ireland's annual deficit is the worst in Europe at 30% of GDP (that would be like the US having a $5Tn annual deficit) and the nation is expected to slash its budget by $20Bn next year just to keep it under that level.
Irish Bailout approved by EU and IMF - From the Irish Times: Irish application for IMF/EU rescue package approved Taoiseach Brian Cowen tonight confirmed the European Union has agreed to Government request for financial aid package from the European Union and the International Monetary Fund. European finance ministers held an emergency conference call tonight to consider a Cabinet request for aid, during which the application was approved. The amount of the aid still hasn't been determined. Apparently the loans will be from the IMF, the European Financial Stability Facility (EFSF), and possibly from the UK and Sweden directly. More from the Financial Times: Eurozone agrees €80bn-€90bn Irish aid
Ireland warned it will have to stump up state assets in bailout -Bord Gáis and the Electricity Supply Board, Ireland's motorways, CIE, the national oil reserves, our stake in Aer Lingus as well as the best parts of the Dublin banks and the whole of the national pension fund are likely to be pledged as security in return for the tens of billions of euro in loans the government will receive from the IMF, the European Community and the European Central Bank. The warning, from markets sources, comes as the talks between the Irish authorities and the IMF-led troika were due to extend through today and into this week. The talks were focusing on ways of limiting the amount of the private banking debts that a generation of Irish citizens will be made to pay for. But in an investor note this weekend, Société Générale in Paris, which helps sell Irish sovereign bonds for the government, said there were calls from around Europe for Ireland to stump up "collateral" in return for its bailout loans.
Irish Citizens Sold Down the River in "Firepower of Stupidity" - Today the Irish Government sold its citizens into debt slavery by agreeing to guarantee stupid loans made by German, British, and US banks. Those loans fueled one of the biggest property bubbles in the world. Ireland has since crashed. Please consider Ireland Seeks Bailout as ‘Outsized’ Problem Overwhelms Nation Ireland applied for a bailout to help fund itself and save its banks, becoming the second euro member to seek a rescue from the European Union and the International Monetary Fund. Finance Minister Brian Lenihan said the loan will be less than 100 billion euros ($137 billion), though he refused to give any further details at a press conference in Dublin today. “A small sovereign like Ireland faced with an outsized problem that we have in our banking sector, cannot on its own address all those problems,” Lenihan said. Ireland may not draw down on the entire loan, he said.
David McWilliams: Pouring more cash down banking black hole is theft – So the Government finally gave up the charade last weekend and asked for help from the IMF and EU. Following a week when everyone, save certain government ministers, seemed to know what was coming, it came as a great relief to the markets when Finance Minister Brian Lenihan made his announcement. Hang on, that's not right, is it? If anything, things in the market have gotten worse. If we ignore the political implosion here and look to the wider European situation for a moment, we can see how little all the 'will we, won't we' agonising that happened here last week actually mattered.The markets know Ireland's economy is not going to recover any time soon, and that rolling over our debt is going to do nothing to solve our problems. Furthermore, whatever chance Ireland has of recovery will be extinguished by a four-year austerity plan.
Ireland should 'do an Argentina' - Ireland is currently experiencing a 14.1% unemployment rate. As a result of bailout conditions that will require more cuts in government spending and tax increases, the unemployment rate is almost certain to go higher. The Irish people are likely to wonder what their economy would look like if they had not been rescued. The pain being inflicted on Ireland by the ECB/IMF is completely unnecessary. If the ECB committed itself to make loans available to Ireland at low interest rates, a mechanism entirely within its power, then Ireland would have no serious budget problem. It is worth remembering that Ireland's government was a model of fiscal probity prior to the economic meltdown. It had run large budget surpluses for the 5 years prior to the onset of the crisis. Ireland's problem was certainly not out of control government spending; it was a reckless banking system that fueled an enormous housing bubble. The decision to make Ireland's workers, along with workers in Spain, Portugal, Latvia and elsewhere, pay for the recklessness of their country's bankers is entirely a political one. There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF.
Ireland Said to Need 85 Billion Euros for Rescue - European Union officials estimate that a rescue package for Ireland may amount to about 85 billion euros ($114 billion), according to two officials familiar with the talks. The European Commission cited the figure as a preliminary estimate on a conference call of euro-region finance ministers on Nov. 21, said the people, who spoke on condition of anonymity because the talks were private. Of the total, 35 billion euros would be earmarked for banks and 50 billion euros to help finance the Irish government. Contagion is spreading through the euro region as Ireland hammers out an aid package with the EU and the International Monetary Fund to rescue its banking system. Spanish bonds tumbled, pushing the extra yield that investors demand to hold its 10-year debt over German bunds to a euro-era record of 236 basis points. Irish bonds also dropped today.
“Waiting for Godot”, or “Endgame”? - No formal announcement yet, but some presumably well-sourced rumours about the size of the Irish bailout (EUR 85Bn), and the rate (7%) While we await the statement, there are reasons to suspect, or hope, that the bailout, like Godot, will never come, because it’s failing already. From a Eurozone perspective, it’s not warded off the dreaded “contagion”. Yesterday, Irish and Portuguese 10-year yields went up again. Mohammed El-Erian’s invocation of a bank run in Ireland (see the Guardian link above) won’t have helped much; nor will today’s Portuguese General Strike. Even more worryingly, Spanish 10-year yields approached their May crisis highs, and their spreads against German bonds hit new highs. So much for the policy justification. There just might be an underlying credibility issue; never mind AIB and Anglo, now to be nationalised, what of the other 80+ banks that also “passed” the European “stress tests”? From an economic perspective, the bailout is another manifestation of the liquidity/solvency confusion that we saw again and again during the 2007-9 crisis. See Krugman for a quick reminder of why this goes nowhere. What on earth is the point of completely surrendering control of Irish economic policy to Eurocrats, and clobbering the country with another round of spending cuts, if “nowhere” is the destination anyway?
The underwhelming Irish bailout - Color me underwhelmed by the Irish bailout. By all accounts it’s going to be less than €100 billion — probably in the €80 billion to €90 billion range — and that sum has to cover the country’s entire borrowing needs for the next three years. The NYT has a breakdown: While a precise breakdown was not given, analysts and people involved in the talks said that about 15 billion euros was likely to go to backstop the banks. As much as 60 billion euros would go to Ireland’s annual budget deficit of 19 billion euros for the next three years. That leaves a few billion euros left over for one-off expenses and emergencies — but I worry that Ireland’s banks are going to need a lot more than €15 billion. The banking system is on its knees and it has roughly half a trillion euros in assets. The black hole in commercial real-estate alone — over and above the €50 billion or so that the Irish government has already shelled out — is estimated at somewhere in the €20 billion to €25 billion range and that’s before you even start thinking about residential mortgages:
Ireland Said to Require 85 Billion Euros for Rescue - European Union officials estimate that a rescue package for Ireland may amount to about 85 billion euros ($114 billion), according to two officials familiar with the talks. The European Commission cited the figure as a preliminary estimate on a conference call of euro-region finance ministers on Nov. 21, said the people, who spoke on condition of anonymity because the talks were private. Of the total, 35 billion euros would be earmarked for banks and 50 billion euros to help finance the Irish government. Contagion is spreading through the euro region as Ireland hammers out an aid package with the EU and the International Monetary Fund to rescue its banking system. Spanish bonds tumbled, pushing the extra yield that investors demand to hold its 10-year debt over German bunds to a euro-era record of 236 basis points. Irish bonds also dropped today.
Ireland’s not unlucky, just an inevitable victim of the euro project – It is the foreseeable consequence of the interaction between a rampant financial system and an ill-conceived, politically-driven currency union. Interestingly, the Irish predicament is not the result of government profligacy. Admittedly, this year Ireland's budget deficit will equal 32pc of GDP, and the debt to GDP ratio will rise to almost 100pc. But this ratio stood at just 25pc as recently as 2007. The huge leap has come as the consequence of the economic downturn, not as the cause of it. Ireland's problems have resulted from an old fashioned property bubble. The transformation into the Celtic Tiger had real sustainable foundations but then it took off into the realms of fantasy. Now Ireland is back down to earth with a bump. By the end of 2010, it is looks as though Irish GDP will be around 15pc below its peak.
US firms warn Irish over tax move - The warning – from executives at Microsoft, Hewlett-Packard (HP), Bank of America Merrill Lynch and Intel – spoke of the "damaging impact" on Ireland's "ability to win and retain investment" should the country's corporation tax rate be increased from 12.5pc. It came as talks between members of the Irish government and the European Union and the International Monetary Fund continued around the clock on a financial aid package of as much as €100bn to shore up the country's beleaguered banking system. Although Brian Lenihan, the Irish finance minister, has indicated Ireland's 12.5pc corporation tax rate – the lowest in the eurozone – will not be raised, a number of factions within the European Union are known to have pushed for it to be increased in return for the bail-out.
Irish Bailout--impact on taxes uncertain - As plans for the $100 billion bailout of the Irish economy and banking system by the European Commission, International Monetary Fund and European Central Bank continues, Ireland's downtrodden prime minister (who will call elections after the budget is finalized) has said that it "will not" change its corporate tax haven status--its corporate tax rate of 12.5 percent will remain for now. At the same time, however, Daily Tax RealTime reports this evening comments today by Eurogroup President Juncker that discussions about Ireland's low corporate tax scheme are ongoing, Both France and Germany would like to see Ireland raise its rate closer to the average 25% EU rate.
What Will Happen To Ireland (And Various MNCs) When Ireland Is Finally Forced To Hike Tax Rates? - One of today's sad conclusions about today's Irish bailout is that despite numerous lies to the contrary, the country's corporate tax rate, that staple which has allowed so many corporations to skirt the record US corporate tax rate, is about to be hiked. The bailout ink on Irish pre-foreclosure mortgage note was not even dry (and you bet Bank of America is not going to lose this one) and already the European Commissioner for Economic and Monetary Affairs Olli Rehn showed the now insolvent island who's boss: "When asked in an interview with RTÉ News if the corporate tax rate was now off the table for good, Mr Rehn said that by Ireland's ceasing to be a low tax country this did not imply specific measures, but 'it is likely unfortunately to imply tax increases." Ironically, the biggest losers in this transition to a higher tax rate would be various multi national corporations, as was observed yesterday, while the biggest gainers would be other European states, which would be on a more competitive footing with Ireland when it comes to attracting foreign direct investment and new business domiciles.
Taoiseach to dissolve Dáil after 'vital' budget passed. - Taoiseach Brian Cowen has resisted growing demands to resign immediately and announced he is to seek the dissolution of the Dáil after provisions of the forthcoming budget are enacted. He made the announcement at Government Buildings tonight, hours after the Green Party called on him to set a date for a general election by the second half of January. Mr Cowen called Fianna Fáil Cabinet members to a meeting at Government Buildings this evening, after which he told a press conference he would seek the dissolution after the provisions of the budget, which is to be delivered on December 7th, are enacted into law. It could take several weeks for the budgetary process to be complete, after which the Taoiseach would have to formally dissolve the Dáil and set a date for polling day. This means an election may not be held until February or March.
Irish PM is forced to call election as €90bn bailout sparks unrest --Deal agreed but coalition falls apart - and Europe fears Spain is at risk An extraordinary day in Irish politics ended in a major setback for Brian Cowen's government last night after his coalition allies forced him to concede an election as soon as his budget goes through. The Green party, which has kept Mr Cowen's Fianna Fail in power for several years, effectively pulled the plug by calling for an election in January, giving him little notice of its demands. After a day of frantic activity in which it became clear the government would not last beyond January, the Irish Prime Minister gave way to the demands of the Greens, who specified they would stay in government until the budget was passed and an agreement hammered out with the IMF, EU and European Central Bank.
Irish Leader to Dissolve Government After Budget Passes - Prime Minister Brian Cowen said late Monday that he would step down once a series of fiscal packages and budgets were in place next month, acceding to the demands of the opposition and its coalition partner, and injecting the threat of political instability into a financial crisis that already has markets on edge. Earlier in the day, the minority Green Party declared that the public had lost faith in the government after its acceptance of a $100 billion rescue package over the weekend and that it would pull out of the government. It called for elections early next year, when a second round of austerity measures, forced on Ireland as a condition of the bailout, will be put before voters who have already suffered through three years of recession. Ireland faces a stark choice between accepting cutbacks in popular middle class social programs or rejecting them and jeopardizing the rescue package, which would invite default. Most analysts expect that Mr. Cowen, whatever the condition of his coalition, will be able to pass the budget — even though it will have put into law such severe measures as a decrease in the minimum wage (one of the highest in Europe) and changes to the country’s generous child benefits.
Anglo Irish Bondholders Swap Notes at a Discount as Investors Share Pain – Bloomberg - Anglo Irish Bank Corp. said holders of 690 million euros ($950 million) of its 2017 subordinated bonds agreed to swap their debt for new notes at an 80 percent discount as the government spreads the burden of the banking crisis. Investors with 92 percent of the 750 million euros of outstanding bonds will now receive 136.8 million euros of one- year government-guaranteed securities paying 375 basis points more than the euro interbank offered rate, Anglo Irish said in a statement today. The discount allows the nationalized bank to generate a gain that can be used to bolster its capital ratios.
Extensive Irish forbearance, what was it good for? - The European Mortgage Federation’s annual compendium of all things mortgage-related is out. The data is a bit aged, since it refers to what transpired in 2009 — nevertheless, it still provides an exhaustive survey of the entire European mortgage market in one handy document. So, it’s a good resource for anyone seeking a longer-term view of things. From that perspective the following chart immediately catches the eye, if not sets the scene of travails to come for Europe in 2010: Nothing quite comes near to the boom and bust experienced in Ireland, does it? But that’s not really anything we didn’t know. What is slightly more interesting comes from the EMF’s summary regarding Irish house price deterioration versus foreclosure rates in 2009. These it turns out were amongst the lowest in Europe. As they write (our emphasis):
How Ireland Went From Free Market Exemplar To Big Government Exemplar - It was not long ago that Ireland was every American conservative's beau ideal of a European state. Low taxes, low regulation, it was the operfect case study in the success of free market policies. Former AEI fellow, and head of Bush's Domestic Policy Council, Karl Zinsmeister, October 5, 2000: One exception to Europe's tepid economic performance has been the Irish. Ireland -- which I visit regularly, including this summer -- is an economy on fire. As recently as the late 1970s, when I attended college in Dublin, the country was still a kind of developing nation. Today, after two decades of red-hot growth, the Irish, stunningly, enjoy a per capita income higher than the Germans. How has Ireland become a "Celtic tiger" (a la Hong Kong, Taiwan and Singapore, the earlier "tiger" economies in Asia)? Simple: By clinging for dear life to the coattails of the American economy. The Irish have basically set themselves up as a free enterprise zone for U.S. companies wanting a base in Europe, rolling out a business-friendly red carpet. The government also mimicked American growth policies in some important areas - chopping taxes and reducing regulations.
Here’s the Real Story Behind the Bailout of Ireland—So why would the Eurocrats demand a bailout of Ireland when Ireland insisted it didn’t need one? The first reason is that much of Ireland’s debt—both its sovereign debt and the debt of its banks—is held by many of Europe’s largest financial institutions. The continued downward pressure on the market value of Ireland’s debt was causing balance sheet issues for these banks. Many of Europe’s banks had written credit default swaps on Irish debt, which was draining cash. Finally, the banks were finding it increasingly expensive to borrow against Irish debt—that is, other banks would not lend money in exchange for Irish debt as collateral, except at steep discounts—creating the potential for a credit crunch. It’s likely that the European Central Bank has large exposures to Irish debt. The ECB has been quietly buying European sovereign debt since May—although it won’t say exactly what debt it is buying. The purpose of the purchases is to stabilize the debt market and provide liquidity to the economies of Europe. The stabilization effort, at least, appears to have failed. Which means that this is not so much a bailout of Ireland—it’s a bailout of Ireland’s counterparties. That is to say, it’s a bit like Europe’s version of AIG: a backdoor bailout of invisible financial players who failed to manage their exposure to a shaky borrower.
Rescue of Ireland Would Dwarf Greece's Bailout on Cost of Shoring Up Banks - Ireland will seek emergency international aid totaling as much as 60 percent of the size of its economy, dwarfing the Greek bailout, to save its banks and bolster its finances. Ireland will ask for about 95 billion euros ($130 billion) from the European Union and International Monetary Fund, Goldman Sachs Group Inc. estimates. UniCredit SA put the package at as much as 85 billion euros, while Deutsche Bank AG sees a 90 billion-euro plan. The 110 billion-euro aid for Greece in May was the equivalent of 47 percent of its gross domestic product. The cost of bailing out Ireland will be inflated by the price of shoring up its banking system, which Goldman puts at almost a third of the total request. The bursting of the real- estate bubble in 2008 pushed its banks close to collapse and plunged the country into recession. “Good news in the short run does not mean problem solved,”
Irish borrowing costs increase - European shares and the euro fell this afternoon and the cost of borrowing for Ireland rose as markets reacted to increased political uncertainty in Ireland. This follows an announcement by the Green Party this morning that it would seek a date for a general election by the end of January, after passing the budget. Irish borrowing costs, which fell under 8 per cent earlier today on news that EU had approved a Government request for a multi-billion euro package, rose shortly after the Greens’ announcement and closed at 8.1 per cent. Discussions resumed today between delegations from the IMF, the EU and the Commission and a team of Irish officials to discuss the terms of the bailout.
Plastic and glass - It seems the Eurozone troubles are heating up again. Debt is like glass. If you hit it with a small shock it stays rigid. But if you hit it with a big shock it breaks. Equity is like plastic. If you hit it with a shock it bends. The bigger the shock the more it bends. But it doesn't break. (OK, so the analogy isn't perfect, but it's good enough.) We need a financial system that is more plastic and less glass. Some countries, like Ireland, do not print money. The sovereign debt of Ireland is debt. It is a promise to pay that will be broken if a big enough shock hits. It is glass debt. Other countries, like Canada, do print money. The sovereign debt of Canada is not really debt. It is more like equity. The promise to pay that debt can always be fullfilled. In the absolutely worst case scenario by printing money equal to the whole amount of the debt. It is plastic debt. It may bend, if printing money causes inflation and reduces the real value of the amount promised, but it cannot break.
Moody's Expects Multi-Notch Downgrade Of Ireland, As Green Party Abdication Sends Irish CDS Wider On Day - Earlier today Moody's finally woke up from its slumber, threatening it would do a "multi-notch downgrade, albeit one that would leave the country still with an investment grade rating", which the people who have made a business model of being behind the curve said is now the most likely outcome of the review of Ireland's sovereign credit rating. Moody's (which rates Ireland Aa2 and has the country on review for downgrade) said that an aid package from the European Union and the International Monetary Fund would shift the burden of supporting Ireland's banks onto the Irish sovereign, and would therefore be "a credit negative for Ireland." Apparently bankruptcy is not covered under the "credit negatives" for Ireland. And while what Moody's does or thinks is completely irrelevant, what the Irish Green party (whose prior opinion we presented in a very distinct clip last night) has announced it will quit the Irish government in January, leaving PM Brian Cowen without a majority in the government, and leaving the door open for elections, and thus a complete undoing of the bailout. Looks like yesterday's announcement will be the shortest rescue in history. CDS is already seeing that, as Irish CDS was last seen lifting offers of 520 and wider, after a 507 close on Friday.
Ireland's credit rating slashed as it prepares to unveil four-year austerity plan - Ireland's credit rating was slashed today just hours before the government was set to unveil a drastic £12.7billion austerity plan. Standard & Poor downgraded its financial reliability two notches to A from AA- and warned further downgrades are possible. Its short-term risk measure was also moved down one place to A-1 to reflect the debt-laden economy, which has led to a political crisis.
Ireland plans to lift sales tax to 23% by 2014 - Ireland said Wednesday it would hike the value-added tax (VAT) on goods and services to 23 percent by 2014 from the current level of 21 percent as part of measures aimed at slashing the public deficit. The government will “increase the standard rate of VAT from 21 percent to 22 percent in 2013, with a further increase to 23 percent in 2014,” said a key budget statement. The changes will yield 620 million euros ($830 million) for the government as it seeks to save 15 billion euros by 2014.
Ireland unveils austere €15bn budget to cut deficit - Ireland's government has set out a harsh and ambitious four-year plan to make €15bn in spending cuts and tax increase to bring down its record deficit, although financial markets remained sceptical. The Irish people will begin to feel the pain next year when 40pc - or €6bn - of the €10bn in spending cuts and €5bn in tax increases will happen. The effect of the measures - required as the precondition for an EU-IMF bailout - will mean the average Irish household will have to pay up £3,000 in extra taxes. Brian Lenihan, the Finance Minister, said the tough measures were taking place against the backdrop of a slow economic recovery, with the Government forecasting the economy will grow by an average of 2.75pc in the years from 2011 to 2014.
Children 'to be hit by IMF plans' - Thousands of children will be hungry and cold if the Government rolls out cost-cutting plans signed off by the International Monetary Fund (IMF), it has been claimed. On Monday, the IMF issued an academic paper, signed off by lead negotiator in Dublin Ajai Chopra, that minimum wage and dole payments should be cut. A leading children's rights campaigner warned any cuts in social welfare payments or the minimum wage will directly affect underprivileged youngsters across the country. Fergus Finlay, Barnardos chief executive, called on politicians not to agree to any plan that will plunge households further below the breadline. He said: "There are thousands of families in Ireland who live at or below the poverty line. That means there are thousands of children below the poverty line. Those children are hungry, cold and at risk of ill health because they live in damp unheated houses. I can't think of a single good reason to make things worse for those children."
Irish tax lawyers are smiling - The Irish tighten their belts in what the Guardian calls a tough four year austerity plan: The taoiseach, Brian Cowen, said no one could be sheltered from the plan. “It’s to bring certainty for our people,” he said. “It’s to ensure that they have hope for the future. To let them know that while we have a challenging time ahead, we can and will pull through, as we have in the past.”There is just one problem. This is bollocks. There are plenty who are sheltered, notably corporations who will continue to benefit from Ireland’s banana republic style 12.5% corporate tax rate. Ireland is going to be allowed to continue to defraud its European partners and facilitate ‘tax optimisation’ like the much-reviled double Irish. We are truly living in a win win era for corporations. It’s a shame it has to be lose lose for the rest of us.
Eating the Irish, by Paul Krugman - The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy driven by runaway banks and real estate developers, all in a cozy relationship with leading politicians. The frenzy was financed with huge borrowing on the part of Irish banks, largely from banks in other European nations. Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations. Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts. Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.
A de facto nationalisation of the Irish banking sector - The banking team at RBS have produced an excellent note on what Ireland’s quoted banks will look like post-recapitalisation. And it makes for uncomfortable reading. In order to bring common Tier 1 equity ratios up to 12 per cent on a Basel III basis as proposed by the EU rescue package, analysts Asheefa Sarangi and Ian Smillie estimate a further €21bn of capital will need to be injected into Allied Irish Banks, Bank of Ireland and Irish Life & Permanent. Now, €5.5bn of this could be funded through the conversion of existing government preference shares and in the case of ILP, surplus capital at its insurance operations. Which leaves a cool €15.5bn to find:
Second thoughts on Ireland - Irish political economy seems to be falling apart in front of our eyes and the bond market isn't so happy, even after Ireland accepted the EU/IMF bailout. That would appear to be political risk. Maybe there won't be a happy ending even in the short run. Here is Thomas Friedman, a number of years back, touting the wonders of the Irish model. Cato and Heritage made similar claims. What are we to make of this broader span of Irish history? I see a few candidate views, not necessarily mutually exclusive:
- 1. The Irish had some excellent economic policies, but they needed to regulate their banks more. They were simply too optimistic and too sloppy.
- 2. Irish troubles could have been contained, at some point over the last two years, had Ireland not been on the euro. They would have devalued, defaulted, and had a rapid bounce back up, within the next three years.
- 3. Ireland never should have guaranteed the liabilities of its banking sector.
- 4. Irish troubles are intimately connected with low corporate tax rates. One claim is that Ireland relied too much on property taxes.
Another mishandled bailout spooks the markets - Markets rally, then reverse gains, as investors to a bailout agreement that is notoriously short on details; an increasing number of market participants are now expectation contagion to Portugal , and some fear that Spain, too, might be in danger; El Pais carries a comment this morning, criticising that the anti-crisis response lacks a sense of unity; in Ireland, meanwhile, the bailout has given rise to a political crisis, as Cowen is forced to call elections in January; some backbencher of his party may be trying to replace him immediately, according to one news report; Garret Fitzgerald predicts that the opposition will vote in favour of the budget; Reuters has details about the German proposals for investor bail-ins through the use of collective action clauses; a debate is now under way about how to break up the euro: Stanley Black argues that the ECB should consider differential interest rates; Gideon Rachman, meanwhile, argues that Germany might pull out in the end. [more]
HAMPing Europe's Periphery - Krugman - The markets don’t seem impressed by the Irish bailout — nor should they be. As I read it, European policy makers are still — still! — viewing the crisis as a confidence problem, not a fundamental problem. The Irish bailout is not, after all, what one normally thinks of as a bailout It’s simply an agreement to lend Ireland funds at more or less safe market rates. Ireland must, as you can see, pay very high rates to borrow on the private market. But if we think about why this is true, we can also see why the bailout isn’t likely to succeed. The basic situation is that given the cost of rescuing Ireland’s banks, and the damage harsh austerity is inflicting on Ireland’s economy, Now, this process is self-reinforcing: higher rates make it even harder to meet Ireland’s commitments, which leads to still higher rates, and so on. The European bailout basically short-circuits this vicious circle. But the bailout will only work if the vicious circle is at the heart of the story — as opposed to being a symptom of the fundamental unsustainability of the austerity-and-full-repayment strategy. That is, it will work only if Ireland is the fundamentally sound victim of a self-fulfilling panic. And that’s a hard claim to make.
Will Ireland's bailout end the euro crisis? The government of Ireland sought a European Union-International Monetary Fund bailout over the weekend, finally succumbing to pressure from its fellow Eurozone members and panicked financial markets. That makes Ireland the second of the Eurozone's 16 members to require a rescue, after Greece got a $150 billion package in May. Ireland's will likely be smaller – perhaps $110 billion over three years -- though the final details are still being negotiated. Olli Rehn, the EU commissioner for monetary affairs, said the bailout of Ireland is “a critical step forward” to “safeguard financial stability in Europe." The Irish bailout will bring to a close weeks of rabid speculation about Ireland's fate that plagued financial markets throughout the world. But is the Irish rescue finally the end of the chaotic instability the Eurozone has experienced for more than a year? Will investor confidence be restored over the zone's future? Probably not, in my opinion. As has been the case throughout the euro crisis, Europe's leaders are dealing with only one part of a bigger problem, and only when their backs are against the wall.
Here’s the Real Story Behind the Bailout of Ireland—So why would the Eurocrats demand a bailout of Ireland when Ireland insisted it didn’t need one? The first reason is that much of Ireland’s debt—both its sovereign debt and the debt of its banks—is held by many of Europe’s largest financial institutions. The continued downward pressure on the market value of Ireland’s debt was causing balance sheet issues for these banks. Many of Europe’s banks had written credit default swaps on Irish debt, which was draining cash. Finally, the banks were finding it increasingly expensive to borrow against Irish debt—that is, other banks would not lend money in exchange for Irish debt as collateral, except at steep discounts—creating the potential for a credit crunch. It’s likely that the European Central Bank has large exposures to Irish debt. The ECB has been quietly buying European sovereign debt since May—although it won’t say exactly what debt it is buying. The purpose of the purchases is to stabilize the debt market and provide liquidity to the economies of Europe. The stabilization effort, at least, appears to have failed. Which means that this is not so much a bailout of Ireland—it’s a bailout of Ireland’s counterparties. That is to say, it’s a bit like Europe’s version of AIG: a backdoor bailout of invisible financial players who failed to manage their exposure to a shaky borrower.
Not All PIIGS Are Created Equal: Irish Bail Out Package To Come With 6.7% Interest Tag, 1.5% Higher - RTE reports that the IMF/EU Irish rescue package will come with a whopping 6.7% rate for nine year money. Per the RTE article, it is unclear if that will be an APR or some multi-year blended effective annual yield: "The Government's four year plan assumes that by 2014, interest payments will have increased from €2.5 billion to €8.4 billion a year - around one fifth of all tax revenue." Regardles of how it is calculated, newspaper tomorrow will be blasting the 6.7% number, which is 150 bps wide of what Greece is paying on backstopped paper, and will only create further resentment at the fact that not only is Europe split into a core and PIIGS, but that it is now apparent that not all PIIGS are treated as equals. How Irish citizens will react once they find out that the EU believes they are less creditworthy than even the Greeks, only the IRA can predict.
Irish Relief Fleeting as `Day of Reckoning' Nears: Euro Credit - Borrowing costs for Europe’s most indebted nations are at record highs as Ireland’s capitulation in accepting a bailout of its banking industry stokes concern that other countries also will have to seek aid. The average yield investors demand to hold 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached 7.52 percent yesterday, a euro-era record. The average premium investors demand to hold those securities instead of German bunds widened to 480 basis points, approaching this year’s 485 basis-point high reached on Nov. 11. The average cost of insuring against a default by the five nations using credit- default swaps reached a record 517 basis points on Nov. 23. “It’s no longer taboo to speak about a restructuring,” “The fact that bond yields continue to rise and put pressure on countries that have to fund from the market makes investors less and less confident, and it’s bringing forward the day of reckoning.”
'No group sheltered' as €15 billion savings plan unveiled - Swingeing cuts to social welfare payments, a broadening of the tax base and a new levy on property are among a raft of measures contained in the Government’s four-year fiscal adjustment plan. The 140-page plan, published today, outlines in detail how Government proposes to make €15 billion of savings by 2014. The package of measures will seek to claw back €10 billion through spending cuts and another €5 billion by way of tax increases, with €6 billion front-loaded in the 2011 budget, which will be unveiled next month. The National Recovery Plan provides a “sound basis” for negotiations with the European Union and International Monetary Fund (IMF) on a financial aid package for the State, European commissioner for economic and monetary affairs Olli Rehn said.
Irish protesters to march against cutbacks - Thousands of people are expected to take to the streets of Dublin for a protest against the Irish Republic's four-year austerity plan. The Irish Congress of Trade Unions (ICTU) has promised a family-friendly march through the city centre. However, police have warned that some groups may be looking to "exploit" the event and could cause trouble. There was violence during a student protest against increased fees in Dublin earlier this month. Irish police commissioner Fachtna Murphy has said he hopes Saturday's march will be dignified and peaceful. However, he said police are prepared for the possibility of trouble.
Thousands Protest Against Irish Bailout - More than 100,000 Irish citizens took to the streets of Dublin today to protest against the international bailout and four years of austerity. Despite overnight snow storms and freezing temperatures, huge crowds have gathered in O'Connell Street to demonstrate against the cuts aimed at driving down Ireland's colossal national debt. So far the march has passed off peacefully although there is a huge Garda presence with up to 700 officers on duty working alongside 250 security guards for the Irish Congress of Trade Unions. Among the marchers there is deep anger that most of the more than €80bn (£67bn) from the EU and the International Monetary Fund will be given to shore up Ireland's ailing banks.
Reports that bailout will attract 6.7% rate rejected - The interest rate for a nine-year EU/IMF loan would be lower than the 6.7 per cent being quoted in some reports today, a source involved in the talks has indicated. The source said the interest rate was still under negotiation but would not be that high. The loan of €85 billion would come from a number of different funds, some controlled by European Union institutions, others by the IMF. It is understood that the interest rate for the IMF portion of the loan will be in the region of 4.5 per cent, while the interest charged by EU bodies will be considerably higher. The source accepted that the average interest rate was likely to be higher than the 5.2 per cent charged to Greece when it was bailed out earlier this year. But it was pointed out that the Greek loan was for a period of only three years.
Borrowing Rates from The EFSF - Today I re-read this piece that Wolfgang Munchau published in the FT on September 28th. Titled “The Truth Behind the EFSF” at Eurointelligence and “Could Any Country Risk a Eurozone Bail-Out?” at the FT, it concludes that countries that tap the facility will have to pay interest rates of about 8 percent. If this were true, then countries like Ireland could face very substantial financing costs even after seeking help from this fund, which would make successful stabilisation all the harder. Looking into this issue, it seems to me that Munchau’s assertions about borrowing rates from the EFSF are not correct. By my calculations (see below) the EFSF borrowing rate would be a bit below 6 percent. Now this is still very high but given the large sums that would be involved if the facility swings into action (financing budget deficits and bond redemptions for three years) this difference is likely represent a significant amount of money.
"Tell the EU and IMF to Shove It!" Irish Prime Minister Brian Cowen is Mahmoud Abbas. He's caved in to the demands of foreign capital and transferred control over the nation's budget to the EU and the IMF. This is a black day for Ireland. The Irish people will now face a decade or more of grinding poverty and depression thanks to their venal leaders. As soon as the ink dries on the IMF loans, the second occupation of Ireland will begin, only this time there won't be armored cars and Paramilitaries in fatigues, but nerdy-looking bureaucrats trained in the art of spreading misery. In fact, the loans haven't even been signed yet, and already IMF officials are urging the government to cut jobless benefits and the minimum wage. They're literally champing at the bit. They just can't wait to get their hands on the budget and start slashing away. And don't believe the hype about European unity or saving Ireland. My ass. This is about bailing out the banks. The bondholders get a free ride while workers get kicked to the curb. Here's a clip from the Financial Times that spells it out in black and white: "According to data compiled by the Bank of International Settlements, the three largest creditors to the Irish economy at the end of June...were Germany to the tune of €109bn, the UK at €100bn and France at €40bn. These sums amount to 2 per cent of France’s gross domestic product, 4.5 per cent of Germany’s GDP, and 7 per cent of British GDP."
Department of Secondary Consequences - It is true that Irish mortgages are “recourse” — that is, you can’t just turn in the keys and walk away from a property as you can in many parts of the United States. On the other hand, Irish residents can leave the country – moving to Britain or the United States is a well-established tradition for many families. And how can an Irish lender enforce debts when someone has emigrated? That's from Simon Johnson, interesting throughout...
Facing Starvation: The Sad Plight of Ireland's Abandoned Horses - SPIEGEL ONLINE - During Ireland's boom years, thousands of people bought horses as a status symbol. But with the economy in crisis, many owners can't afford to keep them. Some 20,000 abandoned horses are roaming Ireland and could face starvation this winter.Before the crisis, Conor Dowling's callouts were usually for stray cats and dogs. When his phone rings now, Dowling, an inspector for the Irish Society for the Prevention of Cruelty to Animals, gets ready to attach the horse trailer to his car. "70 percent of calls are about horses," he says. A stallion roaming across a street or galloping alongside a motorway. Or an abandoned racehorse found grazing on someone's lawn. "We have a huge problem," says Dowling. His stables are full of horses that no one wants and it is becoming increasingly difficult to find new owners for them. "Hardly anyone dares say it aloud but we are going to have to put down a lot of these animals."
Anglo Irish Says It Lost 12 Billion Euros in Deposits This Year - Anglo Irish Bank Corp. Chairman Alan Dukes said the nationalized lender lost about 12 billion euros ($16.1 billion) of deposits this year, adding to evidence of an outflow of funds from the country’s financial system. Deposit outflows have “stabilized” in recent weeks, Dukes said in an interview with Bloomberg Television in Dublin today. Anglo Irish had 27.2 billion euros of customer deposits at the end of 2009, according to its annual report. “Other banks are having similar problems,” said Dukes. Irish deposits could be helped “by decisive action on the banks,” he said.
Honohan Says ‘Relaxed’ About Foreign Ownership in Irish Banks –Irish central bank Governor Patrick Honohan said he is “relaxed” about the idea of foreign investors taking control of Ireland’s largest banks. “If our banking system had been largely owned by foreigners, then they would have absorbed very significant losses on their balance sheets,” Honohan said at an event in Dublin today. “I don’t really have a big problem.” Honohan said foreign banks can help improve access to credit and the nation “will have a slimmed down” financial system in the future. Allied Irish Banks Plc and Bank of Ireland Plc would each need at least 2.5 billion euros to raise their equity Tier 1 ratios to more than 10 percent, Ciaran Callaghan, an analyst with NCB Stockbrokers wrote in an note on Nov. 18.
Who will buy Ireland’s banks? - After playing a central role in bringing the country to its knees, Ireland's banks are up for sale. The central bank boss Patrick Honohan this week took the unusual step of urging bidders to step forward to take them off the authorities' hands. "They [the banks] are for sale as far as I am concerned. I have been an advocate for a number of years for small countries to have foreign owners for their banks," Honohan said. The aid package for Ireland is thought to include up to €40bn (£33.9bn) to rejuvenate the banking sector and carve off the most troubled loans. Cleaned up banks might be attractive to bidders accustomed to dealing with basket-case institutions. For an idea of the price, Bank of Ireland's current market value is less than €2.5bn – and falling sharply. So who might be interested?
Strongest argument against a State default has disappeared - MANY SERIOUS people, in Ireland and elsewhere, have reached the conclusion that the Irish State cannot support the debt burden it has taken on. Flowing from this conclusion comes the view that a portion of that debt must be defaulted on. The most obvious and frequently mentioned portion of that debt that advocates of default point to are monies lent to Irish banks, including senior bonds. There are very powerful arguments to support the default view, and the strongest argument against it, from Ireland’s perspective, evaporated last week – that argument was that any default on bank bonds would cause lenders to stop giving money to the Government to fund its deficit. That has now happened anyway. It is no longer in Ireland’s narrow national interest to prevent senior bondholders from suffering the consequences of their own bad judgement.
Fixing the flaws in the Eurozone - With news that Ireland has applied for a bailout worth tens of billions or euros, the dark predictions for the future of the Eurozone grow ever bleaker. What is happening to the Eurozone? Are the troubles of the high-inflation countries (Greece, Ireland, Portugal, and Spain) due to excessive government borrowing that should have been reined in by the Stability and Growth Pact? Is the solution to be found in more stringent enforcement of the excessive deficit procedures?This column argues that the problems in the Eurozone’s periphery expose a flaw in its design. It proposes that the ECB set different interest rates for different member countries to help make matters better before they get any worse.
FT.com– How to stop Ireland’s financial contagion - If you merge 16 small open economies, you get a large closed economy. But here is the catch. If you assemble the leaders of the 16 small open economies, you get a roomful of 16 small-economy politicians. Economic governance through the European Council has proved always cacophonous and often incompetent. It is an institutional framework of finger-pointing. The Irish say they are not Greece. The Portuguese say they are not Irish. The Spanish finance minister said last week that Spain is not Portugal. There are no prizes for guessing what Italy is not. This governance paradox lies at the heart of the eurozone crisis. It explains, for example, why in the middle of an existential banking crisis, there has been a debate about the Irish corporate tax rate. The French and Germans have argued that Ireland’s ultra-low taxes are distorting competition. The Irish say they need a low tax rate to attract foreign direct investment. It is hard to conceive of an issue that is less relevant to the current problem. The task that needs to be solved now is to stop contagion of the Irish banking crisis. The channels are easy to figure out. The two largest creditors to Ireland are the UK and Germany, with loans outstanding of $149bn and $139bn respectively, according to data from the Bank for International Settlements. An Irish bank default would affect the German and British banking systems directly, and require significant domestic bank bail-outs.
Ireland’s Woes May Spread on ‘Zero Confidence’ -Ireland’s debt woes may spread because investors have lost confidence in policy makers’ efforts to quell the crisis, Lloyds TSB Corporate Markets said. “The markets currently have virtually zero confidence that the bailout in Ireland will solve the European crisis even though fiscal austerity measures in both Portugal and Spain have been severe and prima facie, sufficient to ease market concerns,” Charles Diebel and David Page, fixed-income strategists in London, wrote in an investor note today. “With markets effectively in a position to dictate policy, the risk is that the credibility crisis shifts to more sizeable European Union countries and thereby poses a greater risk to the system as a whole,” they wrote. That may also raise “valid questions about the prescriptive policy measures being sufficient to deal with issues of such magnitude.”
Is the Euro crisis is systemic? -In a note to clients this morning Credit Suisse downplayed the severity of the crisis in Europe and explained why they believe it is contained. Specifically they said:“We continue to believe that this is not a systemic crisis for 3 reasons: (1) The total cost of a worst-case write-off in the Ireland, Greece and Portugal is €170bn, on our calculations (this is based on the cost of severe emerging market banking crises in the past, which has been 30% of GDP, compared to write-offs amounting to 8% of GDP in the European periphery so far). Against this, the amount of money available is around €670bn (€250bn EFSF post haircuts, €60bn from EU, €250bn from the IMF, €110bn from Greece).” So, clearly these smaller nations are merely the appetizer. They are too small to threaten the EFSF’s ability to “work”. But the math is not friendly once we move onto Spain and Italy.
Eyes return to Greece after Irish bail-out - With the Irish “bail-out” moving to its sad denouement, the next sequence of events in the euro’s existential crisis is becoming clearer. Had the Irish banking sector’s ability to maintain funding not been resolved, the Spanish banking system would almost certainly have rapidly been seized up with the same problems. The Irish banks’ loss of wholesale deposits had precipitated the current crisis, and the same class of depositors had already begun to trickle out of Spain. The European Central Bank’s balance sheet was barely able to temporarily provide liquidity to the Irish; the effect of a Spanish deposit flight on the central bank does not bear contemplation. So, the crisis caused by tardy, or even delusional, bank insolvency management has been dealt with, for the moment. This coming week, euro-area finance will turn back to sovereign insolvency, which means, for the moment, Greece.
Greece May ‘Shut Down’ on Cash Shortage - Parts of Greece’s government may be forced to “shut down” as early as next week if the country isn’t able to cover a revenue shortfall after its European Union partners delayed its next tranche of aid money, High Frequency Economics Ltd. said. “With a big tax revenue shortfall, cash requirements are surely greater than the 6.5 billion euros ($8.95 billion) Athens was meant to receive next week,” Carl B. Weinberg, chief economist at Valhalla, New York-based High Frequency wrote in a note to clients today. “Unless the government gets funds soon after Nov. 30, it will run out of cash,” Weinberg said. “If so, the government will have to shut down, at least in part.”
Not out of the woods - CONCERN that Greece's debt crisis might presage similar episodes elsewhere in the euro zone has not disappeared, despite a €750 billion ($990 billion) backstop agreed in May 2010 in concert with the IMF. Sovereign-bond spreads (the extra interest compared with bonds issued by Germany, the safest credit) have drifted back up in a handful of other countries, notably Ireland and Portugal. Attempts to tackle budget deficits through public spending cuts and tax increases have offered some reassurance to bondholders, but have also held back GDP growth. The interactive graphic above illustrates some of the problems that the European economy faces. In 2009 of the 27 countries in the European Union only Poland saw its economy expand. GDP perked up in most countries in the first half of 2010. Germany was especially sprightly in the second quarter. The economies of Austria and the Netherlands have been dragged up in Germany’s wake. But GDP in Greece has slumped, and has been sluggish in Portugal and Spain.
Faith in European banks shaken by stress test doubts - Confidence in the financial strength of Europe's banking system is being eroded only four months after health checks that were intended to demonstrate the sector's ability to withstand severe shocks.As Lord Turner, chairman of the Financial Services Authority, defended his approach to overseeing the £140bn of exposure of UK banks to the battered Irish economy, doubts were raised about whether Europe-wide "stress tests" of more than 90 banks published in July had been thorough enough. The results of the tests, overseen by the Committee of European Banking Supervisors, were intended to demonstrate to investors that banks did not need to raise more capital. Two of the Irish banks – Allied Irish Banks and Bank of Ireland – that are now awaiting bailouts from the European Union and International Monetary Fund were given a clean bill of health. Only seven banks across Europe were deemed to have failed when the results were published.
Greece, Ireland, and Then? - In May, the International Monetary Fund and the European Union thought they had solved Europe’s financial troubles. They crafted a $150 billion bailout for Greece, part of a $1 trillion rescue fund for vulnerable countries using the euro. With defenses like that, no investor would bet against Europe’s financial stability. Six months later, Greece is still tottering, and the Irish financial crisis shows that their deterrent was neither as persuasive nor as effective as they thought. The bailout recipe for Greece, and now Ireland, has a fundamental problem: It fails to acknowledge that these deeply indebted countries will not recover until they reduce their crushing public debt, which in both cases is on its way to hit a staggering 150 percent of gross domestic product within three or four years. Ireland’s total foreign debt, public and private, amounts to 10 times its G.D.P. Growth could help, raising tax revenues and cutting the ratio of debt to G.D.P. But neither Greece nor Ireland is growing. And the draconian austerity budgets that are the price for the rescue deals — Ireland has promised to cut its budget deficit to 3 percent of G.D.P. by 2014, from 32 percent this year — will make things worse.
Who next? - Ireland will get €80-90bn in support according to various news reports this morning; as eurozone accepts Ireland’s request for financial assistance; Dublin says money will be used to restructure and downsize banking sector; Schauble says this is the end of all contagion; Spanish and Portuguese private sector economists fear that the crisis will now come their way; Wolfgang Munchau says Ireland was right to ask for the money, but it won’t resolve the Irish problem, which is one of solvency; Tony Barber says EU must now prevent contagion, and provide clarification on Germany’s bail-in proposals; Frankfurter Allgemeine says Germany faced a choice between pest and cholera, given the country’s exposure to Ireland; Dominique Strauss-Kahn, meanwhile, criticises the eurozone’s governance as inadequate, and calls for a single European labour market. [more]
Portugal next as EMU's Máquina Infernal keeps ticking - The Portuguese seemed baffled - and pained - that investors should link their country in any way with Greece or Ireland. I am afraid they must come to terms very soon with some unpleasant facts.So must Europe’s leaders, who comfort themselves that Greece is a special case because it cheated, and that Ireland is a special case because it allowed its "Anglo-Saxon" banks to go berserk. They have yet to acknowledge the deeper truth that monetary union has insidiously destabilised much of Europe and trapped a ring of largely innocent countries in depression. By the time the eurozone crisis began to blow up in Greece a year ago, it was probably too late already for Portugal. The government then made matters worse by letting its budget deficit creep higher over the first half of the year, while the rest of the Club Med slashed frantically. It is hard to see how Portugal will meet a deficit target of 7.3pc for 2010 agreed with EU.
Portugal Default Risk Rises After Irish Rescue on Concern Over Debt Levels - The cost of insuring against losses on Portuguese government bonds climbed the most in almost two months as traders look past the bailout of Ireland to which country will be next to require assistance. Credit-default swaps tied to Portuguese debt jumped 29.5 basis points to a one-week high of 447 basis points, the biggest increase since Sept. 27, according to data provider CMA. The contracts, which reached a record close of 478 basis points on Nov. 11, have widened about 148 basis points in the past month. The cost of Irish swaps rose following an earlier decline as the government applied for a bailout to help fund itself and save its banks, following Greece in seeking a rescue from the European Union and the International Monetary Fund. Investors are now asking themselves “who’s next? Italy, Spain or Portugal,” Bill Blain, a strategist at Matrix Corporate Capital LLP in London, wrote in a client note.
Portugal opposition says deficit underestimated (Reuters) - Portugal's budget deficit and public debt are higher than those reported by the government, which is trying to regain investor confidence amid a debt crisis, the leader the main opposition party said on Saturday. Pedro Passos Coelho told a meeting of his Social Democratic Party items like state-run companies' debts were not included in the overall public debt, which the government puts at 82 percent of gross domestic product this year. He said that the "true" total public debt stood as high as 112 percent of GDP, while the budget deficit should be at 9.5 percent of GDP, far above the minority Socialist government's target of 7.3 percent for the end of the year.
CDS chart of the day, Portugal edition - The black curve is how Portugal looked in April: a pretty standard upward-sloping curve, with default more likely the longer you go out. By June, however, with the onset of the Greece crisis, things looked very different. (This is the green curve.) Obviously default probabilities were higher across the board. But they were highest at the short end of the curve: 6 months to a year out. If Portugal could make it that far, markets were saying, then it would become steadily less likely to default thereafter. Today, with the red curve, it’s very different yet again. The contrast from just a few months ago is striking: while the 1-year CDS showed the highest default probability back then, today it’s the lowest. The EU bailout of Ireland confirms that Portugal will probably not be allowed to default any time soon.
Portugal Says Will Do Everything to Meet Deficit Goal - Portugal will do all it can to meet its target of cutting the budget deficit to 4.6 percent of gross domestic product next year, Finance Minister Fernando Teixeira dos Santos said after Ireland became the second euro country to seek a rescue. The yield premium that investors demand to hold Portugal’s 10-year bonds instead of German bunds narrowed to 404 basis points today, on track for a seventh straight daily decline, after a euro-era record of 484 basis points on Nov. 11. Portugal carried out its last bond sale of the year on Nov. 10 and faces its next redemption in April. “The Irish bailout announced over the weekend will likely provide some relief to peripheral bonds, but this could be short-lived, with Portugal likely to soon return under the markets’ spotlight, as the government is finding it hard to meet its fiscal targets,” Credit-default swaps tied to Portuguese debt jumped 29.5 basis points to a one-week high of 447 basis points, the biggest increase since Sept. 27, according to data provider CMA.
Portuguese general strike seeks to bring country to standstill - Public and private sector workers in Portugal are staging what unions are describing as the country's biggest ever strike Wednesday, in protest against the unpopular government austerity measures that will see salary cuts and further job losses. Unions say over 500 flights are due to be cancelled and major ports including Lisbon and Setubal will grind to a halt. The strike will also affect banks, media and petrol deliveries. Head of the major CGTP union, Manuel Carvalho da Silva said "the mobilisation of workers is enormous”.
Portuguese unions strike as euro contagion threatens (Reuters) - Portuguese unions staged what they said was the country's largest general strike on Wednesday, pressing the government to scrap austerity measures intended to ward off a debt crisis that is spreading through the euro zone. Any wavering in the Socialist government's committment to austerity measures could push up Portugal's borrowing costs in the same vicious spiral that forced Ireland, and before it Greece, to seek international aid. As the country's two biggest unions stopped trains and buses, grounded planes and halted services from healthcare to banking, the spreads of 10-year Portuguese bonds over German benchmarks hit a euro lifetime high. "It is a bigger strike than the one in 1988," Joao Proenca, the head of the UGT union which is traditionally close to the ruling Socialists, told a briefing. "We consider it to be the biggest strike ever."
Portugal: The Next Failed Eurozone State - Portugal seem to get nowhere with its austerity measures as deficit and spending increased in the last 10 months; Portuguese spreads are as high now as the Greek spreads were ahead of the rescue; the euro fell 1.5% against the dollar to $1.3390; There is growing expectation in the markets that the crisis will hit Spain at some point; Wolfgang Schaeuble tells the Bundestag that the euro might not survive the crisis; Calculated risk reminds us about the stress tests this summer; Martin Wolf criticises German debt restructuring proposal as pro-cyclical at best; Wolfgang Munchau, meanwhile, finds that EU politicians act like Laurel and Hardy, repeating the same mistakes and accusing each other.[more]
IMF's Lipsky Says Portugal Hasn't Sought Financial Aid, Facilities Exist - John Lipsky, the second-ranking official at the International Monetary Fund, said facilities exist to help Portugal in case it seeks aid. “Portugal has not requested any such support but the facilities exist if it were to be needed,” Lipsky said today in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. He said the IMF is in regular contact with Portugal as with other members. Ireland is in negotiations with the European Union and the IMF after the country’s property crash threatened to topple the banking system. Even though EU leaders say Ireland’s bailout will stem contagion in the euro region, investors are turning their attention to the high budget-deficit nations of southern Europe, led by Portugal
Irish Rescue Plan Shifts Focus to Portugal, Spain - Ireland’s plan to seek a European rescue risks escalating, rather than alleviating, the sovereign debt crisis as investors turn their focus to the high budget- deficit nations of southern Europe, led by Portugal. Ireland’s Nov. 21 decision to request emergency aid from the European Union and the International Monetary Fund did little to reverse the jump in borrowing costs. The extra yield demanded to hold Portuguese 10-year debt rather than German bunds jumped 13 basis points today to 420. The Spanish spread with Germany rose 9 basis points to 217 basis points, before the sale of up to 4 billion euros ($5.4 billion) of treasury bills. Even as EU leaders said Ireland’s bailout will stem contagion in the euro region, investors are turning their attention to Portugal, which hasn’t cut government spending and has barely grown for a decade. A rescue of Portugal may increase pressure on its high budget-deficit neighbor Spain, whose gross domestic product is almost twice the size of Portugal, Greece and Ireland combined
Spain, Portugal Bank Debt Risk Surges as Traders Look South - The cost of insuring Spanish and Portuguese subordinated bank bonds soared as traders of credit- default swaps turned their focus to southern Europe following Ireland’s bailout. Swaps on Portugal’s Banco Espirito Santo SA rose to a record while contracts on Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest lender, climbed to the highest in more than five months. The benchmark gauge of European sovereign risk also jumped to an all-time high, while two indexes tied to bank debt surged the most since June. Spain and Portugal are falling under the spotlight as traders speculate they will struggle to cut budget deficits and may require aid. Ireland’s rescue “achieves completely the opposite of what it allegedly tries to achieve, namely to calm markets,” Tim Brunne, at UniCredit SpA said in a report.
O’Neill Says Portugal, Spain ‘Lurking in Background’ – Portugal and Spain are “lurking in the background” of the Irish debt crisis as the proposed rescue plan doesn’t address the euro region’s “fundamental problems,” said Jim O’Neill, chairman of Goldman Sachs Asset Management. “Unless there’s an underlying solution to not just the debt challenge, but also” to how European monetary union “sits together involving all these domestic political partners, how can we forget about the problems lurking with Portugal and Spain,” O’Neill said in an interview from London with Deirdre Bolton on Bloomberg Television’s “Inside Track” today. “All it’s done, particularly given the domestic Irish squabbling, is raise the risk factors for everybody about those places.”
Spain and Portugal under fire as bond spreads hit record - Borrowing costs for Portugal and Spain have surged to danger levels on fears that Europe's leaders are losing political control of the Irish crisis and have yet to agree on a coherent plan to tackle the eurozone's deeper debt woes. Yields on 10-year Portuguese bonds jumped to 6.9pc, replicating the pattern seen in Greece and Ireland just before they capitulated and turned to the EU and the International Monetary Fund. Spreads on 10-year Spanish bonds rose to a post-EMU record of 233 basis points over Bunds, pushing the yield to 4.87pc. Spain's central bank governor, Miguel Angel Fenrandez Ordonez, said the contagion had spread rapidly to the eurozone periphery and "made itself felt" in the Spanish debt markets. He called on Madrid to accelerate fiscal reforms to persuade the markets the country really means to put its house in order. "Spain is a bit too big to be bailed out," said Antonia Garcia Pascual, of Barclays Capital. "The size of rescue required would use up all the funds available and then you have Italy with contagion as well."
Spain, Portuguese CDS spreads hit record levels -The cost of insuring Spanish and Portuguese government debt against default hit record levels Wednesday, while the cost of protecting Irish debt neared levels seen ahead of Dublin's decision last weekend to seek a bailout. The spread on five-year Portuguese credit default swaps, or CDS, widened 21 basis points to 510 basis points, according to data provider Markit. That means it would cost $510,000 annually to insure $10 million of Portuguese debt against default, up from $489,000 on Tuesday. The Spanish CDS spread widened to 312 basis points from 310, Markit reported, while the Irish CDS spread widened 16 basis points to 595. The Belgian CDS spread also hit a record, widening to 155 basis points from 147.
Portugal Approves Austerity Budget - — Portuguese lawmakers on Friday approved a budget plan for 2011 aimed at reassuring nervous lenders that the country could avoid a bailout by meeting its deficit-cutting targets. The Parliament’s approval came at the end of a tortuous week in which the borrowing costs of several ailing economies that share the euro rose to new records amid concerns that others would be forced to follow the example of the Irish government, which capitulated to bond market pressures by requesting rescue money last Sunday. The team of European Union and International Monetary Fund experts working in Ireland was aiming to announce the terms of its package this weekend, before markets open on Monday, to try to lift some of uncertainty that is rattling investors, according to a person with knowledge of the matter, who did not want to be identified because the discussions were ongoing.
Portugal now getting pressure to walk the plank? - The FT Deutschland is reporting that the EU is pressuring Portugal to be the next to walk the plank and quickly accept a bailout package in order to head off the spreading of credit worries. This story however was denied by a German government spokesman and Portugal said they are not being asked. Either way, 5 yr CDS in Portugal, Ireland and Spain are rising to new record highs at 500, 600 and 320 bps respectively. To put these sovereign levels into perspective, California trades at 300, El Salvador at 310, Lebanon at 295, Hungary at 360, Coca Cola at 38, McDonalds at 39, Cablevision at 360 and the USA at 42. Following up Axel Weber’s comments on Wed that the EU/IMF could always expand the side of the EFSF, the German Govt immediately told him to shush up and Merkel said the existing facility is enough. While euro LIBOR has remained stable over the past few weeks, US$ LIBOR is at the highest since Sept 2nd.
Portugal Says EU Can't Force Governments to Accept Rescue Aid - Portuguese Finance Minister Fernando Teixeira dos Santos said European Union governments can’t impose a bailout on his country even as speculation mounts that Portugal will eventually have to ask for one. “There are those who think that the best way to preserve the stability of the euro is to push and force the countries that at this moment have been more under the floodlight to that aid,” Teixeira dos Santos told Jornal de Noticias in an interview. The comments, made yesterday, were confirmed by the finance ministry. “But that is not the vision or the political option of the countries that are involved.” Portuguese bonds have dropped as the government struggles to convince investors it can avoid the fate of Ireland and Greece, which have asked for EU bailouts this year. A majority of euro region governments and the European Central Bank are putting pressure on Portugal to accept a bailout to stop contagion spreading to Spain, the Financial Times Deutschland said today.
Portuguese, Spanish CDS spreads continue to widen -- The cost of insuring Portuguese and Spanish government debt against default continued to rise Friday despite a denial by the Portuguese government that it's under pressure to accept a bailout. The spread on five-year Portuguese credit default swaps, or CDS, widened by 20 basis points to 500 basis points, according to data provider Markit. That means it would cost $500,000 annually to insure $10 million of Portuguese debt against default for five years, up from $480,000 on Thursday. The Spanish CDS spread widened to 312 basis points from 303, while Ireland widened 18 basis points to 600.
Swaps Soar on ‘Sacrosanct’ Senior Europe Debt - The cost of protecting against defaults on senior notes of European banks is soaring on speculation bondholders will be forced to take losses as governments try to share the burden of taxpayer-funded bailouts. “Under a ‘bail-in’ regime, senior bondholders will most likely find themselves as potential burden-sharers, which is in stark contrast with the rules of engagement of the market hitherto,” "Even at the worst point of the current crisis, it was generally a given that senior debt was sacrosanct.” Subordinated bonds have largely borne the brunt of losses because they stop paying before senior securities in case of a default or debt restructuring. Should banks be unable to pay senior bondholders, they may find it more difficult and expensive to raise money. Anglo Irish Bank Corp. investors were forced to take 20 cents on the euro for subordinated debt this week.
Portugal, Spain fight bailout speculation — The epicenter of Europe’s sovereign-debt crisis shifted from Ireland to the Iberian peninsula on Friday, with European Union, Portuguese and Spanish officials scrambling to head off speculation that Lisbon or Madrid could soon be forced to seek help to meet their borrowing needs. Portugal’s parliament passed its 2011 budget plan, as expected, adding to controversial austerity measures. But euro-zone credit markets remained in turmoil, putting the euro under renewed pressure. Spanish and Portuguese equities sold off, with the IBEX 35 index in Madrid slumping 2.3% in intraday trading. Lisbon’s PSI 20 index dropped 0.6%. Read more on the European equity markets. A spokesman for the Portuguese government said a report in the Financial Times Deutschland newspaper -- that Lisbon was under pressure from the European Central Bank and a majority of euro-zone countries to seek a bailout in order to ease pressure on Spain -- was “totally false,” news reports said.
PM Zapatero says no chance Spain will need bailout -- Prime Minister Jose Luis Rodriguez Zapatero said Friday there was no chance Spain would seek a bailout. Asked in an interview on Spain's RAC 1 radio if he ruled out financial help from the European Union, Zapatero said "absolutely." He said Spain's plans to reduce its deficit were on track and that its total debt was still 20 percentage points below the European average. "The deficit reduction plan is being fulfilled scrupulously, we have one of the most solid financial systems, the savings banks are restructuring at a good rate and should be consolidated by the end of the year," he said. Investors have long expressed concern over Spain's savings banks -- or "cajas" -- which were heavily exposed to Spain's collapsed real estate sector and are now saddled with billions of euros in foreclosed property. They are currently under a consolidation process scheduled to finish next month.
Spain's borrowing costs soar amid debt concerns -- Spain's borrowing costs have soared in a sale of 3- and 6-month bills amid fears the country could be affected by the spreading debt crisis. The central bank says the treasury was obliged to pay 1.7 percent in average interest to sell euro2.1 billion ($2.87 billion) in 3-month bills, nearly double the 0.95 percent rate paid in the last such auction Oct. 26. The rate for the sale of euro1.2 billion in 6-month bills jumped to 2.1 percent from 1.3 percent in October.
Spain Banks Face Debt Challenge as ECB Cuts Cash - Spanish banks may struggle to refinance covered bonds as the European Central Bank’s plan to reduce liquidity supports forces lenders to tap debt markets at record-high yield spreads, Moody’s Investors Service said. The higher cost of refinancing is a “credit negative development” for covered bond issuers, “especially if the ECB pulls back its support,” Moody’s analyst Tomas Rodriguez-Vigil Junco wrote in a report today. Spanish lenders have about 70 billion euros ($96 billion) of covered bonds coming due in the next two years, the analysts wrote. Spanish Banks rated below A1, the fifth-highest investment grade, face the biggest refinancing burden because they account for about 50 percent of the total mortgage covered bonds due next year, the Moody’s analysts wrote.
Foreclosed Homes May Flood Spanish Market as Banks Offload Unwanted Assets – Bloomberg - The number of foreclosed homes for sale in Spain may triple next year as new accounting rules prompt lenders to dump their depreciating assets, according to the co-founder of a website that advertises repossessed properties. About 100,000 houses and apartments owned by banks are now on the market, Fernando Acuna said in an interview. A quarter of them are listed on the website operated by his Madrid-based company, Pisos Embargados de Bancos, on behalf of 25 banks. Spanish lenders have a total of 181 billion euros ($242 billion) in “troubled” construction and real estate loans, the Bank of Spain said last month. Since Sept. 30, the banks have been required to account for falling property values more quickly, encouraging them to shed assets without waiting for the market to recover from a three-year decline. ““Lenders took on an immense amount of property from developers and homeowners and now they’re being forced to offload the deadwood,”
Spain’s accumulated public debt is amongst the lowest in the Eurozone… According to independent economists, market analysts and senior Spanish officials, contrary to the assumptions that Spain – like other fiscal offenders in peripheral eurozone, including Greece, Ireland and Portugal – is being punished in the bond markets due to unrestrained public finances, the country’s accumulated public debt is amongst the lowest in eurozone. With rumors galore about Spain’s public finances being out of control and investors deciding to stay away, Spain is increasingly being viewed as a potential victim of market turbulence. However, as per José Luis Rodríguez Zapatero, the Socialist prime minister, the country’s accumulated public debt, at the beginning of 2010, was only 53 percent of gross domestic product (GDP) - half the level of Italy’s public debt. Zapatero, as well as his ministers, further reiterated, for the umpteenth time, that the public debt levels in Spain happened to be nearly 20 percentage points less than the eurozone average as a proportion of GDP.
Spain Forced to Double Rates at Bond Sale - Spain was forced to almost double the interest paid on short-term bonds in an auction on Tuesday, its first following the Irish bailout, while the spread on its 10-year bonds rose to new highs. The bonds were issued in tranches of three and six months, and demand was strong totalling 7.98 billion euros ($A11.0 billion). The Spanish treasury raised 3.26 billion euros, in its target range of 3.0-4.0 billion euros for the auction. But the rates offered were sharply higher than at the last similar auction on October 26, at 1.743 per cent for the three-month bonds, up from 0.951 per cent previously. The yield on the six-month paper jumped to 2.111 per cent from 1.285 per cent. Rates or yields on bonds issued by Ireland, now the subject of an EU orchestrated rescue, and by Portugal, Greece, and Spain and to a lesser extent Italy, have risen as their public finances come under increasing strain. The difference, or spread, between the rate that Spain must pay to attract funds for 10 years, and the rate paid by Germany which represents the benchmark rate in the eurozone, also rose to a new historic high of 236.1 basis points or 2.361 percentage points. It is now at a wider level than at the peak of the Greek debt crisis.
Spain Freezes Start of $18 Billion Electricity-Bond Program as Yield Soars - Spain has frozen the start of its 13.5 billion-euro ($18 billion) program to sell state-guaranteed power revenue bonds until government debt-market volatility abates, people with direct knowledge of the transaction said. Bankers who were authorized yesterday to begin gauging investor interest in the first tranche of bonds will wait until the yield stabilizes on Spanish debt, roiled by Ireland’s bailout request, said two people who asked not to be named because the process is confidential. The sale may proceed after the yield settles, one of the people said.
Spanish, Portuguese Bonds Drop as Europe’s Debt Crisis Deepens - Spanish 10-year bonds fell for a sixth straight week, the longest run since the period ending June 22, 2007, as officials raced to complete an aid agreement for Ireland in an effort to contain the meltdown of its banks. The Irish yield premium over benchmark German bonds reached a record after Prime Minister Brian Cowen requested an international bailout on Nov. 21. “The market has lost faith over the likelihood that the Irish problem can be ring fenced,” said Steven Mansell, director of interest-rate strategy at Citigroup Global Markets Ltd. in London. “It’s a transformation from a market thinking the problem resided in the weaker periphery to a situation where the market is worried about a broader-based contagion.”
Bailout for Spain Would Empty European Coffers, Analysts Warn - Bailout for Spain would require 'whopping €420bn', say analysts, amid fears that as yet undeclared debts could bring the country to its knees The cost of providing an Irish-style bailout for Spain would almost empty the emergency fund that was set up by the European Union and the International Monetary Fund to deal with the crisis affecting weak members of monetary union, a leading team of analysts warned tonight. Jennifer McKeown, Capital's senior European economist, said there was a total of €660bn available from the EU and the IMF, of which Ireland was due to get €80-90bn.
Bailout of Spain Could Spell Trouble for Euro - Europe so far has survived the bailout of Greece. The financial rescue of Ireland also is manageable. Even if Portugal becomes the third country to succumb and seek aid, as many people widely predict, it is unlikely to push Europe to the financial brink. But any bailout of Spain — with an economy twice the size of the other three combined — could severely stress the ability of Europe’s stronger countries to help the financially weaker ones, and spell deep trouble for the euro, Europe’s common currency. Even though Spain, like Ireland, has adopted an austerity plan to help it avoid the need for a bailout, it still could need aid if its banking system proves frailer than the government thinks it is, as was the case in Ireland. This troubling possibility has unnerved lenders, with Spain’s borrowing costs rising even though Madrid has cut its deficit and the country’s banks maintain they have sufficient strength to absorb their bad real estate loans. “Europe can afford the collapse of Ireland, even perhaps that of Portugal, but not that of Spain, so Spain’s ultimate line of defense is in fact this knowledge that it’s too big to fail and that it represents a systemic risk for the euro,”
It's Official: There Is Not Enough Money To Bail Out Spain - It seems that the European bailout buck will stop with Portugal for one simple reason: when Europe created the EFSF it did not think it would need to serially bail out everyone; now the EFSF does not have enough money to cover a bailout of Spain. From Dow Jones: "The European emergency fund, promoted as having the financial firepower to douse a financial crisis in the euro zone, may not even have enough money to cover a bailout of Spain. "[The fund] will be very close to the line, it will be precarious and it won't leave anything for anybody else," said Whitney Debevoise, a sovereign-debt lawyer with Arnold Porter and former World Bank executive director." Of course, if and when Spain is bailed out, other bail outs will be irrelevant, as at that point the vigilantes will focus squarely on Germany. At that moment, nothing less than a complete dissolution of the currency union and an unmitigated monetization ala Weimar will save what is left of the productive powers remaining in Europe.
Will Europe face defaults? Its official – Spain and Portugal will need to be bailed out soon. You can never be certain that something will happen until the government denies it. So check out this article in Tuesday’s Financial Times: Spanish and Portuguese leaders, with reinforcements from Brussels, are fighting a rearguard action to convince investors that there is no need for further eurozone bail-outs after the €80bn-€90bn ($109bn-$122bn) rescue agreed for Ireland at the weekend.“Absolutely not,” said Elena Salgado, Spanish finance minister, when asked in a radio interview on Monday whether Spain needed help from the European Union. “Spain is doing everything it has promised to do, with tangible results.” Portugal is regarded by bond market investors and economists as next in line for a rescue after the bail-outs of Greece and Ireland. But José Sócrates, Portuguese prime minister, was adamant that there was “no connection” between the Irish rescue and Portugal’s problems. “Portugal doesn’t need anyone’s help and will solve its own problems,” he said, insisting that the country had a clear strategy to cut its yawning budget deficit.
Can the EU survive? - For nearly two years now, I've been worried that one or more of the Eurozone countries might do an Argentina. I've been asking whether the Eurozone could survive. I think it's time to change the question. Can the EU survive? I don't know the answer. But I think there's a serious risk that it won't. And I think the EU would have a better chance of surviving if the Eurozone were killed off quickly.The whole purpose of the EU was to stop the European countries fighting one another. That's certainly a laudable purpose. But good fences make good neighbours. And a big argument over which neighbour owes how much to which other neighbours is not conducive to a peaceful neighbourhood. And there's going to be a very big argument if and when some Eurozone countries and their banks cannot pay their debts to other Eurozone countries and their banks. Not to mention their debts to the ECB. This will be much worse than UK and Iceland: because there's much more money at stake; because there are more players involved; and because everybody owes everybody money, so if A can't pay B then B can't pay C, and so on. It's not just an argument about debts and defaults. It's an argument about who is responsible for unemployment, austerity, and recession. Each country will blame other countries for its economic troubles.
The war of politics and finance -There is talk of upping the euro bailout fund: European Central Bank council member Axel Weber said governments can increase the size of the European Union-led bailout fund if necessary to restore confidence in the euro. “Seven hundred and fifty billion should be enough to assure the markets,” Weber said at the German embassy in Paris late yesterday. “If not, it will have to be increased.” The Spanish approach the same issues with another tone:Spain has warned financial traders betting against its debt that they will lose money, in a defiant challenge to the markets which are driving Madrid’s cost of borrowing sharply higher.José Luis Rodríguez Zapatero, Spanish prime minister, on Friday ruled out any rescue package for the country even as the premiums demanded by investors to hold Spanish sovereign debt over that of Germany’s rose to euro-era highs.
Germany Dismisses European Plan to Double Emergency Bailout Fund… The European Commission floated a proposal Wednesday to double the size of Europe's €440 billion ($588 billion) bailout fund for indebted euro-zone countries, but the idea was quickly dismissed by Germany, according to people familiar with the situation. The apparent disagreement between Brussels and Berlin comes amid uncertainty among financial-market participants over whether the funds that Europe has set aside for rescuing stricken euro-zone members would be enough to cope with a possible financial meltdown in Spain. Support from Germany, Europe's largest economy and biggest contributor to the bailout fund, would be essential to push through any increase in the fund.
FT Alphaville » Around the eurozone in distorted CDS curves - They’ve gone all weirdly hump-shaped. The below CDS curve charts are all from Markit, and the black and brown ones are the most recent, and the light grey is from three months ago — except for Greece. Those weird shapes have been picked up by Felix Salmon late on Monday — but also earlier by FT Alphaville in relation to yield curves. The European bail-out scheme has effectively distorted the curves. You can see it most clearly in the Portugal or Ireland charts — default risk spikes precisely three-years out — just when the European Financial Stability Facility (EFSF) would theoretically stop protecting the countries’ debt. For bonds issued after 2013, there was talk of coming up with some sort of ‘crisis resolution’ mechanism, which would inflict burden sharing on (new) investors. In theory then, those CDS curves should be upward sloping — rising sharply in 2013 and continuing to do so afterwards. In practice, however, they are not.
Serial Bailouts Mean Diminished Euro.- THE EURO IS NOT DEAD, but it may be fatally wounded as a viable alternative global reserve currency. For now, the dollar reigns supreme, by default, in every sense of the word. Almost immediately after Ireland acceded to a bailout from the European Union and the International Monetary Fund, the international bond markets have set their sights on Spain as the next crisis point, sending its government bonds plunging and the cost of insuring its sovereign debt soaring. "With Ireland moving toward bailout, bond vigilantes apparently have decided to skip over the Portugal domino and target Spain," writes Uwe Parpart, Cantor Fitgerald's chief economist and strategist for Asia. Spain's credit default swaps hit a record, topping 300 basis points (a premium of $300,000 to insure $10 million debt), to 305 basis points. The yield on 10-year Spanish government bonds has soared a full percentage point as their spreads over German bunds hit a record.
Irish bond spreads up, Portuguese spreads up, Spanish spreads up, euro down - The markets give the dumps down to the Irish budget, and question the country’s solvency; IMF disagrees with EU and ECB over Ireland’s crisis strategy, preferring a tougher line on creditors, and softer fiscal line; Ireland has extended its blanket guarantee for the banking sector; Mohamed El Erian says the eurozone is facing a colossal crisis, with most of the action still to come; we have discovered a reliable crisis metric: the number of No Crisis speeches by ECB board members; Angela Merkel vows to press ahead with her bail-in plan, insisting on the primary of politics (and displaying once more a failure to understand what is going on in the bond markets); German business confidence reaches a post-unification high; the euro, meanwhile, continues to fall and fall. [more]
Irish bonds at 9%, Portuguese bonds at 7% - and Weber pours oil in the fire - Analysts now speculate how long it would take for the crisis to spread to France; the panic was provoked by comments from Axel Weber, who said that the EU would increase the ceiling of the EFSF if necessary; Weber’s comments are based on a calculation, assuming a total possible default mass in the eurozone of €1070bn; German finance ministry rejects calls to increase ceiling; the European Commission is also pondering on raising the size of the fund; France and Germany agreed on terms of bail-in proposal; The EU presses Portugal to accept money from the fund; Robert von Heusinger praises Merkel for engeneering a fall in euro exchange rate; Michael Petis, meanwhile, says that Europe will end up either as a unified country or totally fragmented with little chance of reunion. [more]
Europe Strives to Calm Nerves as Borrowing Costs Rise - Officials across Europe scrambled on Friday to speed measures aimed at easing the fears of investors even as borrowing costs flirted with new highs in the euro zone’s frailer countries. In Portugal, lawmakers approved a tough 2011 budget to help the country meet a pledge to cut the deficit to 4.6 percent of gross domestic product next year, from 9.3 percent in 2009. In Spain, the central bank demanded greater disclosure from banks. And it announced plans for new stress tests to show investors that financial institutions, particularly weaker savings banks, could absorb a “problematic exposure” of 180 billion euros ($238 billion) to the country’s collapsed construction and real estate sectors. Meanwhile, a team of European Union and International Monetary Fund specialists in Ireland was racing to complete terms of its financing package before markets reopened on Monday.
EU rescue costs start to threaten Germany itself - The escalating debt crisis on the eurozone periphery is starting to contaminate the creditworthiness of Germany and the core states of monetary union. Credit default swaps (CDS) measuring risk on German, French and Dutch bonds have surged over recent days, rising significantly above the levels of non-EMU states in Scandinavia. "Germany cannot keep paying for bail-outs without going bankrupt itself," said Professor Wilhelm Hankel, of Frankfurt University. "This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings." The refrain was picked up this week by German finance minister Wolfgang Schäuble. "We're not swimming in money, we're drowning in debts," he told the Bundestag.
Systemic coupling round-up - Time to count up the systemic implications of the Irish crisis, following up on some of today’s links and other news.
- First, the usual contagion to Portugal and Spain is now in full swing, propelled by another barrage of bumbling Euroannouncements: Weber announced that if necessary, the EU would increase the ceiling of the EFSF (to a level that looked intended to accommodate a Spanish bailout); the EU and German government immediately denied any such intention.
- Second, there is the coupling to the UK, both financial, as mentioned here en passant, and economic.
- Third, there is the shadowy shadow banking connection to Germany and elsewhere, set out here.
- Fourth, the “elsewhere” may include not only France and the UK, but also the States.
- Fifth, there’s even a Belgian connection. If you couldn’t tell by now, Ireland really is more than a sideshow, and even proximately, it may not just be about the Eurozone or the European banking system.
Will the Irish crisis spread to Italy? - Here we go again with talks of the end of the euro. This time, however, the trouble was stirred by President of the European Council himself, Mr. Van Rumpuy. The reason for alarm is well known. As soon as it became clear that Greece would miss, albeit slightly, the deficit reduction targets agreed with the IMF and the EU, the nightmare situation of Irish – and possibly Portuguese – default began to materialise. The EU, together with the European Central Bank and IMF are now keen to draw a reluctant Ireland into accepting a life-jacket package (with strings) of €80-€90 billion, that would stop, in the EU’s mind, the disease from spreading to other vulnerable countries. If it spreads to Italy, that could spell the end.
Greece → Ireland → Portugal → Spain → Italy → UK → ? - It is now common knowledge that there is a potential domino effect of European sovereign debt contagion, While some people have been writing about this for well over a year, many others have joined the party late (there are now over 600,000 hits from a Google search discussing this topic.) It is also now common knowledge that while Greece and Ireland have relatively small economies, there will be real trouble if the Spanish domino falls. Iceland has the world’s 112th biggest economy, Ireland the 38th, and Portugal the 36th. In contrast, Spain has the world’s 9th biggest economy, Italy the 7th and the UK the 6th. A failure by one of the latter 3 would be devastating for the world economy. As Nouriel Roubini wrote in February: But the real nightmare domino is Spain; there is not enough official money in this envelope of European resources to bail out Spain. Spain is too big to fail on one side—and also too big to be bailed out.”And as I’ve previously pointed out, Germany and France – the world’s 4th and 5th largest economies – have the greatest exposure to Portuguese and Spanish debt. For more on the interconnections between Euro economies adding to the risk of contagion, see this.
Nigel Farage To European Parliament: “The Euro Game Is Up… Just Who The Hell Do You Think You Are? - (video & transcript) Famous euroskeptic Nigel Farage in just under 4 brief minutes tells more truth about the entire European experiment than all European bankers, commissioners, and politicians have done in the past decade. As we have already said pretty much all of this before, we present it without commentary: "Good morning Mr. van Rompuy, you’ve been in office for one year, and in that time the whole edifice is beginning to crumble, there’s chaos, the money’s running out, I should thank you - you should perhaps be the pinup boy of the euroskeptic movement. But just look around this chamber this morning, look at these faces, look at the fear, look at the anger. Poor Barroso here looks like he’s seen a ghost. They’re beginning to understand that the game is up. And yet in their desperation to preserve their dream, they want to remove any remaining traces of democracy from the system. And it’s pretty clear that none of you have learned anything. When you yourself Mr. van Rompuy say that the euro has brought us stability, I supposed I could applaud you for having a sense of humor, but isn’t this really just the bunker mentality.
Shadow banks, shadow sovereigns - This is not your usual sovereign contagion post. We’ve argued once before that Ireland’s failed bondholder bailout has unleashed contagion that does not just threaten the eurozone. Sudden illiquidity could also strike banking systems across the core, returning markets to volatility last seen during the late-2008 crisis. That moment in the market witnessed an intense dollar shortage for European banks, requiring the establishment of central bank swap lines. Trouble reappeared over Greece in May 2010 and dollar swaps were again pressed into service. Interesting to observe the current pressure on euro basis swaps, even if it’s nothing like at levels of the recent past: It’s a point that returned to mind during the Oxford SWF Project’s discussion of a recent IMF paper on financial globalisation. Ireland looms surprisingly large as a node in this globalisation process. For example — here’s a chart Monk points out that underlines Ireland’s share of the $25,500bn global funds industry:
Chart of the Day: Bubble chart of Exposure to and Bailout of Ireland - Here’s a great graphic on the Irish bailout, quantifying the exposure of foreign banks to Ireland as well as the pots of money from which the 85 billion euros for the Irish bailout is coming. My understanding about the funds which Ireland is only ‘discussing‘ taking, the breakdown is as follows: 45 billion for the state, 20 billion to recapitalise banks and another 20 billion just in case. If I hear differently in the next few hours, I will revise the figures. As for the graphic, hat tip to Barry Ritholtz.
European Banks 'Nearly Bust' If Euro Collapses, Evolution Says -- The European banking system would be “nearly bust” if the euro were to be abandoned which means the 16-member currency “cannot and should not go,” Evolution Securities Ltd. said. “If the euro is abandoned, and we go back to the peseta, lira, escudo, drachma etc., devaluations would follow immediately,” said Arturo de Frias, head of bank research at Evolution in a note to investors today, Devaluations mean write-offs “of a size that would render the whole European banking system completely insolvent.” Contagion from Europe’s sovereign debt crisis is spreading to Spain, sparking concern that the European rescue fund set up in May isn’t large enough. French, German and U.K. banks could lose 360 billion euros ($479 billion) if the euro collapsed, assuming a 30 percent devaluation in the wake of the restoration of national currencies, said de Frias. The damage caused by the abandonment of the euro would be such that such an outcome is impossible and the “only way forward” for Europe is fiscal union, he said.
Sovereign Default Becomes Possibility For Ireland; Why This Is A Game Changer - Both the New York Times and the Wall Street Journal have articles today suggesting that maybe the best course of action for Ireland and several other troubled economies in Europe is plain old-fashioned sovereign debt default. ECB President Jean-Claude Trichet must be apoplectic. Default was not an option, or at least not an option allowed based on the stress tests that European banks undertook earlier this year. Market volatility? Yes, but only imposed on trading account assets (only about 13% of all sovereign debt holdings). Outright default? Absolutely not. The European Financial Stability Facility (EFSF) would make that impossible. Troubled countries would be bailed out by the strong. Held-to-maturity sovereign debt (the other 87%) would mature at par. Or not. For overleveraged countries like Ireland, it's a Sophie’s Choice of who takes the pain: individual taxpayers, bondholders, or corporations. To date, bondholders have been exempt. That’s what bailouts do. They shift the burden to someone else to the benefit of creditors. Or, as a friend likes to remind me, “The headlines are always wrong. It’s not the borrower who has been bailed out, but its lenders.”
Will Ireland Default? Ask Belgium - Simon Johnson - On the face of it, Ireland seems poised on the brink of default. Its debts are very large relative to the size of its economy, most of this money is owed to foreigners and – unless there is an unexpected growth miracle – the country will struggle to pay its debts in full for many years to come. Yet all the indications are that, as part of the historic rescue package to be introduced this week by the European Union and the International Monetary Fund, Ireland will not default on or otherwise restructure its most substantial debts. Why not? German banks are owed $139 billion, which is 4.2 percent of German G.D.P. British banks are owed $131 billion, or about 5 percent of Great Britain’s G.D.P. French banks are owed $43.5 billion, which is approaching 2 percent of French G.D.P.But the eye-catching numbers are for Belgium, which is owed $29 billion. In the relatively small Belgian economy, this accounts for around 5 percent of G.D.P.
Belgium joins financial markets’ hit list - Hold the moules et frites: Belgium has joined Portugal, Spain and Italy on the hit list of countries that may be heading for financial crisis. In the bars of Antwerp and the cafes of Bruges, the talk is less of Christmas markets and hot chocolate than of the rising cost of financing a national debt which stands at 100% of annual national income. Like Ireland, struggling to fend off criticism of its austerity package, there are signs that international bond investors are starting to view Belgium as living on borrowed money and borrowed time. To make matters worse, it has a broken political system and is without a government since April. International money market traders today pushed the cost of insuring Belgium's debts to record levels. The interest payments still fall short of those charged for Spain's government the Portuguese, but analysts said the gap was narrowing quickly.
Fear over Belgian economy as debts climb - Fears have been raised about the future of the Belgian economy after market traders pushed the cost of insuring the country's debt to record levels. The rising cost of Belgium's debt is now 100% of annual national income, raising concerns the country could join Portugal, Spain and Italy on the growing list of countries that could be heading for a financial crisis. Traders are also worried Belgium's broken political system, which has left it without a government since April, is distracting it from tackling its worsening economic outlook
How can Europe stop its debt crisis? - Let's just be blunt: The Eurozone's bailout program has failed. It's not solving the underlying causes of the European debt crisis; it might even be making matters worse. That's become all too clear in the wake of Ireland's decision to seek a rescue from the European Union and International Monetary Fund. The hope was that backing up Ireland would quell the contagion spreading to other weak Eurozone members, especially Portugal and Spain. But the opposite has happened. The fact that Ireland, considered a paragon of reform, was forced into a bailout has only solidified fears in financial markets that the others could be doomed as well. The sovereign bonds of both Portugal and Spain are taking a pounding. The spread between Spanish bonds and benchmark German bonds hit a new record on Tuesday, a sign that investors consider Spain's debt riskier and riskier to own. The euro, after enjoying a strong rally in recent months, has also started slipping again. How can Europe stop the bleeding? What we need is an entire rethink of how the Eurozone is approaching the problems of its weakest members.
ECB May Delay Exit Again as Ireland Rescue Fails to Stem Contagion Spread - The European Central Bank may have to delay its exit from emergency measures again as Ireland’s bailout fails to stem the region’s sovereign debt crisis. Investors are dumping Spanish and Portuguese bonds on concern they will have to follow Ireland and Greece in asking for European Union bailouts, making it more difficult for the ECB to proceed with its withdrawal of liquidity support for banks. Some economists now doubt the ECB will be able to signal a move back to limited auctions of three-month loans, which they regard as the next likely step in the bank’s exit, when policy makers meet next week in Frankfurt. “We can no longer be very categorical on this point given the engulfing crisis in the periphery and the desire of the ECB to avoid exacerbating it,” said Julian Callow, chief European economist at Barclays Capital in London. “We should prepare for the distinct possibility that the ECB realizes the timing would be bad and so avoids taking actions that could inflame an already inflammatory situation.”
Hungarian Bonds to Suffer on 'Poor' Fiscal Policies, SocGen Says - Hungary’s sovereign bonds may come under “selling pressure” because of the government’s “poor” fiscal policies, Societe Generale SA said today. “The government may have underestimated the adverse impact of the ad hoc tax measures” with “negative repercussions for investment and profits,” Societe Generale analysts led by Benoit Anne said in a note to clients today. Hungary, which in 2008 became the first European Union nation to receive an international bailout, plans to cut its budget deficit to less than 3 percent of gross domestic product next year to meet EU requirements. The government is seeking to use private pension assets and special taxes on the energy and telecom industries to plug the budget shortfall.
Hungary Developments Are Worrisome - Hungary is perhaps taking a more obvious approach to influencing monetary policy than Brazil, as ruling Fidesz party has reportedly submitted an amendment to the Central Bank Act that would give the cabinet sole control of appointments to the central bank Monetary Policy Council. Currently, the central bank president and the government split the appointments evenly. This would help prevent the government from stacking the 7-member MPC with friendly members, but that is exactly what Fidesz wants to do. The terms of 4 MPC expire on March 1, and under the current law, replacements would be split between central bank chief Simor and the government. Proposal would allow the government to appoint all 4 and would simply complete the process started back in 2005, when then-Prime Minister Gyurcsany first wrested control of some of the MPC appointments from the central bank.
Fitch Considers Hungary Rating Cut After Pension Plan -- Fitch Ratings may cut Hungary’s credit grade by the end of this year because the government’s plan to funnel private pension funds to the state may have a “negative impact” on fiscal sustainability. Fitch rates Hungary’s debt BBB, the second-lowest investment grade, with a negative outlook, which means that the evaluator is more likely to cut the rating than to raise it or keep it unchanged. The company will make a decision by the end of this year, David Heslam, a director at Fitch Ratings in London, said in a phone interview today. Prime Minister Viktor Orban’s Cabinet two days ago approved a plan to strip citizens of state pensions unless they move their private-pension fund savings to the state. The government is also levying special taxes on selected industries until at least 2014 to cut the budget deficit below the European Union limit of 3 percent of economic output next year.
Ireland refutes the German perspective - If any good can come out of the Irish disaster it is via the realisation that the classic German perspective on the problems of the eurozone is mistaken. Any currency union among diverse economies is bound to be a risky venture. But, with mistaken ideas about how it should work, it may prove calamitous. What, then, is this canonical perspective? It is that the core problems of the eurozone are those of fiscal incontinence and economic inflexibility and so the right solutions are fiscal discipline, structural reform and debt restructuring. Ireland, however, is not in difficulty because of fiscal failings, but because of financial excesses; Ireland has needed rescue, notwithstanding its astonishingly flexible economy; and an emphasis on restructuring of debt has, predictably, triggered a crisis. These realities should make Germany rethink. Will it? I doubt it.Ireland is nothing like Greece. Back in 2007, Ireland’s net public debt was just 12 per cent of gross domestic product. This compares with 50 per cent in Germany and 80 per cent in Greece. Spain, too, had net public debt in 2007 at just 27 per cent of GDP. If the fiscal rules had been applied as ruthlessly as German policymakers say they now want (though their predecessors resisted their application to themselves in the early 2000s), they would have affected France and Germany more than twice as often as Ireland or Spain between inception of the eurozone and the current wave of crises.
Merkel's Dilemma, Chancellor Faces Tough Sell on Irish Bailout - For the second time in just a few months, Angela Merkel will have to explain to voters why Germany must bail out a fellow euro-zone member state. Skepticism is growing -- amongst voters, in the media and within her party. Many want to see Dublin raise its low corporate tax. Germany will be the largest guarantor of the bonds that the European Union rescue fund, which was set up in the spring, will likely issue to borrow money to help stabilize Ireland. Unofficially, there is talk of guarantees worth an estimated €90 billion ($122 billion), with Germany's share possibly amounting to around €25 billion.
Merkel and her colleagues want to put pressure on Dublin to implement a tough reform program that would also address the issue of government revenues. Ireland's low rate of corporate tax, which is just 12.5 percent, has attracted many companies to the country. "It is unacceptable that countries such as Ireland poached companies in Europe through low tax rates only to rely on aid from other countries during a crisis,"
Euro in `Exceptionally Serious' Situation Amid Irish Bailout, Merkel Says - “I don’t want to paint a dramatic picture, but I just want to say that a year ago we couldn’t imagine the debate we had in the spring and the measures we had to take” over Greece, Merkel said in a speech to Germany’s BDA employers’ group in Berlin today. “We are facing an exceptionally serious situation as far as the euro’s situation is concerned.” While Ireland gives “cause for great concern,” the problem is different from Greece because Irish banks are the main issue, Merkel said. “But it’s also right and good” that the European Union set up the 750 billion-euro ($1 trillion) rescue package with the International Monetary Fund that Ireland is now preparing to tap. Merkel is stressing the threat to the euro posed by indebted member countries as she pushes German plans to make investors help pay for any future crisis in the currency area. European Central Bank President Jean-Claude Trichet and leaders in Spain and Greece have clashed with Merkel, saying her stance risks derailing euro-area nations’ deficit-cutting efforts.
Euro at Stake, German Finance Chief Warns - German Finance Minister Wolfgang Schaeuble has warned that the euro itself is at stake in the currency bloc's sovereign debt crisis, knocking about a third of a cent off its value. "We're surrounded by a difficult environment in Europe," Schaeuble said yesterday, referring to a debt crisis that has now engulfed Ireland as well as Greece and threatens to spread further. "I'd like to make clear that our joint currency is at stake. If we can't lastingly defend it jointly as a stable currency, the economic and social consequences would be incalculable," he said.
How Germany got it right on the economy - Germans have something to honk about. Germany's economy is the strongest in the world. Its trade balance - the value of its exports over its imports - is second only to China's, which is all the more remarkable since Germany is home to just 82 million people. Its 7.5 percent unemployment rate - two percentage points below ours - is lower than at any time since right after reunification. Growth is robust, and real wages are rising. It's quite a turnabout for an economy that American and British bankers and economists derided for years as the sick man of Europe. German banks, they insisted, were too cautious and locally focused, while the German economy needed to slim down its manufacturing sector and beef up finance. Wisely, the Germans declined the advice. Manufacturing still accounts for nearly a quarter of the German economy; it is just 11 percent of the British and U.S. economies (one reason the United States and Britain are struggling to boost their exports). Nor have German firms been slashing wages and off-shoring - the American way of keeping competitive - to maintain profits.
Germany Set for Record Deficit—German measures of fiscal consolidation so far have been helpful and successful, but nevertheless the budget deficit this year will be the highest ever, the finance ministry said Monday in its monthly report. "In the long run, only a reduction in the debt ratio can lead to higher economic growth," Deputy Finance Minister Hans Bernhard Beus said in the report. A 2010 budget deficit of around €50 billion ($68.43 billion) is possible, but the deficit will still come in higher than the previous deficit record of €40 billion reached in 1996, the report said. From January through October, the budget deficit has been €54.8 billion
der andere Schuh -- NYTimes: Despite Germany’s economic growth, its banks are among Europe’s weakest. Moody’s, the ratings agency, ranks the average health of German banks below those of most other Western European countries as well as nations like Brazil, Jordan and Mexico. In its annual financial stability report, the Bundesbank warned that German banks had increased their dependence on short-term financing, a profitable but risky practice...
BBC News – German minister says full employment ‘possible soon’ - Germany's economy minister Rainer Bruederle has given an upbeat assessment of his country's recovery, including the assertion that "full employment will soon be possible". He said that Germans were "doing well and spending again", and that domestic consumption was strong. Data released this week showed German business confidence at a 20-year high. German optimism is in marked contrast with the gloom engulfing some European economies struggling with high debts. The euro has fallen by more than three cents against the dollar this week on fears that the Irish debt crisis may spread to other European countries with high budget deficits, such as Portugal and Spain.
Germany sells 4.8 bln euros of Bunds, to poor demand (Reuters) - Germany sold 4.8 billion euros of new 10-year bonds on Wednesday, with low yields failing to draw enough bids to cover the amount on offer despite a marked pick up in risk appetite. The sale came as peripheral euro zone issuers came under intensifying pressure, with contagion fears pushing Spanish and Portuguese yield spreads over Bunds to new euro life time highs. The German Bund sale, which carried a coupon of 2.5 percent and priced with an average yield of 2.59 percent, attracted bids of just 5.667 billion euros against a target amount of 6 billion euros.
IMF chief Dominique Strauss-Kahn urges leaders to cede more sovereignty to EU - In what are likely to prove controversial proposals, Dominique Strauss-Kahn, the IMF managing director, called on the European Union to move responsibility for fiscal discipline and structural reform to a central body that is free from the influences of member states. In a speech in Frankfurt addressing the sovereign debt crisis engulfing Europe once again, he said: “The wheels of co-operation move too slowly. The centre must seize the initiative in all areas key to reaching the common destiny of the union, especially in financial, economic and social policy. Countries must be willing to cede more authority to the centre.” Europe is plagued by crisis because member states put too much faith in banks and let their public finances run out of control. Greece has already been bailed out and Ireland is expected to agree a €100bn (£85bn) rescue within days. Portugal is also at risk.
JPMorgan Private Bank On The "Quixotic" End To Europe's Latest (Failed) Grand Experiment - One of the more persuasive analyses on the fate of the EMU that we have read recently, comes, oddly enough, from JP Morgan, although not from the firm "proper" but from its somewhat more iconoclastic Private Bank division (which manages portfolios for the ultrawealthy). At the core of the argument, which is far more subtle and nuanced than any report by Ambrose-Evans Pritchard, yet which reaches the same conclusion on the viability of the Eurozone, is the now accepted schism between the core and the periphery, in virtually every aspect of their economies: "how can the European Central Bank simultaneously maintain the “right” monetary policy for inflation-phobic Germany and the weak periphery at the same time?" What many don't know, however, is that this very dichotomy was the reason for the collapse of the first attempt at a monetary union in Europe, the European Exchange Rate Mechanism, which ended with a loud thug back in 1992, "when the UK needed a much weaker monetary policy than Germany, which was overheating in the wake of Unification stimulus." Of course, instead of taking no for an answer, Europe merely upped the ante and layered monetary unification on top of an artificial political and customs union.
More Thoughts On Ireland And Peripheral Euro Zone - Here are some more thoughts regarding the negative Ireland comments by Moody’s that we highlighted in our daily. The agency warned of “multi-notch” downgrades to its Aa2 rating, noting that the aid plan will “crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign’s debt burden.” It noted that developments have worsened since the rating was first put on review for possible downgrade back in October. However, Moody’s predicted that it would remain at investment grade. Our own sovereign ratings model (newest update due out soon) now puts Ireland at BBB/Baa/BBB vs. actual ratings of AA-/Aa2/A. Clearly, multi-notch downgrades for Ireland are warranted by all three agencies, though we agree that for now, investment grade (BBB-/Baa3/BBB- or higher) rating should be retained for the country. We continue to see downgrade risks ahead for Spain, Greece, and Portugal too. News of a package for Ireland has ultimately been shrugged off by the markets today after initial gains in the euro and peripheral bond prices. Ireland 10-year yield is down 4 bp on the day, but has given up most of its earlier gains. Contagion remains in play too, as Greece 10-year yields are up 31 bp on the day, Portugal up 5 bp, and Spain up 3 bp. Greece CDS prices are trading right around the record highs from earlier this year.
‘In the worst case scenario these cuts might actually increase the deficit’ - Ha-Joon Chang, author of 23 Things They Don't Tell You About Capitalism, talks about the global crash and why we should treat financial products like new drugs
Can there be such a thing as an “orderly” restructuring? - As EU and IMF officials set about to negotiate their second rescue package to a eurozone member in a year, more and more voices are calling for the “orderly restructuring” of peripheral countries’ debt as an integral component of a crisis resolution framework. The idea is that, when the debt dynamic is unsustainable under most doable fiscal consolidation scenarios, pouring more official money into the problem amounts to “kicking the can down the road” rather than begetting a permanent solution. A key advocate of this view has been Nouriel Roubini, who in a recent paper called for an “orderly, market-based approach to the restructuring of Eurozone sovereign debts” to deal with any insolvencies now, avoid the deferral of tough choices later and contain moral hazard. My objective here is not to challenge the “kicking the can down the road” argument, which is of course correct. Neither am I going to discuss whether Greece , Ireland or, indeed, Italy are illiquid or insolvent. Instead, I want to examine whether it is at all possible to achieve the “orderly” restructuring that Nouriel and others propose in the specific case of the eurozone.
UK banks threatened by Ireland's economic crisis - Britain is expected to foot an estimated £7 billion bill for the Irish bail-out, but there are fears the cost would be far greater to the UK if Ireland's embattled economy failed. The country's debt crisis has laid bare the true extent of Britain's exposure to Ireland and its banks in recent weeks. The International Monetary Fund (IMF) sent out a stark warning earlier this month that the UK economy could be highly vulnerable to economic shock in the troubled country. The IMF said the exposure of UK banks to Ireland could hit the wider economic recovery, with British bank loans to troubled eurozone members such as Ireland, Greece and Spain accounting for around 14% of gross domestic product (GDP).
Every family in Britain will have to pay £300 to bail out the Irish - Bailing out the ailing Irish economy to the tune of billions is in Britain's 'national interest', George Osborne insisted today. The Chancellor described Ireland as a 'friend in need' as he defended plans to pay more than £7billion into an international bailout worth up to £85billion. British taxpayers will be landed with an increase in the colossal debt burden - already £952billion - at a time of desperate cost cutting. They will be stung three times because Ireland will receive funds from the European Union, the International Monetary Fund and direct loans from Britain.
This bail-out blackmail must be stopped - The problem is that you cannot ultimately fix an underlying solvency problem by forcing a country to borrow even more. That only further reduces the chances of the debt ever being repaid. And if markets begin to believe that the countries on the periphery of the eurozone will be permanently underwritten by the rest, it will weaken the creditworthiness of the core: there is already some evidence of this in German bond yields. In any case, constantly having to bail out the insolvent fringe will eventually become politically unacceptable among those forced to pick up the tab. In Germany, the EU’s bail-out fund is already subject to legal challenge, while in Britain, there is understandable horror at being roped into the Irish rescue. Why should our highly taxed businesses be forced to subsidise super-low rates of corporation tax in Ireland? It’s unfair and objectionable. Small wonder that senior officials at the Bundesbank have come round to the view that strong countries would do better to concentrate on shoring up their own banks against debt defaults in weaker countries, rather than propping up the weaker economies.
The British mess (II) - First, let’s have a quick trip down memory lane. The financial crisis got going properly in the UK in August 2007, with the ABCP seize-up leading to the run on Northern Rock in September. Short version: the smaller failed banks vanished into big ones; the big failed banks are propped up by the Government; Barclays squeaked through; the old-fashioned mutual-ownership deposit-backed business model (Co-Op, Nationwide, Yorkshire), much scorned during the demutualizations of the late 1990s, had the last laugh. But unfortunately that is nothing like the end of the story. When we roll the clock forward again to November 2010 we find that, despite earnest efforts by the survivors to cut gearing and balance sheets, the bloated wholesale funding requirements of 2006 and 2007 haven’t accompanied their originators into oblivion. No sirree. In fact, chunks of bank wholesale funding needs, represented by the balance sheets of RBS and Lloyds-HBOS (wards of state already, remember), are likely to resurface as major components of a giant UK funding programme for next year (I think the equivalent of ~USD800Bn of funding rollover in 2011, about a quarter of the worldwide total; I will hat tip any better-informed commenters and update).If you thought EUR10.6Bn of sovereign funding for Ireland was challenging, or EUR26Bn for Portugal, or perhaps EUR128Bn for Spain, or even EUR264Bn for Italy, then – fear not, compared with just UK banks’ intentions, it’s on the small side.
Eric Cantona’s Extremely Organized Bank Run - (video) Eric Cantona – who probably looks thoroughly unfamiliar to most American readers, since he’s a soccer player– has galvanized a nation to make a one-day run on the banks as a statement. That nation is France, and that day is December 7th: “We don’t pick up weapons to kill people to start the revolution. The revolution is really easy to do these days. What’s the system? The system is built on the power of the banks. So it must be destroyed through the banks. “This means that the three million people with their placards on the streets, they go to the bank and they withdraw their money and the banks collapse. Three million, 10 million people, and the banks collapse and there is no real threat. A real revolution. “We must go to the bank. In this case there would be a real revolution. It’s not complicated; instead of going on the streets and driving kilometres by car you simply go to the bank in your country and withdraw your money, and if there are a lot of people withdrawing their money the system collapses. No weapons, no blood, or anything
Growth: The U.S. vs. Europe - Economic growth in the United States has been quite disappointing over the last decade, as we’ve discussed before. Yet growth here has still been noticeably better than growth in Europe. The following chart shows growth of real gross domestic product since 1995 for France, Germany, the United Kingdom and the United States. The source is Haver Analytics: It’s enough to make you wonder what the answer for long-term growth is. Tax cuts don’t seem to be: growth in this country was faster than in Europe after the Clinton tax increase and after the Bush tax cut (and, of course, the American economy grew faster after the tax increase than it did after the tax cut).So what is? Education? I’m sympathetic to that argument, but education obviously has a very long lead time. I’d be interested to see any comparisons between the United States and Europe over this time on other factors that could affect growth, like investment in science and immigration.