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

Saturday, November 19, 2011

week ending Nov 19

US Fed balance sheet shrank in latest week (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week as the central bank decreased its holdings of agency mortgage-backed securities, Fed data released on Thursday showed.The Fed's balance sheet stood at $2.814 trillion on Nov. 16, down from $2.822 trillion a week earlier on Nov. 9. The Fed's holdings of Treasuries totaled $1.676 trillion as of Wednesday, Nov. 16, up from $1.668 trillion as of Nov. 9. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $9 million a day during the week, up from $5 million a day previously. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae , Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $841.98 billion, down from $849.3 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $107.5 billion, down from $107.7 billion the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - November 17, 2011

Fed's Williams: More easing may be needed - A forecast of only sluggish growth, stubborn unemployment and "undesirably low inflation" suggests that more easing steps may be needed, said John Williams, the president of the San Francisco Fed Bank on Tuesday. In a speech to the Greater Phoenix Chamber of Commerce, Williams said the economic story "is one of slow recovery from an especially severe financial crisis and recession, painfully gradual progress on unemployment and receding inflation." This is a story "that calls for continued action by the Fed," Williams said. Further easing could come in the form of additional asset purchases or further communication about the Fed's future policy intentions, Williams said. The Fed has said that it expects to keep rates close to zero until mid-2013 at the earliest.

MBS buys likely best option if easing needed-Dudley  (Reuters) - The trajectory of U.S. house prices is still a significant problem for the economic recovery and in the event of further monetary easing, purchases of mortgage-backed securities could be the best option, a top Fed official said on Thursday. "If additional asset purchases were deemed appropriate, it might make sense to do much of this in the mortgage-backed securities market," said William Dudley, president of the New York Fed. Dudley said the U.S. economic recovery is unacceptably slow and that it faces several obstacles into 2012. "I expect growth of about 2.75 percent for 2012, not much higher," he said. "We also continue to face significant downside risks, mostly related to the stress in the eurozone." "We cannot be satisfied with the current state of the economy or the outlook for the next few years," he said. Dudley said that despite ultra-low interest rates and recent rounds of asset purchases the Fed was not out of policy tools, citing the potential for expanding the Fed's balance sheet still further.

Fed's Dudley: If QE3 Needed, It Might Make Sense to Buy MBS - New York Federal Reserve Bank President William Dudley said Thursday he is "very unhappy" with the economic outlook and strongly suggested he is leaning toward backing further monetary stimulus.  Dudley, the vice chairman of the Fed's policymaking Federal Open Market Committee, said the Fed "could do more" to boost the economy through communication and balance sheet expansion.  If the FOMC does decide to do more quantitative easing he made clear he would favor devoting "much" of the large-scale asset purchases to buying mortgage backed securities. He argued that would be both more helpful to the housing market and less disruptive to financial markets than Treasury purchases.  Dudley also advocated changing the FOMC's "forward guidance" about the duration of zero interest rates to let markets know under what conditions the Fed will begin raising the federal funds rate.  While monetary policy must play "an important role" in sustaining and strengthening the sluggish recovery, he said the Fed also needs help from fiscal and other policymakers

Fed’s Dudley on QE Benefits, Risks of Fiscal Contraction, More - New York Fed President William Dudley followed up a speech at West Point with an interview on PBS’s Nightly Business Report. Here are key excerpts:  We’ve done some very careful work on large scale asset purchases that we’ve done. And we think that they have actually been effective in reducing long term interest rates by taking duration out of the market. By basically helping support the stock market and housing values, and yes, the economy, we wish the economy were stronger than it’s been. But we’re pretty convinced that the economy would have been significantly worse if we hadn’t engaged in these programs.”  “If we don’t get any agreement, then fiscal policy’s going to be restrictive in 2012. So that’s going to hurt the economy, it’s going to hurt growth, it’s going to hurt employment. So we’re not going to see the kind of declines in the unemployment rate that we otherwise might see. And I think it’s going to hurt confidence. I think it’s going to hurt household and business confidence.” “U.S. banks, their direct exposures are quite modest. And they’re much better equipped to manage any type of crisis today than they were in 2008. They bolstered their capital significantly. They built their loan loss reserves. They have very large liquidity buffer. So I think that our banks are in very, very good shape.”

Bullard Says Asset Purchases 'Must Be Employed Carefully' -- Federal Reserve Bank of St. Louis President James Bullard said current policy is appropriate and central bankers should think twice before deciding on further large-scale purchases of securities. "Outright asset purchases are a potent tool and must be employed carefully," Bullard said in a speech today in St. Louis. "Increases in the size of the balance sheet entail additional inflationary risks if accommodation is not removed at an appropriate pace." Federal Reserve policy makers are considering additional stimulus even as the economy picks up. Fed Chairman Ben S. Bernanke on Nov. 2 said unemployment is still "far too high" and additional stimulus "remains on the table."

Fed’s Evans Calls For More Economic Stimulus Steps to Address Unemployment - Federal Reserve Bank of Chicago President Charles Evans said he is calling for “increasing amounts of policy accommodation” to reduce a 9 percent unemployment rate that’s far above the Fed’s objectives. “We ought to be behaving as if there’s a very big problem out there,” Evans said in New York today at the Council on Foreign Relations. Evans, 53, voted against the Federal Open Market Committee’s November decision to maintain its level of stimulus, casting the U.S. central bank’s first dissent in favor of further easing since December 2007. He said today that his position is “unusual” among policy makers. “I’m finding myself sufficiently outside” of the “consensus that I thought I had to publicize that,” Evans said. His vote contrasted with those by three of his colleagues. Dallas Fed President Richard Fisher, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis earlier this year dissented against further easing in August and September.

Fed officials divided on need, trigger for action (Reuters) - Two top Federal Reserve officials on Tuesday made a strong case for further action by the U.S. central bank to spur faster economic growth, but a third, more centrist policymaker disagreed. The differences illustrate the difficulties Fed Chairman Ben Bernanke faces in forging a consensus behind his view that the Fed should do all it can to heal the country's sickly job market. John Williams, president of the San Francisco Fed, and Charles Evans, president of the Chicago Fed, both highlighted the stubbornly high unemployment rate in addressing the uncertain path of the economic recovery. "It is a story that calls for continued action by the Federal Reserve to support a fragile economy," said Williams at a speech in Arizona. Williams, who leans toward the dovish end of the policy spectrum at the Fed and typically emphasizes the danger of high unemployment over the threat from rising inflation, said he would want to see more data confirming inflation will fall and remain low before taking further action to stimulate growth. Evans, a persistent advocate for more aggressive Fed inputs to yank down the lofty unemployment rate, said forcefully that the Fed should be taking action now. "

Fed's Rosengren says fuller action needed on economy (Reuters) - Federal Reserve policies alone cannot restore full employment in the United States and need back-up on the fiscal side and support from greater global stability, a top Fed policy-maker said on Wednesday. Fiscal problems "have increasingly limited the response we would normally expect in a severe economic downturn and a painfully slow recovery," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in remarks prepared for a speech to the Boston Economic Club. The U.S. economy remains at risk from financial shocks at home and abroad, he added, pointing to recent jitters in financial markets from turmoil in Greece, a country "roughly the size of Ohio." Rebuilding the jobs market "will take time and appropriate actions by international policymakers, U.S. fiscal policymakers, and monetary policymakers," Rosengren said. He said that expansion of the Fed's balance sheet in recent years, sometimes derided by critics as "printing money," had not led to a spike in inflation.

Fed's Williams Says Fiscal Actions 'Badly Needed' to Aid Growth   -- Federal Reserve Bank of San Francisco President John Williams called for fiscal aid for the economy, saying government actions beyond Fed easing are imperative for bolstering the recovery and reducing joblessness. “Strong countercurrents” including a decline in wealth, tight credit and concern about financial markets are impeding growth, Williams said today in remarks prepared for a forum in Santiago. “Fiscal policy actions that reduce uncertainty and stimulate recovery are badly needed” and should “work in tandem with monetary policy,” he said. Fed officials are increasingly calling on other parts of government to help lower unemployment that Williams forecasts will remain above acceptable levels until 2016. He cited as an example a recent U.S. government program to let more homeowners refinance mortgages, which could lower foreclosures and give a “modest boost” to consumption. “Other actions that address the continuing problems in the housing market could help spur recovery and enhance the effectiveness of monetary policy as well,” Williams said at a meeting hosted by Chile's central bank.

Fed Hawks, Doves Want Policy Restrictions - There has been an outpouring of commentary from regional Federal Reserve bank presidents that questions some of the fundamentals of U.S. central banking. The comments also demonstrate a remarkable divide in the understanding of the Fed’s role. Consider brief excerpts from just two of the recent regional Fed talkers. On Tuesday, Federal Reserve Bank of Chicago President Charles Evans, a dovish dissenter from the Fed’s consensus, talked about establishing economic growth signposts before eventual changes in monetary policy. He told CNBC in an interview that, as an example, the unemployment rate might have to move to 7 % from the current 9% and core inflation would have to rise above 3%, atop the informal 2% target, before Fed tightening action. He also said more Fed asset purchases, essentially another round of quantitative easing, would be a good idea. On the other end of the policy spectrum is Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond. This inflation hawk on Wednesday talked of the negative implications of the Fed’s crisis intervention to reallocate credit.

New York Fed Swap Lines With Europe Increase By $390MM, Rise To $2.248BN -The New York Fed has released its updated FX swap line data: while the USD line with the BOJ has been cut from $102 million to just $1 million, what is more disturbing is that the swap lines with the ECB increased by $390 million to $2.248 billion. This amount is split between $500 million in a 7 day line at 1.08% and the balance locked up in a 84 day swap at 1.09%, which is where the addition was found. And now we start getting the denials from European banks as to who it may have been to need rescue funding from the Fed via the ECB, and was unable to access USD Libor at a far lower rate.

The Federal Reserve's Dual Mandate - Chicago Fed - In 1977, Congress passed a law requiring the Federal Reserve to promote both maximum employment and price stability. This is often called the "dual mandate" and guides the Fed's decision-making in conducting national monetary policy. The charts below plot the current rates of unemployment and inflation and the most recent projections for the future. The dots show the mid-points of the central tendency of the forecasts for the next three years and the long-run projections, while the dashed lines give the upper and lower ranges of the long-run projections. The Federal Open Market Committee (FOMC) establishes the aim of monetary policy in achieving the Federal Reserve’s dual mandate. The Committee’s policy decisions are often specified in terms of a target for the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances held at the Federal Reserve to other depository institutions overnight.   Open market operations--purchases and sales of U.S. Treasury and federal agency securities held by the Federal Reserve--are the principal tool for implementing monetary policy. 

GOLDMAN: The Fed Is About To Screw Up - You know that Goldman Sachs is a leading proponent of NGDP targeting by the Fed, and in fact it was Goldman's call for NGDP targeting that explains why this idea has moved from academic fringes (and blogs) to something that's been getting discussed everywhere.  Anyway, in a note put out tonight, the firm anticipates the next step by the Fed, and it's not particularly pleased. It is possible that Fed officials will soon adopt an explicit flexible inflation target. This would only be a small step away from the current framework, in which they talk about the “mandate-consistent” inflation rate of 2% or slightly below. However, we think it would be somewhat counterproductive at the margin because it would cement the asymmetry between the employment and inflation part of the Fed’s dual mandate. This risks solidifying expectations of low growth. A move to a nominal GDP (NGDP) target would stand a better chance of helping the Fed achieve both parts of its dual mandate over time. It would provide a way to strengthen the employment side of the mandate, while allowing for errors in the estimation of potential output. If combined with a commitment to use the remaining tools of monetary policy aggressively, our analysis suggests that it could potentially give a significant boost to growth and employment.

Conservatives for NGDP Targeting - Goldman Sachs has another research note out on NGDP  targeting and, among other things, has this to say: NGDP target[ing] enjoys growing support from economists on both sides of the political aisle. Several prominent economists who have recently advocated NGDP targeting, including Paul Krugman, Christina Romer, and Bradford DeLong, lean toward the Democratic side. However, many of the long-standing “market monetarist” supporters of NGDP targeting such as Scott Sumner and David Beckworth identify themselves as political conservatives. Beckworth recently wrote an article advocating NGDP targeting with political journalist Ramesh Ponnuru in the conservative National Review. Gregory Mankiw, an adviser to Republican presidential candidate Mitt Romney, has in the past also published research favorable to NGDP targeting, although he has to our knowledge not weighed in on the current debate. Actually, Greg Mankiw in a recent Brookings Paper argued for macroeconomic policy that amounts to a NGDP target.  Other long-time, right-of-center proponents include Tyler Cowen and Alex Tabarrok--their Modern Principles of Macroeconomics textbook has an innovative AD-AS model that is conducive to making the case for a NGDP target--as well as the recently deceased William Niskanen  of Cato Institute. 

More on Nominal GDP Targeting – Taylor - Several people have asked me to comment on nominal GDP targeting, as recently proposed by Scott Sumner, Christina Romer and Paul Krugman. I did research on nominal GDP targeting many years ago and found that such targeting proposals had a number of problems, which I summarized in the paper “What Would Nominal GNP Targeting Do to the Business Cycle?” Carnegie-Rochester Series on Public Policy, 1985. Although much has changed in the past quarter century I find many of the same problems with the recent proposals. One change is that, in comparison with earlier proposals, the recent proposals tend to focus more on the level of NGDP rather than its growth rate. This removes some of the instability of NGDP growth rate targeting caused by the fact that NGDP growth should be higher than its long run target during the catch up period following a recession. But it introduces another problem: if an inflation shock takes the price level and thus NGDP above the target NGDP path, then the Fed will have to take sharp tightening action which would cause real GDP to fall much more than with inflation targetting and most likely result in abandoning the NGDP target.

Instrument rules, target rules, NGDP, complexity and learning - Nick Rowe - At one extreme you have pure discretion. The central bank does whatever it thinks is best. At the other extreme you have an instrument rule. The rule specifies exactly how the central bank should set the monetary policy instrument, conditional on the indicators (i.e. conditional on its information). The Taylor Rule is an example of an instrument rule*; it specifies the exact setting of the interest rate as a function of recent data on output and inflation.Somewhere in the middle you have a target rule. The central bank announces a commitment to a target, but uses its discretion on how to set the instrument, given all the information provided by the indicators, to hit that target. All inflation targeting central banks, AFAIK, fall into this category. This post is not about pure discretion; it's about instrument rules vs target rules. This post is also, in part, a response to John Taylor's post on NGDP targeting. I stress the "in part" bit, because I don't plan to respond to everything he said. Mainly, I just want to make some conceptual distinctions.

Mental Monetary Disorders - Krugman - Brad DeLong has been blogging about von Mises and his belief — shared by a number of people to this day — that any economic expansion driven by monetary expansion must somehow be unsound and destructive. I’m glad he’s doing this. There’s a tendency on the part of economists, both liberals and Tory Keynesians like Greg Mankiw and John Taylor (because that’s what they are, except when they’re playing for Team Republican), to understate the depth of incomprehension on much of the right. The best cure I know for the notion that a money-led expansion can’t be real is still the story of the baby-sitting coop. You don’t want to get bogged down in the details, which is what some of my usual harassers have been doing. Instead, you want to absorb the key lesson: when the coop was depressed, it was depressed because of inadequate demand, and this inadequacy could be cured by issuing more scrip — money that was created by fiat. I know that a lot of people refuse to accept the possibility of such things, and nothing will convince them that a monetary expansion can ever do real good. But they’re mistaking their own confusion for profound insight.

Why Hasn't the Fed Lowered the Rate It Pays on Reserves? - I've been wondering why the Fed hasn't lowered the interest it pays on bank reserves from its current value of .25 percent to zero. It probably wouldn't do much, but it would slightly lower the incentive for banks to hold cash rather than loaning it out, and more loans would help to spur the economy, so why not give it a try? In addition, unlike some other policies the Fed might pursue, this would be easily reversible, and it would help to convince critics that the Fed is trying everything it can think of. Though it's buried deep within this post, Why Is There a “Zero Lower Bound” on Interest Rates?, the NY Fed explains the FOMC's reluctance to pursue this option. The argument is that it's possible for some interest rates to go slightly negative, and if they do it will cause various problems the Fed would rather avoid (see below). Since banks can borrow from anyone charging less than the rate they earn on reserves and arbitrage the difference away, paying interest on reserves puts a floor on interest rates. 

The ECB Needs the Fed Now More Than Ever - And it is not because the ECB needs more currency swaps.  It is because the ECB needs the Fed for cover.  Here is why.  The Fed is a monetary superpower.  It manages the world's main reserve currency and many emerging markets are formally or informally pegged to dollar. As a result, its monetary policy gets exported to much of the emerging world. This means that the other two monetary powers, the ECB and Japan, have to be mindful of U.S. monetary policy lest their currencies becomes too expensive relative to the dollar and all the other currencies pegged to the dollar. So, to some extent U.S. monetary policy also gets exported to the Eurozone and Japan too.  This exporting of Fed policy to the Eurozone can be seen in the figures below.  The first figure shows the targeted policy interest rates for both the Fed and the ECB since the Euro's inception in 1999.  The figure shows that the ECB adjusted its target interest rate in a manner that seems to follow movements in the targeted federal funds rate, a response consistent with the Fed being a monetary superpower.  Even the ECB's attempt to break away and tighten in 2011 appears to be conforming to the irresistible pull of the Fed's power.

Rate of increase slows for Key Measures of Inflation in October - Earlier today the BLS reported: The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in October on a seasonally adjusted basis ... The index for all items less food and energy increased 0.1 percent in October; this was the same increase as last month and matches its smallest increase of the year.The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.3% annualized rate) in October. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.4% annualized rate) during the month.  Note: The Cleveland Fed has a discussion of a number of measures of inflation: Measuring Inflation. You can see the median CPI details for October here. On a year-over-year basis, these measures of inflation are increasing, and are slightly above the Fed's target. However, on a monthly basis, the rate of increase is mostly below the Fed's target. On a monthly basis, the median Consumer Price Index increased 2.3% at an annualized rate, the 16% trimmed-mean Consumer Price Index increased 1.4% annualized, and core CPI increased 1.6% annualized. (graph)

Inflation Looks Even Less Threatening in October - Inflation, never very muscular in this recovery, looked even punier in October. Consumer prices dropped 0.1% in October. The yearly increase stood at 3.5% in October, but that was down from 3.9% in September and reflects price increases earlier in 2011. Over the past six months, the consumer price index is up at an annual rate of just 2.1% and likely to slow further. Households got some relief on the items they buy most frequently. Food prices rose just 0.1% in October while prices of fruits and vegetables tumbled 1.7%. Gasoline dropped 3.1% in October.  Of course, the Federal Reserve keeps a closer eye on core prices–which exclude food and energy. The core inflation rate was 2.1% in October. That’s a pace the Fed can tolerate, but the core index is likely to be pulled by two different trends in coming months.  Some relief will come from a slowdown in imported-goods inflation. An upward push on core inflation, however, will come from the cost of shelter.

Fed's Lacker says U.S. inflation still a risk (Reuters) - The Federal Reserve's latest effort to push down long-term borrowing costs is likely to push inflation higher with little benefit to economic growth, a top central bank official said on Monday. Jeffrey Lacker, the Richmond Fed's hawkish president, acknowledged inflation is likely to ebb in coming months as pressures from high energy and commodity prices ease. But he warned that inflation remained a threat. "Experience coming out of past recessions suggests that the risks to inflation lie to the upside, so I do not believe we should relax our vigilance on inflation at this time," Lacker told a group of business executives. "I doubt inflation will fall much below 2 percent for a sustained period," he said, referencing the central bank's implicit target for consumer prices. Lacker said he opposed the Fed's latest push to push down long-term interest rates, known as Operation Twist, in which the central bank has committed to selling $400 billion in short-term Treasuries in order to buy longer-dated government bonds. "The effects of these operations is uncertain, but is likely to be relatively small. My sense is that the main effect will be to raise inflation somewhat rather than increase growth," he argued in his prepared remarks.

Oil vs QE3 - So, last night, the US October CPI deflated. Yes, month on month it fell 0.1%. Year on year was less salutary, up 3.5%. Here is the breakup: The big fall year on year was in the energy index, down from 19.3 this time last year to 14.2 this year. So, with the CPI disinflating some is there hope (despair) for further monetary stimulus, that is QE? I think not! For one simple reason: oil is back at $100 (WTI that is, neither Brent no TAPIS got anywhere near it on the downside). Here are the charts. First, the oil price: Note the similarity of charts and consistent falls into October, as well as the absence of the current 20% surge. Stand by for a lousy CPI in the next few months. So, why is oil up? Well, Middle East instability never helps. We’ve got revolution brewing in Syria. Unresolved revolutions in Egypt and Libya, as well as simmering Iran/Israel tensions. But none of that is why, in my view, oil just won’t go away. As I’ve argued before: Commodity supply is inelastic. That is, it cannot respond quickly to a sudden surge in demand. The chart offered below (and mentioned above) shows the effects on any given market if supply cannot respond quickly. Don’t be scared of it, it is easier than it looks:

Easing Inflation Pressure Gives Fed Extra Room to Maneuver in Face of Euro Crisis - US inflation pressures continued to ease in October, according to the latest data from the Bureau of Labor Statistics. With the struggling US economy facing headwinds from the euro crisis, low inflation gives the Fed a welcome extra bit of room to maneuver. The headline CPI actually fell at a 1 percent rate during October.  (All inflation rates given in this post are seasonally adjusted monthly changes stated as annual rates.)  Energy prices were the main factor driving headline inflation downward. Negative inflation is unlikely to persist, however, given that world oil prices have already pushed back over $100 a barrel this week. Core inflation remained moderate in October, rising just slightly to a 1.7 percent annual rate. Apparel prices and prices of medical goods and services helped pull the core rate up a bit from September’s 0.6 percent, which was the low for the year. Another key indicator, the Cleveland Fed’s 16 percent trimmed mean CPI, rose at an annual rate of just 1.4 percent in October, down slightly from the previous month. Unlike the core CPI, which always removes food and energy prices, the trimmed mean CPI takes out the 8 percent of prices that increase most and the 8 percent that increase least during a given month, whatever those prices happen to be.

Subsiding Inflation - Krugman - Calculated Risk informs us that key measures of inflation have subsided. Still no hyperinflation by 2010. To be fair, while the inflationistas have been totally wrong, deflationistas like me haven’t been completely right. Here’s a chart, showing unemployment and core inflation during and after two big recessions; in each case the time series starts at the upper left. I thought this slump would produce a “clockwise spiral” like the 80s recession, and for that matter like what happened in the 70s (not shown). That is, among other things, what textbook adaptive-expectations Phillips curves say should happen. So I thought we might well be into deflation by this point. Instead, while you can see a clockwise spiral, sort of, if you squint, it has been “scrunched” as if it’s bouncing off a hard surface at or near zero. And that’s almost surely exactly what has happened. Downward nominal rigidity — the great difficulty of actually cutting wages and many prices — is now obvious. And research into PLOGs — prolonged large output gaps — shows that this is a general phenomenon.

Irving, Maynard, and Me (Wonkish) - Krugman - I’m going to be a bit grouchy right now, and unfairly so. Via Mark Thoma, I see that David Glasner is worried about what appears to be a need for negative real interest rates, and suggests that this may be close to concerns about the liquidity trap. OK, what I should do is welcome Glasner to the club — and I do, I do. But let me vent for a minute: the observation that a liquidity trap arises when the economy “needs” a negative real interest rate is at the heart of modern liquidity trap analysis; it’s where I came in back in 1998, when I started the whole thing (pdf): To preview the conclusions briefly: in a country with poor long-run growth prospects – for example, because of unfavorable demographic trends – the short-term real interest rate that would be needed to match saving and investment may well be negative; since nominal interest rates cannot be negative, the country therefore “needs” expected inflation. I suspect that a lot of time and effort has been wasted because smart commentators like Glasner “knew” that Keynesians were crude thinkers using mechanical approaches leading them to spend several years laboriously arriving at the same conclusions people like me, Woodford, Eggertsson, Svensson etc. had already laid out in detail a decade ago.

Downside Risks - On Friday, Goldman Sachs economists expressed concerns about two potential negative shocks for the U.S. economy:  "We are particularly concerned about two potential negative shocks— one of which has already materialized to some degree. First, a worsening of the European financial crisis would hurt the economic outlook globally. Second, our forecast assumes that the payroll tax cut is extended for another year; if that failed to happen, the fiscal drag in early 2012 would rise significantly." These are downside risks to Goldman's forecast of about 1% GDP growth in the first half of 2012 - already a very weak forecast! On the second point, additional fiscal stimulus might depend on the so-called "super committee" that has a November 23rd deadline. I have little confidence in the committee. It is hard to believe that Congress would raise taxes on working Americans with a 9% unemployment rate, and in an election year - but that just might happen ...

European Turmoil Could Slow U.S. Recovery - — For the second time in two years, European debt troubles threaten to slow the momentum of the fragile recovery in the United States.  Although American financial institutions have taken steps to protect themselves from Europe’s long-simmering problems, the likely slowdown in Europe could damage consumer and business confidence in America and strengthen the dollar1, making United States exports less competitive.  “Financial contagion can lead to the very rapid global spread of recession2,” . “If trouble intensifies and spills over to equities and other U.S. risk assets, we could see a soft patch.”  Economists say Europe’s troubles would need to worsen significantly before putting the United States economy, which has been strengthening lately, at risk of a new recession.

San Francisco Fed Warns of High Recession Risk for U.S. - The outlook is growing grimmer for the U.S. economy, as the risk of a new recession fueled by European troubles has risen, a new paper from the Federal Reserve Bank of San Francisco argues. In the analysis released Monday, the central bank researchers say the U.S. economy is particularly vulnerable to shocks right now. If something were to strike the nation at this time of already weak growth, contracting gross domestic product would be hard to avoid. The most obvious recession trigger is the worsening and unresolved government debt crisis currently roiling Europe, the authors note. “The odds are greater than 50% that we will experience a recession sometime early in 2012,” the paper states. “The message is clear,” economists warn. “A European sovereign debt default may well sink the United States back into recession,” and “prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic.”

SF Fed: Recession odds in 2012 are greater than 50% due to European Crisis - An economic letter from the SF Fed: Future Recession Risks: An Update - Gathering storms across the Atlantic threaten a U.S. economy not yet recovered from the last recession. ... In the next few months, the odds of recession due to domestic factors appear reasonably contained. ... However, the curve reflecting the international odds suggests more imminent danger to the economy, although this threat is harder to calibrate using historical data and only indirectly reflects the health of the European financial system. Recession odds based on international factors peak at about 45% toward the end of 2011 ... The combination of these two recession coins, shown in the combined risks line of Figure 2, is quite disconcerting. It indicates that the odds are greater than 50% that we will experience a recession sometime early in 2012. Because the international odds of recession are more imprecisely estimated, one must be careful with a strict interpretation of this result. But the message is clear. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic.

Rising Risks of Recession - The situation in Europe has increased the chances of a recession in the US (extract via): Future Recession Risks, FRBSF Economic Letter: ...odds are greater than 50% that we will experience a recession sometime early in 2012…. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession… The Fed appears to be taking some precautions, though perhaps not enough, and a wise Congress would be talking about how to do the same, i.e. how to take action now to insure against the rising future risks. Unfortunatley, wisdom is not the strong suit of this (or any?) Congress, and we'll be lucky if it doesn't make things worse.

Europe’s Disaster Is Headed Our Way - As an author who has just published a book on the crisis of Western civilization, I couldn’t really have asked for more: simultaneous crises in Athens and Rome, the cradles of the West’s law, languages, politics, and philosophy. Yet most Americans are baffled by the ongoing economic pandemonium in the European Union. For them, places like Greece and Italy are primarily tourist destinations they’ll visit at most once. The finer points of Mediterranean politics leave them cold, except insofar as they’re funny. After all, who could resist the opera-buffa character of Silvio “Bunga-Bunga” Berlusconi?  Ever tried to explain to a New Yorker the finer points of Slovakian coalition politics? I have. He almost needed an adrenaline shot to come out of the coma. So why should Americans care about any of this? The first reason is that, with American consumers still in the doldrums of deleveraging, the United States badly needs buoyant exports if its economy is to grow at anything other than a miserably low rate. And despite all the hype about trade with the Chinese, U.S. exports to the European Union are nearly three times larger than to China.

Europe’s debt crisis raising odds of US recession - The European debt crisis is raising the odds of a U.S. recession, with economic contraction more likely than not by early 2012, according to research from the San Francisco Federal Reserve Bank.  While it is difficult to gauge the odds precisely, an analysis of leading U.S. economic indicators suggests a rising chance of a recession through the end of the year and into early next year, researchers at the regional Fed bank wrote Monday. The risk of recession recedes after the second half of 2012, they found. New governments in Greece and Italy, with fresh promises to tackle fiscal problems have in recent days, allayed investor concerns about a near-term sovereign debt default in the euro zone, but Europe's debt crisis is far from resolved. The region is facing its worst hour since World War II, German Chancellor Angela Merkel said Monday.

The Euro Zone Crisis and the U.S.: A Primer - The potential effect of the euro zone crisis on the United States has been the subject of several recent articles, including Annie Lowrey’s on Saturday. Here’s a primer summarizing the three main channels through which the fiasco across the Atlantic could hurt the American economy: trade, stock markets and (most worrisome) a contagious credit crisis.

  • 1) Trade. There are two ways that a European catastrophe could hurt American exports. First, it could shrink our customer base in Europe.  Second, the crisis could shrink the United States customer base around the world.
  • 2) The stock market. European stock markets and American stock markets are strongly correlated, as shown by indices for both in the chart below:
  • 3) Debt exposure and a contagious credit crisis. This is the biggest worry, since global financial markets are deeply interconnected.

The economy slows here and abroad - And what we can do about it. From Macroeconomic Advisers and e-forecasting, some recent reads on the macroeconomy:  Macroeconomic Advisers monthly release for September has GDP flat, while e-forecasting (as of a week ago) has GDP essentially flat for October. As of this morning, MA's tracking forecast has Q4 growth at 3.2%. Short term, it may be growth will continue. I look to the rest of the world to think about what is going to happen, given the trajectory of external sources of demand. Here, the indicators are not altogether promising. From "OECD composite leading indicators continue pointing to slowdown in economic activity" (Nov. 14, 2011)CLIs point more strongly to slowdowns in all major economies. In Japan, Russia and the United States the CLIs point to slowdowns in growth towards long term trends. In Canada, France, Germany, Italy, the United Kingdom, Brazil, China, India and the Euro area, the CLIs point to economic activity falling below long term trend. What can be done? I know there is a tendency, given the policy paralysis we are seeing in Washington, DC (and elsewhere), to just throw up one's hands. But those in policymaking positions can't do that. And in fact I think there are many things that can and should be done. CBO Director Elmendorf outlined many options in testimony before Congress, "Policies for Increasing Economic Growth and Employment in 2012 and 2013".

Leading Indicators or Statistical Noise? - Inquiring minds are digging into the touted numbers of the day, the conference board index of leading indicators.  Month in, month out, one of the biggest leading indicator components is the treasury-Fed Funds Rate spread.One might think that the direction of the spread would be important, but one would think wrong. Month-after-month, the conference board woodenly add points to this leading index component. In these zero-bound conditions, I suggest using the direction of the 10-year rate itself would make more sense, with a falling rate an indication of weakness. Is the stock market a leading indicator or a coincident index of stock market sentiment? If it was leading, what did it say at the 2007 stock market peak? What dis it say at the March 2009 stock market bottom? The idea the stock market leads the economy is complete nonsense. It is coincident at best, and lagging at worst.

Is America following Japan? - The Economist - Tonight in my old stomping ground of Toronto, the following proposition will be debated: “Be it resolved that North America faces a Japan-style era of high unemployment and slow growth.” Paul Krugman and David Rosenberg take the “pro” side, while Larry Summers and Ian Bremmer represent the “con” side. Japan has been studied so thoroughly that I may subtract rather than add value here. Nonetheless, there are two things I find get less attention than they deserve:

  • 1.     How much of the gap between Japanese and American economic performance since the mid-1990s can be explained by demographics?
  • 2.     How much did fiscal tightening contribute to Japan’s steep recession of 1998?

The answer to (1) is “more than you think”, and the answer to (2) is “less than you think”. First, on demographics. Between 1994 and 2008 American GDP grew 3% a year while Japan's grew 1.1%. That sounds dismal, but be sure you use the right benchmark. Japan’s potential growth slowed dramatically in the mid 1990s. As the chart at right illustrates, Japan’s working-age population at that time began a long decline, shrinking 0.4% per year over the period while America’s grew 1.2% according to the OECD. That 1.6 point differential can explain most of the difference in growth. Japanese productivity growth averaged a perfectly respectable 2.1% from 1994 to 2008, the same as America’s.

Krugman vs Summers: The debate - I’m glad I found myself in Toronto this evening, because tonight’s Munk Debate was illuminating and enjoyable. The motion was that “North America faces a Japan-style era of high unemployment and slow growth”; Paul Krugman was arguing for it, while Larry Summers was arguing against. Krugman found himself with the home-team advantage through being paired with Canadian economist David Rosenberg; Summers had strong rhetorical backup from Eurasia Group’s Ian Bremmer. But at heart, this was Krugman vs Summers, which is an inspired match-up: especially in election season, one of the most important criteria for any debate is that it not cleave easily and obviously along party-political lines. That way people just end up voting their party and rehearsing tired party-political talking points.

Larry and Paul and Dave and Ian - Krugman - A belated note on the Munk debate. Felix Salmon has a summary. The weird thing is that to the extent there was an argument about the economics, it was three-sided, and didn’t correspond to the “teams”: Larry Summers and me basically doing liquidity-trap macro, David Rosenberg not too different in analysis of the problem but expressing deep pessimism about the prospects for policy even given the political will, and Ian Bremmer making the case that America is better than other countries, which even if true had no bearing on the question, as far as I could see. Larry affected to be optimistic about the prospects for better policy one of these years. Well, that was his assigned position. What the audience got was some very cogent argumentation from Larry and Dave, and I hope I delivered some value.  Oh, one thing about Felix’s commentary: he describes me as always pessimistic. But my pessimism has been selective; I’ve been pessimistic about unemployment and growth, but optimistic about interest rates and inflation. So it’s not just about crying doom, doom. I think that counts for something — especially since I’ve been right

When will they meet again? - BACK in August, Europe and America seemed to be locked in a downward spiral toward recession. Both economies had experienced a disappointing first half to the year, and both were in the throes of a loss of confidence inspired by political failure: the inability to solve the sovereign debt crisis in Europe, and the unforced error of near-default in America. In the past month, the two economies have clearly diverged. America's has pulled out of its nose dive. Congress hasn't done anything too dangerous in a few months, the Federal Reserve is once again moving to support recovery, and labour markets are looking more buoyant than they have in some time. New, positive retail data this morning inspired Macroeconomic Advisers to push its forecast for fourth quarter growth up to a 3.1% annual rate. Meanwhile, very muted inflation data will make it easier for the Fed to do more to encourage hiring. Europe, on the other hand, is sinking. The euro-zone economy grew 0.2% from the second quarter of 2011 to the third, but all signs indicate that that will be the last flicker before a return to recession.

Supply-Side Solutions? Beware (Wonkish) - Paul Krugman - There’s a new Vox paper suggesting that supply-side policies — structural reform that makes workers more productive, prices more flexible, or whatever — may be the answer to a liquidity trap. Some people may seize on this claim. So it’s worth pointing out that a casual interpretation here gets it all wrong. Here’s what we already know: in the looking-glass world of the liquidity trap, supply-side improvements are generally counter-productive. I know that sounds weird, but that’s what liquidity trap economics is like. A few years ago Gauti Eggertsson identified the “paradox of toil”; in our joint work we sketched out the related “paradox of flexibility”. The basic point is that the aggregate demand curve is actually upward-sloping, because any fall in prices does nothing to reduce interest rates but does increase the real burden of debt. So making wages more flexible, say, does nothing except worsen balance sheet problems.

Poor Consumer Spending is Indeed the Proximate Cause of Much of the Recession -  All that having been said the proximate cause of the slump is a sharp decline in consumer spending from which we have not recovered. Don Boudreaux, as many others have, points to the rise in Real Personal Consumption Expenditures as evidence that this can’t be true. However, ironically Real PCE does not actually measure consumer spending. This is because to make the metric consistent it has to include implicit spending. Things like the rent that you pay to yourself. Things like the medical bills that Medicare and Medicaid pay on your behalf. Things like the spread between the profits that banks make and the interest that they pay to savers. Things like the deterioration of buildings and machines.  These are things that are not directly under the control of consumers, but go under PCE. If you are trying to build a consistent metric then you need to do it this way.

Black swans attack -- "All our governments are insolvent. "No level of taxation could make them solvent. "So we must cut the source of our insolvency. "Government accounting systems are fundamentally flawed. "Wall Street scandals are known and published. But this has been happening in government accounts as well. "Principles of government accounting are riddled with gimmicks. "Governments make promises that cannot be kept. This runs across government behavior at all levels. "The truth about pension plans is that they all lack the assets to cover promises. None are fully funded. "States, counties, cities cannot meet their pension commitments. Current shortfalls can safely be trebled. 'Promises have to be broken on a massive scale on both sides of the Atlantic and austerity decreed. Medicare and Medicaid cannot be spared. "We have fought two wars on borrowed money. "The principal source of insolvency is the expansion of the welfare state. "What has happened was perfectly predictable. "Defense spending will have to be curtailed to tackle coast-to-coast collapsing bridges, roads, schools."

US Debt To GDP Hits 102% And Rising - Very quietly yesterday the amount of total public debt currently outstanding exceeded $15 Trillion Dollars.   While that may or may not surprise some of you; it is an issue that we have been watching sneak up on us.  As the "Super Committee"approaches their deadline for finding $1.2 Trillion in spending cuts over the next 10 years, or just $120 Billion in cuts annually, this becomes an even more pressing and important issue for the economy and the markets.  We have discussed this issue in the past but did some deeper work on the issue to create projections based on the current rate of debt growth as well as comparing it to the Congressional Budget Office estimates.  In the first chart we have take the amount of total public debt outstanding, which is debt held by the public plus intragovernmental holdings, from when President Bush's fical budget year started on October 1st of 2001 until November 15th, 2011. We have then extrapolated the increase in debt based on the average rate of increase of the debt under the current administration to the end of President Obama's potential second fiscal year term ending September 30th, 2011.   This estimation is shown by the dotted red line.   The blue line is the current level of debt with the Congressional Budget Office estimates for the same time period.  Gross Domestic Product has been plotted as well and assumes a 2.5% annual growth rate for the years 2012-2017.

Fed Now Largest Owner of U.S. Gov’t Debt—Surpassing China - - At the close of business on Tuesday, the debt of the federal government exceeded $15 trillion for the first time--with the largest single owner of the publicly held portion of that debt being the Federal Reserve. Over the past year, as the Federal Reserve massively increased its holdings of U.S. Treasury securities and entities in China marginally decreased theirs, the Fed surpassed the Chinese as the top owner of publicly held U.S. government debt. In its latest monthly report, the Federal Reserve said that as of Sept. 28, it owned $1.665 trillion in U.S. Treasury securities. That was more than double the $812 billion in U.S. Treasury securities the Fed said it owned as of Sept. 29, 2010. Meanwhile, as of the end of this September, entities in mainland China owned $1.1483 trillion in U.S. Treasury securities, according to data published today by the U.S. Treasury Department. That was down slightly from the $1.1519 trillion in U.S. Treasury securities the Chinese owned as of the end of September 2010, according to the same Treasury Department report. Thus, at the end of September 2010, the Chinese owned about $339.9 billion more in U.S. Treasury securities than the Fed owned at that time. By the end of September 2011, the Fed owned about $516.7 billion more in U.S. Treasury securities than the Chinese owned.

The Evolution of Federal Debt Ceilings - NY Fed - It’s hardly news that Congress sets a statutory limit on aggregate Treasury indebtedness. Since Congress controls the appropriations and tax code that largely determine deficits, some commentators have questioned the need for limiting indebtedness as well. Interestingly, the current regime was not put in place “on purpose,” to solve a problem that stemmed from a regime of no limits, but rather evolved out of a system of very different, and much more stringent, limits on individual categories of debt. This post describes the nature of the earlier limits and how they evolved to the current regime of a single limit on aggregate indebtedness.

Supercommittee hasn’t ‘given up hope,’ Hensarling says - The co-chairman of Congress’s special debt “supercommittee” said Sunday that the panel’s 12 bipartisan members remain hopeful that they can reach a deal before their Nov. 23 deadline. Two days ago, President Obama called Hensarling and the panel’s other co-chair, Sen. Patty Murray (D-Wash.), to urge the lawmakers to reach an agreement that would both raise revenues and reform federal entitlement programs such as Medicare and Medicaid. But there have been no signs over the weekend that the group is any closer to reaching a deal, and 10 days now remain until the group’s Thanksgiving deadline. Hensarling on Sunday described the panel as facing both a “duty” and a “goal.” The group’s duty, he said, is to address they country’s long-term debt by fundamentally restructuring federal entitlement programs. The committee’s goal, by contrast, is to come up with a plan to achieve at least $1.2 trillion in savings over the next decade, Hensarling said. He added that even if the panel falls short in that effort, the resulting $1.2 trillion across-the-board cut that would be triggered in January 2013 will ensure that the target set out in August’s debt-ceiling legislation is reached.

The Superfluous Super Committee - Once again, we have a familiar soap opera. Will the Democrats save the Republicans from crashing and burning as a consequence of the Republicans' own folly? In this case the soap opera involves the so called Super Committee of Congress. In August, in order to avoid taking responsibility for a default on the U.S. government debt, a needless crisis of their own making, the Republicans cut a deal under which a bipartisan committee of Congress had to come up with at least $1.2 trillion dollars of deficit cuts by November 23 (Happy Thanksgiving) or automatic cuts of the same amount would kick in beginning in 2013. While several Democrats on the Super Committee have been in their usual posture of bending over backwards to consummate a deal, Republicans, until this past week, were insisting that taxes could not be part of the bargain -- thus killing any possible deal. Then Republicans began taking a closer look at what would happen if budget cutting went on auto-pilot as a consequence of their own handiwork. Hundreds of billions in military cuts would kick in, starting in 2013. And over a trillion dollars in Bush tax cuts, mostly for the rich, would expire.

Debt supercommittee getting nowhere fast - The Republican co-chair of a committee in charge of slashing the nation's deficit called deliberations a "roller coaster ride" and gave no indication that a deal could be struck before the panel's Nov. 23 deadline. Texas Rep. Jeb Hensarling said Sunday the panel will fail unless Democrats agree to significant "structural" changes to entitlement programs like Medicare — the government health care program that primarily benefits the elderly — and Social Security, the government retirement program. The supercommittee was created as part of a hard-fought deal between President Obama and lawmakers. It has until Nov. 23 to agree on how to reduce the deficit by at least $1.2 trillion in the next decade. Any amount less than that would be made up in automatic across-the-board cuts divided evenly between defense and domestic programs. The panel has been stymied for weeks over taxes. Democrats want to raise revenue by making tax code changes that directly add money to government coffers. Republicans have agreed to increase government revenue, but are demanding large cuts to benefit programs, which they say are bleeding Americans dry.

Debt supercommittee: Frequently Asked Questions - Washington Post

Deficit Panel Seeks to Defer Details on Raising Taxes - With a little over a week left to reach a deal, members of the Congressional deficit reduction panel are looking for an escape hatch that would let them strike an accord on revenue levels but delay until next year tough decisions about exactly how to raise taxes. Under this approach, the panel would decide on the amount of new revenue to be raised but would leave it to the tax-writing committees of Congress to fill in details next year, well beyond the Nov. 23 deadline for the panel itself to reach an agreement. That would put off painful political decisions but ensure that the debate over deficit reduction stretched into the election year. “There could be a two-step process that would hopefully give us pro-growth tax reform,” Members of Congress and their aides said they were still skeptical that the panel could agree on a mix of spending cuts and revenue increases to reduce budget deficits by $1.2 trillion over 10 years, the minimum set by law.  If the panel falls short, a series of automatic cuts, split evenly between military and civilian programs, would take effect, starting in 2013. Some fear that such a failure could lead to the kind of stock market slide and loss of investor confidence that accompanied stalled efforts to raise the federal debt limit earlier this year.

Not-So-Super Committee Seriously Considers Becoming A Circular Firing Squad - This story by Robert Pear in today's New York Times about the latest from the not-so-super committee tells you everything you need to know about the status of the negotiations.  According to Pear, one of the main plans for reducing the deficit the committee apparently is considering is to set up a process by which tax increases would be considered by the House Ways and Means and Senate Finance Committees at some point next year. Does anyone else see how ridiculous this is?  The anything-but-super committee was set up because the regular committees and legislative process could not agree on what to do about the deficit.  But rather than make those decisions, the super committee may decide that the best way to deal with this situation is to throw it back to the two tax-writing committees that, because they were unable to come up with a plan in the first place, gave the job to the super committee. And the most inane, stupid, absurd, remarkable thing about this is that the definitely-not-super committee will claim that this make-someone-else-do-the-hard-work-later process complies with the legal requirement to reduce the deficit by $1.2 trillion.

Super-Congress wants to have its cake and eat it too – Linda Beale - So the Democrats and Republicans on the so-called "Super-Committee" that is supposed to find $1.2 trillion in budget reductions/increased revenues within a week now thinks it has a solution--let the regular tax committees (Finance and Ways & Means) come up with the tax revenues, while the Super-Committee will go on and specify the spending cuts.  See Deficit Panel Seeks to Defer Details on Raising Taxes, New York Times (Nov. 14, 2011). The proposal doesn't sound like anything that the Dems on the panel should accept.  For a piddling reduction in some of the deductions available to the most affluent individuals, the GOP is willing to lower the rate on those individuals to 28%!  Just more enriching the rich.  The Dems shouldn't agree to that.  Especially since Grover Norquist thinks that any such agreement would be undone immediately, while any stupid agreement the Dems make to "reforming" (i.e., cutting benefits from) the earned benefits programs will be allowed to take place. Grover G. Norquist, the president of Americans for Tax Reform, whose antitax pledge has been signed by most Republicans in Congress, said in an interview, “I am not losing any sleep” over the Republicans’ latest proposal. Mr. Norquist said he was confident that, “at the end of the day, the Republican House will not pass a tax increase.”

Superfraud - Krugman - It’s a bird! It’s a plane! It’s a turkey! I thought I had worked out all the worst-case scenarios for the supercommittee (there was never a best-case). But this is even worse than my worst imagining: a deal to undermine key social insurance programs in return for a promise that Congress will come up with a plan for raising revenue at some future date. If you think that promise has any credibility whatsoever – if you have any doubts that the end result would be to gut Social Security and actually cut taxes for the wealthy – I have this Nigerian bank account that can be yours if you send me $100,000 in expenses. The worst of it is that Democrats might actually go for it.

Rep. Becerra on Deficit Deal: ‘Elements Are There’ - Rep. Xavier Becerra (D., Calif.), a member of the congressional supercommittee working on a deficit-reduction package, said Tuesday that “the elements of a deal are there,” sounding a hopeful note that a deal can be reached by next week’s deadline. “I believe that the elements of a deal are there,” Mr. Becerra said after a weekly Democratic caucus meeting. “We could make it a big and bold deal or we could make it a deal that meets our statutory obligations, but either way it will have to be a balanced deal and the elements of the deal are there.” The congressional supercommittee must come up with a package of at least $1.2 trillion in deficit reductions by Nov. 23. Failure to meet the deadline, or failure by Congress to pass the package by Dec. 23, would trigger government-wide spending cuts. Negotiators are talking about deferring decisions on some tax increases to the relevant tax-writing committees, in a two-step process. Not all of the 12 members of the supercommittee like the approach, but Mr. Becerra said he could live with it. And he raised the possibility that cuts to Medicare and Medicaid could be handled the same way.

Cut now has a plan, revenue increases have wishful thinking…Supercommittee - Discussion continued apace yesterday about the "supercommittee" and the idea of agreeing to agree someday on some revenue increases while going ahead with cuts. This approach is a terrible one since it gives the obstructionist GOP members just another setting in which to refuse to go ahead with tax increases and to "negotiate" yet again over just what counts as a revenue increase.  Like the gimmicks that became so overused in the 2001, 2003, 2004 Bush tax bills, this "deal" is just another gimmick for the radical right to get its way--cuts to Social Security and Medicare, cuts to all programs intended to help the vulnerable, no cuts to military programs, and no tax increases--especially not for the rich. Jim Jordan (Republican of Ohio) said in a USA Today piece that taxes should not be raised because they "should not punish success to satisfy some false definition of balance."  Id.  This is a wrongheaded view of taxes.  The radical right uses language about taxes "punishing success" because they see defending the rich from  taxation as their mission.  The rich are defined as "successful"--even if the wealth is merely built on top of inherited wealth and position, and even if the rich did nothing at all to earn the wealth.  Taxes do not punish success.  Taxes are the way that we cooperate together to fund important government programs that serve all of us. 

10 days to deficit deadline and still no deal - They have been meeting for two months, poring over concepts and ideas already hashed out by three other groups over the past year. But 10 days before their deadline, members of the so-called congressional "super committee" created to forge a deficit reduction deal indicated Sunday that they remain hung up on basic issues of tax and entitlement reform that have previously stymied agreement. Texas Rep. Jeb Hensarling, the panel's Republican co-chair, told CNN's "State of the Union" that the only solution possible might be a two-step process in which the bipartisan committee sets a figure for increased tax revenue that congressional committees would then implement through legislation.

The Deficit Super Committee: Still Not Serious - Is the Congress’ deficit super committee making progress? That depends on your definition of progress, I suppose.   The good news is that Republicans are increasingly uttering the “t” word, suggesting they might be willing to include some tax increases in a deficit reduction plan. The other good news is that Democrats reportedly are getting more specific about cuts in federal spending. But before you start doing backflips of joy, keep a few things in mind: To start, few outside of the committee (including me) have actually seen these proposals. Instead, we have mostly been shown other people’s characterizations of what they say. It is hard to make many judgments based on what some guy says about what some guy said. Based on what we do know, however, both sides are playing big time budget baseline games. When they talk taxes, Republicans start by assuming the 2001/2003/2010 tax cuts will all be extended indefinitely. But by starting by extending the Bush era tax cuts, the Rs would reduce revenues by $4 trillion compared to what would happen if Congress simply lets them expire as scheduled a year from now. So, Republicans would add $4 trillion to the deficit before cutting a paltry $200-$300 billion. In anyplace but Washington this would add up to another $3.7 or $3.8 trillion in red ink. Here, it counts as deficit reduction.

The Supercommittee Looks to Impose a Much Bigger Hit to Seniors Than the Wealthy - The NYT reported that the supercommittee remains deadlocked on taxes. It reports that Republicans are willing to agree to $250-$300 billion in tax increases by eliminating loopholes in exchange for reducing the top tax rate to 28 percent instead of allowing it to rise back to the Clinton era level of 39.6 percent. While the piece notes that this would be a windfall for high income taxpayers, it would have been worth reminding readers that the sums being proposed are less than 2 percent of the projected $17 trillion adjusted gross income of the richest 1 percent over the next decade. By contrast, there is bi-partisan support for cutting the annual Social Security cost of living adjustment by an amount that would reduce average benefits by close to 3 percent. The piece including comments from Morgan Stanley director Erskine Bowles without identifying his association with the giant Wall Street bank.

All the supercommittee proposals in one post - The debt supercommittee’s deliberations have largely taken place behind closed doors, and they’ve been in constant flux. That’s made it difficult to keep track of the offers that both parties have put forward in the attempt to agree on at least $1.2 trillion in deficit reduction. The proposals and counterproposals have evolved over time, but the biggest stumbling block — revenue — has remained constant. Here’s a timeline of what the two parties have offered each other, and when:

The Hill reports on "supercommittee" - Alexander Bolton reports that "With Supercommittee Deadlocked, leaders Reid and Boehner meet", The Hill (Nov. 15, 2011).  Reid (Dem) and Boehner (GOP) met Tuesday, but aides told The Hill that "They're not about to dive in" to the negotiations.  But as the committee seems to be at an impasse close to the 11/23 deadline, the leaders must be discussing what is likely to be the next step.  The arrangements for the group (in case no bipartisan deal could be reached) called for across-the-board cuts that impose reasonable cuts on Defense but limited cuts for social safety net/earned benefit programs (medicare limited to 2% cuts to insurance companies and health care providers/Social Security and Medicaid exempt). .The across-the-board cuts would cut Defense by $500 billion.  Various GOP members of Congress have said they want to change the deal to avoid the cuts to the military.  Tea Party favorite and radical right-winger Jim DeMint has essentially admitted that he never intended to stick with the sequester deal, saying that the GOP has "until next election to fix this thing."  GOP stalwarts want the US to maintain its exorbitant spending as "the world's only military superpower" even while being willing to cut health care and pensions to the vulnerable and even while the country's infrastructure--essential for business--crumbles in ruins.

The Bush tax cuts are tripping up the supercommittee - On Wednesday night, Michael Steel, John Boehner’s spokesman, e-mailed reporters to quash talk that the supercommittee’s Democrats had presented Republicans with another counteroffer and that the ball was now in the GOP’s court.  “This particular conversation was a step backwards,” Steel wrote. “It would lock in the largest tax hike in history – at least $800 billion - and then add an additional $400 billion in job-killing tax hikes without pro-growth tax reform, plus more than $300 billion in ‘stimulus’ spending.” Democrats were agog. There’s no $800 billion tax increase in their proposal, they said. Their plan calls for $400 billion in new revenues -- close to the levels Republicans had pitched earlier. When I circled back to Steel, he explained his note more clearly. “They now plan to extend the current tax rates?” He replied. “That’s big news!”  To understand what Steel is saying, you need to understand that Republicans are trying to use the supercommittee as a vehicle to extend the Bush tax cuts, and how that’s making it much harder for the supercommittee to reach a deal.

'Critical' day for deficit super committee - Wednesday could prove to be the pivotal day for the congressional deficit reduction super committee as it struggles to reach a deal with only one week to go before its statutory deadline. Rep. Chris Van Hollen of Maryland and Sen. Patty Murray of Washington -- two of the panel's six Democrats -- both described the day as "critical." "We need to find out about whether our Republican colleagues want to continue to negotiate or whether they've drawn a hard line in the sand," Van Hollen said. Rep. Jeb Hensarling of Texas, one of panel's six GOP members -- told CNBC Tuesday night that Republicans "have gone as far as we feel we can go" in terms of agreeing to new tax revenues. "That's the question," Van Hollen told reporters when asked about Hensarling's remarks. "The question is whether they've said take it or leave it and don't want to negotiate." Murray insisted that Democrats "are not going to accept a plan that gives a tax break to the wealthiest Americans and balances all of this incredible challenge we have on the backs of middle class families."

Gloom around deficit-reduction panel grows - The stalemate in the congressional "super committee" over raising taxes hardened Wednesday, dimming prospects for a deficit-reduction deal even as an unusual "gang of 147" lawmakers urged the panel to compromise and strike a grand budget bargain. Democrats and Republicans from both chambers gathered to lend rare bipartisan support for a deal on taxes and spending. "Super committee, we've got your back," said Sen. Saxby Chambliss (R-Ga.), a leader of past bipartisan deficit-cutting efforts. Rep. Steny H. Hoyer of Maryland, the top Democratic vote-counter in the House, assessed the crowd of lawmakers gathered and said, "We're getting close to having the votes, folks." But the lawmakers' willingness to set aside partisan differences appeared to do little to break the impasse gripping the 12-member super committee. With just a week remaining before the deadline to vote on a plan, gloomy forecasts began to proliferate. Republicans have drawn a line over the amount of new taxes they will agree to in exchange for reductions in spending on Medicare and other domestic programs.

Deficit committee locked in budget stalemate - (Reuters) - Budget talks in Congress were locked in stalemate on Wednesday as Democrats and Republicans waited for the other side to make a new offer on taxes and healthcare. With a deadline less than a week away, members of a 12-member "super committee" tasked with finding $1.2 trillion in budget savings confronted the same barriers that have thwarted earlier efforts to rein in the growing national debt, which crossed the $15 trillion mark on Tuesday. Republicans, who have moved away from their staunch opposition to tax increases, said they would not give any more ground until Democrats consider reforms that would partially privatize the Medicare health-insurance program for retirees. "I'm still waiting for a proposal that actually solves the spending crisis," the panel's top Republican, Representative Jeb Hensarling, told Reuters. Democrats have proposed raising the Medicare eligibility age from 65 to 67 but have shied away from sweeping reforms. They proposed a $1 trillion tax increase last week. "We are not going to accept a plan that gives tax breaks to the wealthiest Americans and balances all this incredible challenge we have on the backs of middle-class Americans," said Senator Patty Murray, the top Democrat on the committee.

Post Hoc Fallacy - Wednesday’s Washington Post deserves some kind of perverse award for advocacy journalism—in this case, for advocating the proposition that dire economic consequences will ensue if the congressional Super Committee fails to cut a deal for drastic deficit reduction. This is, of course, one side of an argument. Those on the other side, including myself, have argued that austerity in a deep recession makes no economic sense... Moreover, Social Security does not belong in this conversation, and Democrats are better off, substantively and politically, defending it against Republican proposed cuts rather than lumping it in with budget talks. A companion piece, by Ann Kornblut, was headlined, “White House Girds for Failure.” ... OMB Director Jack Lew is quoted, “I think it’s important that they succeed.” Again, the subtext of the piece is that the economy really needs this deal. But the absolute corker is a companion piece by Neil Irwin and Ylan Q. Mui, with the economically absurd headline and premise, “Supercommittee could add uncertainty to holiday shopping.”The writers quote leaders of trade associations saying that the committee needs to act to restore confidence.

Deep spending cuts pose a new threat to US economy -  (AP) — Just as the U.S. economy is making progress despite Europe's turmoil, here come two new threats. A congressional panel is supposed to agree by Thanksgiving on a deficit-reduction package of at least $1.2 trillion. If it fails, federal spending would automatically be cut by that amount starting in 2013. Congress may also let emergency unemployment aid and a Social Security tax cut expire at year's end.Either outcome could slow growth and spook markets.Analysts are concerned, but most aren't panicking. Many say the economy and markets can withstand the blows. That's because Congress or the Federal Reserve could take other steps next year to lift the economy. And investors expect so little from the congressional panel that they're unlikely to overreact whatever it does.

Supercommittee appears unlikely to reach agreement - If the congressional “supercommittee” cannot agree on a plan to tame the federal debt by next week’s deadline, as now appears likely, here’s what will happen: nothing. The automatic spending cuts that were supposed to force the panel to deliver more palatable options would not take effect until January 2013. That leaves lawmakers a full year to devise alternatives. The absence of an imminent crisis helps explain the lack of urgency on Capitol Hill this week, despite a Thanksgiving deadline approaching. With a vast ideological gulf separating the Republican House and the Democratic Senate on taxes and social spending, a mere deadline may no longer be enough to spur compromise. Over the past year, Congress has needed the threat of full-scale chaos to force action.  An impending government shutdown forced the first budget deal, in April. The risk of the nation’s first default on its debt forced the second deal, in August. The supercommittee, created as part of the debt-limit agreement, was designed to avoid that kind of cataclysmic backstop.

From the Depressing to the Ridiculous - OK, the supercommittee needs to go home for the weekend.  According to my colleague Paul Van de Water: Republicans on the supercommittee have made a new offer that would reduce deficits by $640 billion over the next decade, according to news reports (here and here).  The Republican offer consists of roughly $542 billion in spending cuts and $3 billion in revenues, meaning the ratio of spending cuts to revenue increases in the plan is 181 to 1…When one includes the $900 billion in discretionary spending cuts already enacted in the Budget Control Act, the plan’s total deficit reduction rises to about $1.445 trillion, and its ratio of spending cuts to revenue increases rises to 481 to 1. The D’s have rejected the offer as…um…unbalanced.

Failure Is Good -  Paul Krugman - By next Wednesday, the so-called supercommittee, a bipartisan group of legislators, is supposed to reach an agreement on how to reduce future deficits. Barring an evil miracle — I’ll explain the evil part later — the committee will fail to meet that deadline.  If this news surprises you, you haven’t been paying attention. If it depresses you, cheer up: In this case, failure is good.  Why was the supercommittee doomed to fail? Mainly because the gulf between our two major political parties is so wide. Republicans and Democrats don’t just have different priorities; they live in different intellectual and moral universes.  In Democrat-world, up is up and down is down. Raising taxes increases revenue, and cutting spending while the economy is still depressed reduces employment. But in Republican-world, down is up. The way to increase revenue is to cut taxes on corporations and the wealthy, and slashing government spending is a job-creation strategy. Try getting a leading Republican to admit that the Bush tax cuts increased the deficit or that sharp cuts in government spending (except on the military) would hurt the economic recovery.

D’s “Satan sandwich” starts tasting pretty good - The bipartisan debt-limit deal, famously called a “Satan sandwich” by a prominent Democrat this summer, is looking more heavenly to the left. Republicans crowed after striking the agreement with President Obama, while congressional Democrats cried foul. Despite the White House’s endorsement of the bill, 95 House Democrats voted against it. Rep. Paul Ryan (R-Wis.), chairman of the Budget Committee, subsequently said Republicans called Obama’s bluff. Speaker John Boehner (R-Ohio) said he got 98 percent of what he wanted in the deal.   Three months later, members of both parties are looking at the deal much differently. A GOP lawmaker who requested anonymity told The Hill that “it’s the 2 percent that’s killing [Boehner] … I’ve never understood why we thought 12 people could come up with a solution any better than we could.” With the supercommittee deadlocked, the sequestration cuts of $1.2 trillion are now likely to be triggered. Those reductions would hit national security programs, but not call for structural reforms to Medicare, Medicaid and/or Social Security.

Leon Panetta paints doomsday scenario -- Defense Secretary Leon Panetta is warning that the deficit-reduction supercommittee’s failure to agree on a savings plan will force dramatic cuts to America’s nuclear arms, including the elimination of ground-based intercontinental ballistic missiles, cancellation or delays in plans to build a new strategic bomber, and cuts to missile submarine production. The drastic budget reductions triggered by the panel’s failure would lead to the smallest U.S. ground forces since 1940 and the smallest Navy since the beginning of World War I, he said Monday. The Air Force and the Defense Department’s civilian workforce would shrink to their lowest levels ever.

Procurement -- Mother Jones points us to a Stimson Center study, titled What We Bought: Defense Procurement From FY01 to FY10 (PDF).  From the report Procurement funding grew from $62.6B in FY01 to as much as $135.8B throughout the decade.3 In constant dollars, base procurement funding in FY10 increased by 41 percent from FY01.4 Increases also were augmented by the use of supplemental war funding. In FY02, only $1.4B was appropriated for procurement in supplemental war funding. That increased every year until $65.9B was appropriated in FY08. FY08 ended up as the high water mark, but the following three years have all seen procurement funding of about $30B included in war funding.5 In all, $232.8B or 22 percent of total procurement funding in the last decade came from supplemental war funding. Although procurement funding increased in the base budget, supplemental war funding significantly enhanced the resources available. The Mother Jones article says the military is hardly in dire straits when it comes to funding its big-ticket items. "The services capitalized on funding to modernize their forces, especially the major weapons programs that constitute the heart of the services' capabilities," writes the report's author, Russell Rumbaugh—a retired Army officer and ex-CIA military analyst.

The Democrats’ peculiar negotiating strategy - Over the past year, Republicans have learned something important about negotiating budget deals with Democrats: If you don’t like their offer, just wait a couple of months. The first budget showdown came in the lame-duck Congress, when Democrats tried to pass a spending bill funding the government through 2011. Republicans filibustered it. Sens. Claire McCaskill (D-Mo.) and Jeff Sessions (R-Ala.) emerged with a compromise proposal that would cap 2011’s appropriations at about $1.08 trillion, with more cuts coming in the years after that. Democrats defeated it by one vote. A few months later, faced with a government shutdown, they accepted a proposal negotiated with new Speaker John Boehner and a Republican House that capped 2011’s appropriations at $1.05 trillion — and then, in the debt deal, agreed to cut spending by much more in the years after that. Today, many Democrats would love to go back in time and accept the McCaskill-Sessions bill. And the same thing may well happen in the deficit “supercommittee.”

The Myth of the Wealthy Elderly, by Dean Baker: The austerity gang seeking cuts to Social Security and Medicare has been vigorously promoting the myth that the elderly are an especially affluent and privileged group. Their argument is that because of their relative affluence, cuts to the programs upon which they depend is a simple matter of fairness. There were two reports released last week that call this view into question. The first was a report from the Census Bureau that used a new experimental poverty index. This index differed from the official measure in several ways; most importantly it includes the value of government non-cash benefits, like food stamps. It also adjusts for differences in costs by area and takes account of differences in health spending by age.While this new measures showed a slightly higher overall poverty rate the most striking difference between the new measure and the official measure was the rise in the poverty rate among the elderly. Using the official measure, the poverty rate for the elderly is somewhat lower than for the adult population as a whole, 9 percent for the elderly compared with 14 percent for the non-elderly adult population. However with the new measure, the poverty rate for the elderly jumps to 14 percent, compared with 13 percent for non-elderly adults.By this higher measure, we have not been nearly as successful in reducing poverty among the elderly as we had believed. While Social Security has done much to ensure retirees an income above the poverty line, the rising cost of health care expenses not covered by Medicare has been an important force operating in the opposite direction.

Dear Committee: Main Street Says Look at Pensions - THE so-called supercommittee in Congress has until Nov. 23 to find more than a trillion dollars of new savings in the federal budget1.  Here’s one idea: Stop reimbursing the costs of pensions and other retirement benefits at huge, and hugely profitable, defense contractors. Over 10 years, such a move could save an estimated $30 billion — the amount by which these pensions are collectively underfunded. (That figure could change, depending on pension performance.)  True, that might seem like a drop in the bucket, given that the committee’s 12 members are trying to save $1.2 trillion over all. But examining this longstanding practice seems worthy in lean times.  The government also promises to help defense companies shore up their pension funds when they become underfunded. Many of these funds have lost money in recent years in declining financial markets or on bad investments, so the bill for taxpayers has been growing.  Considering how much ordinary Americans have lost in their own retirement accounts — losses that the government does not cover — reimbursing contractors looks like classic corporate welfare.

Dealing With the Budget Deficit: Does the Middle Class Have to Take the Hit?, by Dean Baker - Adam Davidson has a piece in the NYT magazine about how the middle class will have to take a hit to deal with the country’s deficit. It’s a bit quick to reach this conclusion.   First, the piece too quickly dismisses the possibility of getting substantial additional tax revenue from the wealthy. It presents the income share for those earning more than $1 million as $700 billion, saying that if we increase the tax rate on this group by 10 percentage points (from roughly 30 percent to 40 percent), then this yields just $70 billion a year. However, if we lower our bar slightly and look to the top 1 percent of households, with adjusted gross incomes of more than $400,000, and update the data to 2012 (from 2009), then we get adjusted gross income for this group of more than $1.4 trillion. Increasing the tax take on this group by 10 percentage points nets us $140 billion a year. If the income of the top 1 percent keeps pace with the projected growth of the economy over the decade, this scenario would get us more than $1.7 trillion over the course of the decade, before counting interest savings. Of course there would be some supply response, so we would collect less revenue than these straight line calculations imply, but it is possible to get a very long way towards whatever budget target we have by increasing taxes on the wealthy.

Stop the Austerity Train Wreck! - Robert Reich - The biggest question right now on Planet Washington is whether the congressional supercommittee will reach an agreement.  That’s the wrong question. Agreement or not, Washington is  on the road to making budget cuts that will slow the economy, increase unemployment, and impose additional hardship on millions of Americans.  The real question is how to stop this austerity train wreck, and substitute the following:

  • FIRST: no cuts before jobs are back – until unemployment is down to 5 percent. Until then, the economy needs a boost, not a cut.
  • SECOND: Make the boost big enough. 14 million Americans are out of work, and 10 million are working part time who need full-time jobs. The President’s proposed jobs program is a start but it’s tiny relative to what needs to be done. . We need a big jobs program – rebuilding America’s crumbling infrastructure, and including a WPA and Civilian Conservation Corps.
  • THIRD: To pay for this, raise taxes on the super-rich. It’s only fair. Never before has so much income and wealth been concentrated at the very top, and taxes on the top so low.
  • FOURTH: Cut the budget where the real bloat is. Military spending and corporate welfare. End weapons systems that don’t work and stop wars we shouldn’t be fighting to begin with, and we save over $300 billion a year.

Christy Romer On Fiscal Policy - Krugman - A speech she gave two weeks ago (pdf). It’s a very good summary of what we know and how we know it. A sample: To illustrate why estimating the effects of fiscal policy is hard, let me start with an example. In February 2008, the Bush Administration and Congress came together to pass a tax cut—the Economic Stimulus Act of 2008. This was before the collapse of Lehman Brothers, but just after what we now date as the start of the recession in December 2007. The total budgetary cost of the bill was about $130 billion. Most of it came in the form of tax rebate checks mailed between April and July of 2008. John Taylor, one of the economists saying loudly that fiscal stimulus doesn’t work, has a short paper saying this tax rebate wasn’t effective. The trouble with this analysis is, Professor Taylor wasn’t thinking about what else was going on at the time. This was the heart of the subprime mortgage crisis. House prices were tumbling. Mortgage lenders like Countrywide Financial were in deep trouble. Economists were worried that consumption was about to plummet. For most families, their home is their main asset. When house prices fall, people are poorer, and so tend to cut back on their spending. She goes on to talk about more recent research.

Senate proposal to adjust COLA for seniors gains momentum - A Senate proposal to apply a different measure to calculating cost-of-living increases for seniors appears to be gaining momentum. Several Senate Democrats along with Social Security advocates are rallying support for a bill that would reconfigure the current formula used to determine cost-of-living adjustments for seniors' benefits. Meanwhile, they are trying to stop a proposal that has been under consideration by the supercommittee that they say would lead to severe cuts in Social Security benefits and dig deeper into seniors slim budgets. The measure, introduced this week by Sens. Sherrod Brown (D-Ohio) and Barbara Mikulski (D-Md.), establishes an alternative measure of the Consumer Price Index aimed at the specific expenses of seniors, especially healthcare costs. Groups supporting the Senate bill said the supercommittee's chained CPI plan would cut hundreds of dollars each year from Social Security benefits and would result in smaller checks for seniors, even beyond the current structure. Panel members are using it as part of the equation to cut the deficit. "Chained CPI should be buried and not thought of again," Mikulski said if the supercommittee adopted the chained CPI proposal it would kick in next month, sooner than realized.

Shutdown This Weekend Not Out Of The Question - The current continuing resolution expires at midnight Friday and, if it’s not extended, there will be a government shutdown. The current plan appears to be to extend the CR until the middle of December and, unlike previous CR battles, this one has been devoid of all threats and demands for additional spending cuts. But..although it is unlikely, it is not inconceivable that there will be a last-minute attempt by House Republicans to use the CR as leverage with House Democrats or the White House on something. As a result, a shutdown at least over this weekend cannot be dismissed out of hand.

Congress approves minibus, continuing resolution, sends to Obama - The Senate followed the lead of the House on Thursday, easily passing a 2012 "minibus" spending bill that also contains a continuing spending resolution keeping the government running through December 16. The legislation next heads to the president for a signature, likely on Friday. The bill, H.R. 2112, was approved in a 70-30 vote in which Senate conservatives and some moderate Republican opposed it. All fifty-seven Democrats and the two independents voted in favor of the bill. Sen. Tom Coburn (R-Okla.) was the only senator to raise his voice against the spending legislation in the two-hours of debate that led up to the vote arguing that once again Congress was abdicating its responsibility to cut spending.  "I don't think the American people know how badly they have been hoodwinked by the Congress," said Coburn, prior to the vote. "This bill should be defeated...we are running out of money."  More Democrats and Republicans, however, spoke out in favor of the legislation. Some Republicans, like Sen. Roy Blunt (Mo.), noted it met the spending caps imposed by the summer's Budget Control Act and came in from the conference at even lower numbers than the original Senate version.

Congress passes continuing resolution, avoids another shutdown threat - - Congress passed a temporary spending measure on Thursday that will keep the federal government funded and open for business until December 16. The continuing resolution was necessary because the federal government is set to run out of money by midnight Friday. The House passed the measure by a vote of 298-121 Thursday afternoon, and the Senate followed suit Thursday evening, passing the measure 70-30. The measure was passed as part of a larger spending bill for a number of government agencies for fiscal 2012 - including the Agriculture Department, the Food and Drug Administration, the Transportation Department and the Department of Housing and Urban Development, among others. Overall spending levels in the new measure conform to the outlines of an agreement reached in Congress earlier this year. The previous continuing resolution was enacted October 5 as part of a deal providing an additional $2.65 billion in disaster relief needed in the wake of Hurricane Irene, Tropical Storm Lee and a series of tornadoes and wildfires. In addition to early October, partial government shutdowns were also threatened during budget talks in the spring and the debt ceiling debate over the summer.

The New Progressive Movement - Jeff Sachs - OCCUPY WALL STREET1 and its allied movements around the country are more than a walk in the park. They are most likely the start of a new era in America. Historians have noted that American politics moves in long swings. We are at the end of the 30-year Reagan era, a period that has culminated in soaring income for the top 1 percent and crushing unemployment or income stagnation for much of the rest. The overarching challenge of the coming years is to restore prosperity and power for the 99 percent.  Thirty years ago, a newly elected Ronald Reagan made a fateful judgment: “Government is not the solution to our problem. Government is the problem.” Taxes for the rich were slashed, as were outlays on public services and investments as a share of national income. Only the military and a few big transfer programs like Social Security2, Medicare3, Medicaid4 and veterans’ benefits were exempted from the squeeze.  Washington still channels Reaganomics. The federal budget5 for nonsecurity discretionary outlays — categories like highways and rail, education, job training, research and development, the judiciary, NASA, environmental protection, energy, the I.R.S. and more — was cut from more than 5 percent of gross domestic product6 at the end of the 1970s to around half of that today. With the budget caps enacted in the August agreement, domestic discretionary spending would decline to less than 2 percent of G.D.P. by the end of the decade, according to the White House. Government would die by fiscal asphyxiation.

Senate OKs Bill To Boost Hiring Of Veterans - The Senate has approved just in time for Veterans Day a series of tax credits designed to make it easier for veterans to find jobs. Some 240,000 veterans who served in Iraq and Afghanistan are out of work. The Senate bill would provide tax breaks of up to $9,600 to private employers who hire them. The tax credits are the first sliver of President Obama's $447 billion jobs package to actually win bipartisan approval in the Senate. Obama says service members who fought for their country shouldn't have to fight for jobs when they come home. "If you can oversee millions of dollars of assets in Iraq, you can help a business balance its books here at home," he said during a visit to a Virginia military base last month.

A big tax increase is looming —This year the question is whether the super committee will produce a budget plan before its Thanksgiving deadline. Failure could mean huge spending cuts. Meanwhile, nobody seems worried about the $110 billion tax increase on workers set to hit on January 1. Last December’s tax bill cut the worker’s share of the FICA tax that funds Social Security by 2 percentage points—an average of just over $900 each for 120 million households6. That money surely boosted consumer purchases as it dribbled into workers’ paychecks throughout the year. But six weeks from now it disappears like Cinderella’s coach at midnight. Two months ago the president proposed to boost the tax cut by half for 2012—to 3.1 percent—as part of his American Jobs Act. We know how far that’s gotten. Since Senate Republicans basically tabled the bill last month, Democrats have reintroduced it piecemeal. Maybe Democrats plan to bring up the payroll tax cut after the super committee fails to offer a budget plan next week. Maybe they’ll wait longer to build pressure as the year winds down. I have no idea—I’m just an economist. What I do know is that if Congress does nothing, biweekly paychecks will shrink in January by an average of about $35, just as the holiday bills arrive. That surely won’t help consumer spending.

Looming Tax Increase - A year ago, the big worry in Washington was whether Congress would extend the Bush tax cuts before their end-of-year expiration. Failure would have meant a huge tax hike. This year the question is whether the super committee will produce a budget plan before its Thanksgiving deadline. Failure could mean huge spending cuts. Meanwhile, nobody seems worried about the $110 billion tax increase on workers set to hit on January 1. Last December’s tax bill cut the worker’s share of the FICA tax that funds Social Security by 2 percentage points—an average of just over $900 each for 120 million households. That money surely boosted consumer purchases as it dribbled into workers’ paychecks throughout the year. But six weeks from now it disappears like Cinderella’s coach at midnight. Two months ago the president proposed to boost the tax cut by half for 2012—to 3.1 percent—as part of his American Jobs Act. We know how far that’s gotten. Since Senate Republicans basically tabled the bill last month, Democrats have reintroduced it piecemeal. They failed repeatedly until last week when the Senate passed a handful of jobs subsidies for veterans, a political no-brainer right before Veterans’ Day.

I Killed Some Brain Cells Today - I ran a regression of ΔY on ΔX and ΔZ, over the 1967Q1-2011Q3 period. I found that the coefficient on ΔX was 0.007, and on ΔZ was -0.080. Neither coefficient was statistically significant at conventional levels, so I concluded that neither affected ΔY. It turns out ΔY is the GDP deflator inflation rate, ΔX is the growth rate of M1, and ΔZ is the growth rate of real GDP. In other words, I concluded money had no significant impact on inflation. Well, you might say, that was a silly regression to run. It happens to be exactly analogous to the regressions run by the Phoenix Center for Advanced Legal and Economic Public Policy Studies, in its assessment of the effectiveness of government spending. As the Mises blog published today: "a recent study published by the Phoenix Center looked at the empirical evidence for the US over the last 50 years and found that government spending/stimulus had zero positive impact on private sector job creation."

The Balanced Budget Amendment Delusion - This week the House of Representatives will take up a balanced budget amendment to the Constitution. An idea that has been kicking around for ages, it has never overcome the hurdle of needing a two-thirds approval vote in both houses of Congress. (After which it would not require the president’s signature but would need to be ratified by three-quarters of the states to take effect.) The concept of balancing the budget annually is a bad idea but not an unreasonable one. However, the idea of mandating a balanced budget through the Constitution is dreadful. And the proposal that Republican leaders plan to bring up is, frankly, nuts. The Founding Fathers took the necessity of balancing the federal budget to be self-evident – with no need to mandate it because economic circumstances severely constrained the government’s ability to spend more than taxes covered. The memory of the hyperinflation of the War of Independence was fresh, and people were rightly concerned that deficits would lead to the printing of money to cover budgetary shortfalls, restarting inflation.

Balanced budget vote will be close, but goal is far away - This week the debt topped $15 trillion, and today the House once again will weigh whether to require Congress to limit itself to spending only what it takes in. “We would be in a totally different universe if that had passed,” said Rep. Jack Kingston, R-Savannah, who voted for the 1995 bill. In this universe Democratic votes might be even harder to come by than 16 years ago, because as the deficit has ballooned, a balanced budget looks like an impossible near-term dream. Even so, some Democrats plan to join the Republicans in Georgia's congressional delegation in voting yes. And Republicans are eager for a historic moment. “I think it’s critically important for the future of our nation,” said freshman Rep. Tom Graves, R-Ranger. “It’s something I campaigned on. I know a lot of other guys did. … Let’s make it a very strong show of support for the next generation and how we’re going to hand this country off to them.”  The amendment must get a two-thirds vote in both houses of Congress and be ratified by three-fourths of the states to be enshrined in the Constitution. It would go into effect five years later.

Newt Gingrich Wants To Kill CBO -  Former Speaker and current GOP presidential candidate Newt Gingrich might well have said that he wants to kill his personal physician because he didn’t like being told his blood pressure was too high. But that’s the equivalent of what Gingrich did say during a recent debate, when he made it clear that the Congressional Budget Office has to be eliminated if health care reform is going to be repealed. According to Gingrich, the CBO should be done away with because its analysis shows that, as enacted, health care reform reduces the federal budget deficit. This means that repealing it — as many in the GOP base to which Gingrich is appealing wants to do — will increase the deficit and, therefore, require spending cuts or revenue increases to offset the impact. That, of course, will make the repeal effort much harder and far less likely. But instead of proposing those offsets — that is, instead of doing the budget equivalent of taking steps to lower his blood pressure by losing weight, using less salt or taking medication — Gingrich wants to kill the CBO budget doctor so he doesn’t have to hear any more bad reports.

Let’s Get Real, No One’s Eliminating Any Cabinet Departments - Rick Perry’s “Oops” on Wednesday joined the small canon of legendary phrases from presidential debates, right up there with “You’re no Jack Kennedy.” His inability to remember one of the three government agencies he would promise to eliminate as president, together with his smirking indifference to whether it even mattered, was probably the final moment of a candidacy that was already doomed by his lack of preparation for the national stage. But does it matter? Would it have made any difference if Perry had been able to smoothly reel off the names of three agencies, as Newt Gingrich certainly could, and then pad his answer out with some erudite-sounding pabulum about how we need a leaner 21st-century government for the new challenges of a globalized world? In a way, Perry’s flub, and subsequent smirk, was the most honest moment yet in the long march of Republican debates. Perry couldn’t remember the agencies he would eliminate because he wouldn’t actually eliminate any. And neither would President Newt Gingrich or President Mitt Romney. (Ron Paul probably would.) Promising to eliminate cabinet departments is simply a pro forma requirement of Republican rhetoric. It has been for decades. Perry’s indifference to the substance of the promise seemed to admit, “We all know this is just something I’m supposed to say.”

The Folly of the Flat Tax - Next year must be divisible by four because the flat tax, one of the hardy perennials of bad tax policy, has come bouncing back like a bad penny. The flat tax is typically marketed as a way to achieve drastic tax simplification—something virtually everyone favors, at least in the abstract. But what a flat tax would actually achieve is a drastic reduction in tax progressivity. Let's start with simplicity, and with the frank admission that both the U.S. personal and corporate income taxes are disgracefully complicated messes. Throw any insult at them you wish; they probably deserve it. In my view, the loophole-ridden corporate income tax is a bigger offender than the personal income tax. Sad to say, our ungainly tax code is a logical byproduct of our system of democracy-by-lobbyist, which often produces messy, unprincipled outcomes. Every tax preference is in the code because members of some past Congress wanted it there—and current members probably still want it. But, at intervals, public revulsion rises so high that it's time to prune the unruly hedge. Maybe today is such a time.  Many useful steps could be taken to simplify the personal income tax. But, contrary to much misleading rhetoric, flattening the rate structure isn't one of them.

Economist Glenn Hubbard: ‘We need a radical change’ - Hubbard, in this interview, is speaking for himself and not as a representative of the Romney campaign. Here’s a lightly edited excerpt.

  • Ezra Klein: Growth is weak. Unemployment is high. By almost any measure, the recovery has been very, very slow. What’s holding us back?
  • Glenn Hubbard: Let’s put politics aside. Let’s assume we could fix what we wanted to. The problems we have are grasp and clarity. With the financial factors in the recession, the two tangible grasp points are on the consumer side: Consumers have too much leverage; and on the business side, it’s exactly the opposite: Non-financial corporate America has tons of cash. So with that, the right thing to do would be to quickly de-lever consumers and change the animal spirits of businesspeople. On the consumer side, that could mean a big housing push, and on the business side, a big change to corporate tax rates or something else that increases the return on investment. Then there’s a complete lack of clarity in three important areas for government policy: The path of future tax rates. The path of government spending, which is obviously related to tax rates. And the third is regulation, financial regulation in particular. And the lack of clarity in those areas has frozen business.

Anybody Remember Romney’s Tax Plan? - I’ve been reviewing the tax plans of the major Republican presidential hopefuls and am struck at how conventional Mitt Romney’s is.  While Herman Cain wants to replace the entire federal tax code with his 9-9-9 consumption tax and Rick Perry favors a massive tax cut, Romney would do little more than tinker around the edges of the current law. In short, he seems pretty happy with the individual tax code while he supports more business tax cuts.   You can see how all the GOP candidates line up in a nice matrix put together by my Tax Policy Center colleagues.  And looking at them in one place really is eye opening.  While Cain and Perry would effectively blow up the current code (Perry would still let you pay under the existing system for a few more years), Romney would essentially keep it. With all the attention garnered by Perry and Cain, Romney’s cautious tax agenda has floated under the radar. And that is, I suspect, exactly where he prefers it.    

A 20 Percent Tax Rate Cut Would Blow a Huge Hole in the Budget - In the back-and-forth over deficit reduction on Capitol Hill, Republicans have floated the idea of cutting individual tax rates by 20 percent across the board. There is much more to their plan: Crucially, they’d also trim tax subsidies. However, they don’t say how, so my colleagues at the Tax Policy Center looked only at what this broad rate cut would mean for the deficit. And the answer is nothing good. The plan would cut individual income tax rates to 8 percent, 12 percent, 20 percent, 23 percent, 27 percent and 28 percent (rounded up to the next 1 percent). Compared to current law (that is, assuming the Bush-era tax cuts expire as scheduled in a year) cutting rates would increase the deficit by nearly $200 billion in 2015 alone. That’s $200 billion in one year. Relative to current policy (or assuming the relatively low rates and other provisions of the 2001/2003/2010 tax law remain on the books) it would reduce tax revenues by more than $150 billion in 2015.   This seems to violate the useful old aphorism that suggests, “When you are in a hole, the first thing to do is stop digging.” 

Executive Excess 2011: The Massive CEO Rewards for Tax Dodging - Guns don't kill people, the old saw goes. People do. By the same token, corporations don't dodge taxes. People do. The people who run corporations. And these people — America's CEOs — are reaping awesomely lavish rewards for the tax dodging they have their corporations do. In fact, corporate tax dodging has gone so out of control that 25 major U.S. corporations last year paid their chief executives more than they paid Uncle Sam in federal income taxes. This year's Institute for Policy Studies Executive Excess report, our 18th annual, explores the intersection between CEO pay and aggressive corporate tax dodging. We researched the 100 U.S. corporations that shelled out the most last year in CEO compensation. At 25 of these corporate giants, we found, the bill for chief executive compensation actually ran higher than the company's entire federal corporate income tax bill.

There is No Alternative - Taxing the Rich Edition - So, here's the thing: The cat's out of the bag - the 1% in this country have laid claim to more than three decades of steady growth and now have an obscene amount of the nation's wealth. One offshoot of this grave injustice is that the elite and their lackeys have to spend a huge amount of time trying to convince everyone there is no alternative. They don't usually defend the arrangement itself (you're envious for even thinking about that), but rather focus on policy proposals that would threaten the status quo.  So here's waterboy Adam Davidson making a claim you hear from right-wing shills all the time: Namely, you can't just tax the rich because it won't raise enough revenue. According to these defenders of the rich and powerful, in order to raise the money necessary to pay for the 1% ruining the economy and still taking massive bonuses, we must tax the middle class. This is the usual posture by defenders of the status quo: We must gut entitlements, we must tax the middle class, we must, we must, we must - there's just no alternative. It's total and complete bullshit, of course (that unfortunately appears in prestigious publications). But it's bullshit that protects the elite and therefore, continues to appear no matter how many times it's refuted. So, here's Dean Baker (who I just interviewed) on whack-a-mole duty

CBO Testified on Policies to Promote Economic Growth and Employment in 2012 and 2013 - CBO Director's Blog - This morning I testified before the Senate Budget Committee on policies to promote economic growth and employment in 2012 and 2013. During the past two years, CBO has produced several publications focused on options that are available to lawmakers for spurring the economy through changes in taxation and government spending. Today’s testimony updates that discussion but also considers the effects of other legislative policy options—those that do not involve, or whose scope extends well beyond, fiscal policy.

  • Policies that would reduce the marginal cost of adding employees or would be targeted toward people who would be most likely to spend the additional income would have the largest effects on output and employment. Those policies include reducing employers’ payroll taxes and providing aid to the unemployed.
  • Policies that would give little incentive for firms to hire or invest—such as reducing business income taxes and reducing tax rates on repatriated foreign earnings—would have small effects.
  • Achieving both short-term stimulus and long-term sustainability would require a combination of policies: changes in taxes and spending that would widen the deficit now but reduce it later in the decade.

CBO Ranks “Repatriation Holiday” Dead Last in Job Creation - Congressional Budget Office Director Douglas W. Elmendorf told the Senate Budget Committee yesterday that, of 13 policy options for creating jobs, increased unemployment benefits ranks first in terms of jobs created per dollars of federal cost.  That’s not surprising, given that jobless people are severely cash constrained and would quickly spend most of any incremental increase in cash and that, in turn, would lead to higher demand and job creation. By sharp contrast, CBO ranks a repatriation holiday last for job creation of the 13 options analyzed.  CBO notes that U.S.-based multinational corporations are flush with cash and, even though a holiday would make shareholders richer (leading to some additional spending), “CBO expects that the effect on output would probably be positive but much smaller than the net cost to the government.” Specifically, CBO estimates that over the 2012-13 period, a repatriation holiday would boost employment by at best the equivalent of one full-time-job for every $1 million in federal costs.

Charts of the day, corporate income-tax edition - This is a chart of corporate income tax as a percentage of total corporate profits, and it’s the main thing you should bear in mind when people start saying that the US corporate income tax is too high. And while you’re at it, you should remember this chart, too, showing corporate income tax as a percentage of GDP.  Once upon a time, the corporate income tax generated a significant share of tax revenues; now, it’s bumping along in the 2%-of-GDP range. Yes, the marginal rate of corporate income tax is high, at 35%. But US companies are extremely good at not paying that.

GE Filed 57,000-Page Tax Return, Paid No Taxes on $14 Billion in Profits General Electric, one of the largest corporations in America, filed a whopping 57,000-page federal tax return earlier this year but didn't pay taxes on $14 billion in profits. The return, which was filed electronically, would have been 19 feet high if printed out and stacked. The fact that GE paid no taxes in 2010 was widely reported earlier this year, but the size of its tax return first came to light when House budget committee chairman Paul Ryan (R, Wisc.) made the case for corporate tax reform at a recent townhall meeting. "GE was able to utilize all of these various loopholes, all of these various deductions--it's legal," Ryan said. Nine billion dollars of GE's profits came overseas, outside the jurisdiction of U.S. tax law. GE wasn't taxed on $5 billion in U.S. profits because it utilized numerous deductions and tax credits, including tax breaks for investments in low-income housing, green energy, research and development, as well as depreciation of property. "I asked the GE tax officer, 'How long was your tax form?'" Ryan said. "He said, 'Well, we file electronically, we don't measure in pages.'" Ryan asked for an estimate, which came back at a stunning 57,000 pages. When Ryan relayed the story at the townhall meeting in Janesville, there were audible gasps from the crowd. Ken Kies, a tax lawyer who represents GE, confirmed to THE WEEKLY STANDARD the tax return would have been 57,000 pages had it been filed on paper. The size of GE's tax return has more than doubled in the last five years.

Tax subsidies for ... ? - Think Progress points us to a study by Citizens for Tax Justice on what industries receive tax subsidies by amount and percentage, with pages of how data was compiled at the end.

Tax Compliance Now Takes More Than 7 Billion Hours - IRS Commissioner Douglass Schulman recently spoke about complexity in the tax code and associated compliance costs: "Making the tax code less complex is the single most important thing that could be done to improve taxpayer service and boost compliance. Perhaps the most telling indicator of taxpayer confusion over the code's complexity is that today, 90% of individual taxpayers pay for professional tax preparation or tax software to prepare their tax returns. IRS research estimates that, over the past 10 years, the burden for the typical taxpayer has increased by about 20% and would likely be even more if they had to prepare returns themselves without any aids or tools. Moreover, we estimate individual taxpayers and businesses spend more than 7bn hours each year complying with filing requirements.

Spotlight Fixed on Timothy Geithner, a Man Obama Fought to Keep -  “Take a walk with me,” he said to Carole Sonnenfeld Geithner, within earshot of others. Their stroll on the South Lawn was Mr. Obama’s last step in a lengthy effort to keep her husband, Timothy F. Geithner, as secretary of the Treasury for the rest of the president’s term. Having worn down Mr. Geithner, Mr. Obama wanted to explain why it was important that her husband delay his return to New York. That Mr. Obama went to such lengths to keep Mr. Geithner, after not having done the same with others on his economic team who had left at midterm, underscored how much he had come to rely on Mr. Geithner. The question for outsiders as varied as Tea Party Republicans and liberal Democrats is why Mr. Obama would be so insistent that Mr. Geithner stay. As Treasury secretary, he was the highest-ranking member of a team that underestimated the depth of the downturn, and he has managed both to anger Wall Street firms and to be a target of criticism at Occupy Wall Street rallies. For Mr. Obama, however, Mr. Geithner has emerged as the indispensable economic adviser who has outlasted every other member of the original inner circle and whose successes easily outweigh his missteps.

Is America's financialization China's fault? - This morning, as I read the latest big expose on the continuing financialization of America's economy (this one courtesy of the excellent Amanda Terkel), I once again felt the insistent tug of a question that has been worrying at my brain for quite some time now: What is the root cause of financialization? Financialization is real, and has been huge. For a thorough discussion of the phenomenon and an overview of related research, see Wouter den Haan. But the basic story can be grokked in two graphs. First, here's the finance and insurance industries as a percentage of all value added in the U.S.: Now here are finance-industry profits as a percent of all corporate profits. When we see a shift this big, there are two natural explanations. The first is that financialization is a natural and inevitable part of economic development. The second is that something big in the global economy is causing the shift.

Dodd-Frank’s Derivatives Reforms: Clear as Mud - When the architects of the Dodd-Frank regulatory overhaul flinched from the most effective solution — breaking up the banks so that none would be too big to drag down the financial system — they forced regulators of the derivatives market into a cumbersome and potentially dangerous workaround. Those regulators are feverishly making lots of important, arcane rulings that are being followed only by insiders. They are replacing an opaque system prone to failures with a new, huge Rube Goldberg-like system that may reduce global financial risk. Or it may not. Nobody knows, not least the regulators themselves.  The Commodity Futures Trading Commission, led by Gary Gensler, last month approved rules that would require derivatives clearinghouses to open their membership to firms that have as little as $50 million in capital. The big banks that dominate derivatives trading resisted letting in smaller firms, arguing that doing so would make the clearinghouses vulnerable. They have a point: A clearinghouse with a bunch of undercapitalized members would be more prone to failure, unable to pony up when one side of a trade defaults, and we would be back where we started.

GOP wants to repeal Dodd-Frank: instead they should listen to Nassim Taleb - Linda Beale - Nassim Taleb, the author of the book on long-tail events, suggests in a Nov. 6, 2011 op-ed in the New York Times that "it is only a matter of time before private risktaking leads to another giant bailout like the ones the United States was forced to provide in 2008."  That's pretty strong language, and should be cause for worry among those GOP debaters who have been in a pissing contest over how much legislation they can suggest for repeal, like Dodd-Frank, health care reform, and environmental protection.  Instead of defending big banks, the GOP should start thinking about how to break them up.  Instead of suggesting that we need to repeal Dodd-Frank and end regulation of banks, Taleb says we do need  regulation but can't depend on it alone: "Supervision, regulation, and other forms of monitoring are necessary, but insufficient." And instead of defending risk-taking bankers as innovators and entrepreneurs, Congress should be considering measures to undo the incentives for risk taking.  Taleb says--End Bonuses for Bankers. [I]t's time for a fundamental reform:  Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever.  In fact, all pay at systemically important financial institutions--big banks, but also some insurance companies and even huge hedge funds--should be strictly regulated.

Meltdown redux - The U.S. politician-businessman that Congress put in charge of determining the reasons for the 2008 financial crisis has a sobering message for us: “It’s going to happen again.” Phil Angelides, the real estate developer and former California state treasurer who chaired the Financial Crisis Inquiry Commission, said on Friday that “all across the marketplace the warning signs were there” of a coming disaster but the mechanisms and political will to stop it were not. He and I both spoke at a University of Missouri-Kansas City Law School symposium on the financial crisis and the commission set up to examine it. Angelides warned of a recurring economic nightmare unless Congress and the next president start paying attention to the facts and stop listening to the people who caused, profited from or failed to detect the crisis. While Wall Street and laissez faire Republicans have attacked the commission’s final report — — all 22 footnoted chapters of it — Angelides boasted that not one fact had been proven wrong.. Statements from the leading Republican presidential candidates, as well as the tepid actions of President Barack Obama, show an active interest not in fixing the problems, but rather in enabling Wall Street to go on doing business pretty much as it chooses.

Satyajit Das: In the Matter of Lehman Brothers – Part 1: Breaking Up is Hard To Do - The controversial failure of Lehman has become a pivotal point in ideological debates about markets, finance and the role of government. At a more mundane level, Lehman’s bankruptcy points to deeper problems in the “plumbing” of the financial system. The policy debate so far has largely ignored these unfashionable issues. Refusal to understand these lessons will spawn poor new policies and regulations. The concept of “living wills” for large financial institutions substantially ignores some issues that Lehman’s exposed. Many of these concerns relate to derivatives, especially the settlement of contracts following bankruptcy, documentary uncertainties and the use of collateral. ISDA (the International Swap and Derivatives Association) have encouraged the perception that the unwinding of derivative contracts necessitated by the Chapter 11 filing by Lehman was largely untroubled, with contracts settling much as expected. In July 2010, ISDA wrote that: “counterparties were able to close out their over-the-counter (OTC) trades smoothly under…’master agreement’, despite severely stressed market conditions.” As Demosthenes, a Greek statesman, observed: “Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.” The reality, perhaps unsurprisingly, is more complex and not entirely consistent with this soothing narrative.

Satyajit Das: In the Matter of Lehman Brothers – Part 2: Well Structured Messes - In this two part paper, the issues regarding settlement of complex derivatives arrangement revealed by the failure of Lehman Brothers is outlined. Many of the failures affect new regulatory proposals such as the rapid resolution regimes under consideration. The First Part dealt with terminating and settling derivative contracts. The Second Part deals with effects of the bankruptcy on structured products and collateral. Lehman’s bankruptcy filing also affected structured products. Typically, these products are notes, bonds or deposits that use derivative technology to provide investors with higher interest rates than traditional instruments or “bespoke” structured returns on equity, currency, credit or commodity assets. Structured products involving Lehman were frequently “white labelled”; that is, packaged and sold by unrelated banks and brokers as their own. This form of “own brand products”, common in financial markets, creates multiple problems, especially where sold to retail investors in non-English speaking jurisdictions. The level of disclosure of details of the structure and risk is variable. Words like “loss” and “risk” do not appear to exist in many emerging market languages. In addition, the direct exposure to Lehman, the product manufacturer, may not be obvious or even disclosed. Following the demise of Lehman, many investors in Europe and Asia were surprised to discover indirect and hitherto unknown exposure to the collapsed investment bank.

Prosecutions for Bank Fraud Fall Sharply - Federal prosecutions for financial institution fraud have tumbled over the last decade, despite the recent troubles in the banking sector, according to a new analysis of Justice Department data by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University.This category can refer to crimes committed both within and against banks. Defendants include bank executives who mislead regulators, mortgage brokers who falsify loan documents, and consumers who write bad checks. (Here are some recent cases of bank fraud prosecutions.) During the first 11 months of the 2011 fiscal year, the federal government filed 1,251 new prosecutions for financial institution fraud. If that pace continues, TRAC projects a total of 1,365 prosecutions for the fiscal year. That’s less than half the total a decade ago.

Federal Prosecution Of Financial Fraud Falls To 20-Year Low, New Report Shows - Public mistrust for banks may be at an all-time high, but federal prosecution for certain financial crimes is down to a 20-year low. The federal government is on track to file just 1,365 prosecutions for financial institution fraud in fiscal year 2011, according to a new report from a watchdog group. That would be the lowest number of such prosecutions in at least two decades. The report, from the Transactional Records Access Clearinghouse at Syracuse University, comes at a time when the protest movement known as Occupy Wall Street has gained nationwide visibility -- and no small degree of public support -- by criticizing what its members see as a close relationship between big banks and the federal government. The falling number of fraud prosecutions is striking given what many claim is a strong pattern of financial-sector misconduct in recent years, culminating in a housing crisis characterized by alleged rampant mortgage fraud and improper foreclosure, as well as the weakening of the national and global economy.

Financial Fraud Prosecutions Down 60% Over Last Decade - Sure, Wall Street has returned to claiming its 40 percent share, or so, of all corporate profits, while receiving little more than a regulatory slap on the wrist (which lobbyists are currently working to bring down to a light effleurage), but at the very least, at the end of the day justice will be served for all those in financial institutions and all along the mortgage financing food chain who were engaged in fraud.  So there’s that. What’s that you say, Syracuse University?  Oh, never mind: Figure 1: Criminal Financial Institution Fraud Prosecutions over the last 20 years (Via Catherine Rampell at Economix, who notes that this isn’t the result of some sort of generally more lax approach to federal criminal prosecutions over the last decade—prosecutions for other crimes have almost doubled over the same time span.) Just to rub it in, read this paragraph from Randall Wray’s policy brief, “Waiting for the Next Crash,” and then take another look at that graph:

BofA Says Regulators May Limit Transfer of Merrill Derivatives-- Bank of America Corp. may be prevented by regulators from shifting derivatives contracts into the books of a deposit-taking unit, potentially forcing the lender to hand over more collateral to counterparties. The lender has designated the retail-deposit unit, Bank of America NA, as the new counterparty on some Merrill Lynch contracts after the company's credit ratings were cut in September, it said last week in a filing. The Federal Reserve and Federal Deposit Insurance Corp. have disagreed over the moves, and they are now discussing whether to allow future transfers, according to people with knowledge of the matter. "Our ability to substitute or make changes to these agreements to meet counterparties' requests may be subject to certain limitations, including counterparty willingness, regulatory limitations on naming Bank of America NA as the new counterparty, and the type or amount of collateral required," the lender wrote in the quarterly regulatory filing. At stake for Bank of America is the power to curb billions of dollars in collateral payments to counterparties that could be required after a credit-rating downgrade. The company, which has lost more than half its market value this year amid rising expenses from

Are BofA and JP Morgan Really Blocking the Return of MF Global Customer Money? - Here is a white paper that suggests that JP Morgan and Bank of America are trying to subordinate the customers' claims to their stolen funds and keep them in a pool of money to be distributed to the creditors by the Trustee, without any representation for the customers.  This is said to be the cause of the confusion and delay in the return of the funds. There are also claims, not substantiated as far as I can tell, that the positions and assets that were taken from customers were liquidated in a manner so as to maximize the gains to other market participants with advantageous knowledge of those positions.  That is a serious charge that I don't quite understand. I hope the regulators will look into the transfer of customers assets and exactly how they were treated. I hope that the regulators and the Justice Department can sort this out quickly, and prevent any further loss of confidence in the exchanges and financial system on the part of their customers.I think it is fair to say that this entire situation has been handled badly.   Some of the early suggestions that customers would have to take haircuts to 'share' the loss with each other, that the funds would be frozen for years, and the general secrecy that has blanketed this has contributed greatly to the anxiety felt by the more aware among investing public at large.

With MF Global Money Still Lost, Suspicions Grow - Nearly three weeks after $600 million in customer money went missing from MF Global, the search for the cash has been hampered by the bankrupt brokerage firm’s sloppy record-keeping, an increasingly worrisome situation that has left regulators frustrated and customers in the lurch. The round-the-clock effort has consumed an alphabet soup of federal regulators and criminal investigators, with lawyers sleeping at open desks and each agency commandeering a different conference room at the firm’s offices. But as authorities comb through some 38,000 customer accounts, they are growing more suspicious about what went wrong at MF Global, the commodities powerhouse once run by Jon S. Corzine, the former Democratic governor of New Jersey. “The lost money is sort of like a lost child,” . “Every day that passes is more and more concerning, and there’s less and less hope.”

MF Global Is Said to Have Used Customer Cash Improperly - MF Global improperly diverted customers’ cash for its own use in the days before its bankruptcy, an act that regulators believe may help explain why $600 million of customer funds remains missing, people briefed on the investigation say. Investigators have now zeroed in on hundreds of millions of dollars in suspect borrowing at the commodities and derivatives brokerage firm, which at the time of its collapse was run by Jon S. Corzine, the former Democratic governor of New Jersey. At least some of that money was used to cover trading losses at MF Global, regulators suspect, meaning the money may no longer be simply missing. It may be gone. MF Global, like other brokers, can use customer cash if it puts up sufficient collateral. But the firm did not provide enough backing in late October, essentially taking free loans, said the people briefed on the investigation, who spoke on the condition of anonymity because the inquiry was continuing.

Those MF Global MFs! - We have a good friend with money tied up in the MF Global debacle. As of November 1st, he had close to $100K in his “segregated”  futures account with no open positions. He says the MF Global website is shut down and the phones don’t ring when he calls.   This guy was a “big swinging Richard” at one of Wall Street’s biggest firms and now trades his own account. Here is his letter of rebuke to MF Global, which he passed on to us.  Can you tell he is a little peeved? Dear MFGI Correspondence Team: Since you have been taciturn and uncommunicative – I thought I might lighten the mood, break the ice so to speak. You do realize that the theft of customer funds is a first. So congratulations, even in the dark days of Hank Paulson and his ummm-how to put this delicately, “… you are all screwed anyway…” policy – none of the Oligarchs had descended to just outright theft. Even Madoff had the class to run a proper Ponzi scheme requiring charisma, finesse and time.

"The Entire System Has Been Utterly Destroyed By The MF Global Collapse" - Presenting The First MF Global Casualty - BCM Has Ceased Operations - Posted by Ann Barnhardt - Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management, It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator. The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

The Final Straw? Jefferies And Six Other Banks Sued For "Fraudulent" MF Global Bond Issuance - Pick the odd one out of the following 7 banks, while in the process pointing out what they have in common: Bank of America Corp, Citigroup Inc, Deutsche Bank AG, Goldman Sachs Group Inc, Jefferies Group Inc, JPMorgan Chase & Co and Royal Bank of Scotland Group Plc. As it so happens 6 of the 7 are Bank Holding Companies, and have access to the Fed's various emergency facilities. The seventh, Jefferies, which a few years ago, boasted that it is now the largest remaining true investment bank after all its competitors had converted to BHC status, may soon regret it said that and did not join its peers. Why? For the same reason why on November 1, the day after MF Global filed for bankruptcy, we tweeted: "Here is why Jefferies is in deep doodoo: http://1.usa.gov/uNBhzq" The reference of course is to the now legendary prospectus for the MF Global 6.25% notes of 2016 that had the infamous Corzine key man event:  At this point the only appointment Obama may give Corzine is that of a presidential pardon for a criminal felony offense.  Alas, Jefferies, and the 6 other banks, do not have that luxury: as of late this afternoon, all six were sued by pension funds "who said the bonds' offering prospectuses concealed problems that led to the futures brokerage's collapse."

Is Bank of America Gambling on Resurrection (or Is BoA Holding the US Hostage)? - What would you do if you were running an insolvent company? The smart thing is to bet big:  go with a high-risk/high-return strategy.  If the gamble pays off, you're solvent, and if not, well, you're already insolvent.  You're playing with the creditors' money. (And without a tort of deepening insolvency, there really isn't a clear downside for management.)  This is gambling on resurrection.   We've seen the disastrous results of banks gambling on resurrection.  That was the S&L crisis. Rising interest rates in the late '70s decapitalized the S&Ls as the S&Ls' assets were long-term, fixed rate mortgages that paid lower rates than the S&Ls had to pay depositors.  The S&Ls, however, got a pliant Congress to agree to massive deregulation that allowed them to expand into all sorts of new business lines, like commercial real estate and race horses and junk bonds. Insolvent S&Ls went chasing high risk/high return projects.  The result was that the tab for taxpayers to fix the S&L mess was significantly greater. Today, it looks like Bank of America is repeating the S&Ls' gamble on resurrection and using this gamble to hold the US government hostage. 

U.S. boosts estimate of auto bailout losses to $23.6B - The Treasury Department dramatically boosted its estimate of losses from its $85 billion auto industry bailout by more than $9 billion in the face of General Motors Co.'s steep stock decline. In its monthly report to Congress, the Treasury Department now says it expects to lose $23.6 billion, up from its previous estimate of $14.33 billion. The Treasury now pegs the cost of the bailout of GM, Chrysler Group LLC and the auto finance companies at $79.6 billion. It no longer includes $5 billion it set aside to guarantee payments to auto suppliers in 2009. The big increase is a reflection of the sharp decline in the value of GM's share price. The current estimate of losses is based on GM's Sept. 30 closing price of $20.18, down one-third over the previous quarterly price

How Do Recessions Affect the C-Suite? -According to research by Yale labor economist Lisa Kahn, beginning your career during a recession can be a real drag, for a real long time. Finding that first job is obviously harder, and even when you do, the pay is usually much less. Kahn found (full paper here) that people who get their first job during a recession have a starting salary that’s on average 25 percent lower than it would be during a boom. Seventeen years later, those people are typically earning 10 percent less than they would had they started during a better economy. But what about CEOs who start their business career during a recession? Is it any different for them?  According to a new study (full version here) from Antoinette Schoar (“The Church of Scionology” podcast contributor) and Luo Zuo, recessions have a peculiar effect on the career trajectory and management style of CEOs. Those who start work during a recession become CEOs faster, but end up at smaller firms and tend to be more risk-averse.

Factbox: Banks to cut more than 120,000 jobs - Banks are shedding jobs worldwide as stricter regulations and a tough six months for trading income take their toll on investment banking units. France's BNP Paribas is only one of the latest banks to confirm they are also cutting jobs. At Citigroup , more than 3,000 staff could go. Italy's UniCredit said on Monday it was cutting 6,150 jobs as part of a strategy revamp, while Japan's Mizuho Financial group Inc <8411.T> is making 3,000 layoffs as it merges two banking units. The layoff plans brings staff cuts announced this year or reported to be in the works at major banks to 123,000, some of them to be lost over three- or four-year programs. The job cut estimates are likely to be conservative figures, as not all banks trimming teams have publicly announced lay-offs, and the number does not take into account smaller investment banks, boutiques and brokers. Below is the latest summary of cuts:

Big banks binge on Bush- Obama ‘venture socialism’ - Largely out of the media spotlight, the federal government operates a network of financial subsidy programs that benefit big banks by putting taxpayer money at risk.  In its latest act of venture socialism, the Obama administration has offered a novel taxpayer backstop to General Electric, the multinational industrial conglomerate that is famously close to this administration, and that spends more on federal lobbying than any other company. The government accessory in this instance is the Export-Import Bank of the United States, a federal agency that finances U.S. exports at taxpayer risk. Ex-Im exists to subsidize U.S. businesses, with most of the subsidy dollars facilitating Boeing sales. Other industrial titans like GE, Bechtel, and General Dynamics devour most of the rest of the Ex-Im subsidy pie. But manufacturers aren't the only beneficiaries of this little-known federal agency -- banks profit from it, too. For instance, when Ex-Im recently approved $1 billion in financing to subsidize Pemex, Mexico's government-owned oil company, 3M and other U.S. exporters of oil-field equipment benefited, but so did some big banks. Bank of America and JP Morgan financed these sales, and so if Pemex defaults, it's these megabanks the U.S. taxpayer will be bailing out.

No such thing as risk free - THE world faces a disturbing wake-up call as it realises just how risky "risk-free" southern European debt was. In hindsight, that should have been obvious; for most of recent history southern European debt was much cheaper than it was in northern Europe. Southern Europeans faced a higher cost of borrowing to reflect their risk, and this was a reasonable equilibrium. But for a variety of regulatory and cultural reasons, banks loaded up on sovereign debt from all the euro-zone countries, treating it all as if it were risk free, and yields on the debt of southern sovereigns converged toward northern rates. More simply: the debt of southern Europe was priced as if Germany had issued a free put on it. In the New York Times, Liz Alderman and Susanne Craig write: Regulators bear much of the responsibility. Before 1999, when Europe forged its monetary union, regulators permitted banks to treat as risk-free the debt of any country that belonged to the Organization for Economic Cooperation and Development, a club of developed nations that includes the United States and most of Europe. “There was encouragement from European authorities for banks to load up on more debt, because it was seen as safe,”. “In hindsight, it was unwise risk management.”

Eurocrisis: Financial-Prudence-Is-Contractionary Watch » All I am hearing from Washington right now is:We are pressing leveraged banks to reduce their exposure to eurorisk by selling their risky European government bonds off to other private-sector investors. That is a good thing from the perspective of avoiding another financial crisis here in the U.S. that would push us into a full-fledged depression. Risky eurozone government debt should be held by those who are not already in the business of becoming highly leveraged and dancing as close as they can to the edge of failure. That, however, does not change the fact that when Wall Street banks shed their eurorisk that the net risk-bearing capacity of the private market is diminished, and that in the current situation a reduction in the market's risk-bearing capacity widens spreads and is contractionary. What Washington should be doing right now is saying: We will bear some of the eurorisk, and we--as your regulators--require that you raise more capital so that you can cope with and bear the rest. Right now fiscal austerity is contractionary, monetary austerity is contractionary, and banking austerity--requiring finance to cut back on leverage by shrinking assets rather than raising capital--is contractionary as well.

On the Dubious Defenses of the Netting of $4 Trillion of US Bank CDS to the Eurozone - Yves Smith - I think we can safely make some conclusions re the following tweet from Economics of Contempt on the over $4 trillion notional of US bank exposure to Eurozone risks. A Reuters story recounts how the Financial Stability Oversight Council is trying to get a grip on the positions. Even the bank lobbying group the International Institute of Finance is cautious: “As such, the potential for contagion to the U.S. financial system is not small,” the Institute of International Finance, the lobby group for major international banks, said last week. Nevertheless, there is not much room for misinterpretation of this exchange:In the Economics of Contempt remark, it isn’t hard to detect a patronizing, “Ah, you non-insiders just don’t get how this works, do you?” tone. The problem with EoC’s airy assurance is the intense regulatory focus says the authorities don’t buy the industry’s reassurances, and for good reason. Any time a big dealer implodes (and per Bear Stearns and MF Global, they can fail suddenly and catastrophically), it can set off a domino effect of counterparty shortfalls as one side of supposedly netted positions is suddenly not there. An excellent primer on FT Alphaville that we highlighted earlier explains how this can happen. And remember, MF Global (not unlike LTCM in 1998) failed in an manner that the authorities did not anticipate and would not have been monitoring at other dealers.

This Is The Report That Caused Banks To Tank In The Final Hour Of The Day - Bank stocks plummeted after Fitch Ratings released a statement about U.S. bank exposure to Europe.  Here's the key part of the report: U.S. banks have manageable direct exposures to the stressed European markets (Greece, Ireland, Italy, Portugal and Spain), but further contagion poses a serious risk, according to a Fitch Ratings report. Fitch believes that unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen. Fitch’s current outlook for the industry is stable, reflecting improved fundamentals at most banks combined with ratings lower than at pre-crisis levels. However, risks of a negative shock are rising and could alter this outlook. U.S. banks have reduced direct exposure to stressed European markets considerably over the past year in Fitch’s view. Direct exposures appear manageable in the context of banks’ capital positions and diverse earnings streams. Public disclosure of direct exposures has generally improved recently but varies from bank to bank.

U.S. Banks Face Contagion Risk From Europe Debt -  U.S. banks face a “serious risk” that their creditworthiness will deteriorate if Europe’s debt crisis deepens and spreads beyond the five most-troubled nations, Fitch Ratings said. “Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen,” the New York-based rating company said yesterday in a statement. Even as U.S. banks have “manageable” exposure to stressed European markets, “further contagion poses a serious risk,” Fitch said, without explaining what it meant by contagion. The “exposures” of U.S. lenders to major European banks and the stressed nations of Greece, Ireland, Italy, Portugal and Spain, known as the GIIPS, are smaller than those to some of the continent’s larger countries, Fitch said. The six biggest U.S. banks -- JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. and Morgan Stanley (MS) -- had $50 billion in risk tied to the GIIPS on Sept. 30, Fitch said. So-called cross-border outstandings to France for all except Wells Fargo were $188 billion, including $114 billion to French banks. Risk to Britain and its banks was $225 billion and $51 billion, respectively.

JPMorgan Joins Goldman Keeping Italy Debt Risk in Dark - JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally. Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS. As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether. “If you don’t have to, generally people don’t see the advantage to doing it,”

Credit Stress Indicators -Here are a few indicators of credit stress: Here is a screen shot of the TED spread from Bloomberg.  The TED spread is at 0.49, and has been rising recently (top graph). The 5 year graph shows that recent increase in comparison to the U.S. financial crisis in 2008. The peak was 4.63 on Oct 10th. A normal spread is around 0.5. The three month LIBOR has increased: Data from the British Bankers' Association showed the three-month dollar London Interbank Offered Rate, or Libor, rose to 0.47944% from 0.47111% Wednesday.The three-month LIBOR rate peaked during the crisis at 4.81875% on Oct 10, 2008. This is rising again, but still low.  The A2P2 spread as at 0.49. This spread has increased slightly over the last few days, but far lower than the peak of the financial crisis of 5.86. This is the spread between high and low quality 30 day nonfinancial commercial paper. Right now quality 30 day nonfinancial paper is yielding close to zero. The two year swap spread screen shot from Bloomberg. This spread is just over 51.  This spread peaked at near 165 in early October 2008. By these indicators, credit stress is rising, but it is still very low compared to the levels reached in September 2008.

Source: Merrill Lynch agrees to $315 million MBS settlement - Last month U.S. District Judge Jed Rakoff of Manhattan federal court entered a very interesting order in a class action that asserts Securities Act claims against Merrill Lynch on behalf of investors in 18 mortgage-backed securities trusts. Rakoff's one-page order said that Merrill had reached a settlement with the MBS class. The filing received almost no notice -- I heard about it from the brilliant analyst Chris Whalen at Institutional Risk Analytics -- perhaps because it didn't disclose the terms of the settlement, which Rakoff said the parties would file on Dec. 5. But now you don't have to wait. A source familiar with the deal told me that Merrill Lynch has agreed to pay $315 million -- by far the most any MBS defendant has agreed to pay in a public settlement of investors' securities claims. This is only the fourth publicly-known MBS securities settlement (as opposed to settlements of breach-of-contract claims), following this summer's $125 million Wells Fargo class action deal and last week's National Credit Union agreements with Deutsche Bank ($145 million) and Citigroup ($20.5 million). The Merrill settlement should certainly reinforce what I said about the NCUA deals: It's beginning to look like there's considerable value in these MBS securities cases.

Nuns Who Won’t Stop Nudging - Long before Occupy Wall Street, the Sisters of St. Francis were quietly staging an occupation of their own. In recent years, this Roman Catholic order of 540 or so nuns has become one of the most surprising groups of corporate activists around.  The nuns have gone toe-to-toe with Kroger, the grocery store chain, over farm worker rights; with McDonald’s, over childhood obesity; and with Wells Fargo, over lending practices. They have tried, with mixed success, to exert some moral suasion over Fortune 500 executives, a group not always known for its piety.  ”We want social returns, as well as financial ones,” Sister Nora said, strolling through the garden behind Our Lady of Angels, the convent here where she has worked for more than half a century. She paused in front of a statue of Our Lady of Lourdes. “When you look at the major financial institutions, you have to realize there is greed involved.”

Why Not Break Up Citigroup? - Simon Johnson - Earlier this week, Richard Fisher, the president of the Federal Reserve Bank of Dallas, captured the growing political mood with regard to very large banks, observing, “I believe that too-big-to-fail banks are too dangerous to permit.” Market forces don’t work with the biggest banks at their current sizes, because they have great political power and receive almost unlimited, implicit subsidies in the form of protection against downside risks — particularly in times like these, with Europe’s financial situation looking precarious. Mr. Fisher added: Downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. Then, creative destruction can work its wonders in the financial sector, just as it does elsewhere in our economy. Mr. Fisher is a senior public official and also someone with a great deal of experience in financial markets, including running his own funds-management company. I increasingly meet leading figures in the financial sector who share Mr. Fisher’s views, at least in private.  What, then, is the case in favor of keeping mega-banks at their current scale? Vague assertions are sometimes made, but there is very little hard evidence and often a lack of candor on that side of the argument.

Coburn Report: Welfare for Millionaires - Class warfare is a politically charged term these days, from the Wall Street protests to the Capitol Hill negotiations over curtailing the nation’s debt. But a new congressional analysis, obtained by Newsweek, may fuel populist outrage by showing the extent of government subsidies that go to the wealthiest people in America. From unemployment payments to subsidies and tax breaks on luxury items like vacation homes and yachts, Americans earning more than $1 million collect more than $30 billion in government largesse each year, according to the report assembled by Sen. Tom Coburn, a Republican from Oklahoma, who is so often at odds with members of both parties that colleagues call him “Dr. No.” The Internal Revenue Service provided the data showing how much money was going to the much-referenced top 1 percent. In all, millionaires receive hefty help from Uncle Sam. The $30 billion in handouts, to put it in perspective, amounts to twice as much as the government spends on NASA, and three times the budget of the Environmental Protection Agency. On the other hand, it would only cover the cost of fighting about three months in Iraq and Afghanistan. Still, eliminating them would help make a small dent in the $1.5 trillion congressional leaders are trying to find by Thanksgiving.

America’s New Robber Barons - Though the situation is often described as a problem of inequality, this is not quite the real concern. The issue is runaway incomes at the very top—people earning a million and a half dollars or more according to the most recent data. And much of that runaway income comes from financial investments, stock options, and other special financial benefits available to the exceptionally rich—much of which is taxed at very low capital gains rates. Meanwhile, there has been something closer to stagnation for almost everyone else—including even for many people in the top 20 percent of earners. This may seem counterintuitive at first. After all, analysts have long painted a picture of growing inequality over the past few decades in which the top quintile’s share of the national income has risen while the share of the other 80 percent has fallen. But almost all the gains for the top 20 percent was for the top 1 percent. And half of that is accounted for by a tiny group within the top percent—those earners in the top 0.1 percent. Meanwhile, for the four quintiles below the 80 percent level, the share of total income fell significantly. For those from the 80th to the 99th percentile, the share rose only slightly (a little more rapidly as you go higher up).  In other words, Occupy Wall Street’s claim that “We are the 99 percent” is dead on right.

The Global Super Rich Stash: Now $25 Trillion - Another super-slick global financial analysis firm has just tallied how much net worth is sloshing around in the pockets of the world’s most spectacularly wealthy. So when will the time finally come to stop the counting — and start the taxing? In today’s astoundingly unequal global economy, banks can go either of two routes — or both — to bag ever bigger returns. They can squeeze the 99 percent with nuisance fees and penalties. Or they can cater to the richest of the rich. But both routes have bumps. The 99 percent can squeeze back, as they did earlier this month when Americans by the tens of thousands shut down their Bank of America accounts to protest the bank’s $5 debit card greed grab. And the richest of the rich? To cater to these fortunates, you have to first find them. That can be difficult. Fortunately, financial industry consulting firms have stepped up to help. These firms have started publishing annual global wealth surveys that pinpoint where banks — and luxury retailers and anyone else who wants in on top 1 percent action — can find “high” and “ultra high” net-worth individuals.

The US is Now a Corporate Monarchy - I did an interview with a print reporter yesterday about what has been going on with lack of prosecutions, the banks, and Wall Street in general. We discussed the corrupt exchanges and HFT. I dropped lots of F-Bombs, called out cowards and crooks and held nothing back. (“That fucker belongs in prison; this son of a bitch should hang“) Afterwards, she commented that I seemed angry. I wrote back suggesting that I am a happy dude, and its not Anger — its closer to an ineffable sadness that comes once you realize you have lost something dear. I am old enough to have grown up when this nation was a Democracy, but that era has passed. We now live in a nation no longer run by the citizens — it is a Corporatocracy — and that makes me sadder than angry . . . She suggests perhaps a better word is outraged. I wonder: Why have the Europeans figured out they are getting screwed, and we haven’t? Why are they taking to the streets en masse, while we seem to be watching our own control over our own futures slip from our hands almost as if from afar?

Don't be afraid to say it: 'We are the 1 percent' - Wealth is not the issue; justice is. There will always be a 99 percent and a 1 percent, but that is not unjust. It is simply a fact of life. Injustice occurs when the 99 percent threaten the 1 percent because they outnumber them. Injustice occurs when the 99 percent use their majority status to commandeer the wealth of the 1 percent. And if I stand by and let that happen, then I am unjust. So I will stand with the 1 percent. Even though I don’t have much money of my own, I cannot stand by and watch the wealth of my brethren be stolen. That is not the American way; it is the communist way. In America, what is mine is mine and what is yours is yours. So even though I have no money, I will proudly proclaim that I am a capitalist.

Citigroup Thinks These 9 Stocks Will Benefit From The Rise Of Poverty - Citigroup’s investment strategy is built on the hour-glass theory, or the thought that companies playing to the upper and lower classes will post impressive sales growth as the middle class shrinks. And in light of a recent government report on poverty-stricken Americans, this investment strategy could be immensely profitable. (viaBusiness Insider) The Somber Facts The U.S. Census Bureau’s October report was released this Monday morning and offered some depressing insight on the nation’s poverty levels. According to Bloomberg, “the bureau used an alternate method to calculate that 16 percent of Americans, or 49.1 million people, lived in poverty in 2010, up from the official rate of 15.2 percent, or 46.6 million… The new measure put the proportion of indigent Americans 65 and older at 15.9 percent, an increase from the official 9 percent rate.” As the rich get richer and the poor get poorer, and the numbers in each category increase, it is naturally the middle class that is thinning out. The effect on companies with a focus on the middle-class might become quickly apparent if the trend is not reversed. Meanwhile, consumer spending on companies catering to low- and high-income classes will likely rise, leading to impressive sales growth.

Occupy Wall Street plans NYSE shutdown - Occupy Wall Street protesters are planning an attempt to shut down the New York Stock Exchange on Thursday, Nov. 17, as part of a series of actions to mark the movement's two-month birthday, according to a Facebook page that went live Friday. “Join Occupy Wall Street and 99%ers from across the country as we shut down the stock market by throwing a block party the 1% will never forget,” the page states.  Sources within the Occupy Wall Street movement confirmed that the page, which details plans to stop the opening bell from ringing, is authentic.  The page says that a “People's Bell” will ring out instead, and outlines plans for a street carnival in which protesters “rebuild and celebrate the neighborhoods that the Wall Street economy has destroyed.” The action is expected to focus on housing, food, the environment, health care and education, with people from communities telling their stories and protesters constructing monuments to signify the rebuilding of neighborhoods. A NYSE spokesman declined to comment. The NYPD did not immediately comment.

AIG chairman says that you just don’t get it - Steve Miller is the chairman of AIG. Between 2008 and 2009 AIG received $97.8 billion in loans from the Fed plus four bailouts totaling $69.8 billion in taxpayer money. This is what Steve had to say yesterday when asked by Bloomberg TV’s Betty Liu for his views on Occupy Wall Street. I would say the understanding of the Occupy Wall Street crowd of what makes our country work is probably fairly limited. It’s a very simplistic view of things. No one will ever know what would have happened to our country and our whole global financial system if AIG had  been allowed just to go down. What can one say to this without resorting to profanity? A few things.

  • It’s been almost three years to the day since AIG was bailed out. And guess what? AIG stil owes taxpayers $49.4 BILLION! That’s more than half the budget of the Department of Education. What was that about taxpayers getting their money back, Steve?
  • A significant amount of the aid–$52.5 billion–was pumped into special purpose vehicles created by the Federal Reserve  Bank of New York to take dodgy mortgage bonds and other loan-backed securities off of AIG’s balance sheet and the balance sheets of its Too Big To Fail bank clients. Part of this constituted a back-door bailout of American and European banks. To get its money back the Fed will have to wait until these questionable securities mature, hoping that they don’t default in the interim, or sell them in the markets. The Fed tried to sell some earlier this year and, lo and behold, it didn’t go so well. It’s very difficult to say when and whether this money will be recouped.
  • What did U.S. taxpayers get for the rest of the money given to AIG? Unsecured interests. We now own about 77% of the company via preferred and common shares. This means that should AIG go bankrupt–and by the way, their latest numbers look horrible–taxpayers will be among the last to be repaid. They’ll stand near the back of the line and watch as bondholders and other secured creditors get their money back first. How’s that for taxpayer protection?

Zuccotti - Krugman - We don’t yet have the full story — because Bloomberg tried to keep anyone from getting it! What we do have is an obviously specious rationale, and a lot of indications of excessive force. In a way Occupy Wall Street — and all of those who are sympathetic to its concerns — should be grateful. There were, let’s face it, arguments in favor of an eviction carried out with full transparency and a proper regard for civil rights — although there were also arguments, stronger in my view, for allowing this peaceful, meaningful protest to continue. By acting so badly, Bloomberg has made it easy to see who won’t be truthful and can’t handle open discourse. He’s also saved OWS from what was probably its greatest problem, the prospect that it would just fade away as time went on and the days grew colder. Quite a night’s work.

Why We Need Occupy Wall Street - Today —the same day that New York’s Mayor Bloomberg had his cops clear Zuccotti Park—Richard Fisher, the president of the Federal Reserve Bank of Dallas, called for breaking up America’s biggest banks, calling them “too dangerous to permit.” Also today, Warren Buffett, in an interview posted on the Business Wire of Berkshire Hathaway, his company, continued his criticism of American plutocracy. “Through the tax code, there has been class warfare waged, and my class has won,” Buffett said. “It’s been a rout. You have seen a period where American workers generally have gone no place, and where the really super rich as a group increased their incomes five for one in this rarified atmosphere.”All of which suggests that Occupy Wall Street has already been a stunning success in changing the nation’s public discourse. Not that Fisher and Buffett hadn’t criticized our economic policies well before !OWS set up shop in Zuccotti Park, but they are now not just rich and powerful voices crying out in the wilderness. As the following post from Politico’s Ben Smith illustrates, OWS really has altered what the media talk about—the chart measures a Nexis search of print stories, web stories and broadcast transcripts that used the term “income inequality,” measured by week:

A Raid on the First Amendment: New York’s Assault on Press Freedom - The dark-of-night raid on New York City’s Zuccotti Park was not merely an assault on the Occupy Wall Street movement. It was an assault on the underpinnings of the First Amendment to the Constitution, an amendment that was outlined and approved by the First Congress of the United States at No. 26 Wall Street in 1789.That amendment, which was written to empower citizens to challenge and prevent the rise of a totalitarian state, recognized basic freedoms that were essential to the defense of liberty. Among these are, of course, the right to speak freely and to embrace the religious ideals of one’s choice.But from a standpoint of pushing back against power, however, the rights to assemble and to petition for the redress of grievances are fundamental. And those rights were clearly assaulted early Tuesday morning.So, too, was another right: the right to a free press.

This Week's Occupy Evictions Were Systematically Plotted By The Nations Mayors - Conspiracy theorists are going to love this one. In an interview with the BBC, Mayor Quan admitted that she discussed dismantling Occupy Oakland with Mayors from 18 other cities. That explains why the crackdown on Occupations seems to have happened all at once — in Oakland, in Portland, and in NYC, to name a few. You can listen to the clip around 5:30 here, on The Takeaway (they have a partnership with the BBC). Or you can just read what Quan said below: “I was recently on a conference call with 18 cities across the country who had the same situation where what had started as a political movement and a political encampment ended up being an encampment that was no longer in control of the people who started them. And what I think you're starting to see is that the Occupy movement is now looking for more stability. There's been a lot of... talking to peaceful demonstrators...who wanted to separate themselves from anarchists...They're now looking for a private space where they can go to do community organizing around the issues that started the movement, so I think you're going to find that...the encampments are going to try to move to place where they're not in direct conflict with the public...

Police State: #OWS, Other Crackdowns Part of National, Coordinated Effort; Bloomberg Defies Court Order to Let Protestors Back into Zuccotti Park [Update: Judge Rules in Favor of City] - Yves Smith - The crackdowns on the Occupations around the US are as ugly as they seem. The area around Zuccotti Park was subject last night to a 9/11 level lockdown over peaceful, lawful protests by a small number of people. No credible case has been made by the officialdom that the protestors had violated any laws. Martial law level restrictions were in place. Subways were shut down.Local residents were not allowed to leave their buildings. People were allowed into the area only if they showed ID with an address in the ‘hood. Media access was limited to those with official press credentials, which is almost certainly a small minority of those who wanted to cover the crackdown (the Times’ Media Decoder blog says that journalists are describing the tactics, as we did, as a media blackout). Moreover, reading the various news stories, it appears they were kept well away from the actual confrontation (for instance, the reported tear gassing of the Occupiers in what had been the kitchen, as well as separate accounts of the use of pepper spray and batons). News helicopters were forced to land. Gregg Levine tells us, based on a BBC interview of Mayor Quan of Oakland, that as some readers and this blogger speculated last night, the 18 police action was a national, coordinated effort. This is a more serious development that one might imagine. Reader Richard Kline has pointed out that one of the de facto protections of American freedoms is that policing is local, accountable to elected officials at a level of government where voters matter.  National coordination vitiates the notion that policing is responsive to and accountable to the governed.

Are You Happy That Your Tax Dollars are Going to Crush #OWS and Other Occupations? -- Yves Smith - Jon Walker at FireDogLake teases out an issue that has probably occurred to many of you: how exactly have these big, and now coordinated, crackdowns on OWS been paid for? In cash-strapped Oakland, for instance, the first big raid, the one in which Iraq war veteran Scott Olsen was critically injured, the city called in forces from 17 different operations. In New York, as the Grey Lady reported in loving detail, the police engaged in extensive, secret rehearsals before going live. This wasn’t policing. It was a military operation.  As Walker writes:Either cities like Oakland have decided using massive police force to break up peaceful demonstrations is worth wasting money that could have gone to fund needed city services like schools, public transit and infrastructure repair, or the cities are getting federal money from agencies like the Department of Homeland Security to pay for these military style crackdowns.. As we’ve discussed at length, austerity policies backfire economically, by slowing economic growth, which means GDP falls faster than the debt burden does, making debt to GDP ratios worse. Recessions typically hit the lower orders much harder than the rich. And while these crackdowns were nominally about getting rid of the OWS as a eyesore and alleged threat to public safety, it is not hard to see this as an effort to quash a developing mass organization that could stand up to bank/creditor friendly austerian policies. Look at this video, courtesy Lambert Strether. The number of police involved is stunning, something that has not been adequately conveyed in print media reports. This for a group of maybe 2000 people at 1 AM? There were clearly other considerations at work besides simply clearing the park. A big one, as we have stressed, was keeping the media and anyone with a camera well away from any police manhandling. Another is the “resistance is futile” message, that those who oppose authority will lose when it is roused to show force.

WHO coordinated the raids?  -- One data point is just data.  Two points are a trend.  Three points are a correlation. Denver, Portland, Oakland, New York. And we musn’t forget Chapel Hill, North Carolina.  Then we find out that Quan was one of 18 mayors nationwide  on a conference call sometime in the past week where allegedly they planned to break up the occupy protests. There are three possibilities for who coordinated the raids:

  • 1.) The mayors were all good golfing buddies, got together over a few beers and decided all on their own to rid themselves of these meddlesome protestors.
  • 2.) The 1% organized an online Mayor’s Retreat where participants offered charitable donations to the cities who took a more proactive approach to cleaning up their parks. It was simply a way for the 1% to give back to these communities and pair up interested benefactors with cities that have been stretching their tax dollars as far as they could go and were still falling short of their obligations.  Call it Noblesse Oblige.
  • 3.) One (or both) of the political parties was involved in cleaning up the Occupy Movement.  It could have been either party because both take wads of cash from the 1% and have an interest in keeping their finance industry masters happy.   But that’s just a conspiracy theory and you will never find the fingerprints of anyone in particular on the documents.

Police State Tactics - The ugly hand of the federal government is becoming increasingly suspected behind what appears to be a nationwide attempt to repress and evict the Occupation Movement. Across the country in recent days, ultimatums have been issues to groups occupying Portland, OR, Chicago, IL, San Francisco, Dallas, TX, Atlanta, GA, and most recently New York, NY, where the Occupation Movement began on September 17. The two most recent eviction efforts, in Oakland and New York, have been the worst. The police attacks have had a lot in common. They have been “justified” based upon trumped up pre-textural claims that the occupiers are creating a health hazard, or a fire hazard, or a crime problem, generally on little or no evidence, or there has been a digging up of obscure and constitutionally questionable statutes, for example laws outlawing the homeless. Then the police come in, usually in dead of night, dressed in riot gear and heavily armed with mace weapons, batons, plastic cuffs and tear gas, or even assault rifles in some cases and so-called flash-bang stun grenades–all weapons to be used against peaceful demonstrators.

Update: 'Occupy' crackdowns coordinated with federal law enforcement officials - Over the past ten days, more than a dozen cities have moved to evict "Occupy" protesters from city parks and other public spaces. As was the case in last night's move in New York City, each of the police actions shares a number of characteristics. And according to one Justice official, each of those actions was coordinated with help from Homeland Security, the FBI and other federal police agencies. The official, who spoke on background to me late Monday evening, said that while local police agencies had received tactical and planning advice from national agencies, the ultimate decision on how each jurisdiction handles the Occupy protests ultimately rests with local law enforcement. According to this official, in several recent conference calls and briefings, local police agencies were advised to seek a legal reason to evict residents of tent cities, focusing on zoning laws and existing curfew rules. Agencies were also advised to demonstrate a massive show of police force, including large numbers in riot gear. In particular, the FBI reportedly advised on press relations, with one presentation suggesting that any moves to evict protesters be coordinated for a time when the press was the least likely to be present.

Beyond Seizing Parks, New Paths to Influence — The anti-Wall Street protests, which are being driven from their urban encampments across the nation, now face a pivotal challenge: With their outposts gone, will their movement wither?  In New York, where the police temporarily evicted Occupy Wall Street protesters from Zuccotti Park early Tuesday, and in other cities, dozens of organizers maintained that the movement had already reshaped the public debate. They said it no longer needed to rely solely on seizing parks, demonstrating in front of the homes of billionaires or performing other acts of street theater.  They said they were already trying to broaden their influence, for instance by deepening their involvement in community groups and spearheading more of what they described as direct actions, like withdrawing money from banks, and were considering supporting like-minded political candidates.  Still, some acknowledged that the crackdowns by the authorities in New York and other cities might ultimately benefit the movement, which may have become too fixated on retaining the territorial footholds, they said.

Bank of America Makes Millions Charging Fees to Withdraw Unemployment Benefits - Late last month, a national backlash forced Bank of America to abandon its plan to charge customers $5 a month to use their debit cards. But Huffington Post reports that the corporation has quietly been mining other sources of fees, preying on its most vulnerable customers to rake in millions in revenue: Out of work for much of the last three years, Busby depends upon a $264-a-week unemployment check from the state of South Carolina. But the state has contracted with Bank of America to administer its unemployment benefits, and Busby has frequently found herself incurring bank fees to get her money. Millions of jobless Americans like Busby have little choice but to rely on the bank’s prepaid debit cards to collect their monthly benefits. Forty-one states have contracted with Bank of America, Wells Fargo, JP Morgan Chase, and other banks to provide access to public benefits, allowing them to collect unlimited fees, both from the unemployed and state governments. Families who are living hand-to-mouth are outraged to discover that banks worth trillions of dollars are taking such a big cut of their benefits, when they depend on every penny. . BofA customers can be charged $1.50 for speaking to a customer service operator more than once a month, $1.50 for using an “out-of-network” ATM, and $0.50 for entering the wrong PIN number too many times.

Big Banks Turn Unemployment Benefits Into a Profit Center - Despite big banks putting up a brave front, there’s a good deal of anecdotal evidence that individual managers are trying desperately to stop customers from moving their money. Whether it’s just throwing up additional hurdles like a $10 closure fee, or outright begging customers to stay, or bad-mouthing credit unions or community banks, or simply refusing to allow people to close accounts, it’s clear that at the local level, bank managers are trying to hold onto deposits, which even in this go-go age remains an important tool for maintaining capital requirements and funding the risky bets banks continue to make.And if you needed any more of a reason to move your money, consider that many firms, such as Bank of America, have turned the truly indigent into profit centers, by making money off of debit card fees for unemployment benefits.BofA isn’t alone in this practice. US Bank, Wells Fargo, JPMorgan Chase and others have seized control of public benefits in the states, forcing beneficiaries to use their services. And if those banks aren’t available in their areas, or even if they are, they get hit with fees. Banks have seduced state governments with the lure of budget savings from not having to cut checks and mail them out. And they’ve generated this profit center for the banks out of imposing fees on the unemployed and food stamp recipients.

Banks Quietly Ramping Up Costs to Consumers - Even as Bank of America1 and other major lenders back away from charging customers to use their debit cards, many banks have been quietly imposing other new fees.  Need to replace a lost debit card? Bank of America now charges $5 — or $20 for rush delivery.  Deposit money with a mobile phone? At U.S. Bancorp2, it is now 50 cents a check.  Want cash wired to your account? Starting in December, that will cost $15 for each incoming domestic payment at TD Bank. Facing a reaction from an angry public and heightened scrutiny from regulators, banks are turning to all sorts of fees that fly under the radar. Everything, it seems, has a price. “Banks tried the in-your-face fee with debit cards, and consumers said enough,” “What most people don’t realize is that they have been adding new charges or taking fees that have always existed and increased them, or are making them harder to avoid.”

Banks Jacking Up Fees to Retail Customers – Yves Smith - It wasn’t hard to foresee that banks were going to start hitting retail customers with more fees. As we wrote when Bank of America tried introducing a $5 per month fee for debit card use: Consumers should brace themselves for a brave new world of lots of bank fees. Bank of America is no doubt hoping that it will be a price leader and the other major banks will copy its move. Now that banks can borrow at pretty close to zero, cheap sources of funding, like interest-free checking accounts and float aren’t as valuable as they once were. When I lived in Australia, it was pretty much impossible to have a relationship with a bank and pay less than $25 a month for it. The US banks are moving in that direction. The New York Times tells us that banks are in the process of imposing a host of new charges. For instance, TD Bank will charge $15 for an inbound wire transfer. A replacement debit card will cost $5 at Bank of America. Citibank is increasing the fees on a basic checking account by $2 a month; Bank of America, by $3 a month. The reason (or rather, justification) is the impact of the assault on interchange fees:Banks can still earn a profit on most checking accounts. But they are under intense pressure to make up an estimated $12 billion a year of income that vanished with the passage of rules curbing lucrative overdraft charges and lowering debit card swipe fees…Put another way, banks would need to recoup, on average, between $15 and $20 a month from each depositor just to earn what they did in the past.

Gingrich Said to Be Paid $1.6M by Freddie Mac - Newt Gingrich made between $1.6 million and $1.8 million in consulting fees from two contracts with mortgage company Freddie Mac, according to two people familiar with the arrangement. The total amount is significantly larger than the $300,000 payment from Freddie Mac that Gingrich was asked about during a Republican presidential debate on Nov. 9 sponsored by CNBC, and more than was disclosed in the middle of congressional investigations into the housing industry collapse. Gingrich’s business relationship with Freddie Mac spanned a period of eight years. When asked at the debate what he did to earn a $300,000 payment in 2006, the former speaker said he “offered them advice on precisely what they didn’t do,” and warned the company that its lending practices were “insane.” Former Freddie Mac executives who worked with Gingrich dispute that account. Gingrich said this morning the payments were for “strategic advice over a long period of time.”

Fannie, Freddie Execs Score $100 Million Payday - Mortgage finance giants Fannie Mae and Freddie Mac received the biggest federal bailout of the financial crisis. And nearly $100 million of those tax dollars went to lucrative pay packages for top executives, filings show.The top five executives at Fannie Mae received $33.3 million in 2009 and 2010, while the top five at Freddie Mac received $28.1 million. And each company has set pay targets of as much as $17 million for its top managers for 2011.That’s a total of $95.4 million, which will essentially be coming from taxpayers, who have been keeping the mortgage finance giants alive with regular quarterly cash infusions since the Federal Home Finance Agency (FHFA) took control of the companies in September 2008.

CHART OF THE DAY: Proof That Fannie And Freddie Didn't Cause The Housing Bubble - The role of government agencies in causing the housing bubble continues to be debated endlessly. As such, it's always a good idea to have this chart — posted today by Hale Stewart — of various housing bubbles around the world. If you really think it was all Fannie and Freddie's fault, then you have to explain why the U.S. just happened to have the same (roughly) arc of a housing boom as basically every other industrialized country all around the world at the same time.

HUD report on FHA Financial Status - This report shows some improvement from the report last year, but the house price assumptions seem optimistic. From HUD: FHA Issues Annual Financial Status Report to Congress n reporting on findings of the annual independent actuarial study, HUD indicates that, in the midst of continued weakness in housing markets across the county, the MMI Fund capital ratio remains positive this year at 0.24 percent. As was the case last year, the new actuarial study shows that FHA is expected to sustain significant losses from loans insured prior to 2009, and thus its capital reserve remains below the congressionally mandated threshold of two percent of total insurance-in-force. However, the actuaries’ report concludes that, barring a further significant downturn in home prices, the MMI Fund will start to rebuild capital in 2012, and return to a level of two percent by 2014 – outpacing last year’s prediction. This assumes prices increase slightly next year: "The base-case scenario provided by Moody’s Analytics indicates price declines in 2011 of 5.6% and predicts a small amount of growth in prices in 2012 (1.3%), followed by ore steady growth starting in 2013." Here is the HUD report - and the graph below shows the house price scenarios included in the report.

F.H.A. Audit Sees Possible Bailout Need — Chances are nearly 50 percent that the Federal Housing Administration1 will need a bailout next year if the housing market deteriorates further, the agency’s independent auditor said in a report2 released Tuesday. The F.H.A., which offers private lenders guarantees against homeowner default, has just $2.6 billion in cash reserves, the report found, down from $4.7 billion last year. The agency’s woes stem from the national foreclosure crisis. In the last three years, the F.H.A. has paid $37 billion in insurance claims against defaulting homeowners, shrinking its cash cushion. The auditors determined the agency’s level of supplemental cash reserves by projecting losses on its mortgage portfolio and counting them against expected premium revenue. This year, the audit found that the F.H.A. supplemental reserve was less than one-quarter of a percentage point of its current portfolio: $2.6 billion against a $1.1 trillion mortgage portfolio, as of Sept. 30. Legally, the housing agency is required to keep a 2 percent cash buffer, a target it has not met since 2008.

FHA could need taxpayer bailout next year, report says There might yet be another casualty in the real estate market: the Federal Housing Administration. With home prices still seeking their bottom, the federal agency that insures more than $1 trillion in mortgages faces a nearly 50% chance that it could need a taxpayer bailout next year, according to a government report released Tuesday. If the housing market fails to rebound next year, the FHA would need as much as $43 billion from the U.S. Treasury to stay afloat, the report said. That would add to the combined $150 billion already spent to rescue seized housing finance giants Fannie Mae and Freddie Mac. The FHA's projected losses on loans made mostly before 2009 continue to increase, eating away its cash reserves. The agency is dangerously close to being in the same dire position as many homeowners — upside down on its housing finances. "They have no margin for error right now,"

Corker proposes alternative to MERS - Sen. Bob Corker, R-Tenn., hopes to create a new mortgage registration system to streamline the transfer of mortgages nationally.Corker said the registry would function similar to the Mortgage Electronic Registration Systems by creating a single, nationally recognized system for the transfer of loans. Corker included the MERS redux proposal in his Residential Mortgage Market Privatization and Standardization Act, a bill introduced this week to outline the mortgage finance market's transition from dominance by government-sponsored enterprises to a privatized system.The bill sets benchmarks for winding down the government-sponsored enterprises and aims to replace the qualified residential mortgage and risk retention rule with a 5% down-payment and a full mortgage documentation requirement.In a statement, Corker said the act will reduce the percentage of newly issued mortgage-backed securities by Fannie Mae and Freddie Mac every year for a decade. The plan essentially establishes a 10-year time line for privatizing the entire mortgage market, eventually eliminating the need for Fannie and Freddie. The Corker plan also aims to establish an industry-financed database for holding and providing performance and origination data on U.S. home mortgages.

AIG Resists Concessions to Banks for Obama Mortgage-Refinancing Plan - American International Group Inc. (AIG) is holding out as rival mortgage insurers accept policy changes that support the U.S. government push to stoke refinancing among borrowers with little or no home equity.  The bailed-out insurer’s United Guaranty unit is telling lenders it’s unwilling to offer the same protections on defective loans that competitors are granting to aid the Home Affordable Refinance Program, said four people with knowledge of the discussions. MGIC Investment Corp. (MTG) and Radian Group Inc. (RDN) have said they will forfeit some rights to revoke coverage under a plan that gets borrowers into less expensive loans.  President Barack Obama has said expanding the HARP program will make cheaper credit available to more homeowners at a time when mortgage rates are near record lows. The planned changes may also limit banks’ losses on loans that Fannie Mae, Freddie Mac or insurers say were poorly underwritten.  “The real issue here is that some of the lenders with fraudulent or poorly documented or undocumented mortgages want to use the HARP program to relieve themselves of the risk tied to their bad lending decisions,”

HARP Updates - Here are the new Home Affordable Refinance Program (HARP) guidelines from Fannie Mae: Selling Guide Announcement SEL-2011-12 As noted by the FHFA last month, the HARP deadline will be extended, there is no maximum LTV (except in certain cases), and most Reps and warrants have been eliminated. On the timing, according to Fannie Mae: "The expansion of the LTV ratio limits is effective for Refi Plus mortgage loans with application dates on or after December 1, 2011." Desktop Underwriter® (DU) will be updated in March. One of the keys is the elimination of most Reps and warrants, from Fannie Mae:  If I'm reading this correctly, the elimination of Reps and warrants for the original loan applies to Desktop Underwriter® (DU) and that will not be updated until March.

Setback for US mortgage refinancing plan - The US government’s revamp of a home mortgage refinancing initiative will probably not reach as many distressed borrowers as initially hoped after the changes prompted investors to bet that borrowers will continue to have difficulty getting new mortgages.Prices of mortgage bonds whose underlying loans carry high interest rates increased after US-controlled mortgage financiers Fannie Mae and Freddie Mac detailed their changes to the Home Affordable Refinance Programme, a reflection of investor sentiment that there will not be a wave of refinancings wiping out gains from securities trading above par. Analysts from Barclays to BNP Paribas said they were underwhelmed by the changes, which came about three weeks after the White House announced the Harp initiative would be retooled. “It was much weaker than expected,” Fannie and Freddie’s federal regulator, the Federal Housing Finance Agency, previously said the home loan agencies would lower fees and reduce lender liability for soured mortgages. The FHFA also said it would allow deeply “underwater” borrowers, those who owe significantly more on their mortgages than their homes are worth, to be eligible for the refinance initiative. But investors’ bets indicate that borrowers who owe more on their mortgage than their home is worth will continue to struggle to refinance out of expensive loans and take advantage of record low interest rates, undercutting US policymakers’ renewed emphasis on boosting the ailing US property market and helping troubled borrowers avoid default.

California attorney general’s office subpoenas Fannie, Freddie — Investigators with the California attorney general's office have subpoenaed information from mortgage titans Fannie Mae and Freddie Mac as part of a wide-ranging inquiry into lending and foreclosure practices in the state. The subpoenas ask the government-controlled finance companies to answer a series of questions about their activities in California, including their roles as landlords who own thousands of foreclosed properties. The attorney general's office is also seeking details of Fannie and Freddie's mortgage-servicing and home-repossession practices, according to a person familiar with the matter. In addition, investigators want to learn more about the companies' purchases and sponsorship of securities holding "toxic mortgages" in the Golden State, said the person, who was not authorized to speak on the matter and requested anonymity. Fannie and Freddie declined to comment on the investigation. Shum Preston, a spokesman for state Atty. Gen. Kamala D. Harris, also declined to comment.

Top House Democrat demands explanation of penalties for late foreclosures - A top House Democrat is questioning why government-controlled Fannie Mae and Freddie Mac charged mortgage servicers millions of dollars in penalties for not moving fast enough on foreclosures.  House Overnight and Government Reform Committee ranking member Elijah Cummings (D-Md.) sent a letter Wednesday to Edward DeMarco, acting director of Federal Housing Finance Agency (FHFA), the regulator of Fannie and Freddie, requesting information about $150 million in fees the troubled mortgage giants charged mortgage servicing companies last year exceeding foreclosures timelines. “I am concerned that these penalties, at least some of which were ordered by the Federal Housing Finance Agency (FHFA), may have contributed to widespread abuses by mortgage servicing companies and law firms attempting to meet arbitrary deadlines to expedite foreclosures,” Cummings wrote. “The size and timing of these penalties, raise serious questions about whether FHFA may be more interested in expediting foreclosures to clear its books than protecting the rights of homeowners,” he wrote.

Bank Excuses on Foreclosure Growing Stale - The Bank of America1 lawyer laid down a patented rhetorical move heard in courts across America. Your Honor, this Orange County, N.Y., homeowner — a New York City police officer — didn’t make enough money to qualify for a mortgage modification. He didn’t send us the right documents.  He didn’t, he didn’t, he didn’t, and so we should be allowed to foreclose2.  Justice Catherine M. Bartlett of New York State Supreme Court cut off the lawyer. You, she said, are telling me lies. “Bank of America got a bailout, and this is an outrage, how this man has been treated,” she said. “Hard-working, middle-class Americans are trying to make it, trying to refinance with your bank.”  Either bank officials show up in person, the justice said, or I’m going to order them “here in handcuffs.”

More Evidence That Judges Have Had it With Banks -  Yves Smith - Today, we linked to an article in the New York Times that illustrates a considerable change in the attitude of some judges in the wake of the robosigning scandal. Before, the assumption was that of course, the bank was right and any borrower trying to block a foreclosure had better have an awfully compelling case. But a lot of judges were stunned by the level and institutionalization of bank abuses of procedure. And in a small, happy note, some of the employers of the worst foreclosure mills are finally cutting them lose. Per Michael Olenick, Fannie Mae has ceased doing business with the Baum law firm in New York (the one with the now notorious 2010 Halloween party that made fun of mortgage borrowers fighting foreclosures as future homeless people). We first got wind of this decision below from Matt Weidner. Frankly, it reads like a parody, but we got it from April Charney, and it does have the stamps you’d see on the real deal. I’m sure you’ll enjoy it even if it is an artful fabrication, and even more if someone with access to Pacer can confirm that it is genuine. Phillips v US Bank, N.a., Sup Ct Carroll Cty Ga.20111102

Nevada Attorney General Masto Files 606 Count Criminal Indictment Against Two Title Officers (Updated: Lender Processing Services Employees) - 11/16/2011 - Yves Smith - The Nevada attorney general Catherine Cortez Masto has just filed a 606 count indictment against two title officers in a single county, Clark County, for supervising the filing of tens of thousands of fraudulent documents in a robo-signing scheme.  According to the indictment, defendant Gary Trafford, a California resident, is charged with 102 counts of offering false instruments for recording (category C felony); false certification on certain instruments (category D felony); and notarization of the signature of a person not in the presence of a notary public (a gross misdemeanor). The indictment charges defendant Gerri Sheppard, also a California resident, with 100 counts of offering false instruments for recording (category C felony); false certification on certain instruments (category D felony); and notarization of the signature of a person not in the presence of a notary public (a gross misdemeanor)… The indictment alleges that both defendants directed the fraudulent notarization and filing of documents which were used to initiate foreclosure on local homeowners. On the one hand, this indictment is not as gratifying, say, as busting Angelo Mozilo. On the other hand, if low level supervisors in bank frauds face the risk of serving time, you are going to find a ton fewer people willing to take that job.   In addition, as mob prosecutions have shown again and again, you start by going after the foot soldiers in the hope that they roll people higher up on the food chain.  And at a minimum, this action says that the law and due process matter, and violations, particularly large scale, systematic violations, can and will be punished.

First Felony Charges Brought Against Robosigners - Up until now, fraudclosure and robosigning were both merely civil offenses, and as such the banks were actively doing all they could to bury any and all pending litigation under a large settlement umbrella, wash their hands of the whole affair and move on, with nobody in danger of actually walking the plank and certainly not in danger of going to jail. That has all changed as of now, following a Nevada Grand Jury handing down criminal indictments against two title officers employed by Lender Processing Services Inc. for allegedly directing and supervising a robo-signing scheme, in which documents filed in foreclosure cases were signed without proper legal review, Nevada Attorney General Catherine Cortez Masto said Wednesday. The case which, if won on behalf of the plaintiffs, could easily mean several lifetime sentences for one Linda Green, is likely just the beginning of a wave of criminal charges against the thousands of robosigners involved at every stage of housing bubble, and quite possibly is starting as a midlevel fishing expedition which will see gradual escalation up the ranks as the "robotic" ones rat each other out in succession until the elevator goes to the very top floor. Just which floor that is remains to be see although somehow we have a feeling it will be found in the Bank of America tower. The full indictment is below. Needless to say every single Bank of America in-house counsel is feverishly reading this right now, as the feces just got real for both Brian Moynihan and Ken Lewis.

Nevada Attorney General Catherine Cortez Masto Cracks Open the Financial Crisis - Learn the name Catherine Cortez Masto, because she just took a big leap in front of every public servant in the country in terms of restoring faith in government. As Nevada AG, she actually indicted someone for blowing up our housing system. Specifically, she handed down 606 counts of felony or gross misdemeanor indictments on robo-signing against two employees of big bank subcontractor Lender Processing Services. It’s pretty clear from the indictment that these are mid-level employees, one level up supervisors of fraud rather than top CEOs. And yet, even if this were as far as it goes, it would still be a big deal. These would be the only charges served involving the housing crisis and its link with the structurally corrupt securitization chain so far. By itself, these indictments signify that the fraudulent foreclosure game is over for the big mortgage servicers in Nevada, which is the center of the foreclosure epidemic. It says the rule of law matters, in at least one corner of the country. But you don’t throw 606 counts against someone if all you’re going for is jail time for that person; this is about starting at the bottom, and flipping people. It could be the takedown of the mortgage servicer mafia, and then back to the origination.  The Nevada AG office has said they will follow the trail as far as it goes. If banks sanctioned the alleged robo-signers’ activities, Kelleher said, they could be the subject of future actions. “Our charge is to prosecute criminal activity by whomever may be committing it,” he said. “There’s no provision under the law for an industry to collectively decide to circumvent Nevada statutes.”

In Response, LPS Admits to Robo-Signing Deficiencies for Indicted Ex-Employees - Responding to the indictment of two of its employees in a mass robo-signing scheme, Lender Processing Services, a mortgage document processing company, appeared to admit to flaws in its foreclosure documentation process. In their statement on the indictment, LPS acknowledged that they were told of an inquiry by Nevada Attorney General Catherine Cortez Masto, and that they were cooperating fully with the investigation. They added: Earlier this month, the Attorney General’s office confirmed that the company was not a target of this inquiry. The Nevada Attorney General has elected to charge two Lender Processing Services (NYSE: LPS) employees for document execution and notarization practices related to notices of default and deeds of trust filed in Clark County, Nevada from 2005 to 2008. Based on the company’s reviews, LPS acknowledges the signing procedures on some of these documents were flawed; however, the company also believes these documents were properly authorized and their recording did not result in a wrongful foreclosure.

Arkansas Bankruptcy Ruling Slows Foreclosures - A ruling in a Chapter 13 bankruptcy case in Jonesboro, Arkansas, could have a significant impact on how mortgage foreclosure cases are handled in that state. According to TheCityWire.com, the Chapter 13 bankruptcy cases involve the foreclosure of homes with mortgages through J.P. Morgan. In their Chapter 13 repayment plans, the filers apparently did not include fees associated with the foreclosure of their homes, including court and administrative fees. J.P. Morgan, it seems, felt that it was owed those costs and so objected to the repayment plans. But after hearing arguments on the issue, the bankruptcy judge ruled in favor of the debtors.  That decision was based on compliance with Arkansas’ non-judicial foreclosure laws.  J.P. Morgan’s foreclosures in Arkansas reportedly fell into the non-judicial category, but, according to the bankruptcy judge, did not follow the state’s laws for such proceedings. The problem, according to sources, is that J.P. Morgan was not properly licensed to conduct business in Arkansas.  The ruling could have significant impact on others fighting foreclosure and/or filing for Chapter 13 bankruptcy protection in Arkansas. The ruling has also affected those purchasing foreclosed homes.  Because title insurance issuers refuse to insure titles when the home sale did not comply with state law, any foreclosed property that passed through the non-judicial foreclosure process could be in limbo.

The Heirs of Karl Lleywellyn: the PEB Report, Green Cheese, and the Hijacking of American Law (Part I) - This last week the Permanent Editorial Board of the Uniform Commercial Code came out with a report bering the none-too-thrilling title of "Report on Application of the Uniform Commercial Code to Selected Issues Related to Mortgage Notes". There's an awful lot to say about this awful document, and I'm not going to attempt to cover it all in a single blog post. This post is going to cover what the report is, what authority it has, and why it is completely irrelevant (namely that it deals with negotiable notes, when virtually all mortgage notes are non-negotiable). Subsequent posts will deal with the substantive flaws in the report and with the motivation behind the report and with the way the uniform law making process has become completely hijacked by monied interests. There are two critical takeaways from this post. First, it is important to understand that the PEB report is not law. It is not authoritative or binding. The PEB does not determine what the law is or what the Uniform Commercial Code means or does not mean.  Second, it is important to understand that the PEB report is utterly irrelevant because by its own terms it only addresses the enforceability of "negotiable" mortgage notes, and virtually all mortgage notes are non-negotiable. Therefore, even if everything in the PEB report were correct (which it ain't), it would have as much real world application as a report on the enforceability of mortgage notes made of green cheese.

The Heirs of Karl Lleywellyn: the PEB Report, Green Cheese, and the Hijacking of American Law (Part II) What motivated the Permanent Editorial Board for the Uniform Commercial Code to issue its ridiculous report on the enforceability of negotiable mortgage notes (discussed in the previous post in some detail) when virtually no mortgage notes are negotiable? Why go to all the effort and fuss to issue an irrelevant report?   The report is an attempt to paper over all of the legal and paperwork snafus that have gummed up the foreclosure system. The report is an attempt to put a finger on the scale of justice in favor of the banks in foreclosure litigation. (I hope ALI members who read this understand just what a rogue body the PEB has become; I don’t think this is a policy that the ALI membership as a whole would support.)   The authors of the PEB report are like the nameless, cautious imperial officer.  They are lawyers who have realized that there’s a real danger to the banks in the foreclosure process because the banks failed to comply with the law (the bankers themselves don’t get this--for them this is all technicalities that don’t or shouldn’t matter.

The Heirs of Karl Lleywellyn: the PEB Report, Green Cheese, and the Hijacking of American Law (Part III) - As I noted in the previous posts on this thread (here and here), I think the Permanent Editorial Board for the UCC's report on the enforceability of mortgage notes is simply irrelevant because it deals with negotiable notes, and virtually all mortgage notes today are not negotiable. But even if the notes were negotiable, there are still some further flaws in the report itself. I'm not going to attempt a complete catalogue. But I will point out some two highlights:  the failure to address the interaction of the UCC with other law, such as real property law and trust law and agency law; and the failure to address the evidentiary issues that are at the heart of the foreclosure documentation problems. 

Soured on Saurman - Elected justice moves swiftly. The Michigan Supreme Court handed down its opinion in Residential Funding Co. v. Saurman on Wednesday, a couple of weeks after oral argument. They were in a rush to get the opinion out, it seems. Unfortunately, it's a terrible opinion. The Michigan Supreme Court reversed the appellate court to hold that MERS has the power to conduct non-judicial foreclosures (foreclosure by advertisement) in Michigan. To reach this conclusion, the Michigan Supreme Court had to conclude that MERS had an interest in the indebtedness--that is an interest in the note.  MERS, however, expressly disclaims any interest in the note. So it took some acrobatics and legerdemain and outright tautology to get no to mean yes. Here's how they did it: The Michigan Supreme Court argued that MERS had an interest in the indebtedness not via an ownership interest in the note, but because as record holder of the mortgage MERS owned a lien that it could foreclosue on if there was a default on the mortgage. 

Banks cheated vets, lawsuit claims - CNN Video

Winnebago County recorder still finds instances of ‘robo-signing’ -  In late 2010, the furor over “robo-signers” revealed the complicated — and occasionally sloppy, if not entirely negligent — mountains of paperwork that accompany mortgages and the process of foreclosure. Several of the largest banks, including Wells Fargo, JPMorgan Chase and Bank of America, halted foreclosures for several months in states that don’t use the court system in order to check the accuracy of the documents in their foreclosure pipeline. In Illinois, foreclosures are processed through the courts so the foreclosure wave continued unabated. And Winnebago County Recorder Nancy McPherson believes she has found evidence that “robo-signing” is still rampant here in the Rock River Valley. McPherson is one of 12 county recorders collecting evidence of mortgage document fraud for Illinois Attorney General Lisa Madigan. She joined the wave of state attorneys general investigating foreclosures in May when she issued subpoenas against Lender Processing Services and Nationwide Title Clearing, two Florida-based companies that provide “document preparation services” for mortgage lenders to use against borrowers who are in default, foreclosure or bankruptcy. McPherson’s office sampled a small number of foreclosure documents in her office and found hundreds of apparent forgeries.

Foreclosure Crisis Is Far From Over, Report Finds - Five years in, the nation is less than halfway through its foreclosure crisis, the nonpartisan Center for Responsible Lending warned in a report released Thursday. "For people that think we're out of the woods, they need to kind of rethink that premise," Roughly 42.2 million Americans took out a mortgage loan between 2004 and 2008. By February of this year, 2.7 million of those households, or 6.4 percent, had lost their home to foreclosure. CRL estimates that an additional 3.6 million households, or 8.3 percent, are at "immediate, serious risk" of losing their homes. And that estimate is probably lowballing the problem, the researchers said: CRL's research only extends through February 2011, and it excludes both loans originated outside the given time-frame and loans that are not yet seriously delinquent. What exactly is pushing homeowners to the brink? Researchers found the type of mortgage a borrower has can have a greater impact on the borrower's ability to stay in their home than even income or credit history.This trend has had particularly adverse affects for minority homeowners. Higher-income Latinos are three times more likely to lose their homes to foreclosure than their white counterparts, according to the report. . In low-income communities, minority foreclosure rates also eclipse those of white borrowers

Read CRL on Disparities in Mortgage Lending - The Center for Responsible Lending's research team has produced Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. They argue: 1) The nation is not even halfway through the foreclosure crisis. Among mortgages made between 2004 and 2008, 6.4 percent have ended in foreclosure, and an additional 8.3 percent are at immediate, serious risk. (2) Foreclosure patterns are strongly linked with patterns of risky lending. The foreclosure rates are consistently worse for borrowers who received high-risk loan products that were aggressively marketed before the housing crash, such as loans with prepayment penalties, hybrid adjustable-rate mortgages (ARMs), and option ARMs. Foreclosure rates are highest in neighborhoods where these loanswere concentrated. (3)The majority of people affected by foreclosures have been white families. However, borrowers of color are more than twice as likely to lose their home as white households. These higher rates reflect the fact that African Americans and Latinos were consistently more likely to receive high-risk loan products, even after accounting for income and credit status.

Mortgage Market Logjam Crimps Economy - Five years ago, it was too easy to get a mortgage in the U.S. Today, it's probably too hard. That is frustrating Federal Reserve officials who see boulders in the mortgage market blocking the benefits of low interest rates from flowing through to the economy. Lenders are offering 30-year fixed-rate mortgages below 4%. Compared to typical family incomes, houses are more affordable than in decades. Yet home sales are languishing. A National Association of Realtors' survey found 15% of real estate agents said their last contract didn't close because the buyer couldn't get a loan."I turn away a buyer every 48 hours who would have been considered incredibly creditworthy...by my father and grandfather," Of course, mortgage brokers rarely celebrate the sagacity of banks or investors who ultimately buy mortgages. But data bolster Mr. Barnes's complaint. Fed surveys of bankers show they lifted the bar to making mortgages sharply during the panic of 2008 and 2009—not only for subprime borrowers, but for prime borrowers, those with good credit histories and sufficient income to cover their loans. Banks no longer are tightening standards, but very few have relaxed them.

Housing Wins Higher FHA Mortgage Limits - The U.S. housing industry has scored a victory with House and Senate votes to raise the size of mortgages backed by the Federal Housing Administration to $729,750. The measure split Republicans, many of whom supported retaining the lower limit of $625,500. As a result, efforts to restore the higher limit fell short until the Senate attached an increase to a package of spending bills that were passed yesterday by both the House and Senate. The higher FHA limit is expected to become law after the president signs the spending measures, which he must do by the end of today to avoid a government shutdown. “Restoring the higher loan limits for the FHA will provide homeowners and homebuyers with safe and affordable financing, while providing a much-needed boost to housing markets all around the country,” James W. Tobin, chief lobbyist for the National Association of Home Builders, wrote in a Nov. 16 letter to Speaker John Boehner, an Ohio Republican. Lawmakers who backed higher limits said withdrawing federal support could further undermine a housing market still struggling to recover from the 2008 credit crisis.

Don’t Buy Mortgage Industry Hype on Mortgage Modifications - The Mortgage Bankers Association (MBA) boasts that its members have modified over five million mortgages over the past few years. As a data analyst focused on patterns of foreclosure fraud, I’ve analyzed tens of millions of pieces of information. I was willing to take the MBA’s claims at face value but, years ago, came to the conclusion that the MBA and their members have a severe credibility gap.  Remember, the reason for advocating mods is that, properly structured, they are a win-win: investors take a lower loss than they would in a foreclosure, the borrower stays in his house, and another real-estate-price-depressing sale is averted.  But this “everyone comes out ahead” is not what I’ve seen. I’ve been able to check modifications, since they are recorded in public records. It quickly became apparent that while theses modifications are, at best, worthless, and more often than not border on an extension of the same predatory practices that resulted in the original mortgages. These modifications are to mortgages as vultures are to predators, another opportunity to take one last bite out of people trying to keep their homes. Banks are “modifying” lots of loans, but to terms even more favorable to banks.

Occupy Homes: New Coalition Links Homeowners, Activists in Direct Action to Halt Foreclosures - A loose-knit coalition of activists known as "Occupy Homes" is working to stave off pending evictions by occupying homes at risk of foreclosure when tenants enlist its support. The movement has recently enjoyed a number of successes. We speak with Monique White, a Minneapolis resident who is facing foreclosure and recently requested the help of Occupy Minneapolis. Now two dozen of its members are occupying her home in order to stave off eviction. We are also joined by Nick Espinosa, an organizer with Occupy Minneapolis, and Max Rameau, a key organizer with Take Back the Land, who for the past five years has worked on direct actions that reclaim and occupy homes at risk of foreclosure. "The banks are actually occupying our homes," Rameau says. "This sets up for an incredible movement, where we have a one-two punch. On the one hand, we’re occupying them on their turf, and on the other, we’re liberating our own turf so that human beings can have access to housing, rather than them sitting vacant so that corporations can benefit from them sometime in the future." [includes rush transcript]

MBA: Mortgage Delinquencies decline slightly in Q3 - The MBA reported that 12.42 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q3 2011 (delinquencies seasonally adjusted). This is down slightly from 12.87 percent in Q2 2011.  From the MBA: Delinquencies Decrease, Foreclosures Rise in Latest MBA Mortgage Delinquency Survey The seasonally adjusted delinquency rate for mortgage loans on one-to-four-unit residential properties fell to 7.99 percent in the third quarter of 2011, according to data from the Mortgage Bankers Association’s (MBA) National Delinquency Survey. This graph shows the percent of loans delinquent by days past due. Loans 30 days delinquent decreased to 3.19% from 3.46% in Q2. This is the lowest level since early 2007. Delinquent loans in the 60 day bucket decreased slightly to 1.30% from 1.37% last quarter. This is the lowest level since Q1 2008. There was a decrease in the 90+ day delinquent bucket too. This decreased to 3.50% from 3.61% in Q2 2011. This is the lowest level since 2008. This decrease was probably due to the pickup in foreclosure actions. The percent of loans in the foreclosure process was unchanged at 4.43%. So the delinquency rate improved in each bucket (30+, 60+, 90+ days), but the percent of loans in the foreclosure process was unchanged. The key problem remains the very high level of seriously delinquent loans and loans in the foreclosure process.

Mortgage Delinquencies by Loan Type - By request, the following graphs show the percent of loans delinquent by loan type: Prime, Subprime, FHA and VA. First a table comparing the number of loans in 2007 and Q3 2011 so readers can understand the shift in loan types. This graph shows the percent of loans delinquent by days past due. Loans 30 days delinquent decreased to 3.19% from 3.46% in Q2. This is the lowest level since early 2007. Delinquent loans in the 60 day bucket decreased slightly to 1.30% from 1.37% last quarter. This is the lowest level since Q1 2008. There was a decrease in the 90+ day delinquent bucket too. This decreased to 3.50% from 3.61% in Q2 2011. This is the lowest level since 2008. This decrease was probably due to the pickup in foreclosure actions. The percent of loans in the foreclosure process was unchanged at 4.43%. Note: Scale changes for each of the following graphs. The second graph is for all prime loans. Since there are far more prime loans than any other category (see table above), about half the loans seriously delinquent now are prime loans - even though the overall delinquency rate is lower than other loan types. This graph is for subprime. This category gets most of the attention - mostly because of all the terrible loans made through the Wall Street "originate-to-distribute" model and sold as Private Label Securities (PLS). This graph is for FHA loans. The delinquency rate decreased in Q3 and has mostly been declining the last couple years. Some of the decline is because most of the FHA loans were made in the last few years, not in the 2004 to 2006 period like subprime. The last graph is for VA loans.

LPS: House Price Index Shows 3.8 Percent Year-Over-Year Decline in August - The LPS HPI is a repeat sales index that uses public disclosure by county recorders or loan origination data for purchase loans (if the sales price isn't disclosed).  From LPS: Lender Processing Services’ Home Price Index Shows 3.8 Percent Year-Over-Year Decline in U.S. Home Prices in August; Nearly 30 Percent Off Market Peak “In August sales transactions data, we saw the national average home price decline 0.9 percent, following a decline of 0.4 percent in July. This ended a series of increases during the spring of this year; a pattern that has occurred each year since 2009. In addition, the early, partial data for September sales indicates a likely further decline of approximately 1.1 percent to come. As of the end of August, the national average home price was $205,000. This is down 3.8 percent from August last year, and down 0.4 percent from January 1, 2011.” Home prices in August continued the downward trend begun after the market peak in June 2006. The LPS HPI average national home price has declined 28.3 percent since then. The total value of U.S. housing inventory covered by the LPS HPI stood at $10.6 trillion at the peak. As of the end of August 2011, it was $7.65 trillion. During the period of most rapid price changes, from July 31, 2007, through December, 2009, prices declined $56,000 from $282,000.

LPS: Prices Are 28.3% Below Peak in Mid-2006  - National home prices have been on the decline since June 2006 with a few bursts of increases, which Lender Processing Services (LPS) attributes to seasonal trends. Overall, prices have declined 28.3 percent since their peak in June 2006, according to LPS’ new home price index. From July 2007 to December 2009, prices declined an average of 13.8 percent annually. The total decline for this period of rapid decline was $56,000, according to LPS. After December 2009, prices began to decline at a slower pace, posting an annual decline of 3.6 percent and falling a total of $20,000 from December 2009 to the present. LPS released its August home price index Monday. The index tracks prices in more than 13,500 ZIP codes. “Unlike many other indices, the LPS HPI tracks home prices at the date of sale on a month-by-month basis,” explained Kyle Lundstedt, managing director for LPS Applied Analytics. “Our methodology allows us to detect market changes sooner than others and to provide the financial industry with the most accurately timed price information.” LPS reports home prices fell 0.9 percent across the nation in August, after a smaller 0.4 percent decline the previous month. August prices were 3.8 percent below last year’s prices

AIA: Architecture Billings Index increased in October - This index is a leading indicator for new Commercial Real Estate (CRE) investment.  From AIA: Architecture Billings Index Moves Upward After a sharp dip in September, the Architecture Billings Index (ABI) climbed nearly three points in October. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the October ABI score was 49.4, following a score of 46.9 in September. This score reflects an overall decrease in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 57.3, up from a reading of 54.3 the previous month.  This graph shows the Architecture Billings Index since 1996. The index increased to 49.4 in October from 46.9 in September. Anything below 50 indicates contraction in demand for architects' services. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

NAHB Builder Confidence index increases in November - The National Association of Home Builders (NAHB) reports the housing market index (HMI) increased in November to 20 from 17 in October. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Rises Three Points in November Builder confidence in the market for newly built, single-family homes rose by three points to 20 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for November, released today. The gain builds on a revised three-point increase in October, and brings the confidence gauge to its highest level since May of 2010.  This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the November release for the HMI and the September data for starts (October housing starts will be released tomorrow). Both confidence and housing starts have been moving sideways at a very depressed level for several years.

Housing Starts decline slightly in October - From the Census Bureau: Permits, Starts and Completions: Privately-owned housing starts in October were at a seasonally adjusted annual rate of 628,000. This is 0.3 percent (±10 9%)* below the revised September estimate of 630,000, but is 16.5 percent (±10.7%) above the October 2010 rate of 539,000. Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 653,000. This is 10.9 percent (±1.6%) above the revised September rate of 589,000 and is 17.7 percent (±3.4%) above the October 2010 estimate of 555,000. Total housing starts were at 628 thousand (SAAR) in October, down 0.3% from the revised Septmeber rate of 630 thousand (SAAR). Most of the increase this year has been for multi-family starts. Single-family starts increased 3.9% to 430 thousand in October. The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have been mostly moving sideways for about two years and a half years - with slight ups and downs due to the home buyer tax credit. Multi-family starts are increasing in 2011 - although from a very low level. This was well above expectations of 605 thousand starts in October.

Multi-family Starts and Completions, and Quarterly Starts by Intent - Since it usually takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year - it makes sense that there will be a record low, or near record low, number of multi-family completions this year. The following graph shows the lag between multi-family starts and completions using a 12 month rolling total. The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010. The rolling 12 month total for starts (blue line) has been increasing all year. It now appears multi-family starts will be in the 150 thousand to 160 thousand unit range in 2011, up from 104 thousand units in 2010. That is a 50%+ increase in starts - but from a very low level. Completions (red line) appear to have bottomed. This is probably because builders are rushing projects to completion because of the strong demand for rental units. It is important to emphasize that even with a strong increase in multi-family construction, it is 1) from a very low level, and 2) multi-family is a small part of residential investment (RI). But this is bright spot for construction.

Residential Remodeling Index at new high in September - The BuildFax Residential Remodeling Index was at 141.4 in September, up from 138.6 in August. This is based on the number of properties pulling residential construction permits in a given month.  From BuildFax: Remodeling Activity Reaches Record Levels According to BuildFax Remodeling Index for September.  This is the highest level for the index (started in 2004) - even above the levels from 2004 through 2006 during the home equity ("home ATM") withdrawal boom. Note: Permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity. Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year. The remodeling index is up 34% from September 2010. This is the highest year-over-year increase in activity since the index started.

American Migration Reaches Record Low - The share of Americans who move their homes in a year has reached a record low, the Census Bureau reported today. From spring 2010 to spring 2011, just 11.6 percent of the people moved residences, the lowest rate since the government began keeping track of migration in 1948. The difference between that rate and the 2009 rate of 12.5 percent was not statistically significant, but it was a far cry from its heights in the mid-20th century. From 1951-52, for example, 20.3 percent of Americans moved.The record low moving rate was primarily driven by a drop in the share of people moving from one home to another within the same county.Many economists are much more concerned, however, by the low share of Americans who are moving between counties and between states. Declines in this type of migration have been partly blamed for continued high levels of unemployment: stuck in underwater homes they cannot sell, many unemployed workers are unable to move to areas where there are more job opportunities. Among the people who moved within the same county, 18.6 percent did so for job-related reasons; among those who moved between counties, 35.8 percent followed job opportunities.(see map)

Why aren't Americans moving anymore? - A new Census report finds that the percentage of Americans who are changing residences has dropped to an all-time low. Just 11.6 percent of Americans moved last year, down from 12.5 percent in 2009 and way down from 18.6 percent in 1987. In fact, the Census tables show that geographic mobility has been declining steadily since the end of World War II, when one-fifth of all Americans regularly moved. Why is this? There are a couple of things going on here. As Catherine Rampell observes, much of the current drop has been driven by a decline in people switching homes within counties. For that, blame the housing bust. Foreclosures and falling prices have caused home sales to plummet. Notice that many of the states that have historically seen the most churn — such as Florida, California, Arizona, and Nevada — were the states that were hammered by the subprime crisis: But that’s not the only reason. There’s also been a marked drop in Americans who move long distances — and across state lines — to seek out new jobs. A huge part of the story is that there just aren’t as many new jobs available these days. But it’s also possible that people are locked into their homes. The Census found that people living in rental units were 4.7 times more likely to move than those who owned homes.

Vital Signs: Home Heating Costs to Decline -- Home heating costs for many Americans will be lower this year. Natural gas futures closed on Friday at $3.58 for a million British thermal units, down 20% from early June. In a typical November, natural gas prices start rising in anticipation of higher demand, but this year a supply glut is weighing on the market. It has been 10 years since prices were this low heading into the winter.

Industrial Production increased 0.7% in October, Capacity Utilization increased - From the Fed: Industrial production and Capacity Utilization -Industrial production expanded 0.7 percent in October after having declined 0.1 percent in September.  Factory output increased 0.5 percent in October after having risen 0.3 percent in September. Production at mines climbed 2.3 percent in October, while the output of utilities edged down 0.1 percent. Capacity utilization for total industry stepped up to 77.8 percent, a rate 2.1 percentage points above its level from a year earlier but 2.6 percentage points below its long-run (1972--2010) average. . This graph shows Capacity Utilization. This series is up 10.5 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 77.8% is still 2.6 percentage points below its average from 1972 to 2010 and below the pre-recession levels of 81.3% in December 2007. Note: y-axis doesn't start at zero to better show the change. The second graph shows industrial production since 1967. Industrial production increased in October to 94.7, however September was revised down. The consensus was for a 0.4% increase in Industrial Production in October, and an increase to 77.6% for Capacity Utilization.

Vital Signs: Factories Boost Output - Factories boosted their production last month. The Federal Reserve’s manufacturing production index climbed 0.5% from September, putting the measure 4.1% above its year-earlier level. The Fed’s overall index of industrial production rose 0.7% as a 2.3% jump in mining activity more than made up for a 0.1% decline in utility output.

Misc: Empire Manufacturing survey improves, Farmland Prices "surge" - From the NY Fed earlier today: Conditions for New York manufacturers held steady in November- The Empire State Manufacturing Survey indicates that conditions for New York manufacturers held steady in November. After a string of five consecutive months of negative readings, the general business conditions index rose nine points, to 0.6. While the new orders index edged down to -2.1, indicating that orders were a little lower, the shipments index rose to 9.4, indicating an increase in shipments. The inventories index fell to -12.2 — a sign that inventory levels dropped....Employment indexes were mixed: employment levels were slightly lower and the average workweek slightly longer. And from the Chicago Fed: Third Quarter Midwest Farmland Values Surge At 25 percent, the year-over-year gain in agricultural land values in the third quarter of 2011 for the Seventh Federal Reserve District was the largest in just over three decades. Moreover, at 7 percent, the quarterly increase in the value of “good” farmland matched the highest since the late 1970s.

Philly Fed Manufacturing Index Slips -- Mid-Atlantic manufacturing activity remained in expansion mode this month but just barely, according to a report released Thursday by the Federal Reserve Bank of Philadelphia; expectations for the future, however, surged. The Philadelphia Fed said its index of general business activity within the factory sector has fallen to 3.6 in November. In October, the index had jumped to 8.7 from -17.5 in September and a very contractionary -30.7 in August. Economists surveyed by Dow Jones Newswires expected the November index to remain at 8.7. Readings under zero denote contraction, and above-zero readings denote expansion. The Philly Fed report follows Tuesday’s report from the Federal Reserve Bank of New York that New York state manufacturers also have been just treading water this month. Within the Philly Fed survey, the subindexes outside employment generally slowed this month. The new orders index dropped to 1.3 from 7.8, while the shipments index fell back to 7.3 after surging to 13.6 in October from -22.8 in September.

L.A. Port Exports Set New Record High in October - The number of loaded export containers leaving the Los Angeles Port for overseas destinations reached a record high in October of 193,547 TEUs (20-foot equivalent units), beating the previous record of 192,850 TEUs in March of this year (see chart above).  October exports this year are 28.14% ahead of the same month last year, and above the previous month by 9.4%. Loaded import containers in October were 5.5% above the year earlier level, but fell from September by 1%.   Global demand for U.S. export products shipped from the L.A. Port has never been higher, fueled by a strong worldwide economic expansion.  

LA Port Traffic in October: Exports increase year-over-year, Imports down - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported - and possible hints about the trade report for October. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.  On a rolling 12 month basis, inbound traffic is down 0.6% from September, and outbound traffic is up 0.3%. Inbound traffic is "rolling over" and this might suggest that retailers are cautious about the coming holiday season. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). For the month of October, loaded inbound traffic was down 7% compared to October 2010, and loaded outbound traffic was up 3% compared to October 2010. Exports have been increasing, although bouncing around month-to-month. Exports are up from last year, but are still below the peak in 2008. Imports have been soft - this is the 5th month in a row with a year-over-year decline in imports.

Long Beach Container Traffic Plunges 20 Percent    - Container volume at the Port of Long Beach plunged 20.5 percent in October, reflecting the loss of services by several niche carriers in the U.S.-China trade lane.  Containerized imports plummeted 20.8 percent, exports were down 21.4 percent and empty containers fell 19.3 percent from October 2010. The past year has been a difficult one for carriers in the trans-Pacific =as severe overcapacity and weak demand resulted in a steady decline in freight rates.  The erosion of freight rates was especially difficult for niche carriers that operate small 3,000-TEU vessels, as their per-unit costs are higher than the larger carriers. Many of the larger carriers operate vessels of 8,000-TEU capacity or greater. Earlier this year, The Containership Co. went out of business. Niche carriers CSAV, Matson Navigation Co., Horizon Lines and Grand China Shipping each pulled a string of ships from the trans-Pacific, and those carriers were all calling in Long Beach.

Exports in the Recovery (II) - Following up on my previous post on the export contribution in the recovery (averaging 2.6 ppts since the trough), here are some additional observations. First, export growth in the current recovery has been substantially greater from the trough than in the last three recoveries.  Second, this characterization is less pronounced, but not overturned, once one takes into account the severity of the drop-off in exports during the recession. (And is less than that observed in the recovery from the 1990Q3-91Q1 recession).  Third, export growth has been substantially greater than in the past three recoveries even after accounting for the fact that there is some import content in US exports (vertical specialization). In fact, since vertical specialization declined in 2009, then exports adjusted for vertical specialization have rebounded even faster than unadjusted.

The 2011 Microrecession in U.S.-China Trade Data - Last week, the U.S. Census Bureau issued the latest data it collects on the balance of trade of goods and services between the United States and China. The chart below shows what we find when tracking the year-over-year growth in the amount of U.S. imports from China and U.S. exports to China from January 1985 through September 2011, which provides an indication of the relative economic health of both nations.  What we find in the chart above is that the rate of growth of what the U.S. imports from China was very low in September 2011, at what we would describe as being "near-recessionary" values, continuing the pattern we've been observing since June 2011.  This indicates that the economic sluggishness most people perceived during the summer of 2011 was real, because a growing economy would tend to pull in more imports.  But we also see that China's economy is also going through its own slowdown, although it appears to still be growing more strongly than the U.S. economy.

Business inventories flat while sales up – Businesses kept their stockpiles steady in September, marking the first time in nearly two years that they have not boosted their inventories. The Commerce Department said Tuesday that business inventories were unchanged in September after 20 consecutive monthly gains that stretched back to December 2009. Business sales rose 0.6% in September, the fourth consecutive gain. A slowdown in inventory building trimmed overall economic growth by 1 percentage point in the July-September quarter. Still, economists say a temporary decline isn't necessarily a bad sign. With sales strong, businesses will likely resume restocking depleted shelves in coming months and that should provide a boost to economic growth in the October-December quarter.  And a report last week showed that inventories held at the wholesale level actually fell 0.1% in September, the first decline since December 2009. The drop at the wholesale level in September was largely because companies cut their stockpiles of nondurable goods, such as farm products, petroleum and clothing. The decline at the wholesale level suggests that businesses were concerned that future sales could slow.

Retail Sales increased 0.5% in October - On a monthly basis, retail sales were up 0.5% from September to October (seasonally adjusted, after revisions), and sales were up 7.9% from October 2010. From the Census Bureau report:The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $397.7 billion, an increase of 0.5 percent (±0.5%) from the previous month and 7.2 percent (±0.7%) above October 2010. Retail sales excluding autos increased 0.6% in October. Sales for September were unrevised with a 1.1% increase.This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 19.5% from the bottom, and now 5.1% above the pre-recession peak (not inflation adjusted) The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 6.0% on a YoY basis (7.2% for all retail sales). This was well above the consensus forecast for retail sales of a 0.2% increase in October, and no change ex-auto.

Higher Retails Sales Inspire Cautious Optimism - The September surge in retail sales slowed in October, but there's still no sign of recession in U.S. consumer spending. Total retail spending rose 0.5% last month on a seasonally adjusted basis. That's a substantial deceleration from September's 1.1% pop. But ignoring September's unusual and unsustainable gain, October retail sales continue growing at a respectable clip. You can't read too much into any one data point (or data series), but if you're looking for clear-and-present signs of trouble for the business cycle you won't find it here, at least not today. Consumption decelerated in October, but it was the second-best month for growth since March. Even better, most corners of retail posted gains last month. That includes the cyclically sensitive realm of auto sales, which managed to rise 0.5%.  The annual pace of retail sales softened slightly last month to roughly 7.1%. Nonetheless, that's still comfortably in territory that's historically linked with economic expansions.

US Retail Sales Rise More Than Forecast on Electronics, Autos - Retail sales rose more than projected in October as American shoppers gave the economy a boost at the start of the fourth quarter.  The 0.5 percent gain, helped by the biggest jump in electronics purchases in two years, followed a 1.1 percent increase for September, Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg News called for a rise of 0.3 percent.  “Another recession is pretty unlikely,” . The report “suggests a very strong start to the quarter. We’ll continue expanding at a better pace.”  Another report showed producer prices fell for the first time in four months, which may make it easier for retailers to use discounts and maintain the sales momentum through the holiday shopping season. Gains in consumer spending, which accounts for about 70 percent of the economy, are vital to bolstering the recovery at a time when Europe’s debt crisis threatens to slow sales overseas.

You'll Never Guess The One Thing That Made Retail Sales So Strong - Earlier we mentioned how retail sales growth of 0.5% was well ahead of expectations of 0.3%.  Excluding autos the gap was even better: 0.6% vs. 0.2%. What drove the strong performance?  From Goldman: Retail sales increased by 0.5% (month-over-month), more than expected. Sales ex-autos increased by 0.6%, and "core" sales (ex-autos, gasoline and building materials) also gained 0.6%. The better than expected results suggest upside risk to our 2.0% Q4 GDP forecast. Large gains in sales for electronics and "non-store" retailers (online shopping) suggest that the introduction of Apple's latest iPhone likely accounted for much of the upside surprise to core retail sales.

The Good News Is Consumer Spending Is Up; The Bad News Is… On the surface, the latest consumer spending figures suggest that it’s not all doom and gloom out there. In fact, if you take a drive down to your local mall or strip center chances are you’ll see the parking lots full and shoppers filling up their carts with as many useless slave labored imported goods as they can get their hands on. According to economists this is a sign that the economy is bouncing back, and if we could just get more people to do the same thing we should return to booming growth in no time: Consumers are giving a modest lift to the economy. They spent more on trucks, electronics and building supplies in October to boost retail sales for the fifth straight month. The gains provide an encouraging start for the October-December quarter.“The consumer has to come through this holiday season if we are going to get back to more decent growth rates, and the early readings are those households have hit the stores quite strongly,”

Country by Country Per Capita Retail Space Comparison; Lowe's Takes 44% Earnings Hit on Store Closings; JC Penny Reports 3rd Quarter Loss; Retail Store Closing Roundup - Lowe's reported a 44% decline in store profits today and blamed store closings. What are other retailers doing?  First consider Store Closings Slam Lowe's Profit Lowe's Cos.' fiscal-third-quarter earnings fell 44% as store-closing charges masked the home-improvement retailer's slightly improved same-store sales. Please consider the decline in profits came on the heels of an outright 3rd Quarter Loss at JC Penny.J.C. Penney Co. reported a third-quarter loss, citing costs from an early-retirement plan amid weaker spending. 2011 Retail Store Closings Roundup - The number of U.S. retail industry store closings planned for 2011 will not be insignificant, particularly in an economy that is still plagued by high unemployment.  Many experts believe that the number of retail establishments per capita in the United States was excessive even before the economy recessed. According to the 2007 Economic Census, there were 1,122,703 retail establishments in the United States and a total of 14.2 billion square feet of retail space. Per Capita Retail Space Comparison:

  • US 46.6 square feet
  • India 2.0 square feet
  • Mexico 1.5 square feet
  • UK 23.0 square feet
  • Canada 13.0 square feet
  • Australia 6.5 square feet

Can the US consumer carry us all? - The US consumer is back, defying the odds and me. Last night we had October retail sales and results were good. From Calculated Risk: On a monthly basis, retail sales were up 0.5% from September to October (seasonally adjusted, after revisions), and sales were up 7.9% from October 2010. From the Census Bureau report: So, is this sustainable? In one sense yes, in another no. First the good news. This demand appears to have caught producers off guard, or, they have been managing inventories rather well. The September wholesale inventory number last week was low and the inventory sales ratio is also subdued:   This suggests that the unexpectedly strong (relatively) demand, will have to be met with an upswing in production rather than existing stocks. In turn, we could see extra jobs created that will add to the Christmas hiring season that has already matched pervious years. Also from Calculated Risk: I can see this mini-cycle continuing to make a small dent in unemployment (as well as support Chinese exports through year end). It is, not, however, a resilient bounce. And here is why. Check out these personal finance charts from the US Department of Commerce:

Retail Sales Reports Give Me Gas - It just doesn't get any more bullish than today's retail sales report. Or so you would think if you only read the mainstream media reports. "More spending at online stores such as Amazon and electronics and applicance stores boosted retail sales by 0.5% in October, following a strong 1.1% surge in September," shouted Marketwatch. "Retail sales rose more than projected in October as American shoppers gave the economy a boost at the start of the fourth quarter, "enthused Bloomberg.  The real story on this month's retail sales number isn't quite as bright as the captive media reports suggest. As always, they report just the seasonally adjusted, made up number. I like to start with the actual, not manufactured "impressionistic" number reported in the media. Actual sales were up 1.1% from September and 6.7% versus last October. Will someone please explain to me how an actual year to year gain of 6.7% translates to a seasonally adjusted year to year gain of 7.2%. They should be the same. The comparison is of two periods at the exact some point in the year. The impact of seasonal smoothing should be zero. Somehow, the application of seasonal fictionalization causes the annual rate of change to grow too. How cool is that!

Retail Sales: 'Real' Consumers Are In A Very Slow Recovery…The Retail Sales Report released this morning shows that retail sales in October were up 0.5% month-over-month (but the Census Bureau notes that the statistical confidence range is ±0.5%). The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes. The Tech Crash that began in the spring of 2000 had relatively little impact on consumption. The Financial Crisis of 2008 has had a major impact. After the cliff-dive of the Great Recession, the recovery in retail sales has taken us (in nominal terms) 5.1% above November 2007 pre-recession peak. Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function.The green trendline is a regression through the entire data series. The latest sales figure is 5.9% below the green line end point.The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 15.8% below the blue line end point.

Sears loss widens as sales fall - - Sears Holdings Corp's quarterly loss almost doubled as weak demand for gadgets and a reputation for run-down locations hurt sales at the operator of Sears department stores and the Kmart discount chain. The company, led by hedge fund manager Edward Lampert, has faced criticism for relying too heavily on cost-cutting to boost its bottom line, rather than upgrading its stores and improving customer service. Sales open at least a year fell 0.7 percent at Sears Domestic, 0.9 percent at Kmart and 7.8 percent at Sears Canada in the third quarter ended on October 29.

Wal-Mart profit below forecasts despite better sales - Wal-Mart Stores Inc's decision to absorb most of the rising food costs for its stressed U.S. shoppers and spend on its e-commerce business weighed on profitability, even as key U.S. sales rose for the first time in more than two years. Sales at U.S. discount stores open at least a year rose more than expected in the third quarter ended on October 31, ending a string of nine straight quarterly declines. Same-store sales have now risen for four months in a row. But visits to stores were once again down from a year earlier, even as shoppers, on average, spent more per visit. The results coincided with government reports that U.S. retail sales rose 0.5 percent in October, while wholesale prices fell 0.3 percent.

Gasoline prices remain at record highs for this time of year - Retail gasoline prices remained at record high levels for this time of year, but at least the oil rally finally cooled Monday, ending six straight weeks of gains for the commodity. Any slowdown in crude oil inflation is welcome news to American consumers, who are poised to pay a record $489.7 billion on gasoline this year by the calculation of Tom Kloza, chief oil analyst for the Oil Price Information Service. That's more than $100 billion above what they paid in 2010. U.S. drivers were paying an average $3.436 for a gallon of self-serve regular gasoline, according to the Energy Department's weekly survey of service stations. The U.S. average is up 1.2 cents from a week earlier and 54.4 cents from a year earlier. The old record for this time of year was $3.111 a gallon, set in 2007.

Gas Paradox: Falling Demand, Rising Prices - U.S. gasoline demand has dropped to a 12-year low, yet consumers are paying the highest-ever prices for this time of year. The reason: Rising global oil prices are in the driver’s seat. The paradox isn’t limited to the gasoline pump. Home-heating oil users will see record-high bills, despite using less fuel, according to an Energy Information Administration forecast. Diesel fuel prices are up 25% from a year earlier at record November levels, fueled by a powerful one-two punch of surging demand both in the U.S. and abroad, the EIA and analysts added. Prices for gasoline, diesel and heating oil are determined by global demand and worldwide crude prices. That notion is sometimes lost, with the emphasis misplaced on the U.S. benchmark, West Texas Intermediate crude, delivered at Cushing, Okla.However, WTI has been rising and is hovering near $100 a barrel. The European benchmark, Brent crude, is firmly in the realm of triple-digit prices and remains a chief barometer for the pricing of oil products like gasoline and diesel. Surprise news of the reversal of a major pipeline Wednesday will allow Cushing oil to freely flow to the major Gulf Coast refining region, freeing up the U.S. benchmark to rise to world market prices, analysts said. Many analysts see both oil benchmarks above $100 a barrel. That can only mean more pain for U.S. consumers, who already are facing some daunting circumstances.

The recovery in U.S. Heavy Truck Sales, and a forecast for November Auto Sales - First, here is an early forecast for November light vehicle sales from J.D. Power and Associates:  November new-vehicle retail sales are projected to come in at 791,900 units, which represents a seasonally adjusted annualized rate (SAAR) of 11.3 million units—the highest monthly selling rate in three and a half years.  Their total sales forecast would be 13.4 million (SAAR), and that would be the highest sales rate since August 2008 (excluding cash-for-clunkers in August 2009).  Growth in auto sales should make a nice positive contribution to Q4 GDP. Sales in Q3 averaged 12.45 million SAAR, and just looking at October and this forecast for November, sales will be up close to 7% in Q4 over Q3 (over 30% annualized). This graph shows heavy truck sales since 1967 using data from the BEA. The dashed line is current estimated sales rate.  Heavy truck sales really collapsed during the recession, falling to a low of 175 thousand in April 2009 on a seasonally adjusted annual rate (SAAR). Since then sales have almost doubled and hit 346 thousand (SAAR) in October 2011. This is the highest level since June 2007 (over 4 years ago). And this is still below the average of the last 20 years - and well below the peaks - so there is probably more growth in sales to come.

How Household Debt Contributes to Unemployment: Mian and Sufi - The weakness in household balance sheets and the associated pullback in spending are directly responsible for the lion’s share of employment losses in the U.S. economy. This deficiency remains the most significant impediment to a robust recovery. Our research suggests that 65 percent of the job losses from 2007 to 2009 came from the drop in household spending induced by the collapse in home prices and its effect on a highly levered household sector. The first observation we made was that there was a large amount of variation across the U.S. in household-debt levels just before the recession began. In areas that experienced strong increases in home values, debt skyrocketed from 2001 to 2007. However, there were many places that avoided the housing boom and experienced no significant house-price appreciation. In these areas, household-debt levels remained steady in the years before the recession began.  By examining the differences in household balance sheets as of 2006, we were able to tease out how the weak ones are affecting the economy. In a study with Kamalesh Rao of MasterCard Advisors, we showed that areas of high debt experienced a severe shock to house prices and spending from 2007 to 2010.

Producer Prices Ease - Wholesale inflation eased last month. The Labor Department’s producer price index fell 0.3% in October from September, pulled down by lower gasoline prices. Excluding food and energy prices, it was flat after rising the ten prevous months. Lower price pressures should come as a relief to companies that have struggled to pass higher prices on to consumers

CPI Down -0.1% for October 2011 - The October Consumer Price Index, which measures inflation, decreased -0.1% from last month. The overall decline was caused by a -2.0% energy decrease for the month. Food increased 0.1%. Gas alone decreased -3.1% in a month and food at home, or groceries, increased 0.1%. Core CPI, or price increases minus food and energy costs, rose 0.1%. Core CPI is a Federal Reserve inflation watch number. For the year, not seasonally adjusted, the Consumer Price Index for all Urban Consumers (CPI-U) has risen 3.5%. In September, CPI increased by 0.3%. Core inflation is staying reasonably flat, at March lows. Below is the monthly percentage change in CPI-U, all items. U stands for Urban consumers. The core CPI, or all items less food and energy, percentage increase was 0.1%. August core CPI was 0.2%. Don't get too excited, medical care increased 0.5% in a month, while used cars dropped -0.6%. You can more cheaply drive a beater rust bucket while trying to pay for health care. New autos also dropped -0.3%. Transportation overall dropped -1.1%.  Shelter is up 0.2%, with rent increasing 0.4%. Rent is the biggest monthly expense so this is not good news. Home owners equivalent rent of primary residence also increased 0.2% but hotels, motels dropping -1.7%. Clothing increased 0.4% offsetting it's last month's dramatic -1.1% decrease.

Job creation by small firms: Age matters - Atlanta Fed's macroblog - Talking about the role of the average or typical small business in job creation is problematic. Discussing it is challenging because job creation is highly skewed along the age dimension of small firms. This point was driven home in a nice presentation (featuring the chart below) by John Haltiwanger at last week's small business conference cosponsored by the Atlanta Fed, the Board of Governors, and the Kauffman Foundation. (enlarge) The chart shows the 90th and 10th percentiles of the employment-weighted job growth rate distribution by firm age. The fastest-growing firms are the 90th percentile (in purple) of the growth distribution, and the fastest-shrinking firms are the 10th percentile (in green). As the chart makes clear, the fastest-expanding 10 percent of young firms grow extremely rapidly. While the fastest-growing 10 percent of older firms also expand at a good clip, their growth is much slower than that of their younger-firm counterparts. . Firms that are contracting the most (shown in the 10th percentile) also are skewed along the age dimension, although the differences are not as dramatic.

Weekly Initial Unemployment Claims: Four Week average falls under 400,000 - The DOL reports: In the week ending November 12, the advance figure for seasonally adjusted initial claims was 388,000, a decrease of 5,000 from the previous week's revised figure of 393,000. The 4-week moving average was 396,750, a decrease of 4,000 from the previous week's revised average of 400,750. The following 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 to 396,750. This is the lowest level for the 4 week average since early April - although this is still elevated.

Jobless Claims Fall Again As Euro Risk Festers -If the euro crisis represents a threat to the U.S. economy (and it does), it’s not putting upward pressure on new jobless claims--at least not yet. New filings for unemployment benefits dipped again last week to a seven-month low of 388,000 on a seasonally adjusted basis. We’re still not at the post-recession low reached in this cycle (375,000 in late-February), but the old trough is now within shouting distance.  I'm reluctant to say that jobless claims are now on a sustained downtrend, but the odds certainly seem to improving for this long-awaited virtuous cycle. It's been clear for the last month or so that the economic activity in the U.S. has revived after moving close to stall speed in September.

Vital Signs: Fewer People Applying for Unemployment - The number of people filing for unemployment has dropped. Initial jobless claims fell to 388,000 in the week ended Nov. 12 from 393,000 the previous week. The four-week moving average, used to smooth the volatile figures, fell to 396,750 — its lowest level since April. Economists view the labor market as generally improving when claims are consistently below 400,000.

More Americans Calling it Quits: Another Sign the Job Market May be Better Than it Looks - With 14 million people unable to find work and job prospects seemingly bleak, why are more employees calling it quits?According to government data released last week, in the first nine months of the year, about 17.3 million people left their jobs by choice. That's up 9% from last year, when  just under 16 million people called it quits through September. And that rate appears to be increasing. In September alone, just over 2 million told their boss they were taking a hike - the most since November 2008 - an 11% increase from a year earlier. Perhaps surprisingly, economists generally believe that when more people begin quitting their jobs that's usually a sign that the job market is improving. "We have lots of evidence that shows that higher quits is associated with a better labor market," says Steven Davis, a professor and labor economist at the University of Chicago. The reason is that people tend to quit when they are confident they will get another job. But like much else during this recovery, rising quits could be indicating something different this time around.

Why You Should Prepare for Another Year of Slow Growth and High Unemployment - The Federal Reserve Bank of Philadelphia has released its latest forecasts for unemployment over the next several years, and the news isn’t good. By the fourth quarter of 2012 –- election time –- unemployment is expected to be at 8.7 percent. Worse, unemployment isn’t expected to dip below 8 percent until 2014. This could change if growth speeds up over the next year, but the prospects for that aren’t good. For the unemployment rate to drop by any amount, real GDP needs to grow by at least 2 percent. To see a significant reduction in employment, GDP growth needs to reach 4 percent or higher. According to Fed forecasts, the odds for that kind of growth in 2012 are incredibly low: In other words, when you average the predictions made by Fed forecasters, odds of 2 percent to 3 percent GDP growth in 2012 are around 40 percent. The odds for 3 percent to 4 percent growth are below 20 percent, and the odds for anything greater are below 10 percent. The forecast for 2013 is improved -– the odds for 3 percent to 4 percent growth increase to 20 percent –- but not by much.

Postal Service looks to cut 20% of workforce - (Video) A two month extension granted by Congress on a $5.5 billion payment is about to expire, and it's now time to pay up. The U.S. Postal Service needs to pay that $5.5 billion for retiree health benefits or post offices could be in jeopardy of closing. Congress is expected to extend the deadline, but that will only delay the day of reckoning for an agency that's struggling for relevance in an electronic age. Mail volume this past year totaled 168 billion pieces. That's compared to 171 billion in 2010, a decline of nearly two percent. The Postal Service is looking to cut 20 percent of its workforce. That means 120,000 jobs nationwide are on the line.

U.S. Postal Service Said to Weigh Hiring Restructuring Advisers - The U.S. Postal Service, which may have lost $10 billion in the past fiscal year, is discussing restructuring options with potential advisers, according to people with knowledge of the matter. Officials at the Postal Service have met in recent weeks with Moelis & Co., Rothschild and Perella Weinberg Partners LP, said the people, who declined to be identified because the talks are private. As of last week, the service hadn't hired any of the firms and was still deciding whether it needs an outside adviser, the people said. The Postal Service, which is structured to run as a self- supporting government enterprise, can't make a $5.5 billion payment to the U.S. Treasury for future retirees' health benefits and has said it may not have enough cash to deliver mail beyond next August. The organization, which wants to cut 220,000 jobs by 2015, said in July it was considering a plan to close as many as 3,700 post offices, or 12 percent of its locations. "The Postal Service faces a difficult challenge and unless they hire the best in the business a restructuring may fall flat," said Harry Wilson, the founder of MAEVA Advisors LLC who previously worked on a taskforce that restructured General Motors Corp. and Chrysler LLC. "In public sector restructurings, threading the political needle is as important as coming up with a great business solution."

Chart of the Day: Structural Shift in U.S. Economy - I have featured charts similar to the one above that displays real GDP and civilian employment over the last ten years.  More than any single chart, I think this one really helps to accurately describe the current state of the U.S. economy:
1. Measured by real output (GDP), the U.S. economy has made a complete recovery from the 2007-2009 recession now that real output in Q3 was higher than the 2007 Q4 level when the recession started. 
2. While real output has completely recovered to above pre-recession levels, U.S. employment at 139.6 million is still 6.6 million jobs (and 4.5%) below the 2007 peak of 146.2 million,

3. The recovery of real output to historical highs with 4.5% fewer employees has also translated into record-level corporate profits, which are now almost 40% above pre-recession levels.  
4. The recovery of both output and profits to above 2007 levels with 6.6 million fewer workers could explain the sluggish job growth that will probably continue for several more years.  If companies can produce more output now than in 2007 with fewer workers and record profits, where's the incentive to hire more workers?

Structural Unemployment: Posner - The term “structural employment” means high unemployment that persists through the business cycle, rather than being high only during economic downturns, and so is likely to reflect features of the structure of the economy. Unemployment in the United States rose rapidly beginning in the fall of 2008, and it remains abnormally high three years later. Since the economy is still in the doldrums, it is hard to tell whether the abnormal unemployment rate is structural—in which event it may be the “new normal”—or whether it is cyclical. Another complicating factor, emphasized by Becker, is the extension of unemployment benefits to almost two years. Unemployed persons often wait until their benefits are about to expire before they undertake a serious search for a new job, though my guess is that the longer the benefits period, the less the delay in job search; the worker worries about the erosion of his job skills and becomes financially pressed because unemployment benefits are lower than wages.  Although it is premature to say that we have a problem of structural unemployment, it may also be premature to say that we do not.

Has Structural Unemployment Become Important in the United States? Becker - The persistently high unemployment rate in the United States during the Great Recession has led to claims that much of American unemployment is “structural”. According to this view, the demand for workers by companies is insufficient to employ all unemployed workers because there is a mismatch between the skills possessed by many American workers and the skills required by companies. The structural advocates believe the skills demanded by companies tend to exceed or otherwise be different from the skills possessed by many unemployed workers. As a result, so goes the argument, these unemployed workers cannot find jobs and remain unemployed for a long time.  Although I will argue that not much of American unemployment is “structural” or due to such a mismatch, the structural theory is on the surface supported by the large number of long-term unemployed, the most disturbing feature of American unemployment during the Great Recession.. Since the unemployment rate rose above 9% in 2009, the fraction of the unemployed who have been out of work for over 6 months has grown to over 40%. Although long-term unemployment usually rises during prolonged recessions, the magnitude of the rise during the current recession is unusual for the United States.

The Future of Work - A growing number of workers are becoming increasingly concerned about the future viability of their jobs (if they have them) and, in many cases, that of their professions. Looking at a future increasingly defined by slower economic growth and higher energy costs, many are asking, What is the future of work? Given the "recovery’s" stagnant job market and the economy’s slide into renewed contraction, it’s a timely question. To answer it, we must first ask, What is the future of the U.S. economy? In broad brush, the Powers That Be have gone "all in" on a bet that this recession is no different than past post-war recessions. All we need to do to get through this “rough patch” is borrow and spend money at the Federal level, and the household and business sectors will soon recover their desire and ability to borrow more and spend it all on one thing or another. We don’t really care what or how, because all spending adds up into gross domestic product (GDP). In other words, we're going to “grow our way” out of stagnation and over-indebtedness, just as we’ve done for the past fifty years. Unfortunately, this diagnosis is flat-out wrong. This is not just another post-war recession, and so the treatment—lowering interest rates to zero and flooding the economy with borrowed money and liquidity—isn’t working. In fact, it’s making the patient sicker by the day.

Study proves regulations killed practically no jobs - In three straight recent weekly addresses, Republicans have asserted that “excessive government regulations” are keeping businesses from creating jobs. On the contrary, recent government data proves that in the third quarter of 2010 only 0.4 percent of jobs were lost due to government regulations or intervention. “With our economy struggling and red tape still piling up, these nuisances have become full-blown government barriers to job creation,” Rep. Morgan Griffith (R-VA) said in an early October video. The Bureau of Labor Statistics (BLS) asks executives to report the biggest reasons for layoffs. Data released last week showed that out of 1,870 layoffs, only six — or about 0.4 percent — in the third quarter of 2010 were due to “Governmental regulations/intervention.” That number dropped even further in the first two quarters of 2011. By comparison, almost 35 percent of layoffs were due to business demand. “Based on the available literature, there’s not much evidence that EPA regulations are causing major job losses or major job gains,” Richard Morgenstern, a former Environmental Protection Agency (EPA) official who now works at the nonpartisan think tank Resources for the Future, told The Washington Post.

Federal regulation versus jobs…not much there - The Washington Post points us to a study on the overall impact of regulations and jobs: The critique of regulations fits into a broader conservative narrative about government overreach. But it also comes after a string of disasters in recent years that were tied to government regulators falling short, including the financial crisis of 2008, the BP oil spill and the West Virginia mining accident last year. Data from the Bureau of Labor Statistics show that very few layoffs are caused principally by tougher rules.Whenever a firm lays off workers, the bureau asks executives the biggest reason for the job cuts. In 2010, 0.3 percent of the people who lost their jobs in layoffs were let go because of “government regulations/intervention.” By comparison, 25 percent were laid off because of a drop in business demand.

Workers Feel Pressure to Develop New Skills - Just over half of U.S. workers polled in a recent study reported they feel pressured to develop additional skills, though less than a quarter said employers are supporting that development with formal training. The study from consulting company Accenture PLC, which surveyed 1,088 employed and unemployed U.S. workers, found that 55% of those polled feel pressured to add new skills to be successful in their careers. Sixty-eight percent of workers believe it is primarily their own responsibility, rather than their employer’s responsibility, to update their skills. “Our study shows that workers are prepared to improve and expand their skills, but they’re not receiving sufficient support to develop those skills," Proficiency in new technology ranked as the most important initiative among U.S. workers. More than half have added technology skills in the past five years, although just 31% have updated problem-solving skills, and just 21% have developed managerial skills.

Youth Unemployment in United States in Line With Arab Spring Countries -  Is it useful to think of the Occupy movement more as a “left” movement or a “youth” movement?  To answer that question, it’s worth looking into data on the young, particularly as it relates to unemployment. To leave the United States for a minute, one way people are trying to understand the Arab Spring is through the lens of mass youth unemployment and inequality.  Given how high unemployment has been in these MENA – Middle-East and North African – countries, what else could we expect besides revolution? For instance, in early February then IMF chief Dominique Strauss-Kahn told a conference that ”this summer I made a speech in Morocco about the question of youth employment including Egypt, Tunisia, saying it is a kind of time bomb” and ”such a high level of unemployment, especially youth unemployment, and such a high level of inequality in the country create a social situation that may end in unrest.”  Here is the “youth unemployment” blog tag at the IMF to give you a sense of what people there have been saying about it.  In particular, they point out that it should be a major concern for the MENA and African regions.

Generation Y Bother - For youth entering the workforce today, not has the sour economy delayed their careers; they are entering a workforce that offers historically low wages and, unlike their parents, they're coming in with massive amounts of student-loan debt. DÄ“mos, the think tank for which I work, together with Young Invincible, a policy and advocacy group focusing on young people, recently released "The State of Young America," a report that shows just how hard young people have been hit. A poll we commissioned of young people ages 18 to 34 shows that 32 percent of employed college graduates—and a shocking 53 percent of young workers with only a high school diploma—are working jobs that do not advance their careers. Given that the Federal Reserve, in its most recent projection, predicts unemployment will remain at about 8 percent until the end of 2013, and 7 percent until the end of 2014, that means many young workers will not get their first career-track job for another two or three years. As with the youth of the 1980-81 recession, the late career start will in turn lead to lower lifetime wages. Combine a dead-end job with a pile of student loans, and you can see just how much this might affect the country’s future middle class. Twenty-five percent of young college grads have more than $25,000 in student loan debt; 46 percent have more than $10,000. That's many times what their parents borrowed. In 1997, the sum of all outstanding student loan debt, public and private, in the U.S. totaled just $92 billion dollars. Today, that total is $920 billion and climbing, a 900-percent increase. Millennials’ soaring debt burden is largely due to crushing college tuition rates that have risen far faster than inflation. In 1968, when the first boomers entered college, a student could have paid for tuition and fees at a public university by working just 6.2 hours a week at minimum wage; today, they’d have to work full-time just to cover tuition costs.

Why is teen employment down? - Christopher L. Smith, at the Fed, makes the best stab at this question to date: Since the beginning of the recent recession, the employment-population ratio for high-school age youth (16-17 years old) has fallen by nearly a third, to its lowest level ever.  However, this recession has exacerbated a longer-run downward trend that actually began in the 1990s and accelerated in the early 2000s.  There is little research regarding why teen employment has fallen.  Some earlier work emphasized labor supply explanations related to schooling and education, such as an increased emphasis on college preparation while others have argued that adult immigrants have crowded out teens, at least in part because adult immigrants and native teens tend to be employed in similar occupations. This paper presents updated trends in teen employment and participation across multiple demographic characteristics, and argues that, in addition to immigration, occupational polarization in the U.S. adult labor market has resulted in increased competition for jobs that teens traditionally hold.  Testing various supply and demand explanations for the decline since the mid-1980s, I find that demand factors can explain at least half of the decline unexplained by the business cycle, and that supply factors can explain much of the remaining decline.

Reduce immigration to stimulate the economy? - Howard Foster argues that we should strongly reduce immigration in order to create jobs for native workers. I’m going to  focus strictly on the question as he frames it: would reducing immigration stimulate native employment? The answer here is a pretty clear no. For one thing, there the fact that low growth in the number of households has already declined, and with negative consequences. Less household growth means less new houses are needed, and this, in part, explains why the housing sector is failing to contribute to the recovery. This is a problem because housing investment usually is an important component of post-recession economic growth.  In the aggregate, less immigrants mean less households, which means less houses built, which means a slower recover. It’s really foolish to wish to exacerbate the problem of low household growth as Mr. Foster does. No matter how much Mr. Foster may wish it to be true, there are significant adjustment costs to transitioning to a lower population level, and even a lower population growth rate. I would hope it would be obvious even to him that if we kicked out all 14 million immigrants that came to the United States between 2000 and 2010 that the effect would not be a boost in employment, but a lot of vacant homes, businesses, and schools, and widespread economic problems. After all, if Mr. Foster is right and less competition from other workers is the best thing for people, then why isn’t Detroit an oasis of full employment? After all, the mass exodus of competitors surely leaves more jobs for those left behind?

Would Cracking Down on Illegal Immigration Really Cut Unemployment? - "And here is something else that we have to do that will help the economy. We have to build the fence on America's southern border and get a grip on dealing with our immigration problem." This was one of the responses from Rep. Michelle Bachmann during Wednesday night's Republican Presidential Debate when asked how she would create jobs as quickly as possible. Elizabeth Dwoskin at Bloomberg wrote a very thought-provoking article on this topic... She found that Americans don't want many of those jobs that illegal immigrants have. She shows this through a sort of case study of Alabama. The state recently passed a law that allows the police to question people they suspect are in the U.S. illegally. As you might guess, illegal immigrants are fleeing the state. But the expected boost for unemployed Americans isn't materializing: they aren't rushing to take the jobs those illegal immigrants are leaving behind. Dwoskin writes: In their wake are thousands of vacant positions and hundreds of angry business owners staring at unpicked tomatoes, uncleaned fish, and unmade beds. "Somebody has to figure this out. The immigrants aren't coming back to Alabama--they're gone," Rhodes says. "I have 158 jobs, and I need to give them to somebody."

What Can Labor Learn? -- Many in labor are hoping that the energy of the Occupy movement will re-invigorate their movement, which today represents only 6.9 percent of private-sector workers. It’s not entirely clear, however, how protests in public spaces will create an increased sense of solidarity—and hunger for a union contract—in the private space of the workplace, where bosses are able to fire at-will workers who attempt to organize unions. Fiercely anti-union companies are clearly adept at undermining organizing campaigns. But many people in the labor movement say there is a lot more unions could be doing to successfully organize in a hostile climate. In the end, the Occupy movement may benefit the labor movement most not by building solidarity in the street, but by forcing labor leaders to rethink their strategy for rebuilding the labor movement. Unions’ ability to take full advantage of the Occupy movement will hinge on its ability to embrace social movements, be willing to take bold actions in smart strategic campaigns, to stick with those campaigns over the long run and to reform themselves to look and operate more like the Occupy protests. 

Entrepreneurship and inequality - So I was reading Felix Salmon’s account of a debate here in Toronto between Paul Krugman and Larry Summers. I guess it was supposed to be an insider-outside type divide. I was struck by this passage. Summers also tried to defend inequality, at least in part, by saying that “suppose the United States had 30 more people like Steve Jobs” — that, he said, would be a good thing even as it increased inequality. “So we do need to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage.” So no one disagrees with encouraging entrepreneurship. And we could also speculate on whether money and wealth buy it — the Steve Jobs case is not a case in point here for the money crowd. But when we link it to inequality in this way we are asking whether the poor would be supportive of being without so that entrepreneurs receive a reward. In a strict economic sense, we are asking whether the poor (or middle class) are happy outsourcing knowledge creation and are each willing to pay a bit to see that happen.

Whatever Happened to Discipline and Hard Work?, by Tyler Cowen - The United States has always had a culture with a high regard for those able to rise from poverty to riches. It has had a strong work ethic and entrepreneurial spirit and has attracted ambitious immigrants, many of whom were drawn here by the possibility of acquiring wealth. Furthermore, the best approach for fighting poverty is often precisely not to make fighting poverty the highest priority. Instead, it’s better to stress achievement and the pursuit of excellence, like a hero from an Ayn Rand novel. These are still at least the ideals of many conservatives and libertarians.  The egalitarian ideals of the left, which were manifest in a wide variety of 20th-century movements, have been wonderful for driving social and civil rights advances, and in these areas liberals have often made much greater contributions than conservatives have. Still, the left-wing vision does not sufficiently appreciate the power — both as reality and useful mythology — of the meritocratic, virtuous production of wealth through business. Rather, academics on the left, like the Columbia University economists Joseph E. Stiglitz and Jeffrey D. Sachs among many others, seem more comfortable focusing on the very real offenses of plutocrats and selfish elites.

Massive Income Inequality and Achievement among the 99% - The latest from Tyler Cowen: Nonetheless, higher income inequality will increase the appeal of traditional mores — of discipline and hard work — because they bolster one’s chances of advancing economically. Let's be clear here: Severe income inequality DECREASES, not increases, the chances of the poor and middle class to get ahead, not that Libretario Cowen would care much; as an extreme libertarian he'd rather have massive suffering, loss, and decreased growth rather than give up even a tiny amount of personal freedom. It DECREASES the chance to get ahead when you have to work 40 hours per week while going to college full time, thus having far less time to study, learn, and succeed. It DECREASES the chance to get ahead when poor –  and middle class – children have no health insurance, so they grow up sicker, and more poorly developed mentally and physically, and when their mothers can't afford to spend the time to breastfeed due to work, or to buy and cook the healthier foods, whole fruits and vegetables. Or when they have to live in more and more polluted areas because of Republican deregulation. But, hey, no problem, the rich can afford to move away from the pollution. It's only the children of the poor – and middle class – who as a result will be sicker, dumber, and more likely to suffer from behavioral problems.

Why conservatives can't get people to work hard -I'm a bit late to the party here, but I thought I'd offer some comments on Tyler Cowen's recent New York Times column about discipline and hard work. First, some excerpts: Conservatives often believe that much of the poverty in the United States is an issue of insufficient discipline and conscientiousness...Yet how can such a culture of discipline be spread? [I]t has been argued that society should grant respect to business creators and to stern parents who instill discipline...  modern conservative thought is relying increasingly on social engineering through economic policy, by hoping that a weaker social welfare state will somehow promote individual responsibility. Maybe it won’t. I think this is extremely insightful, and I am delighted to hear people beginning to say this. Conservatives really want people to value hard work and discipline (not to mention sexual abstinence), but they typically have no idea whatsoever how to get people to actually value these things! Like the military dad in American Beauty, they think that they can just beat their values into the populace...except instead of fists and feet, the cudgel they try to use is poverty. Without a welfare state, the thinking goes, people who slack off and party and have sex will be forced to live with the consequences of their actions; having been stung by the lash of economic hardship, they will see the light, toughen up, and go get a real job. But unfortunately, this just doesn't work on most people. There are at least four big reasons I can think of, off the top of my head.

Economic Mobility Project - Pew - Does America Promote Mobility As Well As Other Nations? (pdf) - The Pew Economic Mobility Project's fact sheet, Does America Promote Mobility As Well As Other Nations?, previews selected key findings from a multi-country study of economic mobility led by the Russell Sage Foundation with additional funding from the Pew Charitable Trusts and the Sutton Trust. Researchers in 10 countries investigated how socioeconomic advantage, as measured by parents' education, is transmitted over the course of one's life. The results show that in the United States, there is a stronger link between parents' education and children's economic, educational, and socio-emotional outcomes than in any other country investigated. Complete results will be detailed in a forthcoming book from the Russell Sage Foundation, From Parents to Children: The Intergenerational Transmission of Advantage, to be published in Spring 2012.  To view the full report, click on the image.

Delusions Of Mobility - Krugman - Greg Sargent sends us to Paul Ryan’s latest — an attempt to debunk the CBO report on income inequality. As usual, Ryan makes me think of Ezra Klein’s old line about Dick Armey: he’s a stupid person’s idea of what a smart person sounds like. Greg gives us a thorough takedown by Tim Smeeding, who really really knows his inequality stuff. I’d just add that Ryan repeats the familiar line about how we have vast income mobility, so that the picture given by static inequality comparisons is misleading. But as I’ve pointed out, the CBO report itself takes that argument on and refutes it. Multi-year measures of inequality, it turns out, aren’t much lower than single-year measures. How is that possible, when many people change income quintiles? Because they’re usually moving short distances on the income scale. A lot of people move from, say, the top of the second quintile to the bottom of the third quintile or vice versa — but such moves are trivial in terms of their true income position. Big moves, jumping more than one quintile, are much less common; yet it’s those big moves people have in mind when they talk about ,mobility. And in the end, Ryan’s answer is that we need strong economic growth, the kind that we get by cutting taxes on the rich. Because that’s why the Clinton years were an economic disaster and the Bush years so prosperous.

Being Poor in America Really Sucks - There's voluminous evidence demonstrating that income inequality has skyrocketed in the United States over the past few decades and is now higher than in virtually every other developed country. This might not be all that bad if income mobility had also increased, but a number of recent studies have shown just the opposite: at best, mobility is no better than it's ever been, and it might actually have decreased a bit. Generally speaking, the rich are a lot richer than they used to be, and unless you start in an upper middle class family to begin with, the odds of ever joining the ranks of the rich have gone down. But why? The Pew Economic Mobility Project gives us a clue today. The chart on the right compares four big English-speaking countries on a single measure: vocabulary test scores of five-year-olds. You'd expect that children of highly educated parents would do well and children of poorly educated parents would do badly. And you'd be right. On average, the children of poorly educated parents have both genetic and environmental disadvantages, so it's no surprise that they do worse than average. But in the United States they do a lot worse. The Pew chart is normalized so that children of middle-educated parents score in the 50th percentile and other children are compared to that standard. In Canada, the least-advantaged kids manage to score at the 37th percentile. In the United States they score at only the 27th percentile.  We simply don't give our poorest kids a fair start in life.

Explainer: How Did Inequality in America Get So Bad? And What Can the Government Do to Fix It? - In one of the more odd recent pairings, both the wonks at the Congressional Budget Office and the activists occupying Wall Street and beyond have come to the same conclusion: inequality is skyrocketing and one percent of the country is taking home a bigger and bigger share of all the income in the country. The CBO just released a study, years in the making, which confirms that the income for the top one percent has nearly tripled from 1979 to 2007. And not only are those in the top one percent much richer, they also take home a larger share of the economy as a whole than they did thirty years ago. What caused this? And what, if anything, can the government do about it? Below, Mike Konczal explains.

Income Inequality by Age Group in 2010 - Which age group in the U.S. has the greatest amount of income inequality among its members?  We won't keep you in suspense - the chart below reveals the answer!  Are you surprised to see that teens and young adults between that ages of 15 and 24 have the greatest amount of income inequality, as measured by the Gini Coefficient?  If it helps understand why, consider that this age group really represents the point at which Americans enter into their first jobs. It covers everyone from those who haven't graduated from high school, but are working in part-time, minimum wage level jobs on up through recent college graduates in difficult, high paying disciplines like petroleum engineering.  Meanwhile, we see that the level of income inequality drops dramatically for adults between the ages of 25 and 34, which corresponds to individuals who have fully entered into their careers. The amount of income inequality by age group then increases through Age 65-74.

Tackling Income Inequality - Laura D'Andrea Tyson - Income and wealth disparities have reached levels not seen in the United States since the Roaring Twenties. And the concentration of income and wealth contributed to the speculative excesses that brought on the 2008 financial crisis (see Robert Reich’s “Aftershock” and Raghuram Rajan’s “Fault Lines”). According to a recent report by the Congressional Budget Office, rising income inequality is a long-term trend that began in the late 1970s and strengthened during the last two decades. The report confirms the protesters’ belief that the rising gap between the income of the top 1 percent and the income of everyone else is a major factor behind escalating inequality. In the last 20 years, inequality has been largely a story of a small elite – not just the top 1 percent, but the top 0.1 percent – pulling away from everyone else in every source of household income: labor income, capital income and business income. The top 1 percent’s share of national income has also been rising in most other advanced industrial countries, but it is by far the largest and has grown the most in the United States (see Jacob Hacker and Paul Pierson’s “Winner-Take-All Politics”).

68% of the Sons of the 1% Work at Their Dad's Company - Nepotism and wealth go together according to a study published in the Journal of Labor Economics. The researchers found that 68 percent of the sons of top-percentile income earners have at some point by the time they're age 33 taken a job at a firm their father also worked. That's significantly higher than the 55 percent rate for the sons of the second-highest percentile of earners and the 40 percent average for all income levels.  While high earners tend to be self-employed or at least tend to hold sway over hiring decisions at their companies, the pattern could also involve "the formation of values and preferences" -- basically, that fathers tend to raise kids who would fit into their companies well. Whichever hypotheses turn out to be the most important, one of the study's authors, Miles Corak of the University of Ottawa, thinks it proves that something other than meritocracy is at work. He writes on his blogIf the members of the top 1 percent are there because of connections or political power—rather than by the force of their talent, energy, and motivation—then we should be rightly critical about claims that they merit their fortunes, and question the contribution they make to economic productivity. Make your own assessment with the chart from the study below, which graphs that father-son "same firm employment" rate for each income percentile.

As Graduates Move Home, Economy Feels the Pain - Every year, young adults leave the nest, couples divorce, foreigners immigrate and roommates separate, all helping drive economic growth when they furnish and refurbish their new homes. Under normal circumstances, each time a household is formed it adds about $145,000 to output that year as the spending ripples through the economy, estimates Mark Zandi, chief economist at Moody’s Analytics.  But with the poor job market and uncertain recovery, hundreds of thousands of Americans like Ms. Romanelli (and her boyfriend, who also lives with his parents) have tabled their moves. Even before the recession began, young people were leaving home later; now the bad economy has tethered them there indefinitely. Last year, just 950,000 new households were created. By comparison, about 1.3 million new households were formed in 2007, the year the recession began, according to Mr. Zandi. Ms. Romanelli, who lives in the room where she grew up in Branford, Conn., said, “I don’t really have much of a choice,” adding, “I don’t have the means to move out.”

The young and the broke – 37 percent of young households held zero or a negative net worth in 2009 - It is hard to imagine a future generation of Americans were those moving forward are actually poorer than the current generation.  Yet that is precisely the world we are diving into.  Those that purchased homes in the pre-bubble days and also attended college in less inflated times have a massive head start on the current younger generation that is contending with a bursting housing bubble and a financial system that might as well be a roulette wheel.  One startling figure from a recent Pew Research report shows that 37 percent of young households hold zero or a negative net worth.  This is not a good way to build a healthy financial future.  The wealth gap between previous generations is also becoming increasingly large.  This narrative ties into the overall systemic pilfering of the middle class.

What Percentage Lives in Poverty? - Do poor people represent the bottom 16 percent of the population or the bottom 15 percent? The answer matters more than you might think. The difficulty of measuring economic well-being helps explain why it’s hard for people to figure out what economic percentile they belong to or which public policies would best serve their interests. A difference of one percentage point in the overall poverty rate is no big deal. But the new Supplemental Poverty Measure, or S.P.M., developed by the Census Bureau, which yields the slightly higher overall estimate, shows lower rates of poverty among children and higher rates among the elderly than the traditional measure. An estimate based on a measure similar to the S.P.M. suggests that poverty has increased less over time. The S.P.M. goes beyond consideration of money income to estimate the value of such in-kind transfers as food stamps, net taxes paid to government (taxes paid less the value of tax credits received), and medical and work-related expenses (such as child care and commuting costs). It also employs a new standard of need, linked to what low-income families actually spend.

Understanding the New View of Poverty (2): What Helps and What Hurts -  Last week, the Census Bureau published a new Supplemental Poverty Measure (SPM) that changes our understanding of poverty in America. The first installment of this post looked at the way it erodes our stereotypes of who is poor, especially by showing that there are more poor white, working-age, home-owning Americans than we thought. No matter what population group or political party you belong too, it is now harder to dismiss income insecurity as something that threatens only people who are not like you. This installment turns to the issue of which government policies help reduce poverty and which policies may be making the problem worse. The most important contribution of the SPM is to show that key federal antipoverty programs that official data omit play a big role in the lives of people living at or near the poverty level. The largest of those programs is the Earned Income Tax Credit (EITC). Because it is part of the tax code rather than a transfer program, it does not figure in the official poverty measure despite the fact that it is a source of supplemental cash income for families whose credits exceed taxes owed. According to the SMP, without EITC, the child poverty rate would be 4.2 percentage points higher. Although EITC is skewed toward families with children, it also has a substantial impact, 1.5 percentage points, on the poverty rate of working-age Americans. It has only a small impact on poverty among the elderly. (The following table summarizes these and other data.)

Size of the US Underground Economy - I've written on a number of occasions of how I think one of the earliest symptoms of the gradual approach of the "singularity" is the continued lowering of the US male employment/population ratio: Levels are particularly low amongst the young: and the less educated I would expect that the increasing lack of need for many classes of men in US society would be associated with an increase in the size of the underground economy: drug production and dealing, crime, casual cash labor, off-the-books construction projects, etc.  I would also expect that the size of the informal economy would continue to grow further as the US experiences more globalization, more immigration, more automation, and less access to oil and other resources. I was curious to know what efforts had been made to estimate the size of the informal economy.  After some poking around, I discovered Edgar Feige, a widely cited Professor Emeritus of Economics at University of Wisconsin-Madison who seems to have devoted much of his career to this question.  His latest estimates are in this paper, and here's the bottom line:

 Middle-Class Neighborhoods Shrinking - The portion of American families living in middle-income neighborhoods has declined significantly since 1970, according to a new study1, as rising income inequality left a growing share of families in neighborhoods that are mostly low-income or mostly affluent. The study, conducted by Stanford University and scheduled for release on Wednesday by the Russell Sage Foundation2 and Brown University3, uses census data to examine family income at the neighborhood level in the country’s 117 biggest metropolitan areas. The findings show a changed map of prosperity in the United States over the past four decades, with larger patches of affluence and poverty and a shrinking middle. In 2007, the last year captured by the data, 44 percent of families lived in neighborhoods the study defined as middle-income, down from 65 percent of families in 1970. At the same time, a third of American families lived in areas of either affluence or poverty, up from just 15 percent of families in 1970.

The Distribution of Income for U.S. Women in 2010 - If you're one of the 125,084,000 American women Age 15 or older who earned income of any type in 2010, you can see how you compare with all other women by entering your 2010 income into the tool below. Our tool will tell you what percentage of American women earn as much, or less than you! The default income entered in the tool is the approximate median total money income for all women Age 15 or older in the U.S, regardless of whether they work full or part time, or even if they don't work at all or simply volunteer and earn no income. As the estimated median point, half of all women in the United States will have incomes below this mark, while half will have incomes above that amount!

Child poverty charts of the day - These charts come from the Census Bureau’s new report on child poverty in America. The first one shows how it has been increasing rapidly since the recession hit — the crisis might have been caused by Wall Street, but it has had its most devastating effects among poor and blameless children. This is a huge increase: between 2008 and 2010, the number of children in poverty increased by 3.2 percentage points, from 18.4% to 21.6%. Which means the number of children in poverty increased by more than 17%, to 15.7 million. It’s worth mentioning that these are apples-to-apples comparisons using the old poverty figures rather than the new ones, and the new poverty figures show a lower child poverty rate. Under the Supplemental Poverty Measure, the number of children in poverty is “only” 13.6 million. But I’m reasonably sure that if and when that measure gets calculated for 2008 and 2009, it’ll show a rate of increase just as high as we’re seeing in the old one. And I doubt the distribution across the country would be any different, either

North Dakota Oil Boom Raises Rents, Pushing Seniors Out - Thanks to new drilling techniques that make it possible to tap once-unreachable caches of crude, a region that used to have plenty of elbow room is now swarming with armies of workers. Nodding pumps dot the wide, mostly barren landscape. But because it has limited housing, the area is ill-prepared to handle the influx of people. The result is that some rents have risen to the level of some of the nation's largest cities, with modest two-bedroom apartments commonly going for as much as $2,000. The skyrocketing cost of living is all the talk at the senior center in downtown Williston. "Grandma can't go to work in the oil fields and make a 150 grand a year,"

The Sharp Increase in the Food Stamps Program - The poor economy is not the only reason that safety-net programs are spending more. The food stamp program is another example of a safety-net program that is significantly more costly than it was before the recession began. The Department of Agriculture’s food stamp program, now known as the Supplemental Nutrition Assistance Program, or SNAP, provides money to low-income households for the purpose of buying food, often in conjunction with cash assistance programs. Adjusting for inflation, the program spent more than twice as much in 2010 as it did in 2007, before the recession began. The Department of Agriculture found that the food-stamp spending increase “is likely attributable to the deterioration of the economy, expansions in SNAP eligibility, and continued outreach efforts.” Of particular relevance for the SNAP program is the fact that the poverty rate increased 18 percent, to 153 per thousand in 2010 from 130 per thousand Americans in 2007. At least two eligibility expansions have occurred since the recession began: work requirements were lifted from April 1, 2009, through Sept. 30, 2010, and monthly income limits were 10 percent higher in the 2010 fiscal year than they were in the 2007 fiscal year, an increase about twice the rate of inflation over that period.

United States of Hunger - Casey Mulligan noted Wednesday on Economix that United States spending on food stamps had skyrocketed since the recession began. A new Census Bureau report provides a look at just how big the program has become. Last year, more than one in 10 families received food stamps, with some states having significantly higher participation rates. In Oregon, the share was nearly one in five. Here’s a map showing what share of families in each state received these benefits to help them buy food: In Oregon, 17.8 percent of families received food stamps, officially known as Supplemental Nutrition Assistance Program (SNAP) benefits, the highest rate in the nation. Oregon was followed by Tennessee (17 percent) and Michigan (16.9 percent). The state with the lowest SNAP participation rate was Wyoming, with a rate of 6.2 percent. The next-lowest rates were in New Jersey (6.8 percent) and California (7.4 percent).

Number of Texans Receiving Food Stamps Up Sharply Amid Recession - The number of Texans receiving federal food assistance — commonly known as food stamps — has increased by nearly 1.4 million in the last four years. Nearly 15 percent of Texans now receive food stamps, and many more than that are eligible.  More than 3.7 million Texans — more than half of whom are children — receive food benefits from the Supplemental Nutrition Assistance Program, a federally funded program administered by the state Health and Human Services Commission. While more Texans are getting food assistance, experts say food insecurity — the inability to access nutritious food — remains a serious problem. Texas had the second-highest percentage of households suffering from food insecurity in the nation in 2010, according to the U.S. Department of Agriculture.

Central Illinois food pantries see increased need - As cold weather and the holidays quickly approach, area food pantries have seen a 45 percent increase in use over the last few months, according to Barb Shreves, the director of the Peoria Area Food Bank. Keeping up with that kind of demand is difficult, to say the least. The South Side Mission gives out 1,000 bags of groceries each month to those in need, said spokeswoman Meg Newell, adding that 20 percent of families who receive assistance are doing so for the first time. "We're seeing people that would never come to the food pantry, who would never request a meal for Thanksgiving," said Newell. With well over 2,000 requests for Thanksgiving meals expected, only one turkey has been donated out of 100 needed to fill the needs of the elderly, homebound and poor.

Salvation Army empty food shelves (video) - -- The holidays can be a straining time on a family's budget, in fact a new report out from Hunger Free Colorado says twenty five percent of Colorado families don't have enough food to meet their basic needs.But the holidays are right around the corner, and more items in food pantries are becoming more sparse on the shelves. Believe it or not two of the most difficult items to fill the shelves with this year are peanut butter and cereal because of the increase in their price, and down at the Salvation Army they’re hoping to fill these empty shelves by the holiday season Recorded numbers of families are in need of emergency assistance this year, and a large number, nearly 900 thousand are on the verge of going hungry.

US Food Banks Struggling with Holiday Turkey Shortage -- Last year, the River Valley Regional Food Bank donated 2,000 to 4,000 turkeys to families in need. This Thanksgiving, the Fort Smith, Ark., site has a little more than 200 turkeys. “Normally, we have very generous food manufacturers that donate to us,” said Ken Kupchick, the Feeding America food bank’s marketing and development director. “You name it. We are supported by major food producers. Donations are there....It’s just not here this Thanksgiving.” Shannon Traeger, a media relations associate for Feeding America’s national office, said the turkey shortage was being felt by the group’s 200 food banks across the U.S. The food bank has 170 pantries assisting 12,000 families in need, including 25,000 children classified as “food insecure” and close to the same number of residents 50 and older. Kupchick said the food bank had searched high and low for holiday birds. He said a Pennsylvania seller had offered turkeys with missing parts for 93 cents a pound, but the cost of the birds plus transportation would have reached $45,000. The food bank asked other food banks to split the deal, but got no takers.

Overburdened food pantry drops Thanksgiving turkey dinners - A Thanksgiving meal without a turkey seems like heresy, but for the Oak Park River Forest Food Pantry, it's the grim reality of a bad economy. Michele Zurakowski, the pantry's director of operations, said the organization will not hand out turkeys and hams for Thanksgiving or Christmas because of rising food prices and increased demand. For three years, the pantry has distributed the special holiday dinners. Because demand always exceeded the pantry's supply, a lottery system determined which clients would leave without the centerpiece dish. Last year, only about half of the almost 2,800 families that came to the pantry in November and December were given turkeys or hams."That just seemed really unfair to us,"

Homeless Spokane Students On The Rise -- Schools in Spokane County are seeing more homeless students than they did last year. There are programs to help these students, but school staff that helps count the homeless students monthly say more is needed.  At just 17, Britain Webb has lived a lot more life than most of his peers.  “I was homeless recently, twice in the past couple years,” he said. “Domestic violence was a big part of it the first time and then we... living in The Salvation Army.”  Webb is one of 278 students considered homeless in the Central Valley School District right now. The district saw a 45 percent increase in the number of homeless students when compared to this time in 2010. The other school districts around the county are also struggling with a growing homeless student body. 

War veterans homeless in America (Video) An estimated 200,000 American war veterans are homeless, and unemployment among recently returned veterans is 3 per cent higher than the national average

Planning on heating your home this winter? - The great state of Maine is more dependent on home heating oil than any other state in the nation. And nobody up here I’ve talked to — not my friends in the coffee shop, not the convenience store cashiers, not the cabdrivers — thinks that the price of heating oil is anything other than completely manipulated.  Readers, are Mainers right?  And will “position limits” help? And if Mainers are right, is the problem generalized to other commodities? NOTE $3.65! Yikes! Back in the day, the house had the (single) thermostat right in the front hall, so when you opened the door, the boiler would fire right up, and keep you toasty warm. Well, the days of $0.10 oil are gone, and a good thing, too. And the thermostat’s been moved. Now, I understand that a high price is an incentive to conserve, and conservation is good too. But why not — if Mainers are right — claw back the rents from the skimmers and speculators, give ‘em to me, and I’ll put another layer of insulation in. Instead of buying a second yacht cover from Hermes. Too simple? Too populist? Na ga happen?

The unemployment debit-card scandal - I’m a great fan of the way in which states including Oregon, South Carolina, and California are doing away with the unemployment check. If you want unemployment benefits, have them directly deposited into your bank account. Or, if you’re unbanked or otherwise don’t want to do things that way, get your unemployment benefits on a prepaid debit card. Except, it hasn’t quite worked out that way. HuffPo’s Janelle Ross has been all over this — she started with an exposé of the fees associated with the prepaid cards, and followed up with a tough piece about the cozy relationship between South Carolina and Bank of America on this front. And then today, American Banker’s Kate Berry has found something truly evil going on in California: The states sell banks exclusive contracts to run their benefit-card programs, giving Bank of America Corp., JPMorgan Chase & Co. and their rivals millions of new customers in one fell swoop. These banks then collect uncapped, higher fees from merchants with every card swipe, often kicking back some profits to the states as part of revenue-sharing agreements. California, for example, has earned $7.7 million from Bank of America since December 2010… B of A spokesman Jefferson George says it was California’s decision not to offer direct deposit. It takes 24 hours for B of A to transfer funds, he says, adding that further delays are caused by the other banks.

Long Road Ahead for Most American States - Michigan, Nevada and Rhode Island will probably have to wait another six years before they are back to the number of jobs they had before the recession struck, according to economists at IHS Global Insight. These analysts have projected when each state will likely return to its past peak employment, as shown in the map below: Across the country, there are 4.7 percent fewer jobs today than there were when the recession began in December 2007. And remember that the United States population has grown in the last five years, so if the economy were healthy there would be more jobs today than there were then. This analysis only models when we’ll be back to square one.Only Alaska, North Dakota and the District of Columbia have recovered the jobs they lost during the recession. Those places have actually surpassed their previous employment peaks as well.

A State-by-State Look at Long Road to Jobs Recovery - When it comes to jobs, it’s going to take a long time to get over the Great Recession. How long depends on where you live. The map at the right, based on an analysis from IHS Global Insight, gives a stark look at how long it will take for each state to get back to its pre-recession employment peak. The results aren’t pretty — at the median, it will take until the fourth quarter of 2014 to recover fully. IHS says its models take into account factors like states’ industry breakdown, population growth and demographics. But the map will look pretty familiar to anyone who knows how the states stack up in terms of their current unemployment rates. Perennial outlier North Dakota, which is in the midst of an oil boom, boasts the nation’s lowest unemployment rate (3.5% in September), and has already seen its number of employed workers pass its previous peak. States with high unemployment rates, like Nevada and California, will take the longest to dig out of their employment holes.  Click to see larger, interactive map

Which States Would Be Hit Hardest by EU Recession? - Some U.S. states would be hit harder than others if Europe falls into recession, according to new research by Wells Fargo economists.  The report ranks states by how much European exports contribute to their economies. States specializing in commodities and auto and airline manufacturing would be most exposed in a European contraction, the data suggest. Utah tops the list, in large part because of its gold and silver exports. European exports make up 5.56% of the state’s gross domestic product, according to the report. South Carolina, an auto-producing state, comes next, with European exports making up 4.1% of state GDP. West Virginia, a big coal exporter, is third at 3.9%. “Slower demand from the euro zone will likely slow production among the country’s commodity, aircraft and automobile producers and may have been a factor in the recent slide in many of the regional manufacturing surveys, including the Empire and Philadelphia Fed survey,” the report said.  Click image for larger map.

State by state exports to Europe - From the Miami Herald: Florida’s economy faces ‘moderate’ risk from European recession Florida would fare better than many states should Europe slip into recession, a new study [by Wells Fargo] found. ... The report makes no mention of another key concern for Florida: European tourism. The United Kingdom is Florida’s second largest source of international travelers behind Canada, with Germany holding the fifth slot behind Brazil and Mexico. Here is a map from the referenced report by economist Mark Vitner and Michael Brown at Wells Fargo. The map shows European exports as a percent of state GDP. Utah has a very high percentage of exports to Europe - mostly silver and gold to the United Kingdom. West Virginia exports coal. As the Miami Herald article notes, Florida will probably also be impacted by less tourism too. However the largest potential impact is probably from financial contagion as opposed to trade and tourism. Catherine Rampell has a summary of the various channels of contagion: The Euro Zone Crisis and the U.S.: A Primer

A Fix on the Horizon for the Online Sales Tax Mess - A bipartisan group of 10 U.S. senators would allow states to require online retailers to collect sales taxes on all purchases, as long as the states first agree to simplify their sales tax rules. And, remarkably, their  idea has broad support in the business community and may actually pass.  Amazon, which has aggressively resisted the efforts of several states—most recently California— to make it collect sales taxes, says it supports Enzi’s bill. The fight is not about whether buyers owe tax on their online purchasers. They already do. It is, rather about whether sellers must collect the levy at the point of sale or whether consumers have to pony up when they file their tax returns—through a use tax that most state impose but few people actually pay.

California Revenue $1.26 Billion Below Forecast, Agency Says-- California’s revenue trailed projections in October for the fourth consecutive month, bringing the total shortfall to $1.26 billion, a deficit of 5.1 percent, the state Finance Department said. In October, the most-populous state reported $5.2 billion in tax and fee revenue, 10.5 percent below forecasts for the month, the department said in its monthly bulletin. The report was in line with figures released Nov. 10 by Controller John Chiang, who said the state was $1.5 billion behind projections since the start of the fiscal year in July. October’s income taxes, the largest single revenue category, came in 10.6 percent below projections, the Finance Department said, while sales and use taxes, the second-largest category, came in 7.3 percent above estimates. The shortfall raises the prospect of mid-year budget cuts that would hit universities, social services, public safety programs and schools. Under the $86 billion spending plan Governor Jerry Brown and fellow Democrats adopted in June, a revenue gap of $1 billion or more would trigger a series of automatic cuts. In December, the Finance Department will estimate whether the rest of the year’s revenue can meet the original projection.

Cuomo Says New York Budget Gap May Widen to $3.5 Billion -- New York state's projected deficit for the next fiscal year is expected to grow to as much as $3.5 billion as a stalled economic recovery cuts Wall Street jobs and shrinks bonuses, Governor Andrew Cuomo's office said. The gap for fiscal 2013 was projected at $2 billion when the current $131.7 billion budget was approved in March. It's now estimated to have widened to between $3 billion and $3.5 billion, according to the Budget Division's mid-year update released today by Cuomo's office. The division also forecast a $350 million shortfall in the current year. State officials will use the updated revenue forecast and spending projections to start the budget process for next year. "With the prospect of a weak bonus season on Wall Street even more negative pressure is being placed on the state's receipts outlook," the Budget Division said in a statement. New York joins California and Florida in reporting revenue below forecasts in the past month. U.S. states are projecting combined budget gaps of $31.9 billion in fiscal 2013, according to the National Conference of State Legislatures in Denver.

State could face $1B budget gap, House committees learn - Members of the Virginia House of Delegates' money committees were told on Tuesday that the state could face a roughly $1 billion budget gap over the next two years despite increasing revenues. House Appropriations Committee staff director Robert P. Vaughn told members gathered for a two-day retreat that there could be a shortfall of between $885 million and $1.5 billion for the 2013-14 biennium in part because of cost-drivers including Medicaid, updated K-12 school costs and state pension contribution rates. "In the House, we will start examining all programs and all initiatives, especially programs that began within the last five years, and look at making targeted budgetary reductions, not rely solely on across-the-board cuts," "Several other strategies we will employ to balance the budget in a responsible manner include: level-funding essential programs to the extent possible, and reducing or eliminating programs that are not meeting their original legislative intent."

Virginia faces potential budget shortfall of $1 billion - Though Virginia has finished two consecutive years in the black, the state faces a potential budget gap of $600 million to $1 billion over the next two years, the Senate Finance Committee learned Thursday. About $1.6 billion available to meet mandatory or priority items won’t be enough to keep pace with increased needs for items such as Medicaid and education, committee staff told legislators. “You’ve lost a lot of flexibility,” . “We’ve got a lot of uncertainty. … The fundamental thing wrong with the economy is the fact that people can’t find a job.” The gloomy forecast was marginally better than a House Appropriations Committee projection released earlier in the week, which pegged the gap at $885 million to $1.5 billion. The ranges reflect different options legislators have to fund the pension system for state employees and teachers. Still, the General Assembly will face difficult decisions in the coming legislative session that could be compounded based on results from deficit reduction talks under way on Capitol Hill.

Forecast: Washington faces nearly $1.4B deficit - Washington state's chief economist said Thursday that the state has taken in $12 million less than expected since September, and that revenues are projected to drop by $122 million over the next two years. In his latest revenue forecast, Arun Raha said that if $266 million in the so-called "rainy day fund" reserves are used, the state will face a nearly $1.4 billion deficit through 2013, up from the previously projected $1.3 billion. If those reserves aren't used, that deficit climbs to $1.6 billion. Raha said that despite the relatively small change from September's forecast, concern remains. Problems in Europe could make the problem much worse, he said. "Revenues depend on the economy, and the economy is a moving target," he said. "Much of the risk in Washington's economy is based on events outside the region," he said, specifically noting that steps taken by the new government in Italy will be crucial. "It's too big to bail out," he said.

Cities Hit as Funds From Bonds Pay Other Bills - When the recession squeezed Miami's budget in recent years, officials reached into funds raised for road repairs and other projects to plug the shortfall. Now, the city is paying a price. The moves triggered lawsuits and a federal investigation, in a brouhaha that holds ramifications for how municipalities nationwide maneuver around unprecedented money problem. Cities and states across the country are using money designated for specific purposes—such as fixing roads or sewers—in order to fill financial holes elsewhere, according to public officials and records. The moves are exposing municipalities to controversy, as federal regulators and local auditors are more heavily scrutinizing their finances to protect bond buyers and taxpayers. In Miami, the Securities and Exchange Commission is wrapping up an investigation into whether the city used funds intended for roads and other purposes to fill budget gaps elsewhere, according to people close to the probe. Bondholders are suing, saying the moves obscured the city's true finances. The city's former budget director is also suing, claiming he was fired for cooperating with the SEC and the Federal Bureau of Investigation.

Governments Using Swaps Emulate Subprime Victims of Wall Street - -- Ask a Nobel Prize-winning economist what's the difference between the mayor of Baltimore losing taxpayer money with derivatives sold by Wall Street and millions of Americans defaulting on subprime loans and he'll say there isn't any: State and local governments are victims of opaque financing they don't understand, the same way individuals go broke on borrowing at rates too good to be true. Martin O'Malley, Baltimore's mayor in 2002, led his constituents into a financial trap that was supposed to save money on water, sewer and other projects. Now O'Malley, 48, is Maryland's Democratic governor and the state's biggest city faces a $90 million loss to get out of so-called auction-rate securities, the municipal equivalent of a floating-rate home loan that exploded when subprime lending collapsed and helped push Jefferson County, Alabama, into bankruptcy last week. Like first-time buyers who stretched to finance a house and are stuck with underwater mortgages, borrowers from Baltimore to Denver are locked into more than $50 billion of auction-rate bonds sold by banks, which earned an estimated $20 billion in fees on related derivatives that municipalities and local governments in U.K. are prohibited from using because of the risk for catastrophic loss. U.S. cities face hundreds of millions more in penalties if they refinance the bonds into fixed-rate securities with the lowest yields since the 1960s.

Study: Michigan among states raising poor's taxes -  Michigan is among just a handful of states raising taxes on low-income working families while cutting taxes for other groups, the Center for Budget and Policy Priorities said in a report released Tuesday. The Washington-based group notes that Michigan, New Jersey and Wisconsin all have scaled back tax credits for low-income workers in recent years while cutting business taxes. In Michigan's case, low-income families will see their tax breaks shrink starting next year by about $260 million annually while businesses will get a $1.1 billion tax break starting in January and a $1.7 billion tax break the year after. Michigan Gov. Rick Snyder originally wanted to eliminate the state Earned Income Tax Credit, but agreed to reduce it from 20 percent of the federal credit to 6 percent for tax year 2012. He said earlier this year that the state needed to make cuts to balance the budget and noted no cuts were being made in Medicaid programs providing health care to low-income working families. He also has said the business tax cuts will create employment opportunities. "More and better jobs are at the heart of the governor's plan to improve and strengthen our economy so ALL can prosper and benefit," Wurfel said Snyder finds it unacceptable that Michigan's families "are among the poorest in the nation."

Bing to address Detroit's fiscal problems in address Wednesday - Mayor Dave Bing is scheduled to discuss the city's escalating fiscal crisis in an evening speech on Wednesday as pressure mounts on his administration to address a recent report that the city could go broke by spring. Bing will speak from the Northwest Activities Center in a televised address at 6 p.m. and "will address the city's fiscal crisis," mayoral spokesman Stephen Serkaian said. Bing also is expected to address the city's recent problems with street lighting and public transit.  Bing told The Detroit News in a recent interview that an Ernst & Young report on the city's financial condition prompted him to consider becoming the city's emergency manager if asked by the governor. The report has not yet been made public.

Detroit could run out of cash in December, plan must include layoffs - With Detroit Mayor Dave Bing preparing to explain the city's fiscal crisis tonight in a rare televised address, Council President Pro Tem Gary Brown says the situation is even worse than anyone has let on. Bing is expected to discuss a confidential Ernst & Young report obtained by the Detroit Free Press that suggests Detroit could run out of cash by April without steep cuts to staff and public services. That's a grim prognosis, but according to Brown, the city actually could be unable to make payroll "as early as December." "I know the report says April, but there are certain risk assumptions that when you take those into consideration, worst case scenario you could run out (of cash) in December," Brown said this morning on WJR-AM 760. In his speech tonight, Bing is expected to propose privatizing the city's public bus system and lighting departments, both of which have been failing residents but reportedly cost them $100 million a year in subsidies.

Detroit Faces $45 Million Gap, State Takeover, Mayor Bing Says -- Detroit faces a $45 million deficit and called for union concessions to help avoid a state takeover, Mayor Dave Bing said in a televised speech. “Our city is in a financial crisis and city government is broken,” Bing said today in the speech. “If we continue down the same path, we will lose the ability to control our own destiny.” “Without change, the city could run out of cash by April with a potential cash short-fall of $45 million by the end of the fiscal year,” he said.

Economist: Detroit Will Default In 4 Months - It's a race against the clock in Detroit. The home to America's Big Three automakers has until spring to straighten out its budget problems or the city could face bankruptcy or, worse, potential default on its largest debt obligations. "Without change, the city could run out of cash by April, with the potential cash shortfall of $45 million by the end of the fiscal year," Mayor Dave Bing said in an address to Detroit residents Wednesday night. The mayor said $40 million could be saved in the city's budget through pension reform, cuts to medical care costs, and strategic layoffs -- all key points in the budget reform proposal he announced in the televised speech. While many government jobs are on the chopping block under the mayor's proposal, many more could be lost if major changes are not made to the government's deficit, warns David L. Littmann, senior economist with the Mackinac Center for Public Policy.

Mayor Dave Bing to lay off 1,000 Detroit city employees - Delivering on his pledge to avoid an emergency manager, Mayor Dave Bing said today he will lay off 1,000 employees, implement a hiring freeze and increase his demands on unions to accept 10% pay cuts and deep concessions in health care and pension benefits. Bing also said he won’t seek a preliminary financial review, which would be the first step in the appointment of an emergency manager if the state decides the city’s finances are dire enough. “Solving our cash crisis requires a combination of concessions and tough cuts,” Mayor Bing said today. “Layoffs will be strategic. We will limit the impact on residents, protecting core services like police and fire protection as much as we can.” It’s not immediately clear which jobs will be eliminated and how many include police and firefighters

NYC Cuts Shrink 2013 Budget Gap to $2 Billion From $4.6 Billion - New York City's projected 2013 budget deficit has been reduced to $2 billion from $4.6 billion through agency spending cuts and $1 billion in added revenue from new taxi medallion sales, according to a spokesman for Mayor Michael Bloomberg. Schools will reduce spending by $301 million, the police department will trim $74.6 million and the city intends to cut its debt-service costs by $229 million, according to budget documents released by Marc LaVorgna, the spokesman.

This Can't End Well - I was telling my buddy about something I had read earlier in the week about a city in Michigan that could no longer afford to pay their electric bill so they were turning off, and in some cases, removing street lights.  Now I’m guessing the average person might have seen that and not thought much more about it other than “glad that’s not happening in my city!”   And while it may not be happening in your city or neighborhoods today there is chance that it will happen in many more and soon.   I The fact that a city would cut off a service as basic as street lights got me to thinking about what could be next. If reducing the light bill doesn’t fix the cash flow problems what is next. Do they cut back on road maintenance? Water treatment? Police? Fire protection? Do you ever wonder why when money is tight the first things that get mentioned to cut are the things that governments exist to provide in the first place! As I stated before I consider myself the an average guy who does the right things and meets his obligations but I got to wondering what if my city no longer could provide the basic service that they are paid by me (and my other law abiding , responsible neighbors) to do?

Cities brace for 'Occupy' movement's 'mass day'-- In the first major show of strength since police evicted "Occupy Wall Street" demonstrators encamped at Zuccotti Park, protesters on Thursday massed by the hundreds at their former home base, while others marched toward the New York Stock Exchange. The group lifted metal barricades that ringed the financial district park in Lower Manhattan, scuffling with authorities and blocking traffic as police reported up to 75 arrests, many of them on streets near the Exchange. Residents and employees were required to flash identification cards, as police cordoned off the surrounding area, said police spokesman Paul Browne. By late Thursday morning, the Zuccotti Park crowd could be seen surging forward against a large police presence, as authorities struggled to contain the group. By noon, however, police had regained control of much of the area.

Va Beach schools face $90 million budget deficit The city and its school division are facing an estimated combined $90 million budget deficit for the next fiscal year, a gap created largely by falling real estate tax revenue and increases in health care and retirement program costs. The expected shortfall for the fiscal year that starts July 2012 was unveiled at Tuesday's annual financial forecast meeting between the City Council and the School Board, a gathering that kicks off the budget season. The city's share of the deficit - $41 million - comes despite increases in stormwater, sewage and water fees and a new $10 monthly trash fee that starts in January and, so far, no planned raises for city employees. A predicted 5.5 percent drop in property assessments is expected to punch a $22.6 million hole in the two budgets, said Catheryn Whitesell, the city's director of management services. If that prediction holds true, it will be the third year in a row that property values fall. Tuesday's forecast called for real estate values to decline through 2015.

Palm Beach County school officials foresee $52 million budget deficit next year - School board members this evening got an early look at the budget looming for the next school year and they did not like what they saw: a projected deficit of at least $52 million. They warned it now appears impossible to avoid affecting students and essential services with cuts. "We're cutting into the meat now. All the fat is gone" said School Board Vice Chairwoman Debra Robinson of the budget problems the district faces for the 2012-2013 school year. "I'm not looking forward to this bleeding, but I know it is coming." Chief Financial Officer Mike Burke estimated the district will face a $52 million deficit even if the state legislature does not cut state education funding from last year's levels. School Board Chairman Frank Barbieri said there would be no way to avoid affecting schools. He asked Superintendent E. Wayne Gent to make principals aware that with the size of the deficit principals can't just say to cut from someplace else. "They are going to have to tell us where we can cut in the schools,"

Taxpayers footing bill for millionaires’ kids - When the neighborhood school in the pricey Los Altos Hills neighborhood of Los Altos, California closed, local parents were upset. So they formed the Bullis charter school, and gave residents of Los Altos Hills, where the median home value is $1 million and median household income is $219,000, a preference in admissions. [Bullis] accepts one in six kindergarten applicants, offers Chinese and asks families to donate $5,000 per child each year. Parents include Ken Moore, son of Intel Corp.’s co-founder, and Steven Kirsch, inventor of the optical mouse. These kids are getting many of the benefits of an elite private school, while other kids in their school district, the ones who don't live in this particular wealthy neighborhood, are seeing class sizes get bigger and electives get cut. But it's all good: Every child deserves a good education, Buffy Poon, a Bullis mother of three and former EBay Inc. (EBAY) executive and Merrill Lynch & Co. banker, said in an interview.  “It takes all of us, the ‘haves’ and the ‘have nots’ (I cringe to use such blunt distinctions), to help improve the world.”

Congress set to declare pizza a vegetable - "Tomato paste is nutritionally dense, but the Department of Agriculture said it must meet the same volume as a fresh tomato," Sen. Jerry Moran, R-Kan., said in a floor speech earlier this month. "That doesn't make much sense." The National Potato Council, which worked with Sen. Susan Collins, R-Maine, and Sen. Mark Udall, D-Colo., to strip out the limits on starchy vegetables, also hailed the compromise. Collins said the limits that the USDA wants to impose on starchy vegetables — including white potatoes, corn, peas and lima beans — were arbitrary.  The problem lies not with potatoes, which are full of healthful nutrients, but rather the way they are prepared, Collins said. In a recent Senate speech, she said baked potatoes are often "a vehicle" for other vegetables. Yet students would not be allowed to eat a baked potato one day and an ear of fresh corn later that week, an "absurd result," Collins said.

Congress pushes back on school lunches - In an effort many 9-year-olds will cheer, Congress wants pizza and french fries to stay on school lunch lines and is fighting the Obama administration's efforts to take unhealthy foods out of schools. The final version of a spending bill released late Monday would unravel school lunch standards the Agriculture Department proposed earlier this year. These include limiting the use of potatoes on the lunch line, putting new restrictions on sodium and boosting the use of whole grains. The legislation would block or delay all of those efforts. The bill also would allow tomato paste on pizzas to be counted as a vegetable, as it is now. USDA had wanted to only count a half-cup of tomato paste or more as a vegetable, and a serving of pizza has less than that. Nutritionists say the whole effort is reminiscent of the Reagan administration's much-ridiculed attempt 30 years ago to classify ketchup as a vegetable to cut costs. This time around, food companies that produce frozen pizzas for schools, the salt industry and potato growers requested the changes and lobbied Congress.

Making sure schools can serve our children badly -- Although appropriations bills are supposed to be about spending -- not policy-making -- Congress took extra special care this week to make sure child nutrition programs do not have to follow the very reasonable and temperate guidelines recommended by the Institute of Medicine. The conference committee report for next year's agricultural appropriations overturns key elements of USDA's proposed guidelines for child nutrition programs.  The proposed guidelines had included strong support for whole grains, a recommended limit on salt, and a stipulation that not too much of the vegetables served would be white potatoes.  Currently, school lunch programs contain far more salt than recommended limits, and many school systems use french fries and other forms of white potatoes as by far the dominant vegetable. In a step that reminds us all of the Reagan administration's heroically foolish effort to define ketchup as a vegetable, the appropriations committees also intervened to make sure that the tomato puree in pizza counts toward vegetable requirements. USDA officials were sharply critical, and I imagine that the hard-working staff throughout the department are upset.

Poor Students With Poorly Educated Parents More Disadvantaged In U.S. Than Other Countries: Intuitively, a child's academic performance is likely higher if he or she has highly educated parents, and lower if the child has less educated parents. A new report confirms that's true, but reveals that American children of poorly educated parents do a lot worse than their counterparts in other countries. Income mobility just within the U.S. has significantly declined since the mid-90s, according to a report this month by the Boston Federal Reserve. In recent years, families were more likely to stay within their income class than before -- the rich are staying rich, and the poor and middle-class are struggling to move up the economic ladder. But the Pew Economic Mobility Project takes it a step further by asking the question, "Does America promote mobility as well as other nations?" Researchers in 10 countries took to analyzing socioeconomic advantage as a function of parental education. Researchers found that a child's economic and educational status is more affected by parental education than in any other country studied.

European Children More Likely to Outperform Parents Than Americans - Despite the widespread belief among Americans that they’re destined to do better than their parents, Americans are more likely to live as well as or worse than their parents than their counterparts in many European countries. That’s according to this fact sheet, released today by the Pew Charitable Trusts and part of a forthcoming book. The study compares the U.S. and various countries including Australia, Canada and the major European countries, and attempts to measure to what degree a child’s economic future is tied to their parents’ education, income, IQ and various other measures. Not surprisingly, parental education is closely tied to their children’s economic success everywhere. But the tie was strongest in the U.S., meaning children born to more-educated parents are much more likely to move up the ladder. What’s notable is that the divergent paths between children of the educated and not starts from the very beginning — “as early as they can first be measured,” according to the Pew report. A child’s economic future is closely tied to both their parents’ wits and socio-economic standing, but, underscoring the entrenched role social norms play in education, the link was higher for the former. There was no country where children from high and low education parents started out equally prepared for school, a noble but impossible goal.

Ex Libris: About those 5,554 books in the #OWS library - Yes, there were 5,554; here’s the catalog. The eclectic, donated collection, originally cared for by Brooklyn librarian Betsy Fagin, was housed in a tent donated by singer/writer Patti Smith.  I say “there were 5,554″ because this morning New York Mayor-for-Life Michael Bloomberg had the library bulldozed, as part of his bungled invasion of Zuccotti Park, already rebounding to Bloomberg’s discomfiture and (hence) the public good. What’s Bloomberg’s problem with books, anyhow? Does he think trashing a library is going to help him buy his way to a third-party presidential run? Is “destroying things never felt so good” really the platform America’s Mayor of the 1% wants to run on? Wait, don’t answer that. Now, let’s be fair. It is true that Bloomberg didn’t actually set the people’s books on fire.**  All Bloomberg did was bulldoze the library, put the books into garbage trucks, and haul them away to a Department of Sanitation facility at 650 West 57th Street in Manhattan — not to be confused with any of these facilities — claiming that they could be picked up today (Wednesday), presumably on presentation of the proper (photo) ID [Of whom?], thumbprint, iris scan, DNA sample, or whatever else the powers that be want from us these days. Some flack then tweeted a putative photo of said books “safe and sound” . OccupyLibrary: We’re glad to see some books are OK. Now, where are the rest of the books and our shelter and our boxes?  Pas si bete. And what if the sanitation workers “threw” the kitchen food into the same “massive pile” as the books? How many of the 5,554 books can people still read? We already have reports of broken glass being mixed in with other goods the police said could be claimed.

Occupy Wall Street Protesters Shifting to College Campuses… — Goodbye, city park, hello, college green.  As city officials around the country move to disband Occupy Wall Street1 encampments amid growing concerns over health and public safety, protesters have begun to erect more tents on college campuses.  “We are trying to get mass numbers of students out,” said Natalia Abrams, 31, a graduate of the University of California, Los Angeles, and an organizer with Occupy Colleges, a national group coordinating college-based protesters.  Though only a handful of colleges have encampments, tents went up last week at Harvard in Cambridge, Mass., and here at the University of California, Berkeley2. Additionally, protesters in California have vowed to occupy dozens of other campuses in the coming days.  Last Wednesday at Berkeley, about 3,000 people gathered on Sproul Plaza to protest tuition increases, and many then set up a camp. Demonstrators linked arms to protect their tents, but police officers broke through and took down more than a dozen tents, arresting about 40 protesters.

Grade Inflation and Choice of Major - To me, the real and practical problem of grade inflation is that it causes students to alter their choices, away from fields with tougher grading, like the sciences and economics, and toward fields with easier grading.  A couple of recent high-profile newspaper stories have highlighted that college and university courses in the "STEM" areas of science, technology, engineering and mathematics tend to have lower average grades than courses in humanities, which is one factor that discourages students from pursuing those fields. Here's an overview of those stories, and then some connections to more academic treatments of the topic from my own Journal of Economic Perspectives.  A New York Times story on November 4, by Christopher Drew, was titled, "Why Science Majors Change Their Minds (It’s Just So Darn Hard)."  Drew writes: "Studies have found that roughly 40 percent of students planning engineering and science majors end up switching to other subjects or failing to get any degree. That increases to as much as 60 percent when pre-medical students, who typically have the strongest SAT scores and high school science preparation, are included, according to new data from the University of California at Los Angeles. That is twice the combined attrition rate of all other majors."

An Edge in Science Among the Foreign-Born - I’ve previously written about the wage advantage — as well as the simple likelihood of finding and holding onto a job — that comes with a bachelor’s degree in science, technology, engineering or math. The study in that case concluded that many American technology and scientific companies are forced to recruit from abroad. But they can also hire from the foreign-born population currently in the United States. According to a new Census report, a much higher proportion of foreign-born residents 25 or older with bachelor’s degrees earned their degrees in science, technology, engineering or math — the STEM fields — than native-born holders of bachelor’s degrees. The Census report looked at a broader range of degrees than usually considered when defining STEM fields. Majors analyzed by the Census authors, Christine Gambino and Thomas Gryn, included computers, math, statistics; biology, agriculture and environmental science; physical and related sciences; psychology; social sciences; engineering; and multidisciplinary sciences.Among the foreign-born bachelor’s degree holders, 46 percent had majored in a science or engineering field. That compares with 33 percent of native-born college graduates. One-third of all residents with a B.A. in engineering are foreign

America’s ‘Brain Drain’: Best And Brightest College Grads Head For Wall Street -- For employers in need of fresh talent, there are few better places to go than the Stanford University career center, where intelligent, over-achieving, creative and ambitious students stop by on their way toward picking up a degree or three. Access to these top recruits is extremely valuable, and Stanford, like many other top-tier colleges, sells it to the highest bidder. The Career Development Center (CDC) is quite explicit about the process. Its website advertises an "Employer Partner Program" that gives participating companies "a premier position in regard to on-campus recruiting."  All of the organizations at the top level, Platinum, are financial and consulting firms. Of the 19 other sponsors, more than half also fall into those categories. The list is a snapshot of where America's best and brightest are going to work after graduation. Instead of enrolling in medical school or putting their engineering degrees to work designing or building things, these bright minds are headed for Wall Street -- and, like the MIT students who took Las Vegas, figuring out ways to bring down the house. In 2007, an astonishing 47 percent of Harvard University seniors said they planned to go into finance or consulting, according to a survey by The Crimson.

College Tuition, Student Loans, and Unemployment - The protesters at Occupy Wall Street may not have put forth an explicit set of demands yet, but there is one thing that they all agree on: student debt is too damn high. Since the late nineteen-seventies, annual costs at four-year colleges have risen three times as fast as inflation, and, with savings rates dropping and state aid to colleges being cut, students have been forced to take on ever more debt in order to pay for school. The past decade has seen a student-loan binge, so that today Americans owe well over six hundred billion dollars in college debt. That’s a burden that’s hard to carry at a time when more than two million college graduates are unemployed and millions more are underemployed. Some of the boom in student debt can be chalked up to demographics: in the past decade, the number of college-age Americans rose by more than three million and the proportion of eighteen-to-twenty-four-year-olds enrolled in college went from thirty-five per cent to forty-one per cent. Still, the piles of student loans are due largely to the fact that the cost of a college degree has been going up much faster than people’s incomes. And that has raised the spectre that we might be living through a “higher-education bubble,” in which Americans are irrationally borrowing money to spend more on college than it’s actually worth.

Three Florida Colleges Leave Graduates Deep in Debt -- OnlineUniversity.net has released an infographic on schools that graduate students with the most and least college loan debt. And three of the top five colleges with the highest student debt are in Florida.

Student loan default rates surging largely due to for-profit college expansion - The United States has over 4,000 college institutions many which have been raising tuition and fees far faster than the overall rate of inflation.  Combine this with a younger and poorer population and you have a recipe for massive debt serfdom.  As the recession drags painfully on, being the deepest and longest economic contraction since the Great Depression many people are questioning once deeply held mantras of economic prophesy.  A home never goes down in value.  You can’t go wrong with a college education.  Of course these hollow statements mean little without further examination of the details.  Buying a home isn’t necessarily a bad decision but it can be a bad decision if you over leverage yourself like a Wall Street investment bank.  A college education is useful if you go to a quality institution but how many of the 4,000 are for-profit paper mills simply looking to steal money from unwitting students?  The young are facing a challenging future but this pain is also leaking into the balance sheet of their parents.

Many Americans say they will have to work until they're 80 - One-quarter of middle-class Americans fear they will have to work until they're at least 80 years old to afford a comfortable retirement (if "retirement" is even the right word, given that many of these people may never actually retire). That conclusion, in a survey released Wednesday by Wells Fargo & Co., found that nearly three-quarters of Americans expect to continue working into what long has been retirement age. A little more than half of those said they'll need to work to pay their bills, while the rest said they want to keep working. The survey was the latest of many showing that Americans are dangerously unprepared for retirement. With only limited savings, many people are realizing they must work much longer, must dramatically scale back their lifestyles, or both. More than half of middle-class Americans in the Wells Fargo survey said say they must slash their current spending "significantly." The average person has squirreled away a mere 7% of their hoped-for retirement savings -- a median of just $25,000 versus a desired goal of $350,000, according to the survey. Three in 10 people in their 60s have less than $25,000, suggesting they'll have no choice but to live on Social Security.

The New Retirement Normal: The Average American Must Work For Two Extra Years After Death - While Italy is bickering over just how inhumane it is to raise the retirement age by 2 years in a 15 year span (which works out to a whopping 48 days per year) and will likely lead to mass riots and bloodshed in Rome before the idea is ultimately scrapped, things in America's own back yard, the country that now that the EFSF is finished will have no choice but to come to Europe's rescue via the IMF, are looking horrendous to quite horrendous. In fact when it comes to retirement, 80 is, we are sad to say, the new 65, at least according to Wells Fargo. And with average life expectancy in the US peaking at 78.1, it means that the typical American will have to work for an additional 2 years after death to pay for not only not having any retirement savings (thank you Bernanke ZIRP and VIX>30 stock market), but to make sure Europeans have theirs. You think we jest? Nope. From Bloomberg: “Eighty is the new 65,” About 76 percent of respondents said it’s more important to reach a specific dollar amount before retiring, compared with 20 percent who said it’s more important to retire at a given age, regardless of savings, according to the survey of adults with household incomes or assets from about $25,000 to $100,000. About 74 percent expect to work in retirement, according to the survey, with about 39 percent working because they’ll need to and 35 percent because they want to. And 25 percent of those surveyed said they expect they’ll need to work until at least age 80 because they don’t have sufficient savings.

Illinois Gets $1 Billion Surprise as Pension Demands Jump -- Illinois will owe $1 billion more to its pension funds next fiscal year as smaller employee contributions kick in, according to projections released this week by state actuaries. The 19 percent increase in obligations, to $5.9 billion from $4.9 billion in fiscal 2012, wasn’t anticipated by budget officials when they presented the current plan in February. The higher cost to Illinois’s five retirement funds threatens to deepen a budget hole as lawmakers consider tax breaks for businesses threatening to leave the state. The main reason for the increase is the change to the systems, William Atwood, executive director of the Illinois State Board of Investment, said today. While pension reforms effective in January were designed to reduce long-term obligations, the immediate impact of smaller employee contributions has been to increase the difficulty of adequately funding the pensions by 2045.

U.S. Pension Agency Deficit Widens to Record $26 Billion in 2011 - The Pension Benefit Guaranty Corp., a U.S. insurance program for company retirement plans, said its deficit widened to a record $26 billion in the 2011 fiscal year and it took over 152 funds that were closed. The largest year-end deficit in the agency’s 37 years reflect lower interest rates that generate less cash used to make payments and anticipated increases in assistance to multiemployer plans, according to an annual report today. The agency had a $23 billion deficit in 2010. “The majority of pension plans are OK, but as our deficit growth shows, we think that some will lack the funds to pay benefits,” PBGC Director Joshua Gotbaum said in an e-mail statement. The PBGC, which collects premiums from companies, paid almost $5.5 billion last year to 873,000 retirees whose plans had failed. In 2011, the agency assumed responsibility for the benefits of 57,000 people in newly failed plans.

How Income Inequality Undermines Social Security’s Finances - A recent study reveals how rising income inequality is jeopardizing Social Security’s finances. It is by now common to hear Social Security advocates demand that we “scrap the cap” on earnings subject to the Social Security payroll tax.  This is an important appeal. Few Americans realize that millionaires only contribute to Social Security on the first $110,100 they earn. If they did, perhaps they’d be even more adamantly opposed to the benefit cuts many in Washington are proposing. But even fewer people realize that the “cap,” or taxable maximum, as it is called more officially, at one time covered a far larger share of earnings, existing in harmony with fully-funded Social Security benefits. In fact, the cap was baked into Social Security from its inception. The Evolution of Social Security’s Taxable Maximum, a recent study by Kevin Whitman and Dave Shoffner from the Social Security Administration’s Office of Retirement Policy, shows how rising income inequality has greatly increased the amount of earnings above the tax-max, depriving Social Security of much-needed revenue and shifting a larger share of its financing onto middle- and low-income workers.

Vouchers for Veterans, by Paul Krugman - American health care is remarkably diverse. In terms of how care is paid for and delivered, many of us effectively live in Canada, some live in Switzerland, some live in Britain, and some live in the unregulated market of conservative dreams. One result of this diversity is that we have plenty of home-grown evidence about what works and what doesn’t.  Naturally, then, politicians — Republicans in particular — are determined to scrap what works and promote what doesn’t. And that brings me to Mitt Romney’s latest really bad idea, unveiled on Veterans Day: to partially privatize the Veterans Health Administration (V.H.A.).  What Mr. Romney and everyone else should know is that the V.H.A. is a huge policy success story, which offers important lessons for future health reform.  Yet Mr. Romney believes that giving veterans vouchers to spend on private insurance would somehow yield better results. Why?  The claim, always, is the one Mr. Romney made last week, that “private sector competition” would lower costs.  But we have a lot of evidence about how private-sector competition in health insurance works, and it’s not favorable. The individual insurance market, which comes closest to the conservative ideal of free competition, has huge administrative costs and has no demonstrated ability to reduce other costs.

Medicare 27.4% doctor pay cut set for 2012 unless Congress acts - The across-the-board Medicare physician pay reduction scheduled for 2012 shrank slightly from projections made earlier this year, but doctor organizations said the cut still would be catastrophically large. A 27.4% reduction to doctor pay starting Jan. 1 would have devastating consequences on all physicians and the millions of patients who rely on the insurance program for coverage, patient advocacy associations and organized medicine groups have warned. Beneficiaries would suffer from not being able to see the doctors of their choice, and physicians would weigh leaving the program and perhaps closing their doors.The Centers for Medicare & Medicaid Services published its 2012 Medicare physician fee schedule on Nov. 1. The fee schedule updates the payment rates for thousands of medical services and establishes other regulatory policy. Most finalized changes are effective Jan. 1. The proposed fee schedule that was released earlier this year had projected a 29.5% cut in 2012 as mandated by a budgetary mechanism called the sustainable growth rate formula, but CMS revised the figure to 27.4% in the final rule.

Supreme Court to Hear Challenge to Affordable Care Act - It’s official; the Supreme Court will hear the a challenge to the Affordable Care Act, President Obama’s health care reform law. The Court’s decision is expected to come next June. Going by the tenor of conservative rhetoric and the decisions of lower courts, the key issue at hand is the “individual mandate,” which requires all Americans to purchase health insurance by 2014 or face financial penalties. Conservatives argue that the mandate is a gross overreach of federal power —by their lights, the Constitution doesn’t allow the government to tax “inaction.” Allowing the mandate to stand, they argue, would put the United States on a dangerous road toward unrestrained government. Indeed, in his ruling to uphold the individual mandate, Judge Lawrence Silberman of the DC Circuit Court of Appeals pointed out that while “the Government does stress that the health care market is factually unique,” it “concedes the novelty of the mandate and the lack of any doctrinal limiting principles.” As Adam Serwer notes at Mother Jones, this poses a problem for ACA defenders who hope to show that the law isn’t a stepping stone to ever more intrusive government.

Supreme Court to Hear Case Challenging Health Law - The Supreme Court on Monday agreed to hear a challenge to the 2010 health care overhaul law, President Obama’s signature legislative achievement. The development set the stage for oral arguments by March and a decision in late June, in the midst of the 2012 presidential campaign…Appeals from three courts had been vying for the justices’ attention, presenting an array of issues beyond the central one of whether Congress has the constitutional power to require people to purchase health insurance or face a penalty through the so-called individual mandate.  The Supreme Court agreed to hear appeals from just one decision, from the United States Court of Appeals for the 11th Circuit, in Atlanta, the only one so far striking down the mandate. The decision, from a divided three-judge panel, said the mandate overstepped Congressional authority and could not be justified by the constitutional power “to regulate commerce” or “to lay and collect taxes.”  The appeals court went no further, though, severing the mandate from the rest of the law.

Scalia, Thomas dine with healthcare law challengers - The day the Supreme Court gathered behind closed doors to consider the politically divisive question of whether it would hear a challenge to President Obama’s healthcare law, two of its justices, Antonin Scalia and Clarence Thomas, were feted at a dinner sponsored by the law firm that will argue the case before the high court. The occasion was last Thursday, when all nine justices met for a conference to pore over the petitions for review. One of the cases at issue was a suit brought by 26 states challenging the sweeping healthcare overhaul passed by Congress last year, a law that has been a rallying cry for conservative activists nationwide. The justices agreed to hear the suit; indeed, a landmark 5 1/2-hour argument is expected in March, and the outcome is likely to further roil the 2012 presidential race, which will be in full swing by the time the court’s decision is released. The lawyer who will stand before the court and argue that the law should be thrown out is likely to be Paul Clement, who served as U.S. solicitor general during the George W. Bush administration.

What If the ObamaCare Mandate Goes Away? - Kevin Drum figures that, in the unlikely case that the Supreme Court strikes down the ObamaCare* health insurance mandate,  we’ll eventually wind up with something like it through the back door. Answer: insurance companies go ballistic. If they’re required to insure all comers at the same price but healthy people aren’t required to buy insurance, then prices spiral as sick people sign up for coverage and healthy people drop out. Eventually this death spiral will lead — as the name implies — to death for insurance companies, and at that point it becomes a staredown. Something has to be done, and either Democrats or Republicans will blink first. It may seem like a no-brainer that Democrats will be the ones to cave if this happens, but that’s not clear. All it takes is 41 holdouts to filibuster the GOP, and as the insurance industry gets ever more desperate they’ll start pushing hard on their Republican pals. Obviously the outcome is unclear. But depending on where public opinion falls — and requiring insurance companies to insure everyone is pretty popular — Congress might end up reinstating the mandate in some form or another. It’s genuinely a crapshoot.

Health disparities in the US and China - Health disparities across a population are among the most profound indicators of social inequalities that we can find.  And the fact of significant disparities across groups is a devastating statement about the circumstances of justice under which a society functions.  These disparities translate into shorter lives and lower quality of life for whole groups of people, relative to other groups. Both the United States and China appear to display significant health disparities across their populations. Here are a couple of studies that draw attention to these facts.

The Food Industrial Complex Wins. Kids Lose. - Late Monday, the food industrial complex won a big victory in the agriculture appropriations conference report, H.R.2112, with a provision that blocks the Agriculture Department from carrying out a rule to improve school lunches for the first time in 15 years.  This New York Times article covers it well.  The House is voting in favor of this right now at 4:30 p.m. Thursday, and the Senate will pass it late tonight or tomorrow.  We have an obesity epidemic in this country that grows directly from eating too much processed food, too much salt, too much sugar, and way too many calories.  Many times, I begged a 180 pound 4th grader I tutored a few years ago to forego the chips and the Chicken McNuggets and the pizza he was being served to no avail. Many times, I've heard from an inner city OB/GYN how hard it is to deliver a health baby from an obese and diabetic 22 year old mother.  Here we have a sensible regulation sidetracked for short-term profit despite terrible long-term consequences.

Today's teens will die younger of heart disease - "We are all born with ideal cardiovascular health, but right now we are looking at the loss of that health in youth," said Donald Lloyd-Jones, M.D., chair and associate professor of preventive medicine at Northwestern University.  "Their future is bleak." Lloyd-Jones is the senior investigator of the study presented Nov. 16 at the American Heart Association Scientific Sessions in Orlando. The effect of this worsening teen health is already being seen in young adults. For the first time, there is an increase in cardiovascular mortality rates in younger adults ages 35 to 44, particularly in women, Lloyd-Jones said. The alarming health profiles of 5,547 children and adolescents, ages 12 to 19, reveal many have high blood sugar levels, are obese or overweight, have a lousy diet, don't get enough physical activity and even smoke, the new study reports. These youth are a representative sample of 33.1 million U.S. children and adolescents from the 2003 to 2008 National Health and Nutrition Examination Surveys. "Cardiovascular disease is a lifelong process," Lloyd-Jones said. "The plaques that kill us in our 40s and 50s start to form in adolescence and young adulthood. These risk factors really matter." "After four decades of declining deaths from heart disease, we are starting to lose the battle again," Lloyd-Jones added.

US Mental Health Drug Usage - A pretty interesting report from Medco just came out.  It will probably surprise few of my readers to learn that a lot more Americans were on mental health drugs in 2010 than in 2001.  The details are above with around a fifth of all Americans now using pharmaceutical assistance to get by.  The point where we all need drugs to cope still seems to be a number of decades off, however. This graph of antidepressant usage by age was interesting: In particular it struck me that these levels could be high enough to have a noticeable impact on the famous "happiness smile":Source.  That is the phenomenon that if you ask people how happy they are things tend to get worse as they get older into their forties and then start getting better again.  How much of this is just due to the fraction of the population that finally got their meds right?

High IQ linked to drug use - The "Just Say No" generation was often told by parents and teachers that intelligent people didn't use drugs.   Turns out, the adults may have been wrong. A new British study finds children with high IQs are more likely to use drugs as adults than people who score low on IQ tests as children.  The data come from the 1970 British Cohort Study, which has been following thousands of people over decades.  The kids' IQs were tested at the ages of 5, 10 and 16.  The study also asked about drug use and looked at education and other socioeconomic factors.  Then when participants turned 30, they were asked whether they had used drugs such as marijuana, cocaine and heroin in the past year. Researchers discovered men with high childhood IQs were up to two times more likely to use illegal drugs than their lower-scoring counterparts.  Girls with high IQs were up to three times more likely to use drugs as adults.  A high IQ is defined as a score between 107 and 158.  An average IQ is 100. The study appears in the Journal of Epidemiology and Community Health.

Parkinson’s ‘linked with solvent’ - An international study has linked an industrial solvent to Parkinson's disease. Researchers found a six-fold increase in the risk of developing Parkinson's in individuals exposed in the workplace to trichloroethylene (TCE).  Although many uses for TCE have been banned around the world, the chemical is still used as a degreasing agent.  The research was based on analysis of 99 pairs of twins selected from US data records. Parkinson's can result in limb tremors, slowed movement and speech impairment, but the exact cause of the disease is still unknown, and there is no cure.

Cough ... the 20 most polluted cities in America -California has gone to extremes to improve the state’s air quality, pushing out coal-fired power plants and implementing the strictest auto emissions standards in the nation. L.A.’s persistent smog layer may be a shadow of its former self, but it hasn’t been enough. Lots of people and too many cars means California still has seven big cities that rank among the 20 most polluted in the nation.  L.A. ranks No. 2 on our list of America’s Dirtiest Cities, and San Diego is no. 9, but some of the worst air in the country is in smaller cities in the San Joaquin Valley, where a ring of mountains traps a stagnant stew of ozone and particulate matter. According to data that Forbes crunched from The American Lung Association’s State of the Air 2011 report, the most hazardous breathing in America is in Bakersfield. Hot, dusty, adjacent to California’s biggest oil fields, Bakersfield has 60 days a year of unhealthy air, 10 times a level considered acceptable. Its ozone levels are better than at any time in the past 15 years, but still unhealthy for 100 days out of the year.  By contrast, Houston (No. 18) has 25 bad ozone days a year while New York (No. 14) suffers just 17, down from 40 a decade ago).

Tyler Cowen on agriculture policy and corporate bailouts - Here is the latest NYT column from Tyler Cowen, who I generally think of as a market-oriented libertarian economist.  Cowen generally prefers to let the deserving rich be rich, and yet he can see why the demonstrators at Zuccotti Park have "so much resonance."The first problem is that higher status for the wealthy can easily lead to crony capitalism. In public discourse social status judgments are often crude. Critical differences are lost, like the distinction between earning money through production for consumers, as Apple has done, and earning money through the manipulation of government, which heavily subsidized agribusinesses have done. The relevant question, in my view, is not about how much you have earned but about how you have earned it. To further confuse matters, many right-wing Republican politicians supported corporate bailouts and corporate welfare far beyond what was necessary to stabilize the economy, in doing so further muddying the difference between productive and predatory capitalism

2011 U.S. Ethanol Exports Set to More than Double Over Last Year  - For September . . .

  • 105.8 million gallons (mg) of denatured and undenatured (non-beverage) ethanol were exported in September.
  • Half of the shipments went to Brazil
  • September ethanol exports from the U.S. were the third highest on record.

For 2011 . . .

  • Year-to-date exports stood at 746.5 mg at the end of September, almost double the amount exported in the entire 2010 calendar year.
  • The U.S. remains on pace to export between 900 mg and 1 billion gallons in 2011.
  • Canada and Brazil accounted for 55 percent of total U.S. export demand during the first nine months of this year.

USA Export Land Model Analysis For Food Energy Production And Consumption: Part 3 - Show me the few that stayed. Farming is corporate now; there is still the myth of the family farm. Yea, you still have some fractional percent that are still out there, but they are working at Wal-Mart to pay for it, so that they can grow 100 acres of corn. There is nobody that stays on the land. There is kind of a resurgence in it, but it's San Francisco hippies that are going to grow some strawberries, and don't realize that agriculture is 10,000 years of human experience ...it kind of throws you because they can afford to pay $15,000 per acre to grow strawberries, well, that's already suspect. But industrial agriculture owns America—18 percent of all America farmers grow 91 percent of all that we consume....Subsistence farms, which now is seen as a dirty word, and it wasn't a dirty word at all—we lived extremely well...and never saw a $1000 a year income.... Forty-four percent of Americans either lived on farms or something that depended on farms, the local store or whatever. After World War II, they took a survey of what the soldiers were going to do after they came back, and they all said "we are going home."

Wheat Shippers Battle for Sales as Global Grain Glut Expands - France may lose its place as the second-biggest wheat exporter after failing to win more than a dozen tenders in Egypt, the world’s biggest buyer, as shipments from Russia, Ukraine and Kazakhstan overwhelm markets. Egypt favored cheaper supply from the Black Sea region in the past 17 tenders and cargoes to northern Africa from France’s Rouen, Europe’s biggest grain-export hub, fell to a four-month low in the week ended Nov. 2, port data show. France’s crop office expects a 23 percent drop in shipments in the 12 months ending in June, the most in at least a decade. That’s reversing last season’s trend, when French cargoes jumped 16 percent to a record as Russia and Ukraine cut sales to ensure domestic supply. Prices that reached a three-year high in February are plunging after both countries eased restrictions. Output is also expanding elsewhere and the United Nations expects the biggest-ever global harvest. “The world is awash with wheat and unless you can compete with the Black Sea you’re stuck,” . “The bias is for lower prices in an effort to clean up the glut.”

Solar Power Boom Threatens Prime Ag Land - The question of when a farm is a farm is coming up often these days in California's agricultural heartland, where the sunny days and wide open spaces that make it America's most productive ag land are proving an irresistible mix to developers seeking to get in on the push for renewable energy.  Developers say that solar panels "harvest" the sun's energy to turn into electricity, and that their 35-year lifespan is about the same as an almond orchard. "I view this as a temporary use," said developer Al Solis, as he made a pitch to the Fresno County Board of Supervisors recently to allow farmland planted in Asian vegetables to convert to solar.The land rush is on, and to critics it looks like the leapfrog housing boom of the late 20th century that chopped up some agricultural regions into too-small pieces.

‘Deadly synergy between beetles, blister rust, and climate change’ may doom rugged pine - The ghostly conifers found on chilly, wind-swept peaks like this may well be among the earliest victims of a warming climate. Even in the Northwest, rising temperatures at higher elevations have brought hundreds of thousands of whitebark pines in contact with a deadly predator - the mountain pine beetle - that is helping drive this odd tree toward extinction. Connie Mehmel, with the Okanogan-Wenatchee National Forest, is one of a handful of entomologists struggling to track the beetles' destructive path. Mountain pine beetles are probably best-known here as the trunk-girdling devils that have reddened and deadened millions of acres of lodgepole, exposing the Northwest to a greater potential for cataclysmic wildfires. But the evolutionary history of lodgepole pine and beetles is so intertwined that those forests in many places are expected to grow back. Whitebark pines may not. "What concerns me and a lot of people in my line of work is we are seeing beetles being more active in areas where we didn't use to see them - particularly in higher-elevation areas," Mehmel says. "We have thousands of acres of whitebark pine that are being attacked by mountain pine beetles, more than we've seen in quite a long time."

China's grain output in danger --- China will face yield losses in rice, wheat and corn -- the country's three main crops -- unless it takes steps to offset the effects of climate change, an expert warns. "The impact of climate change, especially extreme weather and plant diseases and insects, will cause a bigger grain production fluctuation in China and bring more serious threats to the country's food supplies," said Tang Huajun, deputy dean of the Chinese Academy of Agricultural Sciences, In an effort to safeguard China's grain security, the government last month said it would introduce legislation aimed at improving the country's grain production, protecting farmlands and to adopt policies favorable for the agricultural sector. The government's Agriculture and Rural Affairs Committee is pressing for the legislation to include improvements to the national grain reserve system and measures to prevent foreign capital from undermining national grain security, state-run news agency Xinhua reports. China, the world's second largest and fastest-growing economy, is the world's biggest grain producer.

Japan farm radioactive levels probed - New research has found that radioactive material in parts of north-eastern Japan exceeds levels considered safe for farming.  The findings provide the first comprehensive estimates of contamination across Japan following the nuclear accident in 2011. Food production is likely to be affected, the researchers suggest.The results are reported in the Proceedings of National Academy of Sciences (PNAS) journal.  In the wake of the accident at Japan's Fukushima nuclear power plant, radioactive isotopes were blown over Japan and its coastal waters. Fears that agricultural land would be contaminated prompted research into whether Japanese vegetables and meat were safe to eat. An early study suggested that harvests contained levels of radiation well under the safety limit for human consumption.  Now, an international team of researchers suggests this result deserves a second look.

Freshwater Use by U.S. Power Plants: Electricity’s Thirst for a Precious Resource | Union of Concerned Scientists - Take the average amount of water flowing over Niagara Falls in a minute. Now triple it. That’s almost how much water power plants in the United States take in for cooling each minute, on average.  In 2005, the nation’s thermoelectric power plants—which boil water to create steam, which in turn drives turbines to produce electricity—withdrew as much water as farms did, and more than four times as much as all U.S. residences. It requires more water, on average, to generate the electricity that lights our rooms, powers our computers and TVs, and runs our household appliances, than the total amount of water we use in our homes for everyday tasks—washing dishes and clothes, showering, flushing toilets, and watering lawns and gardens.  This tremendous volume of water has to come from somewhere. Across the country, water demand from power plants is combining with pressure from growing populations and other needs, and is straining our water resources—especially during droughts and heat waves.  

Why the World May Be Running Out of Clean Water - Earlier this month, officials in the South Pacific island nation of Tuvalu had to confront a pretty dire problem: they were running out of water. Due to a severe and lasting drought, water reserves in this country of 11,000 people had dwindled to just a few days' worth. So far Tuvalu has been bailed out by its neighbors Australia and New Zealand, which have donated rehydration packets and desalination equipment. But the archipelago's water woes are just beginning — and it's far from the only part of the world facing a big dry. Other island nations like the Maldives and Kiribati will see their groundwater spoil as sea levels rise. Texas, along with much of the American Southwest, is in the grip of a truly record-breaking drought — even after days of storms in the past month, Houston's total 2011 rainfall is still short of its yearly average by a whopping 2 ft., or 60 cm. Australia has experienced severely dry weather for so long, it's not even clear whether the country is in a state of drought, or more worryingly, a new and permanent dry climate that could forever alter life Down Under. "Climate-change impacts on water resources continue to appear in the form of growing influence on the severity and intensity of extreme events," . "Australia's recent extraordinary extreme drought should be an eye-opener for the rest of us." (See photos of the world's water crisis.)

UN weather agency says La Nina is back - The U.N. weather agency says La Nina conditions re-emerged in August and will likely continue through the rest of 2011 and into early next year. The La Nina phenomenon is characterized by cooler sea surface temperatures in the central and eastern tropical Pacific, greater rainfall in the southern Pacific, and dry conditions in parts of east Africa, southwest Asia and the southern United States. The World Meteorological Organization says La Nina conditions could strengthen to "moderate intensity" but probably will be considerably weaker than the most recent ones linked to flooding and drought in parts of the world. La Ninas — the opposite of El Ninos — normally trigger some extremes, such as flooding in Australia and drought in Texas.

Amazon fire season 'linked to ocean temperatures'…Sea surface temperature (SST) anomalies can help predict the severity of Amazon fire seasons, a study has suggested. A team of US scientists found there was a correlation between El Nino patterns in the Pacific and fire activity in the eastern Amazon.  Writing in the journal Science, they say they also found a link between Atlantic SST changes and fires in southern areas of South America.  They said the data could help produce forecasts of forthcoming fire seasons. "We found that the Oceanic Nino Index (ONI) was correlated with interannual fire activity in the eastern Amazon, whereas the Atlantic Multidecadal Oscillation (AMO) index was more closely linked with fires in the southern and south-western Amazon," they wrote. The ONI is a system used to identify El Nino (warm) and La Nina (cool) events in the Pacific Ocean, while the AMO index performs a similiar function in the Atlantic.

Air Pollution: Bad For Health, But Good For Planet? - Cleaning up the air, while good for our lungs, could make global warming worse. That conclusion is underscored by a new study, which looks at the pollutants that go up smokestacks along with carbon dioxide. These pollutants are called aerosols and they include soot as well as compounds of nitrogen and sulfur and other stuff into the air. Natalie Mahowald, a climate researcher at Cornell University, says so far, scientists have mostly tried to understand what those aerosols do while they're actually in the air. "There are so many different kinds of aerosols and they have many different sources," she says. "Some warm and some cool. But in the net, humans are emitting a lot of extra aerosols, and they tend to cool for the most part." The aerosols reflect sunlight back into space, or they stimulate clouds that keep us cool. But it turns out that's not all they do. These aerosols also influence how much carbon dioxide gets drawn out of the air by plants on land and in the sea. "They can add nutrients, for example, to the oceans or to the land," Mahowald says. "But also while they're in the atmosphere they can change the climate, and so that also can impact the amount of carbon the land or the ocean can take up. So there are quite a few different ways that aerosols can interact."

Top Ten Causes Of Toxic Pollution - A report released this week by the Blacksmith Institute reveals the major causes of toxic pollution and the associated challenges facing the developing world. In the report, “The World's Worst Toxic Pollution Problems Report 2011,” the health impacts on the people who live near the sources of pollution are discussed. Those individuals could lose “an average of 12.7 years to death or disability,” according to a press release. The Blacksmith Institute explains that in the countries residing outside North America and Western Europe, “pollution hotspots are poorly documented, and sometimes are completely unknown to local and national governments.” Yet, the report finds that most of these sites are caused by multinational corporations. Thus, they are “poorly regulated, locally owned small and medium-scale operations.” According to the United Nations Development Program, developed countries “consistently failed to meet their stated pledges” in fighting “the impact of climate change in developing countries.” The Blacksmith organization's top ten list consists of the collected data of over 2,200 sites where toxic pollution exists in levels above internationally accepted health standards. The list is as follows:

Moron from Scam Companies “Validated Carbon Credits” and “Baron Traders Limited ” Threatens This Blog - I posted this a few days ago, about the screechingly obvious fake Gibraltar company Validated Carbon Credits, a trading name of Baron Traders Ltd and its lying “CEO” James Richards. Two comments to the post have caught my eye: It´s obvious your posting is not only slanderous but based on pure conjecture without any circumstantial evidence whatsoever. Why is it you don´t have a “contact us” link? Did you even bother contacting the company / individuals to try and establish some facts? This was purportedly by a lady called Karen Johnson, who guilelessly provides an email address, bubblybosun@gmail.com, which, a quick Google reveals, is a handle used by none other than James Richards, the aforementioned lying CEO. Rather than dwell on that, or on the fact that “she” evidently doesn’t understand the meanings of the words “circumstantial evidence” and “slanderous”, I responded as follows: Hello Karen, Since I know that James Richards is a liar, and Ellie Johnson is a liar, why on earth would I go out of my way to contact them? I’d just get told more lies. I don’t think my post is the least bit slanderous. Produce some evidence that I am wrong. Evidence was not forthcoming.

Government's Vital Role in Energy Innovation - In the wake of Solyndra's failure, pundits have latched on to a simple, compelling narrative: government can't do energy right. From synfuels to solar panels to "clean coal" (written, inevitably, with knowing quotation marks), demonstration projects funded by the Department of Energy are described as one failed white elephant after another.What gets left out (and forgotten) is that virtually every one of today's major energy technologies exists thanks to sustained US government investments in research, development, and demonstration. Consider:

Republicans Cut Top Science Office by 1/3 - Scientists are regarding it as yet another attack on science by a political party that has, in the words of GOP presidential candidate Jon Huntsman, become “the antiscience party.” A 2012 spending bill expected to be approved this week slashes the White House Office of Science and Technology Policy (OSTP) budget by a whopping 32 percent. The cuts “will have real consequences on OSTP’s operations,” said spokesperson Rick Weiss. The OSTP is the White House’s overall coordinating agency for federal science initiatives ranging from clean energy research to economic competitiveness to space exploration to climate change to education.Cutting the top office responsible for insuring scientific integrity in government is the latest action by a Republican party whose leadership seems to be prosecuting an assault on science at almost every level, including House Speaker John Boehner’s attempts to have creationism taught in science classes and his false assertion that climate scientists are arguing carbon dioxide is a carcinogen.

EPA to be GOP target in 2012 - The Environmental Protection Agency is likely to play an unusually prominent role in the 2012 presidential election, reflecting ongoing partisan debate in Congress over the ties between environmental regulations and jobs. “What we’re going to see in this cycle is a lot of bitterness. … It’s going to be more partisan than it’s ever been,” said GOP environmental strategist Chelsea Maxwell. “So the energy and environment issues will definitely creep into that.” It goes against conventional campaign wisdom — environmental issues rarely play a large role in shifting the electorate. But this year, the conversation has taken a new turn. The message of nearly all campaigns nationwide is jobs with a capital “J.” Republicans have spent lots of time and effort targeting the “job-killing EPA” for a landslide of regulations that they say hurt businesses and the American economy with dubious returns on health.

Frozen Planet Climate change episode won't be shown in US - An episode of the BBC's Frozen Planet documentary series that looks at climate change has been scrapped in the U.S., where many are hostile to the idea of global warming.British viewers will see all seven episodes of the multi-million-pound nature series throughout the Autumn.But U.S. audiences will not be shown the last episode, which looks at the threat posed by man to the natural world.It is feared a show that preaches global warming could upset viewers in the U.S., where around half of people do not believe in climate change.

Wealth, Illth, and Net Welfare - Wellbeing should be counted in net terms — that is to say we should consider not only the accumulated stock of wealth but also that of “illth;” and not only the annual flow of goods but also that of “bads.” The fact that we have to stretch English usage to find words like illth and bads with which to name the negative consequences of production that should be subtracted from the positive consequences, is indicative of our having ignored the realities for which these words are the necessary names. Bads and illth consist of things like nuclear wastes, the dead zone in the Gulf of Mexico, biodiversity loss, climate change from excess carbon in the atmosphere, depleted mines, eroded topsoil, dry wells, exhausting and dangerous labor, congestion, etc. We are indebted to John Ruskin for the word “illth,” and to an anonymous economist, perhaps Kenneth Boulding, for the word “bads.” In the empty world of the past these concepts and the names for them were not needed because the economy was so small relative to the containing natural world that our production did not incur any significant opportunity cost of displaced nature. We now live in a full world, full of us and our stuff, and such costs must be counted and netted out against the benefits of growth. Otherwise we might end up with extra bads outweighing extra goods, and increases in illth greater than the increases in wealth. What used to be economic growth could become uneconomic growth — that is, growth in production for which marginal costs are greater than marginal benefits, growth that in reality makes us poorer, not richer. No one is against being richer. The question is, does growth any longer really make us richer, or has it started to make us poorer?

Naomi Klein on Climate Change: Hit and Miss - Klein got her start, at least outside her native Canada, as a cultural critic in the wonderful book No Logo.  Since then, with each project she has dipped further into economics, with a weird bifurcation: her political and cultural analysis has become even more insightful, but her understanding of economics has not kept pace.  This was a problem in The Shock Doctrine, and it is a problem in her missive on climate change on view in the current Nation. She is right that climate denialism has its roots in politics and psychology, not science, and that trying to make a serious response to the impending crisis look like business as almost usual is misguided.   I think Klein is exactly right that climate activists should accept the reality of the cultural divide and cook up effective strategies to deal with it. But the economics is a mess.  She rails against globalization, but this is a false target.  The fundamental driver of carbon accumulation in the atmosphere is burning fossil fuels, and humanity has done this in ever greater quantities as the technology for extracting and converting these energy sources has developed.  We have been doing it when there was less trade, more trade, and in-between trade.  If we took the carbon-intensive industries in China that export to the US and moved them to North America, there would be hardly any difference in the planetary carbon trajectory. 

Climate change: Sea rise could kill vital marshes - The critical tidal marshes of San Francisco Bay – habitat for tens of thousands of birds and other animals – will virtually disappear within a century if the sea rises as high as some scientists predict it will as a result of global warming. The sea would inundate the coastline and eliminate 93 percent of the bay’s tidal wetlands if carbon emissions continue unchecked and the ocean rises 5.4 feet, as predicted by scientists under a worst-case scenario, according to a new study by PRBO Conservation Science. The tidal areas closest to the Golden Gate, including Richardson Bay in Marin County and much of the East Bay coastline, were identified as most vulnerable to sea level rise. “Marshes cannot keep up with the high-end sea level rise predictions,” said Diana Stralberg, a research associate with PRBO, also known as the Point Reyes Bird Observatory, and the lead author of the study, which was published Wednesday in the online science journal PLoS One.

Major storms could submerge New York City in next decade. Sea-level rise due to climate change could cripple the city in Irene-like storm scenarios, new climate report claims -- Irene-like storms of the future would put a third of New York City streets under water and flood many of the tunnels leading into Manhattan in under an hour because of climate change, a new state government report warns Wednesday. Sea level rise due to climate change would leave lower Manhattan dangerously exposed to flood surges during major storms, the report, which looks at the impact of climate change across the entire state of New York, warns. "The risks and the impacts are huge," said Art deGaetano, a climate scientist at Cornell University and lead author of the ClimAID study. "Clearly areas of the city that are currently inhabited will be uninhabitable with the rising of the sea." Factor in storm surges, and the scenario becomes even more frightening, he said. "Subway tunnels get affected, airports -- both LaGuardia and Kennedy sit right at sea level -- and when you are talking about the lowest areas of the city you are talking about the business districts." The report, commissioned by the New York State Energy Research and Development Authority, said the effects of sea level rise and changing weather patterns would be felt as early as the next decade.

Depressing climate-related trends – but who gets it? - I saw two particularly depressing trend lines this week. Both were confronting enough to make me stop, sit back and just contemplate. It was not as though these came as a great surprise — I’d been following these data for years. But for some reason, the seriousness of them really struck home like never before. The first was a report on Arctic sea ice volume. Here is the graph that shocked me: It shows the minimum northern hemisphere sea ice volume yearly from 1979 to 2011, and a simple time-series forecast based on a fit of the exponential-decline model. You can read about the details here: PIOMAS September 2011 (volume record lower still), where various related charts are also shown. One can argue about the precision of the projection line, but the general fit is remarkably robust and, on this basis, it is reasonable to conclude that unless some remarkable turn around occurs, the Arctic summer ice volume will be near-zero by 2020.

World headed for irreversible climate change in five years, IEA warns - The world is likely to build so many fossil-fuelled power stations, energy-guzzling factories and inefficient buildings in the next five years that it will become impossible to hold global warming to safe levels, and the last chance of combating dangerous climate change will be "lost for ever", according to the most thorough analysis yet of world energy infrastructure. Anything built from now on that produces carbon will do so for decades, and this "lock-in" effect will be the single factor most likely to produce irreversible climate change, the world's foremost authority on energy economics has found. If this is not rapidly changed within the next five years, the results are likely to be disastrous. "The door is closing," Fatih Birol, chief economist at the International Energy Agency, said. "I am very worried – if we don't change direction now on how we use energy, we will end up beyond what scientists tell us is the minimum [for safety]. The door will be closed forever." If the world is to stay below 2C of warming, which scientists regard as the limit of safety, then emissions must be held to no more than 450 parts per million (ppm) of carbon dioxide in the atmosphere; the level is currently around 390ppm. But the world's existing infrastructure is already producing 80% of that "carbon budget", according to the IEA's analysis, published on Wednesday. This gives an ever-narrowing gap in which to reform the global economy on to a low-carbon footing.

Global Temps `Virtually Certain’ to Rise: UN - The UN Intergovernmental Panel on Climate Change whirrs into action this week with a significant assessment of extreme events and disasters. The final report is due on Nov. 18. A draft summary for policymakers obtained by Bloomberg shows the caution and rigor with which scientists approach attributing observed trends to man-made climate change. The panel says it’s “virtually certain” that warm daily temperature extremes will increase in this century. It’s “likely” that human influences have led to a warming of extreme daily minimum and maximum temperatures across the globe, and that instances of heavy rainfall will increase. The report finds the average maximum wind speed of hurricanes is likely to increase, though storm frequency is likely to drop or remain the same. “Likely” or “virtually certain” imply precision in science that’s generally absent from everyday speech. So when they say “virtually certain,” they’re using a definition of 99 to 100 percent probability. “Very likely” is 90 to 100 percent, and “likely” is 66 to 100 percent.

Regions must brace for weather extremes: UN climate panel -  Southern Europe will be gripped by fierce heatwaves, drought in North Africa will be more common, and small island states face ruinous storm surges from rising seas, according to a report by UN climate scientists. The assessment is the most comprehensive probe yet by the 194-nation Intergovernmental Panel on Climate Change (IPCC) into the impact of climate change on extreme weather events. A 20-page draft "summary for policymakers" obtained by AFP says in essence that global warming will create weather on steroids. It also notes that these amped-up events -- cyclones, heat waves, diluvian rains, drought -- will hit the world unevenly. Subject to modification, the draft summary will be examined by governments at a six-day IPCC meeting starting on Monday in the Ugandan capital of Kampala. In the worst scenario, human settlement in some areas could be wiped out, the report warns.

Mongolia Bids To Keep City Cool With 'Ice Shield' Experiment -- Mongolia is to launch one of the world's biggest ice-making experiments later this month in an attempt to combat the adverse affects of global warming and the urban heat island effect. The geoengineering trial, that is being funded by the Ulan Bator government, aims to "store" freezing winter temperatures in a giant block of ice that will help to cool and water the city as it slowly melts during the summer. The scientists behind the 1bn tugrik (£460,000) project hope the process will reduce energy demand from air conditioners and regulate drinking water and irrigation supplies. If successful, the model could be applied to other cities in the far north. The project aims to artificially create "naleds" - ultra-thick slabs of ice that occur naturally in far northern climes when rivers or springs push through cracks in the surface to seep outwards during the day and then add an extra layer of ice during the night. Unlike regular ice formation on lakes - which only gets to a metre in thickness before it insulates the water below - naleds continue expanding for as long as there is enough water pressure to penetrate the surface. Many are more than seven metres thick, which means they melt much later than regular ice.

Eurozone Crisis May Cloud Durban Climate Talks - Ahead of the Durban climate change talks beginning Nov 28, experts are worried that Eurozone crisis may curtail the billions of dollars of funding from industrialised countries to their poorer counterparts to adapt to climate change. Money is expected to be a bone of contention between developing and developed countries at the United Nations Framework Convention on Climate Change (UNFCCC) Conference of Parties 17 (COP 17) Nov 28-Dec 9. With financial crisis deepening in Europe — spreading from Greece to Italy — and the US economy also going through a troubled phase, the money pledged by developed countries is nowhere to be seen. “The financial crisis in Europe will definitely affect the flow of money promised by the rich countries and this is going to be a big fight in Durban,” Chandra Bhushan, deputy director general of the Centre for Science and Environment, told IANS.

UN chief urges leaders to finalize financing of $100 billion climate change fund - U.N. Secretary-General Ban Ki-moon urged world leaders on Monday to finalize the financing for a multibillion-dollar fund to fight the effects of climate change. Delegates at a U.N.-sponsored climate-change conference that starts Nov. 28 in Durban, South Africa, are to consider ways to raise $100 billion a year for the Green Climate Fund created last December to help countries cope with global warming. Ban told the opening session of a climate meeting in Bangladesh’s capital that the world should make a concerted effort to finance the fund. “Governments must find ways — now — to mobilize resources up to the $100 billion per annum pledged,” he said. “An empty shell is not sufficient.”

No (or at least little) net loss of jobs from regulation - We keep hearing the phrase “job-killing regulations” from the Republican side of the aisle, with environmental regulations generally at the top of their lists. Yet there has never been much evidence for the claim that government regulation is systematically bad for employment or the economy. To the contrary, scholars, this blog, think tanks (notably the Center for Progressive Reform), and even the Office of Management and Budget (which is not particularly a fan of regulation) have thoroughly debunked the idea. But somehow the truth has had a hard time making into the general public consciousness, or even the “mainstream media.” Perhaps that is changing. Today’s Washington Post has a very good story about the complexity of the interaction between regulations and employment economy in the context of coal-fired power plants. The story points out a fact I hadn’t known but which doesn’t surprise me — more workers are required to operate the old coal-fired power plants that will finally have to add modern pollution controls under rules EPA has sent to the White House for review than new natural gas plants. But the switch to natural gas has been progressing for years for economic reasons, even without coal being required to bear the full costs of its health and environmental impacts. The failure to regulate coal, in other words, has artificially retarded a change the market would have made long ago.

France Needs To Upgrade All Nuclear Reactors - France needs to upgrade the protection of vital functions in all its nuclear reactors to avoid a disaster in the event of a natural calamity, the head of its nuclear safety agency said, adding there was no need to close any plants. After Japan's Fukushima disaster in March, France, along with other European countries, decided to carry out safety tests on 58 reactors and its next-generation reactor under construction in northwestern France. The aim was to test their capacity to resist flooding, earthquakes, power outages, failure of the cooling systems and operational management of accidents. IRSN, experts on radiation protection and nuclear safety, delivered a 500-page report to nuclear watchdog ASN on Thursday, which will in turn hand over its conclusions, based on the report, to the government at the start of 2012. Peer reviewers from other European countries will then study the findings until the end of June.

Cesium fallout widespread - Radioactive cesium from the crippled Fukushima No. 1 nuclear plant may have reached as far as Hokkaido, Shikoku and the Chugoku region in the west, according to a recent simulation by an international research team. Large areas of eastern and northeastern Japan were likely contaminated by the plant, with concentrations of cesium-137 exceeding 1,000 becquerels per kilogram of soil in some places, says the study, which was posted Monday on the website of the National Academy of Sciences. Researchers for the U.S.-based organization said the study, which was based on partial data readings, is the first to estimate potential cesium contamination across the country. But they also played down the incident's impact on the three distant regions. "The levels are not something that should raise concerns over agricultural production or human health,"

Citizen Consumer - Survey after survey shows that 30–70 percent of consumers want to buy greener, healthier, more socially responsible products, but there is a massive gap between what consumers say they care about and what they actually buy. Yet it would be an error to disregard consumers as agents in creating more just and green manufacturing and supply chains. In the United States almost 70 percent of GDP is driven by what the government calls “personal consumption expenditures,” a sizable portion of which is consumer products.  Not only do consumers have clout, but traditional state and intergovernmental regulation has failed to ensure ethical manufacturing. Global production systems continue to challenge the capacities of states, international organizations such as the United Nations, and NGOs to curb labor and environmental exploitation and human rights violations. Complex cross-border transactions, rapid movement between suppliers, and limited transparency have made it virtually impossible for national governments to regulate global production.

NY Times Falls on its Face Reporting on NRG Solar Project - The NY Times published an article yesterday entitled “A Gold Rush of Subsidies in Clean Energy Search,” that essentially boiled down to criticizing government subsidies fostering development of clean and renewable energy. The NY Times’ reporters singled out NRG Energy’s 250 megawatt (MW) California Valley Solar Ranch project in San Luis Obispo, opining that it was typical of “the banquet of government subsidies available to the owners of a renewable energy plant.” As it turns out, if NRG’s solar power project is indeed typical, then the US public should be in pretty good shape. I can certainly support the Times and its reporters’ efforts to act as watchdogs of large, poltiically well-connected corporations feeding off the public trough without having any “skin in the game.” There’s always seem to be, and have been, plenty of that, most of it never covered by the press. Unfortunately, the NY Times’ (NYT) reporters get so much of crucial substance wrong in this article that you have to wonder if political and economic bias rather than incompetence is to blame. The article is so full of holes that it prompted NRG to issue a claim-by-claim rebuttal.

How BP Blew Its Chance to Spearhead a Solar Innovation - BP has had its share of missteps, including the worst oil spill in history. It may have made another sort of mistake in solar energy—failing to capitalize on an important advance that has now been taken up by Chinese solar-panel makers. The advance could help the Chinese companies maintain their overwhelming lead in the solar industry. The technology is a new method for transforming chunks of raw silicon into large cubes of crystalline silicon. These large cubes can then be sliced into wafers to make solar cells. The new process results in monocrystalline silicon—which is needed for high-efficiency solar cells—at roughly half the cost of current methods. Most of the solar panels sold today use lower-quality multicrystalline silicon, which results in lower-power solar cells.  The new technology can be retrofitted to existing equipment, so factories that make multicrystalline solar cells could be quickly and cheaply upgraded to produce monocrystalline cells. The efficiency gains enabled by the technology could transform a 500-megawatt per year factory into a 540-megawatt factory (measured in the power output of the solar panels a factory produces).

Why Krugman's Argument Against Fossil Fuels Fails Economics 101 - Opponents of fossil fuels have long championed solar power and wind power as replacements. Unfortunately, there is no evidence that solar and wind can provide the cheap, plentiful, reliable energy that our standard of living requires. They have never come remotely close to competing economically on a free market. In fact, due to their low concentration and high intermittency, they have proven unable to provide substantial baseload power in any country, ever, even when exorbitantly subsidized. When confronted with these facts, opponents of fossil fuels offer a seemingly scientific counterargument. Fossil fuels are only cheap, they say, because fossil fuel companies aren’t required to pay for the “hidden costs” or “negative externalities” of their product. These “hidden costs” are harms not reflected in the prices we pay–such as the presumed damage from future climate change. Companies should be required to pay these “hidden costs,” the argument goes, and if they were, solar and wind would actually be cheaper than fossil fuels. In a recent column, “Here Comes the Sun,” Paul Krugman invokes this view to argue for major taxation on fracking. To believe otherwise, he says, is to be economically illiterate. Unfortunately, this analysis fails both Political Philosophy 101 and, surprisingly given Krugman’s credentials, Economics 101.

Solving The Energy Storage Problem - If we adopt solar and wind as major components of our energy infrastructure as we are weaned from fossil fuels, we have to solve the energy storage problem in a big way. An earlier post demonstrated that we do not likely possess enough materials in the world to simply build giant lead-acid (or nickel-based or lithium-based) batteries to do the job. Comments frequently pointed to pumped hydro storage as a far more sensible answer. Indeed, pumped storage is currently the dominant—and nearly only—grid-scale storage solution out there. Here, we will take a peek at pumped hydro and evaluate what it can do for us. The idea for pumped hydro storage is that we can pump a mass of water up into a reservoir (shelf), and later retrieve this energy at will—barring evaporative loss. Pumps and turbines (often implemented as the same physical unit, actually) can be something like 90% efficient, so the round-trip storage comes at only modest cost.

Wind Power to be Competitive with Natural Gas by 2016 - Falling costs mean that the average onshore wind farm will be competitive with natural gas-fired power generation by 2016, according to Bloomberg New Energy Finance (BNEF). The London-based analysis company says that the levelised cost of energy from onshore wind farms – that is, the cost without subsidies or support mechanisms – has fallen by 14% for every doubling of capacity. “Due to structural overcapacity and growing competition in the wind industry, we expect turbine prices to continue to fall over the next few years. At the same time as designers roll out yet larger turbines with longer blades designed to capture more energy, even in low-wind locations, capacity factors will continue to increase,” the company said. “We expect wind to become fully competitive with energy produced from combined-cycle gas turbines by 2016 in most regions offering fair wind conditions … Any increase in the cost of gas, which will consequently raise the cost of energy of gas-fired turbines, would bring forward the timing of grid parity for wind.”

Gas industry looking to generate more cash with exports - The shale-gas bonanza is fueling a hot competition among businesses that want to claim a share of what is promoted as an abundant long-term energy source. T. Boone Pickens is pitching compressed natural gas as a cheap motor fuel. Electricity suppliers want gas to fire up new power plants. And the chemical industry, which buys natural gas as a raw material for plastics, says fuel from resources like Pennsylvania’s Marcellus Shale could inspire a resurgence of U.S. manufacturing. Now, another potentially large rival market for natural gas is emerging: Exports. The Department of Energy has received five applications from companies that want to create terminals to ship liquefied natural gas (LNG) overseas. One application has been approved. The natural gas industry, which is eager to sell more fuel, says overseas markets could generate billions of dollars in export earnings, improve the nation’s balance of trade and boost the economy in shale-gas areas such as Pennsylvania. “Exports represent a good opportunity for the United States,” said James J. Balaschak, a principal of Deloitte Services L.P., based in Philadelphia. The five export facilities could ship up to 6.6 billion cubic feet of gas a day to foreign countries, about 10 percent of total current domestic U.S. consumption.

Has the Barnett Shale left its best days behind? - Natural gas production is declining in North Texas' Barnett Shale after hitting an all-time high in May, and the Haynesville Shale in Louisiana and East Texas has eclipsed the Barnett as the nation's top shale-gas producer.  But cry not for the Barnett, industry veterans say. The granddaddy of U.S. shale-gas plays is home to more than 17,000 producing wells, and thousands more are expected to be drilled in coming years. If natural gas prices make a sustained rise, after three years in the doldrums, drilling activity would surge and the Barnett again could hit record highs in production, experts say.  Higher gas prices are "all you need to get production high again, "Barnett Shale production hit an all-time high in May, averaging 5.87 billion cubic feet of gas per day, according to Powell's calculations based on Texas Railroad Commission data. But Barnett production declined in the next three months, with the average tumbling to 5.49 billion cubic feet per day in August, the last month for which data is available.

Review of Emerging Resources: U.S. Shale Gas And Shale Oil Plays (EIA 105 pp pdf)

Hot Air and the Fracking Jobs Boom - Most major news outlets have done pieces touting the jobs boom associated with fracking. The story goes that allowing this relatively new form of drilling will both lower energy prices in the United States and also lead to an employment boom in the regions where the drilling takes place. And, how do we know there will be a boom? Well, the industry said so. It turns out that the employment boom ain't all it is cracked up to be. The environmental group, Food and Water Watch, released a report yesterday that examined job projections for New York, which is considering ending a ban on fracking. The industry had projected that fracking in western New York would create more than 60,000 new jobs. Food and Water watch looked at the experience in the adjacent Pennsylvania counties, which allow fracking, and concluded that the potential job gains for New York are one-tenth as large, or about 6,000. And, this is before taking account of any jobs that may be lost due to environmental damage (e.g. in tourism associated with fishing, hunting, and camping). In short, for these counties there is not much of an issue of jobs versus the environment. The number of potential jobs at stake are relatively few and most are likely to go to people living outside the region in any case.

Decision on Fracking Postponed Again - A controversial vote on whether to allow natural-gas drilling in the Delaware River Basin was postponed abruptly Friday, the third time the commission delayed a decision on rules governing hydrofracking in the regional watershed. The five members of the Delaware River Basin Commission were scheduled to vote Monday on whether to lift a moratorium on gas drilling in the protected region and pass regulations governing the process. The commission issued its final rules on drilling in the basin earlier in November, but has yet to adopt them. A vote on the rules was postponed to allow "additional time for review" on the matter by the commissioners, the agency said in a statement.  Governors from the states covered by the basin—New Jersey, New York, Delaware and Pennsylvania—sit on the regulatory agency, along with the U.S. Army Corps of Engineers.

Key Delaware River natural gas drilling vote postponed - A key vote to lift a ban on drilling for natural gas in the Delaware River Basin has been postponed, prompting claims of victory from environmentalists concerned about water contamination. The Delaware River Basin Commission (DRBC), which regulates water use across the 14,000-square-mile (36,260-square-km), gas-rich basin, suspended a vote scheduled for Monday amid speculation that its five members lacked the three votes needed to allow drilling. "There are still some open issues that the commissioners have to work through," said DRBC spokesman Clarke Rupert, who had no new date for the vote. Earlier this month, the DRBC proposed ending the drilling moratorium in the basin that stretches across parts of Pennsylvania, New York, New Jersey and Delaware and sits atop the United States' biggest natural gas deposit: the Marcellus Shale. Under proposed new regulations, the DRBC said it will provide water for no more than 300 natural gas wells over 18 months, at which point they will reassess the rules. The delay has frustrated drillers and the governor of industry-friendly Pennsylvania, Tom Corbett, who is keen to develop the state's slice of the basin.

Delaware River Basin Commission meeting canceled - A crucial meeting about the future of gas exploration set for Monday has been canceled. The meeting by the Delaware River Basin Commission was to be held in Trenton, N.J., and a crucial vote to allow exploration along the Delaware River was to take place. But on Friday, the commission announced the meeting has been canceled for the second time. No future date has been set. “Really, they had to postpone it because it was becoming a Donnybrook,” said Tom Shepstone, campaign director for Energy In Depth, the Northeast Marcellus Initiative. He accused filmmaker Josh Fox as using the upcoming meeting as a “theatrical display.” Fox said on Friday the cancellation of the meeting was a “reprieve by the government,” adding the move was “enormous” for those opposed to gas exploration in Wayne County and along the Delaware Basin. Shepstone said since the DRBC was going to have the meeting in a large theater in Trenton, N.J., he felt that was conducive to those who are opposed to the shale exploration. “It provided an opportunity for a rallying cry,” said Shepstone. “I don’t see how they could vote under these circumstances.”

The race for ‘first gas’ - While debate continues around land access and groundwater contamination, the coal seam gas industry in Queensland is powering ahead in a race for ‘first gas’.  Which begs the question, why the rush? It is no secret that government is a few steps behind the resource companies in terms of providing a solid regulatory framework for the industry to operate within.  This is particularly the case for the management of CSG water in river catchments already plagued by their own water management issues (although DERM has released a CSG Water Management Policy and is investigating other beneficial use options). Making substantial investments ahead of certain regulatory obligations appears a risky move on the part of the gas companies.  After all, the gas will still be under your lease if you wait for some policy certainty, and sunk investments will provide substantial bargaining power to government to expand their wish-list as they finalise their policies.  You won’t walk away from a billion dollar investment because the government makes you spend a little extra on over-the-top sweeteners to local communities.

Two Charts on Natural Gas vs. Oil Prices, Gas is Now 75% Cheaper On an Energy-Equivalent Basis vs. Oil - 1. From Scott Grannis (top chart):"Natural gas is down fully 75% from its 2008 high, while crude oil is down by only 33%. As the top chart above shows, natural gas hasn't been this cheap relative to crude for decades, thanks to significant new drilling techniques which have resulted in a natural gas production bonanza in the U.S. It is hard to underestimate the degree to which cheap and abundant natural gas is going to transform U.S. manufacturing and energy generation in the years to come." 2. From Nathan Slaughter (bottom chart): And over the decades, we've grown accustomed to oil as one our chief energy sources. So accustomed, in fact, that we're now overlooking a cleaner, plentiful alternative that is about 75% cheaper. A barrel of oil contains about six times the raw energy content of a thousand cubic feet (Mcf) of natural gas. So all things being equal, with oil prices about $99 per barrel, natural gas should fetch about one-sixth as much, or $16.50 per Mcf. But thanks to horizontal drilling and fracking technologies, the United States is now awash in accessible, cleaner-burning natural-gas resources. And the resulting flood of natural gas has created a surplus, causing prices to collapse.

U.S. Coal Exports are Surging and Wyoming Coal is Being Shipped to Asia - Six seaports account for 94% of U.S. coal exports, which are dominated by coking coal: A recent report from the e.i.a. was noteworthy concerning our coal exports:

  • Over 68% of total U.S. coal exports in 2010 were coking coal, which is used in making iron and steel.
  • Steam coal, used to generate electricity, comprised the remaining 32% of exports.
  • Overall U.S. coal exports have been resurgent, reaching nearly 71 million tons in the first eight months of 2011—the highest level in decades—driven by high global demand and significant weather disruptions of Australian coal exports.
  • Coal exports from Seattle, Washington have also risen sharply in recent years as significant coal production in the Powder River Basin seeks access to growing Asian coal markets.

Coal Exports Are Bigger Threat Than Tar Sands Pipeline - The planned Keystone XL oil pipeline has earned major national attention for the damage it would do to the climate. At the same time, another climate drama is playing out with much less attention as coal companies make plans to export huge quantities to Asia by way of Pacific Northwest ports. It’s pretty clear that both projects are environmental horror stories, but I’ve been wondering: which one is worse? So, from the “King Kong versus Godzilla” files, here’s my analysis of their carbon impacts. It turns out, coal exports are actually the bigger problem—and that’s really saying something. The result surprised me: coal exports look to be an even bigger climate disaster than the pipeline. There are, in fact, quite a bit more direct emissions from burning the coal than from the oil. That’s true even when one counts the energy-intensive tar sands extraction and processing—and, of course, there are plenty of upstream emissions associated with coal mining that I’ve left out of the equation here. (In order to make a roughly direct comparison, I also omitted emissions associated with both products’ mining, refining, transportation, and so forth.) Clearly we can ill afford either one of these projects, but until we have a clear energy policy that respects climate science we’ll be wrestling with these kind of killer projects one at a time.

Ecocentric: On Coal, Jobs and Regulations - Washington Post has a nice piece this morning on the real impact of government regulations on employment, pivoting off the tightening environmental rules that have led some coal plants to close early. She finds that on the whole, regulations don't have much impact on jobs: Some jobs are lost. Others are created. In the end, say economists who have studied this question, the overall impact on employment is minimal. "If you're a coal miner in West Virginia, it's not a great comfort that a bunch of guys in Texas are employed doing natural gas,” said Roger Noll, an economics professor at Stanford and co-director of the university's program on regulatory policy. “Some people identify with the beneficiaries, others identify with those who bear the cost, and no amount of argument is ever going to change their minds.” According to data from the Bureau of Labor Statistics, few layoffs seem to be caused directly by regulations—in 2010 0.3% of people who lost their jobs in layoffs were let go because of government regulations, compared to 25% who were cut because of a drop in demand. And the process of meeting regulations can create employment too, as workers are needed to retrofit plants and install new equipment.

Is the Pipeline Victory a Turning Point for the Climate Movement - Two days ago I was convinced that the amazing Keystone XL pipeline victory won by the North American climate movement on November 10 was going to be, without question, a pivotal turning point. Today, having thought more about it, I’d say it’s more like somewhere between “maybe” and “probably.” I’m reminded of another “victory” that many in the climate and broader progressive movement were feeling just about three years ago: Obama’s election. That one didn’t exactly turn out the way many of us thought it would. Obama does deserve credit and thanks for the decision he made to put off a final decision about the tar sands Keystone XL pipeline until sometime in 2013. This is a major blow to Transcanada and their efforts to expand tar sands oil production. It’s a rare instance where a fix that was in was “unfixed’ and overturned because of the power of a genuinely popular national movement. Without such a movement, there is no way that Obama would have done what he did.

Advocates of Keystone Pipeline Try to Co-opt OWS - This week, the Occupy Wall Street spokes council—a recently created decision-making body composed of people from the movement's various working groups—met for the first time; the OWS General Assembly voted to denounce “Jobs for the 99%,” a website backed by the energy industry and unions marshalling OWS language against opponents of the Keystone XL pipeline; and a dozen New York occupiers set out on a 300-mile march to Washington, D.C., planning to reach the capital in time for a Super Committee meeting November 23.

Private Labor: Wake Up and Smell the Tar Sands - Danniel Henninger in today's WSJ:  "The decision by the Obama administration to "delay" building the Keystone XL pipeline is a watershed moment in American politics. The implication of a policy choice rarely gets more stark than this. Put simply: Why should any blue-collar worker who isn't hooked for life to a public budget vote for Barack Obama next year? The Keystone XL pipeline would have created at least 20,000 direct and indirect jobs. Much of this would have been well-paid work for craftsmen, not jobs as hod carriers to repave the Interstate.  Within days of the Keystone decision, Canada's prime minister, Stephen Harper, said his country would divert sales of the Keystone-intended oil to Asia. Translation: Those lost American blue-collar pipeline jobs are disappearing into the Asian sun.  No subject sits more centrally in the American political debate than the economic plight of the middle class. Presumably that means people making between $50,000 and $175,000 a year. The president fashions himself their champion.  You would think someone in the private labor movement would wake up and smell the tar sands."

NRDC: There's No Way In Hell The Keystone Pipeline Will Create 20,000 Jobs - The Natural Resources Defense Council is against the proposed $1.7 billion that will transport oil from Canada's tar sands to Texas. Those who support the pipeline argue that it will help America become less dependent on Middle East oil and create American jobs. Those against the pipeline, like NRDC, argue that it will destroy the environment and contribute to global warming. (One NASA scientist, James Hansen, has said that, if we start burning the tar sands, it will be "game over" for the planet.) President Obama recently postponed a decision to approve or reject the pipeline. This caused Republicans and the oil industry to howl that the President's delay has cost the country 20,000 jobs. NRDC disputes this conclusion. We've printed their note below. When one considers more than environmental concerns, the right answer on the Keystone project is not obvious. So, we'd be glad to hear from the oil industry and other proponents of the pipeline as well.

Obama's Indefensible Pipeline Punt - "With a total length of close to 3,000 kilometers, the new [Keystone XL] pipeline would add just over 1 percent to the already existing network of crude oil and refined products lines that crisscross the United States and parts of Canada. Why, if pipeline safety is a key concern, have we not seen waves of civil disobedience focused on more than a quarter million kilometers of existing pipelines? Long-term statistics show convincingly that there is no safer way to transport large masses of liquids over long distances than a pipeline. Moving the same amount by trucks or rail would be much more risky, in addition to being vastly more expensive. So would be moving the oil from Alberta to British Columbia and then shipping it by tankers via the Panama Canal to Texas.  Here comes the craziest twist: if the opponents of the XL succeed and prevent its construction, there is a strong possibility that Alberta’s oil sand-derived oil will be piped westward to Canada’s Pacific coast and loaded on supertankers going to Asia, to feed China’s grossly inefficient industries.

Mr President - It's Time to Make a Decision on the Keystone XL Pipeline - Leadership and courage? Surely you jest. President Obama could have made a courageous decision here. In fact, he had two options, either of which would have taken courage. They were:

Option 1 – The President could have announced the following: I have made the decision today to reject the Keystone XL Pipeline proposal. I campaigned on the issues of the pressing threat of climate change and continued dependence on fossil fuels. Allowing the Keystone Pipeline to bring Canada’s oil sands to U.S. refineries would move the U.S. in a direction opposite to my campaign promises. The people who elected me into office have made their voices heard, and they do not want policies in place that encourage expansion of the oil sands.

Or, it would have been courageous had he taken the opposite stance:

Option 2 – The President could have announced: The United States is a country that is still heavily dependent upon oil for our transportation needs. The Department of Energy estimates that oil will continue to provide the bulk of our transportation fuel for decades to come. The U.S. will continue to rely on oil imports for a large portion of our needs, and it is important that those imports come from friendly, stable countries. I have therefore decided to approve the Keystone XL Pipeline proposal, ensuring stable supplies for years to come.

Controversial Oil Pipeline Plan to Be Rerouted After Threat of Delayed US Approval - Days after the Obama administration threatened to delay approval of a planned oil pipeline from Canada to the Gulf of Mexico -- angering unions while appeasing environmentalists -- the company seeking to build the pipeline says it's willing to reroute the project to get it back on track. Speaking at a news conference at the Nebraska Capitol, company officials said TransCanada would move the planned pipeline out of the environmentally sensitive Sandhills area of Nebraska, a change the company previously claimed wasn't possible, as part of an effort to push through the proposed $7 billion project.

TransCanada says it will work with Nebraska on new pipeline route - TransCanada said Monday that it will work with Nebraska on a new route for its controversial Keystone XL pipeline that would avoid the Nebraska Sandhills, a unique area of sand dunes, grasslands and wetlands.  Alex Pourbaix, TransCanada’s president of energy and oil pipelines, said he expects that the new route would stay as close as possible to the previous proposed route while avoiding the Sandhills, and in return he expects that Nebraska officials will back the project. “We will now work with the Nebraska Department of Environmental Quality on a route that avoids the Sandhills, while making as much use of the existing right of way as possible,” he said. Pourbaix said that staying close to the proposed line would be better than moving the new pipeline close to an existing Keystone pipeline. Moving it near the existing route “would waste all that existing right of way that we have already procured with agreements in place. And it would add well over 100 miles of pipeline, which would have a larger environmental impact than just jogging around the Sandhills.”

Keystone Pipeline Will Be Rerouted - At a special session of the Nebraska Legislature, a state senator announced Monday that TransCanada had agreed to adjust its intended route of the Keystone XL1 oil pipeline to avoid the environmentally sensitive Sand Hills region of the state.  “There had been discussions about this over the last couple of days,” said Matt Boever, a spokesman for State Senator Mike Flood. “Moving it out of that Sand Hills region is important.” The proposed pipeline would run from Alberta’s oil sands2 to the Gulf of Mexico and was slated to pass through the Sand Hills, which includes the Ogallala Aquifer, a vital source of drinking water for the Great Plains. TransCanada’s offer comes just days after a Nov. 10 announcement by the State Department that it would delay a final decision on the $7 billion project until it had considered other routes through Nebraska. The Obama administration had been under increasing pressure from environmental groups, as well as citizens and lawmakers in Nebraska, to reroute the pipeline.

Nebraska lawmakers vote unanimously to reroute Keystone pipeline (Reuters) - The Nebraska legislature on Wednesday voted unanimously to advance a proposed law that would reroute the controversial TransCanada Keystone XL pipeline to avoid the sensitive Sandhills and Ogallala aquifer. Nebraska and TransCanada Corp agreed Monday to find a new route for the stalled pipeline. Under pressure from green groups, the U.S. State Department last week ordered the company to find a new route for the line in a decision that set back the timing of the $7 billion, Canada-to-Texas pipeline by more than a year. The pipeline would carry crude oil from Canada's oilsands area to Texas refineries. Nebraska Gov. Dave Heineman would have final state approval on any proposed route. Under the bill, the state would pay for a new environmental study for the new route. Lawmakers on Wednesday also approved paying up to $2 million for the study. In the Nebraska legislature, bills must be voted on three times. The environmental study legislation will be voted on again on Friday, and if necessary again on Tuesday. "It's a necessary expenditure," said State Sen. Bill Avery. "We need to make sure this is something we control." Nebraska has forged ahead with pipeline legislation despite the U.S. State Department's decision last week to put off giving TransCanada a permit for the Keystone XL line until 2013.

Energy Independence - The Big Lie - It is too bad that our 255 million cars can’t run on hot air. American presidents have propagated the Big Lie of energy independence for the last three decades. The Democrats have lied about green energy solutions and the Republicans have lied about domestic sources saving the day. These deceitful politicians put the country at risk as they misinform and mislead the non-thinking American public. They have been declaring our energy independence for 30 years, but we import three times as much oil today as we did in the early 1980’s. The CPI has gone up 350% since 1978, but the price of a barrel of oil has risen 800% over the same time frame. Today, I hear the same mindless fabrications from politicians and pundits about our ability to become energy independent. Any critical thinking analysis of the hard facts reveals that the United States will grow increasingly dependent upon other countries to supply our energy needs from a dwindling and harder to access supply of oil and natural gas. The fantasy world of plug in cars, corn driven vehicles and solar energy running our manufacturing plants is a castle in the sky flight of imagination. The linear thinking academic crowd believes a technological miracle will save us, when it is evident technology fails without infinite quantities of cheap oil.

Selling the Oil Illusion, American Style - US production of crude oil peaked in 1970 at 9.637 mbpd (million barrels per day) and has been in a downtrend for 40 years. Recently, however, there's been a tremendous amount of excitement at the prospect of a "new era" in domestic oil production. The narratives currently being offered come in the following three forms: 1) the US has more oil than Saudi Arabia; 2) the US need only to remove regulatory barriers to significantly increase production; and 3) the US can once again become self-sufficient in oil production, dropping all imported oil to zero. Let's first take a look at over 70 years of US oil production.The US is currently enjoying its second stabilization phase since the peak in 1970. (Daily oil production has rebounded from a deep hole in 2008, from below 5 mbpd to above 5.5 mbpd). The first stabilization period lasted for more than 7 years, from 1977 to 1985. While it did not reverse the overall decline trend, which had resumed by 1990, this was certainly good news, just as our current production increases are good news. But the production history laid out graphically here is instructive and gives a clear warning: It would be unwise to herald the recent uptick in domestic production with a "new era" headline. Deepwater drilling, Gulf of Mexico, and Alaska were all "new era" events in their day as well.

CNN: Oil prices gushing: 20% surge in 6 weeks -- Americans reeling from all the grim economic news lately can add one more item to the list -- surging oil prices. Analysts say the recent rally that's sent U.S. crude prices up 20% since the start of October has been driven by a broad range of factors, from a weaker dollar to an easing supply glut and ongoing tension in the Middle East.  And if that continues, it could add up to a greater burden for drivers, in the form of higher gas prices.  The U.S. Energy Information Administration said1 last month that U.S. prices would average $3.52 per gallon this year before dropping to $3.43 in 2012. But that all could change if oil continues to trend higher.

Oil Soars Past $100, Seaway Reversal to Ease Glut -U.S. oil prices surged Wednesday to close above $100 a barrel for the first time since June, propelled by news of a critical pipeline reversal that will ease a year-long oil glut in the Midwest.  In the most active trading session since Libya's civil war erupted in February, U.S. WTI surged more than $3 a barrel while Europe's Brent slipped 30 cents as traders rushed to buy back the roller-coaster Brent/WTI spread, betting that the two markers would once again trade largely in line.  Traders cautioned that Enbridge's move to reverse the 350,000-barrels-per-day Seaway pipeline to ship crude from Cushing to the coast would not completely eliminate the distortion in the U.S. domestic market. Bank analysts still rushed to narrow their forecasts for the spread, which has fallen by about a third from a record $28 a month ago.  "The reversal of the Seaway will likely accelerate the anticipated clearing of the Midwest surplus, reducing the reliance next year on expensive barge transportation," Goldman Sachs analyst David Greely wrote in a note to clients. The bank brought forward its $6.50 spread forecast by six months.  Prices shot higher after Canada's Enbridge and Enterprise Products Partners announced the reversal plan Wednesday, shortly after ConocoPhillip said it had sold its 50 percent share to Enbridge for $1.15 billion.

Arbitrage in action - Oil prices have been rising lately, threatening to act once more as a weight on consumers and a headwind to growth. The price of oil soared above $100 per barrel in trading early today. Of one kind of oil, anyway—West Texas Intermediate. Another sort, Brent crude, has been well above $100 per barrel for months now. That gap is finally closing. Why was there a difference in the first place, and why is it now disappearing? Normally, the prices of the two oil types are quite close and move together. For most of this year, however, WTI has been substantially cheaper than Brent crude. The reason has to do with the physical limits to arbitrage. Oil has been pouring into Cushing, Oklahoma, where WTI contracts are settled, thanks in part to new supply from Canada and the northern Plains. Suppliers would love to sell that oil at the higher Brent price, but there's a bottleneck. The easy way to get the oil to tighter markets would be to send it through the Seaway pipeline to the Gulf of Mexico, but oil in that pipeline has been running from the Gulf, to Cushing. Even as the price spread made reversing the flow of the pipeline ever more profitable, Conoco, part-owner of the pipeline, opted not to change over. See more interesting details on the situation here. Today, however, news broke that Conoco would be selling its stake in the pipeline, and that its operator would soon be reversing the flow. With the prospect of an elimination of the bottleneck, the arbitrageurs quickly got to work. The spread between Brent crude and WIT narrowed immediately by about $3 per barrel.

Kuwait daily crude output exceeds 3 mln bpd - minister - -- Kuwait's daily output of oil has exceeded three million barrels per day (bpd), announced the Minister of Oil Dr. Mohammad Al-Busairi on Sunday. The production of crude oil reached 3.67 million barrels per day on Saturday and 3.54 million bpd on Friday, said Al-Busairi, also Minister of State for National Assembly Affairs, in response to a question by KUNA during a reception of journalists after receiving well-wishers on Eid Al-Adha. Member states of the Organization of Petroleum Exporting Countries (OPEC) are expected to address the question of crude output at the OPEC conference, due in Vienna in the middle of December, Al-Busairi said. Global market is forecast to be in short of one million to 1.5 million barrels per day till the end of the current year, and Kuwait has increased its oil production to cover up this shortage of supplies, the minister added, explaining the motives that prompted the Gulf state to hike its oil output. The market needs more oil supplies, even with comeback of the Libyan oil, Al-Busairi elaborated. Hiking the production of the Kuwaiti oil is in line with a strategy hammered out by the Kuwait Petroleum Corporation (KPC), which aimed at hiking the output to four million bpd by 2020, the minister said, noting that prices are set according to supply and demand.

Saudi Oil Production Declining - Saudi oil production has been declining modestly for the last 2-3 months (depending on your preferred data source) while the oil rig count in country has continued to increase.  See above graph (the black line is the average of five sources of production information on the left scale, while the red curve in the lower part of the graph is the Baker Hughes rig count on the right scale). For readers that don't follow every twist and turn of Saudi oil statistics let me sketch the back story since 2005.  In about 2005 when global oil supply appeared to plateau, Saudi Arabia also had appeared to plateau at around 9.5mbd.  At that time the rig count, having been stable for years, began to rise as Saudi Arabia launched a series of large megaprojects to expand production capacity (or replace oilfields that were in decline depending on your point of view).  Then in 2006, production began to mysteriously decline despite high oil prices (provoking a great deal of debate in the energy blogosphere as to whether this was a voluntary move to further increase prices, or an involuntary one due to underinvestment and/or declines in some of their fields).  Regardless, in mid 2007, production began to gradually increase again until by mid 2008 it had reached the previous plateau level of 9.5mbd.

Five Misconceptions About Peak Oil - I recently attended the annual ASPO conference in Washington, D.C. This was only my 2nd ASPO conference; the other one I attended was in 2008 in Sacramento. There were many familiar faces, some of whom I had previously met and some I only knew by reputation. The mood seemed remarkably calmer than in 2008. That year, oil prices were just coming down from record highs, a pair of hurricanes were causing spot gasoline shortages, and the economy was headed into the toilet. The general mood was that things were rapidly unraveling. Three years later, the long-term outlook isn’t really any different, but I think some who predicted imminent doom are starting to change their views on how things are going to play out. I noted during one of my talks that I don’t even like the term “peak oil.” That is because there are a number of misconceptions and negative connotations associated with it. I prefer to talk in terms of resource depletion and a supply/demand imbalance that includes multiple elements – all of which combine to keep upward pressure on oil prices. So what are those misconceptions about peak oil? Below are the ones I think are most common.

Royal Dutch Shell says oil spill strikes Nigeria pipeline amid increasing theft vandalism - Royal Dutch Shell PLC says one of its pipelines running through Nigeria’s oil-rich southern delta has spilled crude oil in the region, causing unknown damage. Shell issued a statement Sunday saying the spill on its subsidiary Adibawa pipeline was discovered on Saturday. Shell said it had sent out a team which had stopped the leak and was now looking at the damage and trying to clean up the spill. Shell said the pipeline was part of its Okordia-Rumuekpe line that runs through Bayelsa state. A fire struck that line earlier this month, as Shell says spills come from oil thefts the majority of the time.

Local warehouse space is bursting with stored metals - Long-vacant New Orleans warehouses are bursting with metals such as copper, lead, aluminum and zinc as manufacturing slows down with the economy. The stockpiles that are accumulating are good news for owners of local warehouses, but the trend has touched off a rare scramble for specialized warehouses in certain parts of the metro area.  New Orleans is now the second-largest London Metal Exchange site in the country behind Detroit, according to the exchange, and has more copper, zinc and steel in storage than any other place in the United States.  With the global economic slump continuing for longer than anyone imagined, metals are now piling up in the 53 New Orleans-area warehouses certified with the London Metal Exchange because they're not needed around the world for manufacturing. Kevin Kelly, owner of Port Cargo Service, a metals warehousing business, said it may take years to run down supplies. He says the city is running out of suitable warehouse space. "I'm considering buying property and building warehouses if I can find good land to build it on."

Chinese TV Host Says Regime Nearly Bankrupt - China’s economy has a reputation for being strong and prosperous, but according to a well-known Chinese television personality the country’s Gross Domestic Product is going in reverse. Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis—on the brink of bankruptcy. In his memorable formulation: every province in China is Greece. The restrictions Lang placed on the Oct. 22 speech in Shenyang City, in northern China’s Liaoning Province, included no audio or video recording, and no media. He can be heard saying that people should not to post his speech online, or “everyone will look bad,” in the audio that is now on Youtube. In the unusual, closed-door lecture, Lang gave a frank analysis of the Chinese economy and the censorship that is placed on intellectuals and public figures. “What I’m about to say is all true. But under this system, we are not allowed to speak the truth,” he said.  “Don’t think that we are living in a peaceful time now. Actually the media cannot report anything at all. Those of us who do TV shows are so miserable and frustrated, because we cannot do any programs. As long as something is related to the government, we cannot report about it.”

Gordon Chang: The Reasons For China's Imminent Bust - The global dominant narrative about China is wrong, claims Gordon Chang. Don't expect it to be the 'pocketbook of last resort' that will rescue world markets from their current malaise. And don't expect its remarkable economic growth to continue. In fact, expect a "hard landing" for China - and soon. Forbes.com columnist and international lawyer Gordon Chang has spent much of his time since the early 1980s working and living in China. His primary knowledge of the country and his relationships there give him a superior understanding to how its economy is actually faring than many analysts based in the West. And what he sees today doesn't inspire confidence. We are seeing the first real signs of slowdown in China's economic growth looking at the year-over-year numbers for the past several months. Car sales have decreased nearly 5% since last year, and property values are beginning to plummet in key markets (30% in October alone in Shanghai).

China’s Total Local Debt May Top Audit Estimates, Observer Says - China’s local government debt may be almost 3 trillion yuan ($473 billion) higher than the figure given by the nation’s audit office, if loans taken out by township governments are included, the Economic Observer reported, citing research from an independent institute. Borrowing by townships, an administrative tier of government below provinces, cities and counties, wasn’t included in a report by the National Audit Office in June that put debt from those three levels at 10.7 trillion yuan, the weekly newspaper said in a report on its website dated Nov. 12, citing Beijing Fost Economic Consulting Company. Local authorities in China, barred from directly selling bonds or taking bank loans, set up at least 6,576 companies to raise money for roads, sewage plants and subways, according to the audit office’s report. Government officials have sought to allay concerns that the debt will saddle banks with soured loans and derail economic growth.

China reboots money supply - Unknown to everyone except the People’s Bank of China, at the time of announcement of the monetary statistics, the PBOC had quietly expanded the definition of M2 money supply, and announced it only last night in a statement. The statement essentially said that the new M2 definition has been used in the October monetary statistics, which showed that M2 increased by 12.9% yoy.  The new definition includes both non-depository financial institutions deposits and social housing fund on top of existing M2 measure.  All adjustments towards the previous M2 figures are not published at this stage except for October 2010, which the statement said was RMB72.35 trillion, and which is how they arrived at the 12.9% growth for October 2011.  The M2 for October 2010 under previous criteria was about RMB69.98 trillion, thus based on the revised October 2010 figure, the old M2 measures are roughly 3.4% understated. The understatement of money supply started in the last two years as the shadow banking system grew rapidly, and there is a chance that the money supply growth since the financial crisis and the subsequent aggressive monetary easing is understated somewhat.  As a result, M2 was no longer reliable, and the People’s Bank of China previously mentioned that they are developing a new measure of broadest money supply (they call that M2+).

Yuan Deposit Growth Slows; Investors Dump Yuan for Dollars; What Would Happen if China Floated the Yuan? - Inquiring minds are reading the South China Morning Post which says Yuan deposit growth slowing  Yuan deposits in Hong Kong may have dropped significantly last month due to falling trade volumes with the mainland and a weakening of the currency in the offshore market, analysts said. Bankers and analysts said while the brake could be a positive for local banks in the short term, if the trend continued it could impact their strategy to bet big on yuan business. The slowdown could also drag the pace of the internationalisation of the yuan, while not derailing it. The Hong Kong Monetary Authority has yet to release October figures on yuan deposits, but by the end of September there was about 622 billion yuan in the city. "Based on recent trends, I would be doubtful that the figure could top 700 billion yuan at the end of the year," He said if the trend continued into the first quarter of next year it could pinch banks betting big on pushing their yuan business, meaning they would have to adjust their strategy accordingly. Michael Pettis at China Financial Markets had lengthy comments and an interesting chart on the above article via email. Here is a short text snip (minus the chart).

Rising Chinese Redback Could Overtake Debased Greenback -  In part one of Rising Chinese Redback Could Overtake Debased Greenback published on Financial Sense in July of this year, we reviewed the major tectonic shift that is happening in the global currency markets with the rise of the Chinese currency, also known as the Redback or Renminbi (RMB).This rise of the renminbi is starting to get focus in the mainstream media this week with the announcement from the U.S. China Economic and Security Review Commission’s 406 page published report to the U.S. Congress that said “it is no longer inconceivable that the RMB could mount a challenge to the dollar, perhaps in the next five to ten years.” There is also now now open talk in the Chinese press of the eventual replacement of the USD by the RMB. In part one of this article, we talked about the major macro economic factors that would lift up the RMB and overtake a collapsed U.S. Dollar. Since Part 1, there have been several major new developments. Nigeria announced they are moving 10% of their currency reserves into RMB and suggested they might move oil sales to China into RMB. Philippine Finance Secretary Cesar Purisima said in an interview on Sept. 3 that buying the yuan may be “prudent.” The Chinese government also announced London as an official offshore center in which to internationalize the RMB.

BOJ Cuts Economic View as Europe Crisis Becomes Growing Risk (Bloomberg) -- The Bank of Japan cut its economic assessment as Governor Masaaki Shirakawa called the European debt crisis the biggest danger for the nation’s export-led recovery. “Developments in Europe’s sovereign-debt problems are the largest risk now,” Shirakawa told reporters in Tokyo today after the BOJ left its asset-buying fund unchanged at 20 trillion yen ($260 billion). A few board members have become more concerned the economy’s outlook has worsened since October, he said. Central banks from Australia to Indonesia to Japan have eased policy in recent weeks and Shirakawa said Europe’s sovereign woes are already hurting exports from developing economies. The BOJ may bolster stimulus again if the yen resumes its gains after climbing to postwar highs against the dollar last month, according to Nomura Holdings Inc. and Tokai Tokyo Securities Co.

Spending Slide Spreads - KEY parts of Australia's services sector are being hit by the slowdown in consumer spending.Figures released by Westpac, the second biggest lender, shows that the well-publicised impact on the retail industry has spread to hotels, the construction industry and the finance and insurance sectors. Cafes and restaurants have suffered as consumers have closed their wallets and concentrated on paying down debt. Along with hotels, with which they are bracketed, food outlets have incurred one of the biggest jumps in percentage terms in the number of impaired loans and bad debts incurred by Westpac over the 12 months to the end of September this year. The figures cover 14 major sectors of the economy including property, manufacturing and mining. According to the data released on Friday as part of the bank's compliance with risk and lending rules, Westpac saw impaired loans run up by the hotel and food hospitality sector rise by $71 million to $205 million. It also recorded a small increase - of $5 million to $54 million - in the money it has set aside to cover debts that it may not recover.

Global Tariff Rates by Country - List of Countries with different tariff rates. Higher score indicates higher level of tariffs. Generally, tariffs are lower amongst countries with higher GDP per capita.

Latin America better prepared to weather a slowdown in global economy - With a few exceptions, the analysis that countries more linked to the faltering U.S. economy, such as Mexico and those in Central America and the Caribbean, have shown slower growth and commodity-rich countries whose trade is tied to Asia, especially China, have outpaced their northern neighbors still holds up. But with jitters about the euro zone crisis spreading, fears that a Greek default may still be in the cards and the possibility of a slowdown in the Chinese economy, questions loom for Latin America and the Caribbean.  “The European crisis will end badly and there will be some impact but not as much’’ as the old days when a global slowdown would push the region into a downward spiral, “What happens in China is more important to Brazil than what happens in Europe,’’ he said. Latin America also is better prepared to handle an economic storm than it was in 2008-2009. Not only has the region learned lessons from that crisis, but many countries have built up their international reserves and continued economic reforms. That’s especially true for countries blessed with iron ore, copper, oil and vast expanses of land for production of the soybeans, wheat and cattle that China buys.

The New Young Turks: Over-Educated, Tech-Savvy, and Jobless - To get a sense of the scope of Turkey's youth unemployment problem, you don't have to look much further than downtown Istanbul's inexpensive cafes, which are invariably jammed with 20-somethings during working hours. The country's challenge isn't simply one of creating more jobs to handle the rising tide of young people entering the work force, it's also a matter of creating quality positions that can meet the heightened expectations of job-seekers. Setting the stage for the unemployment conundrum is the demographic fact that more than half of Turkey's estimated population of 75 million people is under the age of 30. And not only are there more youngsters seeking employment, they tend to be better educated than their elders. Over the past decade, many 20-somethings in Turkey have become the first members of their respective families to attend university or other institutions of higher learning. Over the same period, the country has experienced robust economic growth -- 8.2 percent in 2010, and averaging 6 percent annually from 2002-2008. But the growing economy hasn't been able to create jobs fast enough to handle the increasing number of youths entering the labor force. That has left many newly minted graduates unable to find a job to match their skills.

Egypt May Seek $3 Billion Loan From IMF as Debt Costs Soar -- The Egyptian government may ask the International Monetary Fund for the $3 billion loan it rejected this year after domestic borrowing costs soared, Deputy Prime Minister Hazem El Beblawi said. “The government has discussed the issue and there is an agreement in principle,” Cairo-based El Beblawi, who is also the finance minister, said in a telephone interview today. “We are considering the right time.” Egypt’s ruling military council, which turned down the previous loan agreement, will not object to the government’s decision, he said. Dwindling international reserves and foreign investment after the revolt that toppled President Hosni Mubarak have forced the government to pay the highest borrowing costs in three years. The yield on Egypt’s one-year Treasury bills jumped 65 basis points, or 0.65 percentage point, yesterday to 14.725 percent, seven basis points less than a peak in September 2008 at the height of the global financial crisis. Egypt reversed course in June and said it wouldn’t be taking the IMF loan it had announced three weeks earlier. Then- Finance Minister Samir Radwan, who lost his job in a July reshuffle, said in a July 27 interview that the ruling generals vetoed the loan after a “damaging” media campaign because the IMF was seen as tainted for endorsing the economic policies of the Mubarak regime.

UK urged to prevent vulture funds preying on world’s poorest countries - Britain is being urged to help close down a legal loophole that lets financiers known as "vulture funds" use courts in Jersey to claim hundreds of millions of pounds from the world's poorest countries. The call came from international poverty campaigners as one of the vulture funds was poised to be awarded a $100m (£62m) debt payout against the Democratic Republic of the Congo after taking action in the Jersey courts. "The government could close this loophole tomorrow if it wanted to and stop tax havens becoming the 'go-to' destinations for vulture speculators. These people seek to profit by forcing the world's poorest countries to pay them millions," said Max Lawson, head of policy at Oxfam. Vulture funds legally buy up worthless debt when countries are at war or suffering from a natural disaster and defaulting on their sovereign debt. Once the country has begun to stabilise, vulture funds cash in their cheap debt deeds, at massively inflated cost to the countries. In the case before the Jersey court, to be decided next month, FG Hemisphere, run by vulture financier Peter Grossman, is trying to collect $100m from the DRC on a debt that appeared to start out at just $3.3m. The original debt was owed to the former Yugoslav government to build power lines.

Do minimum wages drive industrialization?  Minimum wages kill employment, right? Maybe not. After doubling the wages at his auto plants, Henry Ford explained: our own sales depend on the wages we pay. If we can distribute high wages, then that money is going to be spent and it will serve to make… workers in other lines more prosperous and their prosperity is going to be reflected in our sales.  Now, evidence from Indonesia’s industrialization: Big Push models suggest that local product demand can create multiple labor market equilibria: one featuring high wages, formalization, and high demand and one with low wages, informality, and low demand. I demonstrate that minimum wages may coordinate development at the high wage equilibrium. formal employment increases and informal employment decreases in response to the minimum wage. Local product demand also increases, and this formalization occurs only in the non-tradable, industrializable industries

Politics Matter: Changes in Unionization Rates in Rich Countries, 1960-2010 Reports: Researchers have offered several explanations for the decline in unionization. Many emphasize that “globalization” and the technological advances embodied in the “new economy” have made unions obsolete. However, if the decline in unionization is the inevitable response to the twin forces of globalization and technology, then we would expect unionization rates to follow a similar path in countries subjected to roughly similar levels of globalization and technology. This paper looks union membership and coverage for 21 rich economies, including the United States, and finds over the last five decades a wide range of trends in union membership and collective bargaining. The national political environment, not globalization or technology, is the most important factor driving long-run changes in unionization rates in the United States. Report - PDF - Flash - Press Release

Even as Governments Act, Time Runs Short for Euro — The window of opportunity to save the euro is rapidly closing, as the sovereign debt crisis1 erodes the solvency of Europe’s banks and drives up borrowing rates for even once rock-solid countries like France.  A growing consensus about the urgency of Europe’s situation has brought some drastic and tangible steps toward dealing with it: first by Greece, then by Italy, where lawmakers on Saturday signed off on austerity measures and cleared the way for Prime Minister Silvio Berlusconi to step down.  Both countries are moving toward more technocratic governments2 that are committed to delivering the difficult reforms demanded by the European Union3, the European Central Bank4 and the International Monetary Fund. But there are a host of problems that could quickly overwhelm that progress.  Looming over all the discussions of reform and financing mechanisms is the slowdown in the Continent’s already anemic growth rate, to 0.5 percent in 2012, and even the threat of a double-dip recession, the European Commission said in a forecast for the euro zone last week.

Greece, Italy, and financial stability - Jim Hamilton- The drama began in Greece. Where is it going to end? Let me begin with some observations on the basic mechanics of sovereign debt default. If you borrow $1 at a 5% interest rate, next year you're going to owe $1.05. If you don't pay any of it back and just roll over the debt, you'd then have to borrow $1.05 next year, meaning you'd owe $1.10 at the end of the following year. It's hard to see how that game can go on forever, even if it's a sovereign government doing the borrowing. One critical parameter is the GDP growth rate. If the GDP growth rate is bigger than the interest rate (e.g., nominal GDP growing faster than 5% in the previous example), then the debt you owe, although growing, would still shrink as a percentage of GDP. A sovereign government might well continue to find lenders in such a situation, even if it's just rolling over a growing amount of debt. But if GDP growth is below the interest cost, then debt that's continually rolled over would grow to become an arbitrarily large multiple of GDP. Eventually you run into the logistical constraint that there simply aren't enough funds in the world to buy that much debt. As soon as lenders recognize that's where the process is headed, the government is going to find it suddenly much more difficult to borrow the necessary new sums.

Fiscal Imbalance: Reply to Jim Hamilton - Jim writes Eventually you run into the logistical constraint that there simply aren’t enough funds in the world to buy that much debt. As soon as lenders recognize that’s where the process is headed, the government is going to find it suddenly much more difficult to borrow the necessary new sums. To prevent that from happening, over the long haul any government is forced to run a primary budget surplus, meaning that tax receipts exceed expenditures other than interest costs, in order to be able to use some of that primary surplus to make interest payments. The higher the debt load, the higher the steady-state primary surplus needs to be. The logistical constraint technically only necessarily binds if the interest rate on Sovereign debt exceeds the nominal growth rate of the entire world denominated in the Sovereign’s currency. However, I think Jim’s basic point can be seen if we just think about what it would take to keep Sovereign debt from rising to an arbitrarily high fraction of GDP for the country itself.In that case typically what we are going to need is not primary surplus but primary balance, more or less. That is because the opportunity cost of funds is almost necessarily going to be lower than the nominal growth rate of the economy.

Citizens strongly back unity coalition: polls - Greeks strongly support their new technocrat prime minister Lucas Papademos and his national unity government, opinion polls showed Saturday, which also indicated the country may continue with coalition rule after he steps down next year. Papademos, a former central banker, has already called on the nation to rally behind his coalition as it sets about securing a bailout deal with the eurozone, which demands austerity measures likely to be highly unpopular with Greeks. A survey by pollsters MRB showed he has support, at least for now, from Greeks appalled by bickering among party politicians after the previous Socialist government collapsed. The poll also signaled that no party might win a majority when the interim coalition finishes its work and early elections are held, opening the possibility of some kind of continued coalition government.

New government offers no austerity relief, may stay longer - Greeks have largely welcomed the new government, saying the somber international policymaker [new Prime Minister Lucas Papademos] is a safer pair of hands than those of politicians they say have put their own interests ahead of those of the country. But [Theodoros Pangalos, a returning deputy prime minister from the previous cabinet] warned voters not to expect relief from the tough tax measures decided earlier this year to qualify for further bailout tranches. "The manoeuvring space for any relief measures in 2012 is very narrow," he said. In his first statement as prime minister, Papademos vowed to fulfill a deal forged last month with eurozone leaders that will release an 8 billion euro loan Athens needs to avoid running out of cash next month plus longer-term funding later.

Italy Passes Budget; Berlusconi Resigns - Italian Prime Minister Silvio Berlusconi resigned on Saturday, bringing down the curtain on one of the most brash and controversial leaderships of the western world and ushering in a season of austerity for one of Europe's biggest economies. Italians packed the streets of central Rome, whistling, booing and shouting "buffoon" at the 75-year-old premier as his motorcade snaked towards Palazzo del Quirinale to tender his resignation to Italy's president. The outpour of collective scorn was a melancholy coda to the 18-year political career of a man who has long taken pride in his ability to make Italians laugh. The move came after Parliament passed key economic measures that preface a much tougher round of austerity likely to be carried out under the emergency administration.

Berlusconi’s Resignation Ends a 17-Year Era for Italy - With his country swept up in Europe’s debt crisis1 and his once-mighty political capital spent, Prime Minister Silvio Berlusconi2 resigned on Saturday, punctuating a tumultuous week and ending an era in Italian politics.  His exit, a sudden fall after months of political stalemate, paves the way for a new government of technocrats led by Mario Monti, a former member of the European Commission. Mr. Monti is likely to be installed early next week, following the apparent consent of key blocs of Mr. Berlusconi’s center-right coalition.  His resignation came just days after the fall of Prime Minister George A. Papandreou in Greece. Both men were swept away amid a larger crisis that has threatened the entire European Union3, in which roiling financial markets have upended traditional democratic processes.  Though it was met by cheering crowds in Rome, the end of Mr. Berlusconi’s 17-year chapter in Italian politics, characterized by his defiance and fortitude, sets off a jarring political transition. “This is the most dramatic moment of our recent history,”

Berlusconi Bravado No Match for Euro-Region Debt Crisis - Earlier this month, Prime Minister Silvio Berlusconi told reporters what he thought of the risk to Italy’s solvency as the European debt crisis sent bond yields toward euro-area records, and who he thought should fix it.  “Restaurants are full, it is difficult to reserve a seat on a plane, resorts during holidays are fully booked,” he said at a Group of 20 meeting in Cannes, France. “We really are a strong economy. I can’t see another figure on the Italian scene capable of representing Italy on the international stage. I feel obliged to stay on.”  Four days later he offered his resignation after his parliamentary majority eroded and the country’s bond yields soared past the 7 percent mark. Berlusconi made good on that pledge yesterday after parliament passed parts of a 45.5 billion-euro ($62.6 billion) austerity package aimed at restoring investor confidence and taming financing costs.  His departure paves the way for a coalition government to be led by former European Union Commissioner Mario Monti. Berlusconi remains in parliament and could lead the People of Liberty party he founded in the next elections, which are due by April 2013

The Full Monti -- Rumors suggest that Italy is so desperate for money that it will try the full Monti*.  Mario Monti is about to be asked to try to form a government. Of course the actual negotiations have begun, except it doesn't seem that Prof. Monti is inclined to negotiate. His position seems to be that Italian politicians totally blew it (correct) so they will let him try to fix things (good luck with that). The rumored position of the Berlusconi has moved from the prime minister should be one of his guys, to he should name half of the cabinet to he should name at least someone (who would be Gianni Letta his Rove) to OK just don't take away my TV (spoiled kids are that way). Monti has already semi-officially announced that the new economics minister with be Guido Tabellini who is widely considered to be the most eminent Italian economist in Italy**. He is known for his work on how politicians do not serve the public interest (kids this was an original approach when he started -- really).

EFSF Fail: Forced to Buy Some of Its Own Bonds in Auction - Yves Smith - We’d linked to an article in Friday’s Financial Times about the EFSF that had more than a twinge of official bluster and desperation about it. It first had the hapless CEO of the fund, Klaus Regling, complaining that he could not lever it enough because markets were too volatile. How ’bout the real reason: there aren’t enough suckers. Anyone with an operating brain cell knows that without ECB backing, a scheme to lend to borrowers in trouble backed by the very same troubled borrowers is not such a hot idea.  Now we learn things are probably worse than they seem (and remember, they already weren’t looking so hot). From the Telegraph: The European Financial Stability Facility (EFSF) last week announced it had successfully sold a €3bn 10-year bond in support of Ireland. However, The Sunday Telegraph can reveal that target was only met after the EFSF resorted to buying up several hundred million euros worth of the bonds. Sources said the EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt.

EFSF Bail-Out Fund Buys Its Own Debt Because Not Enough Others Will - Mish -To raise "bailout" money the EFSF sells bonds. In its first auction after the new Merkozy agreement, not enough investors wanted the garbage and the fund ended up buying some of its own bonds. The Telegraph reports Eurozone bail-out fund has to resort to buying its own debt Sources said the EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt. The failure of the EFSF will increase pressure on the European Central Bank to effectively become the lender of last resort for the eurozone, a move it has strongly resisted. The EFSF raises money by selling bonds that few investors want. So it buys its own debt effectively raising no cash. Is this supposed to work?

EFSF Denies It Is An Illegal Pyramid Scheme - If there is one thing one can say about the insolvent European continent is that despite everything, it is a bastion of truth, and a knight of see-thru disclosure. After all, who can forget such brutally honest statements as "Greece will not default", or the follow ups: "Ireland is not Greece", "Portugal is not Ireland", "Spain is not Portugal", "Italy is fine", "Italy has turned down money from the IMF", "The IMF has never offered any money to Italy", and then the old standbys, "the ECB will not be a lender of last resort", "the EFSF will use 4-5x leverage", wait, make that "the EFSF will use 3-4x leverage", and last but not least, "Europe is not America" and "it is all the fault of evil CDS speculators." Well we have one more to add to the list: "the EFSF is not an illegal ponzi scheme" - because after the mindboggling report in the Telegraph yesterday that the EFSF has bought hundreds of millions of its own bonds, exposing the scam in the heart of the Eurozone for anyone to see, the European rescuer of last resort (at least until the ECB comes out monetizing and Eurobonds are issued)has no choice but to join in the parade of truths and as Reuters reports "said on Sunday that it did not buy its own bonds last week, denying a British newspaper report that it spent more than 100 million euros ($137 million) to cover a shortfall of demand. "The EFSF did not buy its own bonds and the book was 3 billion euros," an EFSF spokesman said, referring to the 3 billion euros raised in last Monday's 10-year bond issue." We are certain that in order to dispel rumors about its fraud-i-ness, the EFSF will promptly submit a full breakdown of the entities that received bond allocations (we know that Japan is good for €300 million, that China is good for €0.0, and that as Merkel said one week ago, "hardly any countries in G20 have said they will participate in the EFSF." So, because we believe everything that comes out of Europe, we are patiently waiting to see just who it was that bought EFSF bonds when nobody else did.

European Ponzi Goes Full Retard As EFSF Found To Monetize... Itself ZeroHedge: We have long mocked and ridiculed the Fed for being the ultimate ponzi instrument: after all, why worry, when your central bank will buy up almost three trillion in US paper in about 2 years (a very comforting fact for US politicians who never have to fear that those trillions in new porkbills, pardon fiscal stimulus programs, may end up without funding). Well, as it turns out those wily veteran bankers from across the Atlantic have just one upped America yet again. According to the Telegraph, the abysmal, and barely successful, 3 EUR billion issuance of EFSF bonds (which was originally supposed to be 10 EUR billion, on its very very gradual climb to 1 EUR trillion) had one more very curious feature to it, aside from confirming that it is Dead On Arrival as expected. It turns out that in addition to being the most convoluted and complex creation ever conceived by JPM which is advising Europe on coming up with structured finance products that are so complex nobody will ask any questions and will automatically assume someone else has done the homework, it is also the quintessential ponzi instrument. The Telegraph reports that the already reduced 3 EUR billion "target was only met after the EFSF resorted to buying up several hundred million euros worth of the bonds." You read that right: in its first bond issuance since its transformation to the European Bank/Soveriegn Bailout Swiss Army Knife, the EFSF not only failed to raise a minimum token amount, but also had to... buy its own bonds.

Standard & Poor’s shoots France in the head, then says it’s sorry. Time for a duel. - In the midst of the Eurozone/Euro mess, as the troika (the European Commission [EC], the European Central Bank [ECB] and the International Monetary Fund [IMF]) work furiously to contain (didn’t Bernarke claim “containment” re: subprime disaster in 2007?) the contagion of investor panic and debt yields rising to unsustainable levels, Standard & Poor’s “accidentally”sent out an “erroneous” email on Thursday suggesting that it lowered France’s triple-A rating. Not that it was planning to lower it, but that it already had. Hmmm. Can it be a coincidence that the EC is planning to issue new rules on credit ratings agencies in a few days? In the U.S. we’ve already seen the damage wrought by the three Stooges, Standard & Poor’s, Moody’s and Fitch’s. They plastered triple-A ratings all over toxic waste mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs–which entail pooling MBSs and slicing them up). As the true nature of these putrid instruments revealed itself, the credit ratings agencies downgraded the obtuse structured financial vehicles to junk bond status, sometimes dropping them several notches within a week. In the U.S. the credit ratings agencies hide behind the First Amendment. Their legal argument is that they cannot be held accountable because they are merely issuing “opinions”. The European regulators are trying to put protections in. A draft released earlier this week made that clear:

Video: Roubini Diagnoses the Euro Zone

Fears rise over banks’ capital tinkering  - Concern is growing that banks in Europe and elsewhere are moving to meet new tougher capital requirements by tinkering with their internal models to make their holdings appear less risky. Under the global Basel III rules, which will be phased in between now and 2019, banks have to hold top quality capital equal to 7 per cent of their assets, adjusted for risk. The biggest banks will also be hit with an additional surcharge of up to 2.5 per cent. Banks in the European Union will also have to hit a temporary 9 per cent ratio next year after discounting their risky sovereign debt holdings. All of these requirements are aimed at making banks more resilient by forcing them to have more capital to absorb unexpected losses. But banks, faced with volatile markets and low share prices, are reluctant to issue equity right now. So many of them are instead trying to reach the required ratios by reducing the denominator, through what they call “risk-weighted asset optimisation”. In some cases, that means selling or running down risky assets, but in others, it means changing the way risk weights are calculated to cut the amount of capital that will be required.

Lessons from Europe - Matt Yglesias lists three things we’ve learned about the European Union over the course of this crisis:

    • — One: The German government has proven to be stingier than I thought. Pre-Greece, I thought that the German political class would on some level welcome an opportunity to open the German pocketbook in exchange for political domination of the entire continent. This turns out not to be the case. Germans would really like to mind their own business and export capital goods and luxury cars to China.
    • — Two: The informal “everyone must agree, but in reality France + Germany = ‘everyone’” rule of EU decision-making is in somewhat rocky shape. First Finland and later Slovakia held things up over domestic political controversies that were only loosely related to the core issues. This makes it extremely difficult for the EU to make credible commitments.
    • — Three (and perhaps most important): We learned from Greece that EU member states have greater capacity for secret budget shenanigans than I would have thought possible. We Given that Italy, especially under Berlusconi, is not exactly above suspicion in terms of governance quality Greece gives us reason to wonder whether the easily accessible public data about Italy is accurate.

Eurozone, why did we bother - When you look at Eurozone bond spreads on a historical basis… you have to wonder:

BBC interactive graphic - Eurozone debt web: Who owes what to whom? - The circle below shows the gross external, or foreign, debt of some of the main players in the eurozone as well as other big world economies. The arrows show how much money is owed by each country to banks in other nations. The arrows point from the debtor to the creditor and are proportional to the money owed as of the end of June 2011. The colours attributed to countries are a rough guide to how much trouble each economy is in.

The only way to save the eurozone from collapse - As of last week, the eurozone no longer had a functioning sovereign bond market. The crisis has spread to France, whose bond spreads have approached Italian levels of six months ago. The unfortunate accident of Standard & Poor’s mistaken publication of a French ratings downgrade tells us that the rating agency is clearly preparing a downgrade. It merely pressed the button too early. The European financial stability facility, the fragile and undercapitalised construction on which Europe’s rescue strategy rests, is therefore also likely to lose its triple A rating.  The cause of the panic attack was the European Council’s decision on October 26 to renegotiate the private sector participation of Greek sovereign debt holders. With that decision European leaders destroyed what was left of a functioning eurozone government bond market. Investors interpreted it – correctly in my view – as a precedent. They then dumped their Portuguese, Spanish, Italian and even French government bonds. As of now, there is only one significant risk-free asset in the eurozone – German government bonds. The German government bond market is large and liquid, but not large enough to sustain the world’s second largest economy. The presence of a risk-free asset can hardly be overstated in a modern financial system. Each insurance company, each pension fund needs to invest part of its income in such assets. Through a combination of short-sightedness and financial illiteracy, the European Council has now put itself in a position where it desperately needs Eurobonds, if only to assure the existence of a functioning financial sector.

Mario Monti Tapped to Lead Italy Out of Debt Crisis - A day after accepting the resignation of Prime Minister Silvio Berlusconi1, Italy2’s president on Sunday asked Mario Monti3, a former member of the European Commission, to form a government charged with helping defend Italy from Europe’s sovereign debt crisis4.  President Giorgio Napolitano formally chose Mr. Monti after a day of meetings with political leaders across the spectrum, almost all of whom had pledged their support for a government of technocrats to guide Italy’s post-Berlusconi future.  “The president of the republic,” Reuters quoted a statement from the presidential palace as saying, “has received Senator Mario Monti and conferred a mandate to form a government.”  Mr. Monti told reporters in Rome that he would get to work quickly to try to form a government. Italy must “heal its finances” and resume growth because today’s leaders owe it to future generations,

Italy's Monti to Form New Government  —Mario Monti started work to form a new government of national unity for Italy, as the country moved swiftly to try to restore credibility in its fractured political establishment before markets opened on Monday. Mr. Monti, a 68-year-old economist best known for his term as Europe's antitrust regulator last decade, is charged with perhaps the most difficult task facing any of the Continent's leaders: cutting Italy's crushing public debt without starving the country of the growth it needs to keep paying back that debt. Mr. Monti said he would name a cabinet quickly. Before the new administration can start operating, it needs approval from both houses of Parliament—a green light that is expected within days. Though Mr. Monti's new government is likely to be approved quickly by Parliament, any honeymoon period will be short. First off are likely to be more budget cuts than those already announced by Italy last summer in order to balance its budget by 2013.

Goldman Sachs International Advisor Mario Monti Is Italy's New Prime Minister - And so the international advisor to Goldman Sachs drones on. In the meantime, the €300 billion in BTP sales is set to resume in just over 13 hours. Yet the reason why the EURUSD is less than jubilant on the news is that Silvio apparently has just come back from the dead and has treatened to "pull the plug" on Monti. From the FT:The markets may soon discover that the Bocconi University professor’s room for manoeuvre will be limited by the political realities of a parliament where Silvio Berlusconi’s People of Liberty party remains the largest force. The public humiliation of Mr Berlusconi on Saturday night – his motorcade chased through the streets and crowds of thousands screaming abuse as he handed in his resignation – reflect the extent of the ex-prime minister’s fall from grace. But as he defiantly told a party leadership meeting hours earlier, they still retain the “golden share” in Mr Monti’s enterprise, particularly in the senate. "We are ready to pull the plug,” Mr Berlusconi was quoted as saying.

Chairman of the European Branch of the Trilateral Commission and Bilderberg Member Becomes Leader of Italy - He served as a European Commissioner for two consecutive terms and was appointed rector and president of Bocconi University. He currently serves as a Senator for life in the Italian Senate, and is considered a likely successor to former Prime Minister Silvio Berlusconi. Mario Monti holds a degree in economics and management from Bocconi University, Milan. He completed graduate studies at Yale University,[2] where he studied under James Tobin, the Nobel prize-winning economist. He taught economics at the University of Turin (1970-85) before moving to the Bocconi University, of which he has been rector (1989-1994) and then president (since 1994). His research has helped to create the Klein-Monti model, aimed at describing the behaviour of banks operating under monopoly circumstances. Monti is the first chairman of Bruegel, a European think tank founded in 2005, and he is European Chairman of the Trilateral Commission, a think tank founded in 1973 by David Rockefeller.[4] He is also a leading member of the Bilderberg Group. Monti is an international adviser to Goldman Sachs and The Coca-Cola Company.

Regime Change in Europe: Do Greece and Italy Amount to a Bankers' Coup? - The voice of the people isn't something the markets seem to want to hear these days. First there was Greece, the cradle of democracy itself, where early this month, the merest mention of a referendum offering its citizens a say in a series of severe austerity measures was enough to send the markets into a tailspin. The ultimate result: the collapse of Prime Minister George Papandreou's ruling coalition, the rejection of any notion of bringing the proposal before the people, and the installation of a caretaker government under the leadership of Lucas Papademos, a former vice president of the European Central Bank and, until earlier this week, a visiting professor at Harvard. Then came Italy. As Athens threatened to go under, Rome found itself under pressure not so much for its level of debt — which though high is generally considered within the limits of sustainability — as much as for the erratic behavior of its flamboyant prime minister, Silvio Berlusconi. On Monday, investors seemed to make the collective decision that he could no longer be trusted at the helm of the euro zone's third largest economy and sent Italy's cost of borrowing up towards crisis levels. By the end of the week, not only was Berlusconi finished, so was the very idea of holding a vote to replace him. The markets had spoken, and they didn't like the idea of going to the electorate. "The country needs reforms, not elections," said Herman Van Rompuy, president of the European Council on a visit to Rome Friday.

How Mario Monti can solve Italy’s immediate fiscal problems - Italy has a lot of debt, but also lots of wealth.   There is, however, no need to sell off the Pieta.  More than half of Italian government bonds are held domestically.  Apply a wealth tax and use it to pay off all of the domestically held bonds; in essence the government takes the wealth with one hand and mails it back with the other.  The debt/gdp ratio is more than cut in half and the announcement to do so comes immediately.  The Italian citizenry is not poorer, although they are required to recognize losses which already have been incurred.  The Italian government also can do some fraction of this, and retire part of the domestically held debt, rather than all of it.  I am not predicting this will happen!  And while it would not cure Italy’s underlying growth problems, and could make some of those problems worse, it would buy them time. What’s scarce in this situation is trust.  Why should Italian taxpayers think they will get the money back?  And the intra-Italian redistributions of wealth — from homeowners to bondholders most likely — won’t be popular.

Pressure on the ECB grows as Mario Monti rides to rescue - The European Central Bank (ECB) is under intense pressure to step up purchases of Italian bonds after premier Silvio Berlusconi finally relinquished power in Rome, clearing the way for former EU commissioner Mario Monti to form an emergency government of technocrats. The "halo effect" of Mr Monti helped bring Italian bond yields back from the brink of a catastrophic spiral on Friday but the gains are likely to be tested again as the new team faces the stark reality of Italy's fractured politics.  "The ECB must make it clear that it will not allow Italy's bond yields to rise above 5pc, however much it costs," said Thomas Mayer, chief economist at Deutsche Bank. He described the current policy of half-hearted bond purchases as "a recipe for failure", signaling to markets that the ECB is not willing to see the job through with overwhelming force.  Britain's Vince Cable, echoed the calls for bolder action, blaming the ECB's passive stand for the dramatic escalation of the crisis last week that pushed Italy's €1.8 trillion to brink of meltdown and spread contagion to France. "The central bank has to have unlimited powers to intervene to support economies, and indeed banks, to prevent collapse," he told the BBC.

Italy Passes Bond Test — At a Cost  - Italy cleared its first hurdle since economist Mario Monti agreed to form a caretaker government to force through tough fiscal reforms, comfortably selling €3 billion of short-dated bonds Monday in a sale that had been seen as a key test of demand for Italian debt.  The sale was in focus after bond yields last week soared to levels that had previously seen Greece, Ireland and Portugal forced into seeking external help. While Italian yields have eased since last week's vicious selloff on hopes that the new government will take steps to address the debt troubles, Monday's auction still came at a steep cost. The five-year bonds were sold at an average yield of 6.29%, up from 5.32% at the last tap in October, the Bank of Italy said. That was the most Italy had to pay for five-year funds at an auction during the euro era, but the yields were sharply below the peaks of 7.73% seen last week when the country's political crisis escalated.  The bonds got bids for 1.47 times the amount on offer, up from 1.34 times at the previous auction.

France Keeps a Watchful Eye on Turmoil in Italy - While Italy has replaced Greece as the focus of anxiety amid Europe’s worsening debt crisis1, investors are increasingly concerned about the outlook for France, whose banks are among the world’s biggest and are closely linked with their counterparts in the United States.  One crucial gauge of investor sentiment, the difference between what France pays to borrow versus what Germany pays, has doubled since the beginning of October, and last week reached its widest point since the formation of the euro2 currency zone in 1999. Meanwhile, speculation that France could soon lose the sterling triple-A rating on its sovereign debt intensified after Standard & Poor’s mistakenly told clients on Thursday that it was downgrading France’s debt.  The jump in Italian bond yields to more than 7 percent last week, on concern about Rome’s ability to borrow, reminded investors just how much Italian debt French banks hold.  But French banks also hold a lot of French government bonds, whose yields have risen in tandem with concerns that Paris’s finances may be strained as it foots a larger bill to help prevent the crisis from engulfing Italy.

Between the Whirlpool of Riots and the Rocks of Default – Market-Based Debt Relief after Greece - So now we can all breathe easily again. After all, the bond markets have rid the world of a dynasty of prevaricating Greek prime ministers and a modern-day Il Duce reincarnated as a trousers-around-the-ankles buffoon. There is just one fly in the ointment. Investors may start serially mugging healthy countries. Sovereign borrowers have a defense, fortunately, if only they dare use it. Bond markets have already started tilting at France. French public debt is a manageable four fifths of annual product, its fiscal deficit low for a country recovering from a credit collapse, its banking sector moderately sized and domestically oriented, and its voters pragmatic about paying taxes for services the private sector cannot provide. It’s no surprise France has a higher credit rating than the US. Why would France make bond investors nervous? The answer is that investors have done reasonably well by boycotting the bonds of successive euro zone governments. They’re getting at least half their money back from Greece, a country that could have repudiated its debt rather than shoulder a burden still greater than GDP. Portugal and Ireland are paying up. And Italy, a country whose ex-leader wanted to plunge his nation into crisis rather than tax his own business interests, is grinding out austerity and payment in full. Indeed, bond investors have come close to securing guarantees from the whole euro zone without having to pay for them.

Europe: Italian and Spanish bond yields rising - The Italian 10 year bond yield is up to 6.7%. And keep an eye on Spain ... The Spanish 10 year bond yield has increased to 6.1%. The Spanish 2 year yield is up to 5.0% From Bloomberg: Merkel’s CDU Delegates at Party Gathering Support Allowing Exits From Euro  “We’re not throwing anybody out,” Finance Minister Wolfgang Schaeuble said in an interview from Leipzig with broadcaster Phoenix. “We want Greece to stay in, that everybody stays in,” he said. “But if a country can’t carry the burden or doesn’t want to carry the burden, and the Greek people have to carry a heavy load, then we have to respect the country’s decision.” Earlier today, the Greek New Democracy opposition leader Antonis Samaras was quoted as saying his party would not vote for any austerity measures, and he would not sign any letter pledging a commitment to austerity measures. If so, Greece will probably be leaving the euro sooner rather than later.

Bond Market Stares Down Technocrats as 10-Year Yields Climb in Italy and Spain; Technocratic Showdown in Greece with Troika Already? - The technocratic governments in Italy and Greece are not off to a smooth start judging from the action in the bond market. A quick glance at the 10-Year note in Italy shows the yield is up 25 basis points to 6.70% and the Spanish 10-year note is up 24 basis points, soaring through the 6% mark to 6.09%. Meanwhile, Greek 1-year bonds are trading at a mere 250%. Any bets on when they exceed 300%? German Chancellor Angela Merkel says Europe faces toughest hour since Second World War. What Merkel says is irrelevant so let's instead focus on a few other snips from the Telegraph article. Papademos succeeds George Papandreou, whose proposal to hold a referendum on the country's bailout terms prompted EU leaders to raise the threat of a Greek exit from the currency bloc. The new Greek leader, a former central banker who oversaw his country's entry to the eurozone in 2002, must win a Wednesday confidence vote in his cabinet before meeting eurozone finance ministers in Brussels on Thursday, Opinion polls show Papademos has the support of three in four Greeks. But he was facing his first protest in front of parliament on Monday afternoon from left-wing demonstrators who accuse the new government of working in the interests of bankers.

Super Mario vs the Bond Vigilantes - THE relief rally lasted just a few hours before investors again lost their enthusiasm for Italian bonds, which they had gained after the resignation of Silvio Berlusconi, Italy's prime minister, and the nomination of Mario Monti in his place. At least it lasted long enough for Italy to sell €3 billion worth of 5-year bonds.  The auction attracted enough bids to sell all of the bonds on offer, thus avoiding failure. Yet the avoidance of failure is different from success. Italy will pay an interest rate of almost 6.3% on the bonds, the highest since 1997, according to Bloomberg. What is more, the rate is almost a full percentage point higher than the one the country had to offer in an auction a month ago. With enough successful auctions such as this one, Italy will be on a path to bankruptcy.  Worse, within just a few hours of the auction, yields on benchmark 10-year Italian bonds were back up to 6.6%. Contagion is also spreading again to other countries in the periphery. Yields on Spanish 10-year bonds edged above 6% for the first time since the European Central Bank started buying them (along with Italy's) in early August.

Is This the End of the EMU? - For more than a decade, I’ve been arguing that the EMU was designed to fail. It was based on the pious hope that markets would not notice that member states had abandoned their currencies when they adopted the euro, thereby surrendering fiscal and monetary policy to the center. The problem was that while the center was quite happy to centralize monetary policy through the august auspices of the Bundesbank (with the ECB playing the role of the hapless dummy whose strings were pulled in Germany), the center never wanted to offer fiscal policy capable of funding essential spending. (See also Nouriel Roubini’s Eurozone Crisis: Here Are the Options, Now Choose and  Marshall Auerback’s piece: The Road to Serfdom.) Member states became much like US states, but with two key differences. First, while US states can and do rely on fiscal transfers from Washington—which controls a budget equal to more than a fifth of US GDP—EMU member states got an underfunded European Parliament with a total budget of less than 1% of Europe’s GDP. The second difference is that Maastricht criteria were far too lax—permitting outrageously high budget deficits and government debt ratios.  Before readers accuse me of going over to the neoliberal side, let me explain.

The Correct Pronunciation Of EC Is Eek - Krugman - I’ve managed to go a whole day without thinking about the euro, but tomorrow’s FT is online and I couldn’t help myself. So Munchau says that the Germans believe that the installation of Mario Monti will solve everything. The president of the Bundesbank has ruled out any lender of last resort actions by the ECB. And Gavyn Davies does the math on Italian stabilization; it’s not pretty unless rates come way down, and restoring cost-competitiveness looks impossible without a higher inflation target for the eurozone, a point I keep trying to make. Maybe the markets will continue a relief rally for a little while. But as far as I can see, Eurodämmerung is still very much on track.

Bundesbank warns against intervention - The president of Germany’s powerful Bundesbank has firmly rebuffed international demands for decisive intervention in the bond markets by the European Central Bank to combat the eurozone debt crisis, warning that such steps would add to instability by violating European law. Bundesbank president Jens Weidmann told the Financial Times that only politicians could resolve the crisis, and he rejected the idea of using the ECB as “lender of last resort” to governments.  He also criticised actions taken by eurozone governments as “inconsistent”, and warned that their plans to involve private sector banks in rescue plans for Greece could add to the eurozone’s woes. Such private sector involvement, he said, could undermine market confidence in the eurozone’s crisis-fighting tools such as the rescue fund, the European financial stability facility. The forthright comments by Mr Weidmann, who is one of the most influential voices on the 23-strong ECB governing council, come at a decisive moment for Europe’s 13-year-old monetary union, which in recent days has seen Italy’s borrowing costs soaring dangerously and the prime ministers of both Italy and Greece resigning.  To prevent the crisis erupting into a global economic shock, the ECB has been urged to intervene directly by economists and politicians around the world, including at the weekend by Russia’s Vladimir Putin.

Merkel Urges Overhaul of European Union - German Chancellor Angela Merkel called for an overhaul of the European Union, advocating closer political ties and tighter budget rules, in her most explicit prescription for ending the debt crisis.  Speaking to her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig today, Merkel said leaders must create a “new Europe” by deepening ties in the 27-nation EU. At the same time, she repeated Germany’s rejection of jointly sold euro bonds.  “The task of our generation now is to complete the economic and currency union in Europe and, step by step, create a political union,” Merkel said. “It’s time for a breakthrough to a new Europe.” Merkel’s address marks an escalation in her rhetoric as the debt crisis that began in Greece in October 2009 sent Italian and Spanish borrowing costs to euro-era records last week and roiled French markets. “What she means is that either we get more Europe now or the project will die,” . “This means that Germany must give up some sovereign rights and some party colleagues and voters may find this hard to swallow. But there’s no alternative.”

Merkel’s Party Votes to Allow Exits From Euro - German Chancellor Angela Merkel’s Christian Democratic Union party voted to offer euro states a “voluntary” means of leaving the currency area.  CDU delegates meeting in the eastern German city of Leipzig for their annual party congress today backed a motion on the euro that included a clause permitting euro exits without exclusion from the European Union. They rejected an amendment that would have sought to change voting at the European Central Bank so that it is weighted according to economic size.

Italian Bank UniCredit Reports A Gigantic Loss: Italian bank UniCredit released earnings results today, and its finances are in terrible shape. Net losses amounted to €10.64 billion ($14.54 billion), after net profits of €334 million ($456 million) a year ago. The bank has already said it will need to raise €7.5 billion ($10.3 billion) from shareholders in order to shore up dangerously low capital reserves. Reuters reports that the company is also expected to cut 5,000 jobs. Shares of the bank's stock are falling today. The Italian bank has been hard-pressed to stay afloat amid tightening liquidity conditions in the eurozone. At the same time, it will be forced to recapitalize to adhere to the 9% core capital requirement for EU banks by next June. It is unclear whether UniCredit will be able to do this without seeking aid from the Italian government and perhaps even the European Financial Stability Facility, amounting to a de facto nationalization of some of the bank's assets.

Italy: not good but we have seen this before - Below is the Italian government debt expressed as % of GDP. There are two lines, the gross and net values of government debt. Net debt is a more appropriate measure as it takes into account some of the financial assets that the Italian government owns and it is equivalent to what is referred to in the US as "government debt held by the public". I include gross debt as well because the "net" measure is noisy and some times unreliable so some prefer to focus on gross debt.  When we look at gross debt we see that Italy is now back to where it was in 1994. If we focus on net debt the current level of debt is significantly below what it was in 1994. So Italy has seen similar or higher levels of debt before. Certainly it was not growth what saved them. GDP growth in Italy has been low during this period of time: the average growth rate for the period 1994-2007 was 1.6%, clearly below the growth in other Euro countries (France grew at 2.6% and Spain at 3.6% during the same period of time). What about interest rates? As it is clear from the chart, financial conditions back in 1994-1995 were extremely difficult for the Italian government with nominal interest rates as high as 12%. Much higher than the current levels of 6-7% that look as unsustainable.

EU Backs Limits To Naked CDS, Short-Selling  -- The European Parliament backed Tuesday new rules to limit short selling and the trading of credit default swaps, in an effort to reduce speculation on sovereign default at a time when some members of the European Union are under close scrutiny. "The rules will impose much more transparency and virtually ban certain CDS trades, thereby making speculation on a country's default more difficult," the Parliament said in a statement. According to the new rules--which will now have to be rubber-stamped by representatives of EU governments and are expected to enter into force in a year's time--the purchasing of default insurance contracts without owning the related bonds will be banned, the Parliament explained. National authorities will be able to lift the ban for as much as 12 months, in case the sovereign debt market starts malfunctioning, it said. The rules will also increase the amount of information that market prayers will have to disclose to the authorities, it said.

Greek opposition leader refuses to back new austerity plan - The leader of Greece's center-right opposition Antonis Samaras said on Monday his New Democracy party would not vote for any new austerity plan demanded by international lenders before they provide more financial aid to Athens."Some say that to unblock the (8 billion euro) instalment we need to sign a joint statement with all the parties that support this new transitional government. But I will not sign such statements," Samaras said.European leaders are demanding Greek party leaders sign a commitment to fulfil the accords reached at the EU crisis summit in October, which resolved to write off some of Greece's debt in exchange for a new austerity program, which Greece must implement in the next few years to get financial aid from international lenders and prevent a default.The troika of international lenders comprising the IMF, the European Union and the European Central Bank agreed the sixth 8 billion euro ($11 billion) tranche for Greece to tackle its debt crisis, but it was put on hold after former Prime Minister George Papandreou proposed holding a referendum on the new bailout package. A popular vote was likely to frustrate all agreements with creditors. Papandreou later had to give up the initiative and agreed to resign.

Greek conservatives stance threatens bailout - Greece's conservatives vowed today to reject any new austerity measures in return for the aid that is keeping Athens from bankruptcy. The move is a sign a new coalition government may not enjoy the kind of cross-party support its lenders demand. Ahead of a confidence debate in Greece's new cabinet, New Democracy party leader Antonis Samaras said he would not sign up for any new belt-tightening. A policy mix of spending cuts and tax hikes agreed with Greece's international lenders should be changed to better promote growth, he said. Although his party is part of the new administration led by former European Central Bank vice president Lucas Papademos, its support for the three-day old government has so far been lukewarm. Another coalition party - the small far right Laos - has also said it would not support any new wage or pension cuts.

Germany Resists Austerity in Budget -As Germany puts the final touches on its 2012 budget, it is becoming increasingly clear that Europe's largest economy is a glaring exception at a time when a worsening debt crisis is forcing other major capitals to pull their belts ever tighter. Berlin is enjoying its lowest unemployment in decades and the government is still finding money to spend on infrastructure and income tax cuts and to preserve German influence in the French-German aerospace group European Aeronautic Defence & Space Co. by buying shares in the company. But in France, Europe's second-largest economy, the government has presented two austerity budgets as it tries to preserve its triple-A credit rating. Greece's government has been forced to slash public-sector wages and shut down vital public services, even closing some hospitals. And Italy, one of the world's biggest economies and a member of the Group of Seven leading industrialized nations, is being monitored by the International Monetary Fund.  Growth in German gross domestic product is expected to grind nearly to a halt, falling to just 0.8% next year after about 2.9% this year, the European Commission forecast this week. Yet even as growth slows, Germany remains on track to balance its budget by 2016 and even has money to spend.

Greece Keeping Euro Is Only Choice: Papademos - Greek Prime Minister Lucas Papademos, charged with securing international financing to avert a collapse of the economy, said keeping the euro is the only way forward for the country. “Our membership of the euro is a guarantee of monetary stability and creates the right conditions for sustainable growth,” Papademos told lawmakers late yesterday at the start of a three-day debate on a confidence motion in his new government. “Our membership of the euro is the only choice.” Papademos formed a government on Nov. 11 after four days of political wrangling. It must implement budget measures and decisions related to an Oct. 26 European bailout amounting to 130 billion euros ($177 billion), as well as manage a voluntary debt swap, by the end of February. The German government suggested yesterday countries should be allowed to leave the euro if the task of staying in it becomes too tough. The immediate priority for Greece is securing the payment of an 8 billion-euro loan installment under a previous 110 billion-euro European Union-led rescue, Papademos said. The tranche must be paid before the middle of December to prevent a collapse of the country’s economy.

Greek PM: 2011 deficit to reach 9 pct of GDP - New Greek Prime Minister Lucas Papademos says the country's budget deficit will reach 9 percent of gross domestic product this year, higher than earlier targets. Papademos was sworn in last week to head a 15-week coalition government backed by the outgoing Socialists and rival conservatives, created to secure the approval of a new massive bailout worth euro130 billion ($177.6 billion) from other eurozone countries and the International Monetary Fund. Papademos presented an outline of his policies in parliament on Monday, promising faster structural reforms and declaring that Greece has already met requirements to receive the next euro8 billion ($10.9 billion) rescue loan installment, vital to avoid bankruptcy.

Ireland and Greece: Blackjacked by the Banks - Perception of the crisis in Europe over the last month has been less concentrated in time and place compared to Black Thursday in New York, but in other ways the reaction is similar. What seemed unthinkable a month ago now appears unstoppable. Talk by European leaders of the break up of the eurozone or the ejection of some countries is no longer taboo. Illusions of a new European order are evaporating. Once countries like Greece and Ireland, with histories of poverty, emigration and foreign domination, believed they had finally caught up with the British, French and Germans and would enjoy the same standard of living. The collapse of these hopes makes the shock of the financial crisis all the greater in places where people believed that it would. The worst affected economies may eventually stabilize, but they will not wholly recover. “Greece would like to rebound to its old pre-crisis level,” Tassos Teloglou, one of Greece’s leading investigative journalists, told me. “But this is impossible because this was based on us having the same triple AAA credit rating as Germany and pretending we had a similar level of debt. You can’t go back to that because they [foreign countries and international banks] don’t trust us anymore.”

The Triumph Of Austerity (And Its Consequences) - Europe's slowing economy is a wake-up call for the austerity-now folks. Industrial production in the euro-zone fell 2% in September, a sharp drop from August's 1.4% rise, EuroStat reports. The annual pace is still positive, but a slowdown is evident here as well with September's year-over-year rise of 2.2% vs. 6.0% in August. Germany is still the exception these days, enjoying far stronger growth than its neighbors. What accounts for the divergence? There's no single answer, but an obvious place to start: interest rates. The high and rising rates outside of Germany are conspicuous, whereas German rates are low and falling.  As The Wall Street Journal reports: Bonds issued by highly indebted euro-zone countries came under renewed pressure Tuesday, with traders demanding the highest yield premiums since the inception of the euro to hold French, Spanish and Belgian bonds instead of safe-haven German bunds, as they fretted over the ability of policy makers to push through tough austerity measures without choking growth..We've seen this movie before. Higher rates after a severe debt-deflation recession are burdensome, perhaps economically fatal. Hiding behind the excuse that we must fight inflation NOW requires a grand dismissal of economic history. There are times to impose austerity and don the hawkish posture, but there are times when that's exactly wrong. This is one of those times, particularly for Europe.

To Save Europe They Had To Kill Democracy: It's hard not understand a trend from the political goings on Greece and Italy now. In both countries, popularly elected leaders are leaving and being replaced by technocrats -- stable, competent men well-respected by the rest of Europe. In Italy, the hard-partying billionaire populist Berlusconi finally lost the support of Parliament, whereas in Greece, a third-generation Greek leader has been replaced with someone who has served both the ECB and the Boston Fed! The NYT has a piece on the technocrat phenomenon, and whether there the new leaders of Greece and Italy will do any better. The question now, in both Italy and Greece, is whether the technocrats can succeed where elected leaders failed — whether pressure from the European Union backed by the whip of the financial markets will be enough to dislodge the entrenched cultures of political patronage that experts largely blame for the slow growth and financial crises that plague both countries. Some said there was cause for optimism. “First, the mere fact that they have been asked in such difficult circumstances means that they have a mandate,” . “Granted, it’s not a democratic one, but it flows from disaffection with the bickering political class.”

WHOOPS: The Irish Prime Minister Actually Told The Truth About the Euro Rescue Fund  - Someone's spilling the beans. Irish Prime Minister Enda Kenny just told Reuters his thoughts on the European Financial Stability Facility, the fund responsible for bailing out Portugal, Ireland, and Greece and keeping contagion from spreading. It's not going to work—at least not as it stands right now. Specifically, he said the October 26 agreement to leverage the fund to about $1.4 trillion is "insufficient" and has not succeeded in returning confidence to the markets. These statements echo what the majority of economists and analysts have been saying for months. Here are some reasons they've been citing on this assertion:

  • - $1.4 trillion is just not enough to build an adequate firewall between Italy and Spain, and certainly not enough to bail out Italy.
    - Insuring 20-30% of losses on sovereign bonds would not convince investors to purchase them.
    - If investors are going to lose 70-80% of the value of their bond holdings, that's really not much better than default anyway.
    - There are major doubts that any countries, investors, or sovereign wealth funds would actually buy bonds issued to fund the leverage plan.

Sovereign Debt Yields and Spreads Soar Everywhere: Belgium, France, Italy, Spain, Ireland; Major Problem List is Every Country but Germany; Belgium Spread Inverts Significantly - The ECB, IMF, EMU, and EU are on the verge of multiple emergency meeting, if indeed meetings are not already underway. A quick check of the following bond spread tables and today's yield action will explain.  Across the board, yields and spreads widened significantly today. Note in particular the jump in the 2-year bond yield of Belgium.Also note the inverted spread situation for Belgium. The spread to German 2-year bonds is 3.49 while the spread to 10-year bonds is 3.13.Belgium has been off nearly everyone's radar, but not for long. The EFSF is underfunded for Spain and Portugal alone. It's now time to add Belgium to the major problem list.  On second thought, the major problem list now includes every country but Germany.

Italian Yields Reach 7%, French Debt Slides as Bond Rout Deepens -- Italian bonds led a slump in euro- area government debt as investors abandoned all but the safest assets amid rising borrowing costs at auctions and concern the region’s financial woes are deepening. “It’s a confidence crisis,” . “Investors have no confidence that the euro zone can solve its problems. They will look for the most safe place they can store their money, which is Germany. Everything else is suffering.” German two-year rates dropped below 0.3 percent for the first time, while the extra yield investors demand to hold 10- year bonds from France, Belgium, Spain and Austria instead of bunds all climbed to euro-era records. Italy’s 10-year yield rose above 7 percent as prime minister-in-waiting Mario Monti wrapped up talks on forming a new government. Spain and Belgium sold less than the maximum target of bills at auctions today as financing costs increased. Italy’s 10-year yield climbed 37 basis points, or 0.37 percentage point, to 7.07 percent at 5 p.m. in London.  The yield on the 10-year bund fell one basis point to 1.77 percent, less than half France’s 3.67 percent rate.

Spain yields highest in 14 yrs at auction - Spain paid yields not seen since 1997 and Belgian borrowing costs hit three-year highs at short-term debt sales, as ebbing confidence that the euro zone crisis can be tamed sent bond investors scurrying ever deeper into the region's core. Driven by renewed concerns that Italy, the euro zone's third largest economy, will still need a bailout despite appointing a former EU commissioner to head a revamped government, contagion from the debt crisis spread wider. That caught Madrid and Brussels right in the firing line at Tuesday's auctions. Solid demand allowed Spain to sell 3.2 billion euros of 12- and 18-month T-bills, but both yields -- at 5.022 percent and 5.159 percent, respectively -- hit their highest at a primary auction since 1997. Belgium raised 2.725 billion euros, with three-month yields at 1.575 percent, the highest since January 2009, and 12-month paper selling at a three-year high of 3.396 percent.

Italy, Spain, France Credit Risk Surge to Records, Swaps Show -- Italian, Spanish and French credit- default swaps surged to records as Europe’s worsening debt crisis prompts investors to shun the weakest government bonds. Swaps on Italy jumped 27 basis points to 589 and Spain climbed 23 to 480, according to CMA prices at 4 p.m. in London. France rose 19 basis points to 233 and Belgium increased 21 basis points to a record 344. An increase signals worsening perceptions of credit quality. Kokusai Global Sovereign Open, Japan’s biggest mutual fund by assets, dumped almost $1 billion of its holdings of Italian government bonds by Nov. 10, a weekly report from the fund shows. Yields on Italian and Spanish 10-year bonds surged as economic growth in Europe failed to accelerate in the third quarter, the European Union’s statistics office said today. “We now have the possibility of both Italy and Spain calling for help at the same time,” The yield on Spain’s 10-year bond rose 21 basis points to 6.32 percent, the highest since August 1997, while the yield on Italian 10-year bonds climbed 35 basis points to 7.05 percent, according to data compiled by Bloomberg. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 19 to 362.5 basis points.

European Bond Yields Rising as Euro zone economy slows - From the WSJ: Recession Fears Haunt Euro Zone The euro-zone economy barely grew in the third quarter despite a temporary bounce in Germany and France, raising fears that the euro bloc may already be sliding into recession ... Gross domestic product in the 17-nation euro zone grew 0.6% at an annualized rate during the third quarter ... Germany's economy recovered to post a 2% annualized growth rate ... France grew 1.6% after stagnating in the second quarter.  Those two countries comprise half of euro-zone GDP, indicating that the rest of the euro bloc contracted as a whole .. Below is a table for several European bond yields (links to Bloomberg).
The Italian 10 year bond yield is up to 7.07%. The Italian 2 year yield is up to 6.54%.
The Spanish 10 year bond yield has increased to 6.34%. The Spanish 2 year yield is up to 5.3%.
The French 10 year bond yield is at 3.67%. The Belgium 10 year yield is up to 4.9%.

German ZEW Economic Sentiment Index Falls Sharply Again in November; Europe Already in Recession, Expect it to Dramatically Worsen - Barclays Capital via email reports that German ZEW economic sentiment index falls sharply again in November. The ZEW German economic sentiment index fell to -55.2 in November from -48.3 in September, below our forecast (-52.0) and consensus (-52.5). The current reading is far below the long-term average of about +25 points and reflects the very low expectations of the financial experts taking part in this survey for German economic activity over the next six months. The ZEW's current situation index declined from 38.4 in September to 34.2 and the gap between sentiment and the current situation remains large. Current readings are now very close to those in June 2008, before the current situation index went into free fall and a sharp recession followed. The ZEW said that "world trade is weakening and the public debt problems in the Eurozone and in the US weigh heavily on business activity. These risks could even gain more importance and thus could further harm economic growth in Germany." In our view, these figures underline the very pessimistic outlook of financial sector experts which is increasingly shared by others and clearly shaped by the sovereign debt crisis in the euro area. They point to growing risks to our German GDP Q4 forecast of only a slight contraction in Q4 GDP by 0.1% q/q.

Thin Ice - I’m not surprised that the halo effect of political changes in Italy and Greece had a very short half-life. Why would it? Nothing has changed. I’m not surprised that the contagion has worked its way to France. After all, the ECB intervention policy insures that France becomes a target. “If you can't sell Italy, sell France”, is the market’s response. But I’m absolutely blown out by the pace of things. France’s bonds are being devalued on a daily basis. Italy has been functionally shut out of the new issue market. Market liquidity has dried up. What were once routine transactions are now difficult to price. E100mm bond transactions for France and Italy were normal; today E25mm is a market amount. What is becoming scarily clear is that there is no more announcements coming that are going to make a difference. All the news is out on expanding the EFSF. The only thing that could reverse this tide is an agreement to “federalize” the debts of Europe. This would leave Germany (massively) on the hook. There is zero chance of this happening. The central question that the market will ask and answer in the next few weeks is whether France can withstand the onslaught.  Two charts. One says France is probably okay. The other says we are headed for a hard landing.

Some calm after the chaos - AFTER a day of tense nerves on November 15th, when bond yields across most of the euro zone soared as the prices of just about all government debt other than Germany’s fell, there was some respite. On November 16th yields contracted sharply amid traders’ talk of massive buying by the European Central Bank (ECB). Details of its intervention will not be known until next week, when it will show how much it has bought (but not what). Yet by mid-morning traders were already talking about the ECB having bought some €2 billion worth of bonds, most of them Italian. If correct, that would suggest a far bolder action by the bank to try to stem panic in markets than in the past.The immediate impact was visible in yields on Italian 10-year bonds, which were pushed back below 7%. Yet the ECB’s action, while welcome, may have come too late to avoid real damage to markets. Part of the reason for its aggressive buying must have been the alarming spread of investor panic from peripheral bond markets to those in Europe’s core, including some of the euro-zone’s most credit-worthy members. Among “core” euro-zone members, yields had shot up not just on French debt, but on Dutch and Finnish bonds.

You're Not Going To Believe Who Mario Monti Just Named As Italy's New Finance Minister: Himself! He was also asked to be the Prime Minister. According to Bloomberg, he will hold both posts. The CEO of Intesa Sanpaolo—an Italian banking group—was also announced as the new minister of Infrastructure and Transport. It is still unclear who would take his place at the helm of the company. The move may be part of the Italian government's effort to reassure investors that the government has the willingness and expertise to pursue big changes in economic policy. Monti is a respected economist and academic. He also served as European Commissioner for Internal Market, Services, Customs and Taxation from 1995 to 1999, and then as the Commissioner for Competition from 1999 to 2004. It also appears that Monti will not appoint any politicians from the major political parties to his cabinet. While analysts have lauded the prospect of a technocratic Italian government, Bloomberg reports that the lack of political figures could pose a challenge if popular opposition to austerity measures increases.

Monti names unelected government of technocrats and bankers- Incoming Italian Prime Minister Mario Monti has named a government entirely composed of unelected figures, just days after a technocratic government was installed in Greece, where the presence of far-right figures linked to the military junta are raising hackles.Monti, an ex-EU-commissioner, was appointed officially on Wednesday by the president of the republic.  The new leader has in turn also appointed himself finance minister and, in a move likely to amplify criticisms that a regime of bankers has been imposed on Europe’s southern flank, Corrado Passero, the CEO of Intesa Sanpaolo, the country’s largest high-street bank, has been awarded the industry and infrastructure dossier.  All ministerial posts will be held by technocrats, soldiers and diplomats.

The ECB must be LOLR, ASAP - FOLLOWING Felix Salmon’s advice, I had a look at “Liquidity - when it comes to the crunch” by Exane BNP Paribas (no link). Not only is it an interesting read throughout, I also had a very interesting email conversation with Daniel Davies, one of the authors of the aforementioned research report. It turns out that the liquidity problem for banks is at least somewhat mitigated by the fact that the ECB accepts European government bonds at relatively generous haircuts. However, as Mr Davies and Jag Yogarajah write, the banks have no certainty that the ECB will continue with its policy to accommodate any financial need of banks. In the absence of encouraging refinancing perspectives, they “use the balance sheet” for that purpose. That means deleveraging: that is, selling of assets which in turn will contribute to further liquidity strains. But there is more. Bank-like institutions (e.g. shadow banks) do not have access to the ECB window. To understand why that is a problem, we need to read some of Gary Gorton’s work on the “run on the repo market” as a proximate cause of the 2008 financial crisis.

Eurozone bonds hit by mass sell-off - Eurozone bond markets suffered a mass sell-off on Tuesday as investor fears spread beyond Italy and Spain to triple A-rated France, Austria, Finland and the Netherlands. The premium that France and Austria pay over Germany to borrow rose to euro-era records of 192 basis points and 184bp respectively, levels investors say are no longer consistent with top credit ratings. “Markets are losing patience so they are going for the jugular, which is the core countries and not the periphery,” said Neil Williams, chief economist at Hermes, the UK fund manager. “There is convergence but it is convergence on the ­weakest.” Mike Riddell of M&G, one of Europe’s biggest fund managers, called it “probably the most worrying day” of the crisis so far.The rise in bond yields affected all main eurozone countries apart from Germany, and suggests that the two-year-old sovereign debt saga could be entering a dangerous phase. In a day that euro-era records tumbled, Italian yields moved through 7 per cent – a level viewed as unsustainable – for the second time in a week. The Spanish premium to Germany hit 482bp, above the critical 450bp rate at which Irish and Portuguese yields spiralled out of control and forced both countries into international bail-outs. Belgium also saw its bonds’ spread over German debt reach record levels of 314bp.

Games of Chicken, by Tim Duy: The Eurozone is stuck on a path that leads to a very nasty equilibrium. From the Financial Times: In a day that euro-era records tumbled, Italian yields moved through 7 per cent – a level viewed as unsustainable – for the second time in a week. The Spanish premium to Germany hit 482bp, above the critical 450bp rate at which Irish and Portuguese yields spiralled out of control and forced both countries into international bail-outs. Belgium also saw its bonds’ spread over German debt reach record levels of 314bp. The proximate cause of the sell-off appears to have been the weak GDP 3Q GDP report: Europe’s economic expansion failed to accelerate in the third quarter as Germany and France struggle to shore up a region bracing for a recession sparked by an escalating debt crisis. Gross domestic product increased 0.2 percent from the previous three months, when it rose at the same pace, the European Union’s statistics office in Luxembourg said in a statement today. That matched the median forecast of 39 economists surveyed by Bloomberg News. From a year-earlier, GDP increased 1.4 percent. A separate report showed that German investor confidence fell to a three-year low in November. One would normally anticipate that as growth decelerated, bond yields would fall in expectation of monetary easing. Not so in Europe, as slower growth fosters fear of sovereign default as deficits widen. As is well known at this juncture, the response of policymakers will be to enact deeper austerity measures, which will in turn slow growth further.

Selloff in European Debt Continues; Spanish Five-Year Government Note Yield Increases to Euro-Era Record 5.82% - The selloff in European debt continues. Were it not for the ECB loading up its balance sheet with the garbage, no telling how high yields would be. Nonetheless, Spanish Five-Year Government Note Yield Increases to Euro-Era Record 5.82% Spanish five-year notes fell for a third straight day, driving the yield 11 basis points higher to 5.82 percent at 7:35 a.m. London time. That’s the highest since before the euro was created in 1999. Italian five-year notes also fell for a third day, pushing the yield up nine basis points to 7.12 percent.  Expect the ECB to intervene any time now, probably as I am typing at 2:30 AM Central. However, don't expect ECB intervention to do any long-term good, because it won't.

Spanish debt risk premium smashes records - Spain's debt risk premium has shattered euro era records on fears over the public deficit, a clear warning to the next government just five days before an election. Investors punished Spain on Tuesday, sending its borrowing costs surging on the debt markets and at a government bond auction. Reassurances from the conservative Popular Party, which is storming towards a landslide win over the ruling Socialists in November 20 election, seemed to have no effect. The risk premium - the extra return investors demand to buy Spanish 10-year government bonds over comparable safe-haven German debt - broke records for a second day, reaching 4.575 percentage points.

Italy bond yield rises back above 7% despite ECB - Italy's 10-year government bond yield bounced back above the 7% level Wednesday. The yield fell earlier, with several strategists reporting heavy buying of Italian debt by the European Central Bank. The 10-year yield rose 12 basis points to 7.04%, according to FactSet Research. Bond yields rise as prices fall. The 7% level is widely viewed as marking an unsustainable level. On Tuesday, a Europe-wide rout sent yields jumping even for triple-A rated countries such as France, Finland and the Netherlands. Other European government bond yields also pushed higher after initially declining Wednesday. France's 10-year yield rose by around 4 basis points to 3.70%, while the 10-year Belgian bond yield  rose 5 basis points to 4.90% and the Dutch 10-year yield rose 4 basis points to 2.44%. Spain's 10-year bond yield remained around 3 basis points lower at 6.27%.

Italy Investors Give Junk Rating to Monti's Debt: Euro Credit -- Mario Monti's Italian government will have to stave off a ratings downgrade as it refinances $420 billion of bonds and bills coming due next year, as investors price the debt as junk. The ranking implied by Italy's bonds is Ba2, two steps below investment grade and six levels lower than the country's A2 grade, according to Moody's Analytics. The only nation with investment-grade ratings whose bonds cost more to insure using credit-default swaps is Hungary, ranked four steps lower, which Standard & Poor's said last week it may cut to junk. "The business cycle has turned down and there are problems in banking which Italy is not immune to." Monti, a former European Union Competition Commissioner, is tasked with restoring confidence in the nation and reassuring investors that Italy can cut a 1.9 trillion-euro ($2.6 trillion) debt load and spur economic growth that has lagged behind the euro-region average for more than a decade. A downgrade may prompt a political furor with the European Commission, which is due to propose an overhaul of ratings regulation later today, including suspending sovereign grades during crises.

Europe must not allow Rome to burn - Confronted with turbulence in the provinces, the eurozone has sent in new governors. In place of the wayward George Papandreou, Greece now has Lucas Papademos, former vice-president of the European Central Bank. Instead of the unruly Silvio Berlusconi, Italy has Mario Monti, former head of competition policy at the European Commission. Europe is putting in place these new governors in members that have descended to the status of clients. Will this work? Not without a huge amount of support from the centre. What is at stake today is not only the stability of the European – perhaps the world’s – economy, but the survival of the most successful – and certainly most civilised – effort to unite Europe since the fall of the western Roman empire 1,535 years ago.  It is the aspiration embedded in the European Union. The shift in the centre of economic gravity northwards is also old.So, when Germany’s Angela Merkel, chancellor of Europe’s most powerful state, calls “for Europe to build a ‘political union’ to underpin the euro and help the continent emerge from its ‘toughest hour since the second world war’” I take her seriously. I have little doubt, too, that the majority of the German business and political elite believes that the survival of the euro and of a united Europe is in the country’s interest. The question is whether they are prepared to pay the price.

Italian Yields at 7 Percent for Second Day as ECB Rally Fails to Hold - Italian five- and 10-year bonds yielded more than 7 percent for a second day as the securities failed to hold an earlier advance after the European Central Bank was said to step up purchases of the nation’s debt. Spanish 10-year bonds fell for a third day amid speculation yields will surge at tomorrow’s auction of up to 4 billion euros ($5.4 billion) of securities due in January 2022. German bonds declined after the nation got fewer bids than the maximum sales target in an auction of two-year notes, and Chancellor Angela Merkel said the country is ready to cede some sovereignty to strengthen the euro area.“There’s still no credible backstop for Italy and Spain and the ECB buying on the current scale is just far too small to have any impact,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “There’s a Spanish auction tomorrow, which will be a pretty clear test of appetite. The yield level is likely to be pretty punitive.” The ECB was said by two people with knowledge of the trades to have bought larger-than-usual sizes and quantities of Italian debt under its Securities Market Program today. It also bought Spanish bonds, the people said. A spokesman for the ECB in Frankfurt declined to comment.

Italian default scenarios - The most important debate of our lifetimes is now ongoing. For many, the answer will be existential. First, the question: Should the ECB “write the check’ for the euro area national governments? In thinking about the answer to this all-important question, I prefer to shift the focus by changing the verb “should” to “will”.  Answering this slightly different question is much more important than answering the first question for you as an investor, a business person and as a worker. If the ECB writes the check, the economic and market outcomes are vastly different than if they do not. Your personal outlook as an investor, business person or worker will change dramatically for decades to come based upon this one policy choice and how well-prepared for it you are. The right question to ask then is: Will the ECB “write the check’ for the euro area national governments? To date, my answer to this question has been yes. See, for example, my thoughts on why questioning Italy’s solvency leads inevitably to monetisation and why Investors will buy Italian bonds after ECB monetisation. But what if the ECB doesn’t write the check? What if the ECB let’s Italy default, what then?

Decline And Fall - Krugman - Ed Harrison has a good essay on how the world euro ends if the ECB doesn’t step in on a massive scale. I don’t agree with everything — I think he’s wrong to attribute the commodity spike of 2010-2011 to monetary policy — but he’s basically right about how the thing unravels. I might place greater emphasis on the immediate channel through which falling sovereign bond prices force bank deleveraging, but we’re picking nits here. And this is totally right: If the ECB writes the check, the economic and market outcomes are vastly different than if they do not. Your personal outlook as an investor, business person or worker will change dramatically for decades to come based upon this one policy choice and how well-prepared for it you are. Crunch time. If prejudice and false notions of prudence prevail, the world is about to take a major change for the worse.

Italy’s fundamentals aren’t worse than usual - The markets have come to the conclusion that Italy’s debts are unsustainable in the long term. They are therefore demanding a higher risk premium to compensate for the risk that they might not be repaid in full. So runs the conventional wisdom. However, the situation is not that simple.In the first place it is not at all clear that Italy’s situation is especially worse than it was ten or fifteen years ago. The country’s debt first hit 120% of GDP in 1993, after the spending spree of the 1980s when budget deficits were regularly higher than 10% of GDP. In 1992 the deficit was 9.5% of GDP; and with interest rates on the debt of 10% or more, the country’s interest bill represented 12% of GDP. Throw in a discredited and dysfunctional political system, and the situation looked bleaker than it is today. Yet the country did not default. The old political parties were blown away, and a series of governments, both technocratic under Ciampi and Dini, and party-based under Berlusconi and Prodi, oversaw a period of fiscal retrenchment which brought the deficit to under 3% of GDP by 1997. Part of the improvement came through a fiscal squeeze which brought the primary balance from a deficit of 2% of GDP in 1990 to a 5% surplus by 2000. The rest was the result of lower interest rates. By the late 1990s Italy was able to borrow at around 6% — a rate that no one then considered unaffordable.

The not-so-original sin of finding others to pay for it - Paul Krugman talks about the causes of the current sovereign default crisis in terms of what economists call "the original sin". The concept was developed to describe situations in which a country borrows in someone else's currency. When faced with a crisis, large devaluations of their exchange rates make the value of debt increase, which leads to default and possibly a deeper crisis. Krugman argues that a similar logic applies to Euro countries today: Italy has borrowed in a currency (Euro) that they do not control and this is a problem. If Italy had borrowed in their own currency they will always be a way out of a high debt situation: printing more Italian Liras.  Let me take a step back before I comment on how the "original sin" applies to Europe. What is a government default? Government debt is a result of spending decisions that have not been financed with tax revenues. If government debt is to be paid back it simply means that some future tax payers will pay for the spending done in previous years. If debt is not paid back and government defaults, it is simply a shift in the burden of paying for the debt from current and future tax payers to someone else (bond holders). In that sense, default of a government has nothing to do with default of a company where we tend to think about a failure of a business model. It is simply about finding someone else to pay for our spending, not tax payers.

If you tolerate this, your T-bills will be next  - In the sound and fury of eurozone sovereign debt activity on Tuesday, we forgot to take note of Belgium’s auction of short-term T-bills. It was not good. It was really not very good: Yields on both the three-month and 12-month paper sold reached three-year highs. More to the point, they rose to these highs out of the blue compared to recent trading. The auction’s minimum target amount (€2.7bn) was also barely reached. You can check how the auction fared (compared to previous Belgian issues in 2011) here. Interesting the yield seems not to have improved on Wednesday. “Buyers’ strike,” for a number of reasons, is a good way to describe the state of Europe’s sovereign debt market at the moment. It has really affected the lack of liquidity even in prime long-dated AAA bonds like those of France — see those vaulting spreads to German debt — but we think that it must really end up hurting sovereigns’ short-term refinancing needs, in the primary market (auctions) in particular. Spain had a T-bill auction on Tuesday with the same problems. Italian T-bills in the secondary market were (sorry to bring out the cliche) canaries in the coalmine before last week’s carnage. As Macro Man writes, at some point even the Bundesbank has to realise that this constant drip-drip of dysfunction will blow up the “transmission of monetary policy,” the only object it allows for the ECB’s bond-buying.

Turmoil Spreads in Europe - Europe's debt troubles on Tuesday spilled over to top-rated nations that had been largely untouched by the crisis—including Austria, the Netherlands, Finland and France—in an ominous sign for European policy makers. Bond yields across the Continent jumped as prices dropped, in a sign of investors' faltering confidence in officials' ability to keep the debt crisis contained in the euro zone's troubled peripheral countries. Tuesday's selloff came amid news that the euro zone's economy scarcely grew in the third quarter. Trading of anything but German bunds—seen as safe securities akin to U.S. Treasurys—became difficult. Investors sold bonds issued by triple-A rated France and Austria. Even prices of bonds issued by fiscally upright Northern European triple-A nations such as Finland and the Netherlands fell. Among the cash-strapped periphery, Italian bonds again rose above 7% and Spanish yields surged to 6.358%, according to Tradeweb.  For months, a worst-case scenario of European policy makers has been that the crisis, born in heavily indebted countries, would infect otherwise healthy countries at the heart of the monetary union. Tuesday's trading suggests that could now be happening.

Portugal’s Unemployment Rate Rises to 12.4% as Economy Shrinks - Portugal’s jobless rate rose to 12.4 percent in the three months through September as the economy contracted for a fourth quarter. The unemployment rate increased from 12.1 percent in the second quarter and 10.9 percent in the third quarter of 2010, the Lisbon-based National Statistics Institute said today in an e-mailed statement. Employment in agriculture, forestry and fishing declined 3.4 percent from the second quarter, the institute said. The government forecasts unemployment will reach 13.4 percent in 2012 before it starts to decline in 2013. Prime Minister Pedro Passos Coelho is cutting spending and raising taxes as he tries to meet the terms of a 78 billion-euro ($105 billion) aid plan from the European Union and the International Monetary Fund

Bond Market Gives Overwhelming Vote of "No Confidence" in New Greek Technocrat Prime Minister - The Guardian Business Blog reports 5.18pm: The results are in from Greece, and the new unity government has received an overwhelming vote of confidence. Of the 293 deputies who cast ballots, 255 MPs endorsed the motion while 38 rejected it. 5.55pm: Lucas Papademos's victory in the vote of confidence in the Greek parliament rounds off a decent day for Europe's new technocratic governments (with Mario Monti sworn in as Italy's new PM this afternoon).Quite frankly that is not the vote of confidence that matters. This is the vote of confidence that matters. The Bloomberg link to Greek 1-year bonds shows the pertinent information even if their chart does not. A 1-year bond yield approaching 300% is decidedly not a vote of confidence.

Greek economy in dire shape ahead of govt confidence vote -  Greece's economy shrank 5.2 percent in the third quarter, official data showed Tuesday, highlighting the depths of the crisis as parliament debated approval of a new government under Lucas Papademos. Athens is racing against time to adopt deeply unpopular reforms demanded by its European Union and International Monetary Fund creditors before the release of bailout loans needed to avert bankruptcy in mid-December. Papademos' transition government, formed last week with the backing of the socialist, conservative and right-wing nationalist parties, is expected to carry a vote of confidence on Wednesday but must hold early elections in a few months. Hoping to delay a possible default, the Greek debt management agency on Tuesday raised 1.3 billion euros ($1.78 billion) in a sale of three-month treasury bills, having to pay slightly higher rates of 4.63 percent, up from 4.61 percent in October.  On Tuesday also, there appeared to be some movement on crucial plans agreed at a eurozone summit last month to write off 50 percent of privately owned Greek debt, with a finance ministry source saying talks with the banks would begin "this week".

Austerity & Fascism In Greece – The Real 1% Doctrine -  See the guy in the photo there, dangling an ax from his left hand? That’s Greece’s new “Minister of Infrastructure, Transport and Networks” Makis Voridis captured back in the 1980s, when he led a fascist student group called “Student Alternative” at the University of Athens law school. It’s 1985, and Minister Voridis, dressed like some Kajagoogoo Nazi, is caught on camera patrolling the campus with his fellow fascists, hunting for suspected leftist students to bash. Voridis was booted out of law school that year, and sued by Greece’s National Association of Students for taking part in violent attacks on non-fascist law students. With all the propaganda we’ve been fed about Greece’s new “austerity” government being staffed by non-ideological “technocrats,” it may come as a surprise that fascists are now considered “technocrats” to the mainstream media and Western banking interests. Then again, history shows that fascists have always been favored by the 1-percenters to deliver the austerity medicine. This rather disturbing definition of what counts as “non-ideological” or “technocratic” in 2011 is something most folks are trying hard to ignore, which might explain why there’s been almost nothing about how Greece’s new EU-imposed austerity government includes neo-Nazis from the LAOS Party

Staring into the abyss  - WHILE we're on the subject of just what it means to be European, let me direct your attention to this week's print edition, which contains a Special report on the euro crisis by The Economist's foreign editor, Ed Carr: [T]he crisis that has engulfed the European Union (EU) is about much more than the euro. As government bonds, share prices and banks swoon and global recession knocks on the door, the first fear is of financial and economic collapse. But to understand what is happening to the currency you also need to look at what is happening to Europe. The euro will not be safe until Europe answers some fundamental questions that it has run away from for many years. At their root is how its nations should respond to a world that is rapidly changing around them. What will it do as globalisation strips the West of the monopoly over the technologies that have made it rich, and an ageing Europe starts to look increasingly like the western peninsula of a resurgent Asia?

Europe’s liquidity crisis - So here’s the 3-month Euribor/Eonia spread, instead, which also has the advantage of going back to 2007. It’s not the best indicator when it comes to measuring banks’ cost of funds, but it’s fantastic if what you’re looking for is a guide to how stressed the Euroland funding market is. This chart comes from a 40-page note on European bank liquidity published by Daniel Davies and Jag Yogarajah of Exane BNP Paribas; I can highly recommend you try to get yourself a copy of it somehow. And in fact the situation is worse than this chart makes things look, since in the months immediately following Lehman’s bankruptcy, the three-month interbank funding market effectively did not exist, and the numbers being charted here are, in the note’s words, “arguably somewhat hypothetical“. Take out the nonexistent market following Lehman’s collapse, and spreads in Europe are right at their all-time highs. We all know why this is, of course. European banks have lots of European sovereign debt. European sovereign debt is falling in value. Therefore European banks are insolvent. Therefore, they have greatly increased credit risk. Therefore, spreads are rising.

The Italian Solution: A Dissent - Yesterday a group of economists issued a petition to the (new, Berlusconi-free) Italian government. You can read it here. They set out what is mostly good advice based on the premise that Italy should remain in the EMU. Many of my friends signed the petition, but I had to decline. Here is the text of my response to them: “Dear Friends: I share your concern about the grave situation in Italy. I support much of the petition. In particular, I agree that the ECB must stand ready to buy government debt – indeed, it should announce its intention to drive interest rates for government debt of every member below 3%, and keep buying until it achieves the goal. I also agree that fiscal contraction must be abandoned. There are however three points discussed in the petition on which my views diverge:

  • a) The solution to the Euro crisis is not to be found in SDRs and the IMF. The ECB can immediately end the problem with government debt. No external help is required, nor should it be sought.
  • b) The petition should not call for stabilizing debt ratios at current levels. With an ECB backstop, the debt ratio disappears as a matter for concern. It
  • c) The petition’s statement about “freeing resources” to direct them to promoting full employment is confused. It seems to be based on some loanable funds model. Europe’s problem is that it has far too many “free resources” that are idle – unused capacity: labor, factories – so it does not need to “free” any more.

Regulators encouraging banks to game risk models - Two interesting articles were published yesterday discussing how banks in Europe are resorting to clever tricks that artificially raise their loss-absorbing capital to levels specified by regulators. They’re doing this especially to hit the level of 9% core capital-as-a-percentage of risk-weighted assets that the regulators require as a response to the most recent stress tests. While actually selling loans and exposures would be one way to achieve this so-called “risk-weighted asset optimization”, it looks like many banks are actually just choosing to fiddle around with the internal, self-created risk models that both the current Basel II and the not-so-new-and-improved Basel III regulatory regimes allow them to use. Yes, these regulatory regimes allow the banks to decide, for themselves, how risky their loans are. Which of course then drives how much or how little loss-absorbing capital they must hold. Don’t worry, though, because the regulators approve the models on a yearly basis. I haven’t yet come across an instance of a bank having to increase its count of risk-weighted assets due to its model changes. Funny how it seems to move in one direction only. For example in Fears rise over lenders’ capital tinkering the Financial Times notes that Lloyds has, through a combination of selling and model-tinkering, dropped its 2010 risk-weighted assets by a whopping £16 billion. With the blessing of UK regulators.

Spain bond yields surge after expensive auction - The Spanish Treasury on Thursday sold €3.562 billion ($4.79 billion) of benchmark 10-year paper at a maximum yield of 7.088%, which was the highest yield paid since the euro's inception. The bond represents a new series, therefore yields cannot be directly compared to results of a prior-10-year auction, the Treasury said. On Oct. 20, the Treasury paid a maximum yield of 5.5% on April 2021 bonds, according to Dow Jones Newswires. Spanish 10-year government bond rose to 6.61%. Yields on 10-year Italian government bonds were above 7%. The market is also awaiting results on a French government bond auction.

The not-so-original sin of finding others to pay for it - Paul Krugman talks about the causes of the current sovereign default crisis in terms of what economists call "the original sin". The concept was developed to describe situations in which a country borrows in someone else's currency. When faced with a crisis, large devaluations of their exchange rates make the value of debt increase, which leads to default and possibly a deeper crisis. Krugman argues that a similar logic applies to Euro countries today: Italy has borrowed in a currency (Euro) that they do not control and this is a problem. If Italy had borrowed in their own currency they will always be a way out of a high debt situation: printing more Italian Liras.  Let me take a step back before I comment on how the "original sin" applies to Europe. What is a government default? Government debt is a result of spending decisions that have not been financed with tax revenues. If government debt is to be paid back it simply means that some future tax payers will pay for the spending done in previous years. If debt is not paid back and government defaults, it is simply a shift in the burden of paying for the debt from current and future tax payers to someone else (bond holders). In that sense, default of a government has nothing to do with default of a company where we tend to think about a failure of a business model. It is simply about finding someone else to pay for our spending, not tax payers.

Default, Inflation, the Blooey Factor, and the Rubicon Effect - Krugman - Antonia Fatas has a thoughtful post questioning whether the lack of one’s one currency really matters; he writes, At the end of the day, default, taxes or seignorage are three ways to pay for the spending governments have already done. They are not that different conceptually. In a closed system there is no way to avoid grabbing resources from your own citizens – in some sense deciding between the three choices is simply a redistribution decision. And yet I believe that he is quite wrong about the implications for the euro crisis, for a couple of reasons, both of which have to do with the possibility of self-fulfilling expectations of default. The first, which I’ve tried to explain but apparently haven’t done clearly enough, is what I’ve been calling the Rubicon effect. Cutting and pasting because I have other stuff to do this morning, it’s the proposition that countries without a printing press are subject to self-fulfilling crises in a way that nations that still have a currency of their own are not. . A country with its own currency isn’t in the same position: even if it is pushed into some inflation, there’s no red line that need be crossed. The second reason involves the limits to arbitrage, which I’ve been calling the Blooey Factor in this context.

Italy to Sell 440 Billion Euros of Debt in 2012, Cannata Says - (Bloomberg) --Italy’s soaring borrowing costs won’t have a lasting impact on the country’s debt even as the Treasury prepares to sell 440 billion euros ($595 billion) of bonds and bills next year, said Maria Cannata, the Treasury’s director of public debt. “Next year we have to sell 440 billion; it sounds prohibitive but it’s not, even if things have gotten more complicated because investors are frightened by the volatility in markets,” she said at a conference in Milan. The yield on Italy’s 10-year bond is hovering near the 7 percent threshold that prompted Greece, Ireland and Portugal to seek European Union bailouts. The difference between the 10-year yield and comparable German debt was at 513 basis points today, more than twice the average for the past year. Italy can’t be compared with Greece and the debt crisis is European, not just Italian, Cannata said. “AAA-rated countries such as France are showing signs of contagion,” Cannata said, adding that the widening spread between benchmark French bonds and German bunds was “worrying.”

Italy Opts Not To Release Preliminary GDP Data As It Sets Off To Raise $600 Billion In Debt In 2012 - We are trying to decide what is funnier: Italy cancelling bond auctions and telling the world it does not need the cash, even as its Treasury Director tells the world the country will need to raise €440 billion... that's €440,000,000,000 in cash, next year, or that as Reuters reported earlier, the country has simply decided not to issue preliminary Q3 GDP data. From Reuters: Italy will not issue preliminary data for third quarter gross domestic product, so the performance of the economy for the period will only be known when final GDP data is issued on December 21, national statistics institute ISTAT said. ISTAT normally issues a preliminary estimate for growth more than a month before the final numbers. The institute said a series of revisions were being drawn up to previous data and this procedure had prevented the calculation of its customary preliminary estimate for the third quarter. The euro zone's third largest economy is widely expected to have contracted between July and September and a further decline in GDP is expected for the fourth quarter. That would provide further fuel for a bond market sell-off that is already driving Italy to the verge of having to seek international aid.

Banks in Italy Find an Unusual Liquidity Lifeline - The London Stock Exchange is becoming the lender of last resort for many banks in Italy as concerns over the country’s debt levels squeeze liquidity out of the Italian financial market. With cash increasingly hard to come by, Italy’s banks are turning to CC&G, the exchange’s Italian clearinghouse, for short-term lending. That includes some of the country’s largest financial institutions, including Unicredit and Mediobanca, according to a person close to the situation. While just two banks received short-term capital from CC&G in 2009, that number has now risen to 15 — half of them Italian and the rest European financial institutions that trade in the country. The money, which comes from collateral that traders must put up to complete financial transactions, is deposited with the banks to cover shortfalls in liquidity. CC&G earns a profit by charging banks interest on the money that they borrow.

Update: Greek Crowd Now Amassed In Front Of US Embassy - Live Video Update: the Athens crowd has now amassed in front of the US embassy in Athens. Europe is FIXED!!!! Via Reuters: Greek police fired tear gas at black-clad youths on Thursday as thousands marched through Athens to mark a 1973 student uprising against the 1967-1974 military dictatorship and protest bitter austerity measures. Students and teachers, workers and pensioners marched beating drums and chanting "EU, IMF out" in the first public test for a new national unity government charged with imposing painful tax rises and spending cuts to avert bankruptcy.

Greek bond losses put role of CDS in doubt - Earlier this year, Deutsche Bank quietly decided to reduce its exposure to Italian government bonds. But it did not do that by simply selling debt; instead it achieved this partly by buying protection against sovereign default with credit derivatives contracts. That duly enabled the doughty German giant to report that its exposure to Italian sovereign bonds had dropped an impressive 88 percent during the first half of the year – at least, when measured on a net basis – from 8 billion euros to less than 1 billion euros.  So far, so sensible; or so it might seem. But there is a crucial catch. These days, it is becoming less clear whether those sovereign CDS contracts really offer effective “insurance” against default. And that in turn raises a more unnerving question: if the exposures of the large European banks were measured in gross, not net, terms, just how much more vulnerable might they be to sovereign shocks? Or, to put it another way, could the problems now hanging over euro zone banks and bond markets be about to get worse, due to the state of the sovereign CDS sector?  The issue that has sparked this debate is, of course, Greece. In October, euro zone leaders announced that they intended to ask investors to swap any holdings of existing Greek sovereign bonds for new bonds, with a 50 percent haircut. Logic might suggest that a loss that painful should count as a default. If so, logic would also imply that it merits a CDS pay-out.  After all, the whole point of credit derivatives – at least, as they have been sold to many investors in recent years by banks’ sales teams – is that they are supposed to provide insurance for investors against the risk of a bond default. And there is a well developed mechanism in place, created by the International Swaps and Derivatives Association, to make such pay-outs in a smooth manner. That has already been activated over six dozen times for corporate CDS; just last Friday, for example, the process was activated for Dynegy, a corporate entity which recently declared bankruptcy.

Greek non-default deal not running smoothly -- I thought I should flag this since it is a cornerstone of the present European sovereign debt crisis strategy. Last month the EU worked out a deal whereby Greece’s private sector creditors “voluntarily” exchange the debt they are due for new debt that constitutes a write down of 50%. But now it seems that the EU is only going to get 70-80% of private creditors onboard. This deal was structured so as to prevent both credit default swap triggers and the ECB’s taking losses. And with only 70-80% participation, the deal is not going to pass. Putting a happy spin on things, Institute of International Finance (IIF) Managing Director Charles Dallara said "we hope to find an agreement with Greece within weeks.” The IIF is an international banking group, which is coordinating private creditor negotiations. Dallara went on to say that “we could speak with direct confidence of 70% to 80%…I can easily imagine a situation in which participation is very, very high." Translation: we are seriously worried that this deal is falling apart. I don’t want to lie outright, so I’ll just say that we can “easily imagine” it working.

IMF Won’t Release Greek Funds Without Support - The International Monetary Fund won’t release the next tranche of funding for Greece under a 110-billion euro ($148 billion) package with the European Union until there is broad political support for the measures attached to the loan, a spokesman said.  “It’s important that the unity government now shares its commitment to the implementation of the economic program” and the decisions agreed by European leaders last month,  “Once broad political support” for the measures “is assured, then we can proceed with completion” of the review and the release of the tranche.  Greek Prime Minister Lucas Papademos, a former European Central Bank vice president, won a three-month mandate to implement budget measures and ensure a second bailout package from the IMF and euro nations that was agreed to last month. The Greek government is seeking the release of 8 billion euros under the first rescue plan by the middle of December.  The IMF, which will finance about 2.2 billion of the 8 billion-euro tranche, is seeking assurances of political support from Greece, while declining to describe what form those should take.

Spanish and French bond yields soar - French and Spanish borrowing costs shot up on Thursday and the spread between their bonds and those of Germany hit record highs despite political leaders' promises to end the eurozone debt crisis. French President Nicolas Sarkozy follows the bond spread closely, worried that markets are losing confidence in the ability of all eurozone countries' apart from Germany to manage their public deficits and sovereign debt. The spread between 10-year French bonds and the equivalent German Bund hit 200.6 basis points, or 2.006 percentage points. Spain's spread hit 489.5 basis points, another record for the single currency era. France now has to pay more than twice as much as Germany to borrow for 10 years, even though both theoretically carry the top AAA credit rating, which Sarkozy's government is fighting desperately to retain. Markets were also watching France and Spain's latest new bond issues, which saw both countries forced to pay higher rates of return to investors.

Europe a tinderbox today, France next ‘domino’ to fall - Europe is a tinderbox this morning, its financial crisis deepening and protests mounting. In Italy, demonstrators clashed with police and the country's new prime minister, Mario Monti, prepared to unveil a fresh crisis plan. In Greece, where protests and strikes have been widespread, authorities have thousands of police officers on hand for another demonstration today. Mr. Monti has taken a firm hold on the government, appointing a cabinet with no politicians. Today, all eyes are on his proposals for more bitter medicine. "For the group, the honeymoon period will be short (or rather, non-existent), as the new cabinet will need to work quickly to restore investor confidence in the face of rising debt costs,". "Monti will lay out his policy platform today and then face a confidence vote in the Senate Thursday evening (followed by a separate confidence vote by the lower house on Friday)." In the markets, borrowing costs hit punishing highs again in what is unquestioningly a frightening new chapter in the euro zone's two-year-old debt crisis. "Italian benchmark yields are back in the bailout zone, above 7 per cent, despite the installation of a cabinet of technocrat experts in Rome, while Spanish yields are heading merrily towards the same abyss,"

Official Denial Signals Spanish Bailout Imminent; Dreadful Result in Spanish Bond Auction, 6.975% Yield on 10-Year Debt; Merkel says "ECB Cannot Solve Euro Crisis" - The ECB stepped into the fray once again today but the the results of the Spanish debt auction today speak for themselves. The rate on 10-year bonds is close to touching the 7% mark. The BBC reports on the "Dreadful Result" The Spanish government sold 3.56bn euros (£3.04bn; $4.79bn) worth of bonds out of a maximum target of 4bn euros. The auction attracted bids worth 1.5 times the securities offered. The so-called bid-to-cover ratio was down from 1.8 in October. "The result was dreadful. They didn't manage to raise the full amount and the bid-to-cover is really poor," said Achilleas Georgolopoulos, rates strategist at Lloyds in London. "The fiscal profiles of Spain and Italy are different but their yields seem to be aligning now." Bloomberg reports "Volatility on Spanish sovereign debt was the highest among developed-country markets today, according to measures of 10- year bonds, two-10-year spreads and credit-default swaps. The cumulative change was 5.1 times the 90-day average, the Bloomberg gauge showed"

Spanish Banks Have $41B of ‘Unsellable’ Real Estate - Spanish banks, under pressure to cut property-backed debt, hold about 30 billion euros ($41 billion) of real estate that’s “unsellable,” according to a risk adviser to Banco Santander SA (SAN) and five other lenders. “I’m really worried about the small- and medium-sized banks whose business is 100 percent in Spain and based on real- estate growth,” . “I foresee Spain will be left with just four large banks.”  Spanish lenders hold 308 billion euros of real estate loans, about half of which are “troubled,” according to the Bank of Spain. The central bank tightened rules last year to force lenders to aside more reserves against property taken onto their books in exchange for unpaid debts, pressing them to sell assets rather than wait for the market to recover from a four- year decline. Land “in the middle of nowhere” and unfinished residential units will take as long as 40 years to sell, Cantos said.  Land in some parts of Spain is literally worthless, “If there were to be a proper mark to market of real estate assets, every Spanish domestic bank would need additional capital,”

IMF Downgrades Portugal GDP Outlook to -3.0%; Barclays Capital Cites Downside Risks - The IMF is nearly always late and nearly always overly optimistic in its assessment of global growth. Today the IMF downgraded its forecast of Portugal, something that should have been obvious six months ago. Via Email (no link available) Barclays Capital offers these comments ... The IMF released yesterday a press statement on its second mission review of Portugal (see link at end). Overall, the conclusion is that the "programme is on track" for this year but headwinds will require additional fiscal measures to meet 2012 targets. The 2012 "headwinds" are reflected in IMF's downward revision to its growth forecast from -1.8% to -3% (in line with the EC).In our view, there are downside risks to this scenario. Meeting the 2012 fiscal target may prove challenging as tax revenue may disappoint on account of weaker growth than expected (BarCap 2012 GDP growth -3.6%.) The IMF expects real GDP to contract -3.0% next year, down from -1.8% projected in the WEO and at the programme inception in May 2011 (BarCap: -3.6%). According to the technical mission, weak domestic and external demand will impair the economy

Portugal Heading for 'Shock' Year as Crisis Deepens -- With an economy struggling in a recession, Portuguese Prime Minister Pedro Passos Coelho is fighting to avoid the market mayhem that toppled the Italian government last week. Coelho, whose Social Democratic Party ousted the Socialist government in June elections, is meeting targets set by the European Union and International Monetary Fund in the 78 billion-euro ($105 billion) bailout program, and he plans to implement next year what he calls the "most difficult" budget in memory. He's slashing state workers' salaries and avoiding further one-off income-tax surcharges to fill a financing hole. The risk premium on Portugal's 10-year bonds fell in the past week, contrasting with the increases of Italy, Spain and France. Portuguese growth averaged less than 1 percent a year in the past decade to rank among Europe's weakest economies. "2012 will be the year of shock,"

Swiss Central Bank Forces MegaBanks UBS and Credit Suisse to Shrink and De-Risk -  Yves Smith - The Financial Times gives prominent play to a story that I suspect will go largely unnoticed in the US, that of the way that the Switzerland’s bank regulator, the Swiss National Bank, has forced its two biggest banks, UBS and Credit Suisse, to shed risk in a serious way and shrink. It took a while for the central bank to impose conditions, but the proximate cause was the bailout of UBS during the crisis. As we discussed in ECONNED, UBS went full bore into bonus gaming, not only keeping its own AAA CDO tranches, but also buying them from other banks, then partially hedging them with credit default swaps. That created very large and easy “profits” for the traders. And as we know, that scheme blew up spectacularly.  The Swiss National Bank, unlike any other sugar daddy rescuing reckless banksters, forced UBS to hire independent parties to interview staff and prepare a report explaining in gory detail how the bank blew itself up. Most of this information was made public. Had every other banking regulator followed suit with their wayward charges, it would have provided a vastly better foundation for discussions of regulatory reforms and would have led to much more focused investigations. The SNB earlier this year had taken the unprecedented step of imposing a 19% capital requirements, which is in line with the recommendations of some academics, like Amat Admati. This was the outline of the plan, per Eurointelligence.

The flailing ECB - MB’s got a real European flavour today and rightly so with its credit market’s crisis going from bad to worse with every passing day.  Of course there’s much talk abroad of the ECB electing to “print” money and begin buying sovereign debt to prevent the crisis spreading further into the banking system.  I thought I’d take a look at the ECB’s bond buying to date and see how effective it’s been. Here is the chart: To me this looks like many a chart I’ve seen when a central bank tries to muscle down a currency. It works initially and then fades quickly, swamped by the trend. As the Swiss central bank has shown recently with its currency peg, if you really want change the trend, you have to go all in.

Will the euro be destroyed by ideologues? - We could be living through the last days of the euro. That is not a happy thought. While there were many negative aspects to the rules governing the European Central Bank (ECB) and the eurozone economies, no one can want to see the economic chaos that will almost certainly follow the collapse of the euro. There will likely be a wave of bank collapses as banks are forced to write down much of the debt they hold in Italy, Ireland and other heavily indebted countries. This would bring about another Lehman-type situation where finance freezes up. Banks would stop lending to each other and even healthy businesses would find it difficult to obtain credit. That is the story of a severe double-dip in the eurozone, with the spillover effect almost certainly pushing the United States and most of the rest of the world into recession. It could easily be over a decade until these economies recover from the damage. The absurdity of this story is that such a collapse could be easily prevented. The recipe is simple. The ECB must agree to backdrop the debt of Italy and most of the other heavily indebted countries, after a write-down of Greek debt. It should also have an expansionary policy that allows somewhat higher inflation in Germany so that the peripheral countries can regain competitiveness by having lower positive inflation rates.

The ECB could make things easier - MATTHEW YGLESIAS has a short post on Italy and its nominal GDP growth. He uses a new interactive tool at Reuters to play around with the figures for nominal GDP growth, debt-to-GDP ratio and the interest rate. What he finds is that with 4.5% NGDP growth and a very high 7.5% interest rate, Italy needs a 3.6% primary surplus, which it is projected to have in 2012 (although I have my doubts), to maintain a stable debt-to-GDP ratio. Mr Yglesias’ post leads us to an interesting conclusion: monetary policy is as important as how the central bank chooses to lend in times of crisis. Assume for the sake of argument that Italy had an independent currency and central bank. It would be able to steer the economy to 4.5% NGDP growth if it wanted to. And as Mr Yglesias’ example shows, the primary surplus would then be sufficient, even at very high interest rates to keep Italy solvent. No bond-buying or threat thereof is necessary in such a case. Predictable and sufficient NGDP growth is enough. In reality, however, Italy is part of the euro zone and has lost a lot in relative competitiveness. As adjustments within a monetary union are very hard (as Germany should know) and inflation will be low in Italy in the meantime, it will not get 4.5% NGDP growth any time soon.

Is the ECB Powerless or Unwilling? Relevant to the question of the legal limits of relying on the European Central Bank as lender of last resort, Tyler Durden observes Jens Weidmann, head of the Bundesbank, defending the narrow view of the ECB’s role in a recent Financial Times interview: The eurosystem is a lender of last resort – for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty [prohibiting monetary financing – or central bank funding of governments]. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions. I think the prohibition of monetary financing is very important in ensuring the credibility and independence of the central bank, which allow us to deliver on our primary objective of price stability. This is a very fundamental issue. If we now overstep that mandate, we call into question our own independence.This looks like two separate arguments:  (1) lender of last resort activities would violate Article 123; (2) this prohibition of LLR activities (“for sovereigns”) is a good idea anyway, because it preserves ECB independence. The second argument, if this is what Weidmann intends, would imply that a great many central banks that do have LLR roles, including the Fed, lack sufficient independence.  As Brad DeLong argues, this narrow, LLR-less mandate for the ECB represents a radical break with central banking tradition.

ECB Determined to Go Down with the Ship? - With the risk premium on Italian government debt growing, the best hope for a resolution to the Euro crisis would seem to be for the European Central Bank to announce an unlimited intervention to cap the yield on sovereign bonds.  However, it steadfastly refuses to do so - presumably because it feels that such an action might risk a violation its prime directive of "inflation rates of below, but close to, 2% over the medium term." In a recent Project Syndicate column, Brad DeLong argued that the ECB is failing to step up to the plate as the lender of last resort:The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on [its] compass, and that is inflation.”  Similarly, Barry Eichengreen writes:Merkel and Sarkozy need to make the case that if the euro is to become a normal currency, Europe needs a normal central bank – one that does not merely target inflation like an automaton, but that also understands its responsibilities as a lender of last resort. More on this from The Economist, Antonio Fatas, Gavyn Davies and Martin Wolf as well as a nice "news analysis" from the NY Times

France, Germany clash over ECB role to stem crisis (Reuters) - France and Germany, Europe's two central powers, clashed on Wednesday over whether the European Central Bank should intervene more forcefully to halt the euro zone's accelerating debt crisis after modest bond purchases failed to calm markets. Facing rising borrowing costs as its 'AAA' credit rating comes under threat, France appeared to plead for stronger ECB action, adding to mounting global pressure spelled out by U.S. President Barack Obama. Bond market turmoil is spreading across Europe. Italian 10-year bond yields have risen above 7 percent, unaffordable in the long term. Yields on bonds issued by France, the Netherlands and Austria -- which along with Germany form the core of the euro zone -- have also climbed. "The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures to ensure financial stability in Europe," government spokeswoman Valerie Pecresse said after a cabinet meeting in Paris.

Saving the Euro: Germany's Central Bank against the World - An unsuspecting observer witnessing last Wednesday's meeting in room E 400 of the Paul Löbe House, a parliamentary building in Berlin, could have been mistaken for thinking it was the defense of a PhD thesis. Sitting across from him, the members of the Finance Committee of the German parliament, the Bundestag, could easily have been a board of university examiners. But the man being questioned was none other than Jens Weidmann, the 43-year-old president of Germany's central bank, the Bundesbank, and it didn't take long for his audience to realize that he should not be underestimated. Speaking in a quiet but firm voice, Weidmann delivered his assessment of the bailout policy of the euro-zone countries and the European Central Bank (ECB). In the end, it was Weidmann who was handing out the grades -- and they weren't good ones.  Politicians still hadn't done their homework, the Bundesbank president said critically. He assigned the blame for the crisis of confidence in the euro zone to politicians and said that they were jeopardizing the central bank's independent position. And then came the statement without which no German monetary watchdog can complete an appearance. The ECB, Weidmann said, has only one purpose, namely "to keep prices stable."

Presenting Deutsche Bank's Pitchbook To The ECB To Go "All In" - Say you are the CEO of Deutsche Bank (whoever that may be these days following Ackermann's stunner of an announcement yesterday), and you have so much dirty laundry that if the market so much as looks at you funny, you know very well it is game over the second you have to engage in reactionary damage control. After all your assets are 84% if not more, of total German GDP and there is no way that you can be bailed out by one country alone, even if that country is the only one that is not a complete Banana republic. So what do you do? Why you tell your bankers to write the best, most persuasive pitch book they can come up with, addressed to none other than Goldman Sachs alum and ECB head, Mario Draghi, and you tell him the truth: "Europe has hit its Tipping Point" and it is now or never. In other words, in 51 slides, your task is to convince the ECB that unless they terminally break away with their traditional stance of not monetizing, not only they, but the entire European status quo will cease existing. And that's precisely what you do. Behold: "The Tipping Point - Time To Call The ECB" - Deutsche Bank's definitive attempt to encapsulate the Mutual Assured Destruction that we are "certainly" all going to suffer, unless the ECB prints, and prints, and prints. The bottom line, you would tell Draghi, is "do nothing, and pull the cord now; or do something, risk hyperinflation which may or may not come, but at least extend and pretend for a few years."

ECB Goes Hog Wild, Lifts Every Offer In Another Failed Attempt To Calm Market - In yet another attempt which will backfire miserably, starting about 30 minutes ago the ECB has gone absolutely apeshit in the market and has been buying every single piece of paper it could get its hands on, focusing on BTPs with Spanish bonds in second place. As the chart below shows, following what has been a non stop buying spree, the Italian benchmark 4.75% of 2021 has soared from 84.75 to 86 in one non-stop run. The implicit motive is to get the Spanish Bund spread down from 500 bps which virtually guarantees a margin hike and a collapse into the toxic debt hole. Will they be successful? Of course not: we give this intervention another 10-15 minutes tops before Draghi's bond buyers are exhausted and the selling resumes. In the meantime, the ECB's SMP cumulative total is now well over €200 billion.

Asian powers spurn German debt on EMU chaos - Andrew Roberts, rates chief at Royal Bank of Scotland, said Asia's exodus marks a dangerous inflexion point in the unfolding drama. "Japanese and Asian investors are for the first time looking at the euro project and saying `I don't like what I see at all' and fleeing the whole region. "The question on everybody's mind in the debt markets is whether it is time to get out Germany. The European Central Bank has a €2 trillion balance sheet and if the eurozone slides into the abyss, Germany is going to be left holding the baby. We are very close to the point where markets take a close look at this, though we are there yet," he said. Jean-Claude Juncker, Eurogroup chief, fueled the fire by warning that Germany is no longer a sound credit with debt of 82pc of GDP. "I think the level of German debt is worrying. Germany has higher debts than Spain," he said.

Europe Fears a Credit Squeeze as Investors Sell Bond Holdings - Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral.  Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations.  If this trend continues, it risks creating a vicious cycle of rising borrowing costs, deeper spending cuts and slowing growth, which is hard to get out of, especially as some European banks are having trouble meeting their financing needs.  “It’s a pretty terrible spiral,” said Peter R. Fisher, vice chairman of the asset manager BlackRock and a former senior Treasury official in the Clinton administration.  The pullback — which is increasing almost daily — is driven by worries that some European countries may not be able to fully repay their bond borrowings, which in turn would damage banks that own large amounts of those bonds. It also increases the already rising pressure on the European Central Bank to take more aggressive action.

Max Keiser Short Film On Greece - Here's What Happens When Your Country Goes Broke

Troika back in town - The interim government took a first step on Friday towards meeting terms of an international bailout needed to avoid bankruptcy, submitting a budget bill that foresees no new austerity measures next year as long as reforms are enacted. But more importantly, however, was the rift between parties in technocrat Prime Minister Lucas Papademos's unity coalition caused by jockeying for position by the New Democracy party ahead of an election slated for February 19. Papademos must win pledges from the rival parties that they will do what it takes to meet bailout terms or Greece's lenders will withhold an 8bl euro aid tranche Athens needs to dodge default next month, plus longer-term financing later. As part of that process, representatives from the "troika" of the International Monetary Fund, the European Union and European Central Bank met with [Finance minister] Venizelos and Papademos on Friday and it is expected that Pasok party leader George Papandreou will be meeting the troika at his office in Parliament at 10:30 on Saturday morning. ND leader, Antonis Samaras is also due to meet officials from troika on Saturday.  Tensions have risen between coalition partners, Pasok and ND, as the latter's leader, Antonis Samaras, has refused to sign the commitment sought by EU and IMF authorities.

Europe could be in worst hour since WWII: Merkel (Reuters) - German Chancellor Angela Merkel said on Monday that Europe could be living through its toughest hour since World War Two as new leaders in Italy and Greece rushed to form governments and limit the damage from the euro zone debt crisis. A rally on financial markets sparked by the appointment of respected European technocrats in Rome and Athens soon stalled. Analysts warned that daunting obstacles could hinder decisive action needed to breathe new life into their ailing economies. Italy had to pay a euro-lifetime record yield of 6.3 percent to sell five-year bonds with investors wary of buying its debt until prime minister-designate Mario Monti can undertake profound economic reforms. In a first sign of trouble for new Greek Prime Minister Lucas Papademos, the leader of the main conservative party rejected any toughening of austerity and refused to sign a letter sought by European authorities pledging support for a new 130 billion euro bailout.

Merkel Says Germany Is Ready to Cede Some Sovereignty to Save the Euro - Chancellor Angela Merkel said that Germany is ready to cede some sovereignty to strengthen the euro area and restore confidence in the common currency. European Union treaty changes to strengthen EU institutions and patrol tighter budget rules are needed “to make the euro zone more crisis-proof,” Merkel told reporters in Berlin today at a joint briefing with Irish Prime Minister Enda Kenny. “Germany sees the need in this context to show the markets and the world public that the euro will remain together, that the euro must be defended, but also that we are prepared to give up a little bit of national sovereignty,” Merkel said. Germany wants a strong EU and a euro “of 17 member states that is just as strong and inspires confidence on international markets.”

Ireland: "Germany Is Our New Master" - Not only is Germany at the epicenter of the Italian-Spanish-French save-us 'discussion', they have now managed to add Ireland to their 'Uber Alles'. Reuters is reporting the leak of confidential Irish budget information by German lawmakers and Irish parliamentarians are seething - viewing the leak as 'incredible' and 'unprecedented'. Given the new laws, Germany now has the right to be fully informed about bailout countries' progress before new tranches of funds are paid out. As the Irish Daily Mirror put it perfectly "Germany is our new master."

Obama Accuses Eurozone of "Problem of Political Will"; Bank of England Explains True Meaning of "Lender of Last Resort" --President Obama believes saving the Euro is a matter of "political will". Apparently 17 nation treaties are meant to be broken, ignored, or easily adjusted. That's what French president Nicolas Sarkozy thinks as well. Meanwhile in a rare statement from a central banker that I agree with, Mervyn King explains the Harsh Truth about the Meaning of "Lender of Last Resort" The European Central Bank is under pressure to bail out indebted countries by printing more euros. But it really isn't as straightforward as that. It is a statement of why there is no easy solution to the crisis that involves the ECB simply cranking up its printing presses and lending to Italy, Spain and whoever else needs a helping hand. The ECB, under its mandate, is simply not allowed to lend to eurozone governments who are struggling to access funds at reasonable rates – and there are good reasons for that arrangement...

Latin showdown with Germany over ECB - Germany is facing a moment of strategic truth. The sacred union with France that has held together through thick and thin for half a century is in growing danger as contagion spreads North, engulfing the French bond market.  The EU's €440bn EFSF bail-out fund was supposed to take over on the rescue task, relieving the central bank. It has been a disastrous flop, unable to raise money itself at a viable cost after toying with leverage plans that greatly concentrate risk for creditor states. The net effect has been to accelerate contagion to the core.  Germany's constitutional court has ruled that "open-ended" and "automatic" liablities violate the country's Basic Law. So only the Germans can save monetary union, yet the Germans cannot legally do so. Europe's crisis has reached an impasse, the result of the original design flaws of EMU. Even so, a growing chorus of economists within Germany itself is calling for a strategic change.  "We are in an emergency situation; this isn't plastic surgery. If worse comes to worst, the ECB has to act before the financial system falls. And if it acts, it should act properly and set an upper limit for sovereign yields. It's naive to believe that Italy can solve its problems on its own. Structural reforms can't be implemented overnight."

Eurozone bond markets in turmoil as France and Germany dig in over ECB - The row between France and Germany over whether to use the European Central Bank to rescue the eurozone has intensified, further shattering international confidence that a solution can be found to the escalating debt crisis. On a day when the US president, Barack Obama, accused the eurozone of suffering from a "problem of political will", Paris and Berlin clashed over whether the ECB should be called on to do more to bail out countries that are struggling to borrow. Obama, on a visit to Australia, warned that Europe's leaders must do more to save the single currency. "Until we put in place a concrete plan and structure that sends a clear signal to the markets that Europe is standing behind the euro and will do what it takes, we are going to continue to see the kinds of market turmoil we saw," he said.

European Rift on Bank’s Role in Debt Relief - The financial stability of Europe has come down to one institution, the European Central Bank, which is now under heavy new pressure to rescue the euro — or possibly see it collapse.  José Luis Rodríguez Zapatero, Spain’s prime minister, on Thursday became the latest leader to demand that the bank find a solution to the euro crisis, saying that “this is what we transferred power for” and that it had to be a bank “that defends the common policy and its countries.”  Only the fiercely conservative stewards of the European Central Bank have the firepower to intervene aggressively in the markets with essentially unlimited resources. But the bank itself, and its most important member state, Germany, have steadfastly resisted letting it take up the mantle of lender of last resort.  European politicians and analysts say that unbending stance now threatens the survival of the euro and the broader integration of Europe itself.  “There is no solution to the crisis without the E.C.B.,”   “The amounts we are talking about are too big for anybody but the E.C.B.”

Euro Rescue Plan Falling Short Renews Franco-German ECB Spat - The failure of European leaders to end the debt crisis with their broadest effort yet has revived a Franco-German dispute over the European Central Bank’s role and fueled investor concerns over policy makers’ economic impotence. ECB chief Mario Draghi today slammed governments for failing to implement policy commitments as holders of Greek debt began talks in Athens on structuring a 50 percent writeoff that was the cornerstone of a deal pieced together last month at an all-night summit. Officials in Berlin and Paris yesterday swapped barbs and European borrowing costs outside of Germany rose to euro-era records.

European Central Bank may start printing money to tackle debt crisis - The European Central Bank could soon bow to pressure to print money to prevent a further escalation of the euro zone's debt crisis, with respondents in a Reuters poll giving an even probability the ECB would adopt a policy of quantitative easing. The poll of 50 bond strategists across Europe and the United States conducted this week gave a median 48 percent probability that the ECB will be forced to conduct outright quantitative easing (QE). That would be a highly controversial break from its existing policy, where it offsets government bond purchases in its Securities Markets Programme by draining liquidity from the system in separate operations.  Of those who predicted the ECB would start QE, as the Federal Reserve and the Bank of England have done, a majority said it would happen by March 2012.  A slim majority, 25 of 49, of analysts saw an even bigger role for the ECB, expecting it to become the lender of last resort, providing emergency loans for governments.

EU Banks Face $270 Billion Goodwill Hangover for Past Purchases - European banks may have to write down some of the $270 billion of goodwill from their purchases in the run-up to the financial crisis before they can sell assets, or new stock, to bolster capital. UniCredit SpA (UCG), Italy’s biggest lender, this week opted to take an 8.7 billion-euro ($10 billion) impairment charge following a series of acquisitions at home and in eastern Europe. Other European banks are yet to follow, analysts said. Credit Agricole SA (ACA), Banco Santander SA (SAN) and Intesa Sanpaolo SA are among European banks with the most goodwill remaining on their balance sheets, according to data compiled by Bloomberg. “Banks that paid a premium for businesses when the outlook was better will need to reassess the goodwill on their balance sheets,” said Andrew Spooner, an accounting partner at Deloitte LLP in London. “Previous acquisitions which are exposed to peripheral Europe are most vulnerable to impairments.” European bank stocks are trading at an average 58 percent of their book value, according to Bloomberg data. While writing down goodwill won’t deplete banks’ capital for regulatory purposes, it’s a sign that executives overpaid for purchases.

Moody's downgrades raft of German banks -Moody’s has downgraded the credit ratings of a number of German public-sector banks, saying there is a lower likelihood the German government will step in with a bailout. Moody's added the downgrades, which focused on senior debt and deposit ratings of the banks, are due to the support for German public-sector banks becoming less certain. The downgrades come despite the German government announcing earlier this week it will reactivate its bank-rescue fund, giving the government the capability to recapitalise the country's banking system. The ratings agency added the strict conditions set out by the European Commission have also played their part in the downgrades, as this makes it difficult for banks to accept state aid.

Italian Banks May Need $8.2 Billion in Capital - Italy’s five biggest banks, including Intesa Sanpaolo SpA (ISP), may need to raise a combined 6.1 billion euros ($8.2 billion) of additional capital as the Italian government bonds they own deteriorate in value. Two-year Italian debt, which the banks valued at 97 cents on the euro or better on Sept. 30, trades at about 92.7 cents. That suggests Intesa, UniCredit SpA (UCG), Unione di Banche Italiane SCPA (UBI), Banco Popolare and Monte Dei Paschi di Siena SpA need more capital, today’s Bloomberg Risk newsletter reports. Spokespeople at all five banks declined to comment on their capital needs. The European Banking Authority instructed Unicredit, UBI, Banco Popolare and Monte Dei Paschi to raise new capital by June 2012, to meet its revised 9 percent core tier one ratio. The EBA cited a slump in the government securities they held at the end of the third quarter. UniCredit owned 40 billion euros of Italian bonds at 97.2 percent of face value, according to a results presentation covering the three months to Sept. 30. Intesa, with 63 billion- euros of securities, increased the amount set aside against those assets by 1.6 billion euros, suggesting a valuation of 97.4 percent of face value, according to third quarter results.

Bundesbank chief Weidmann says don't overstretch ECB - Decisions taken by European leaders so far have not fully addressed the core of the European debt crisis but this does not justify stretching the role of the European Central Bank, ECB Governing Council member Jens Weidmann said on Friday. France and Germany, Europe's two central powers, are at odds over whether the ECB should intervene more forcefully to halt the euro zone's accelerating debt crisis after modest bond purchases failed to calm markets. "The lack of success in containing the crisis does not justify overstretching the mandate of the central bank and making it responsible for solving the crisis," Weidmann, who also heads the German Bundesbank, said in a speech prepared for delivery at the European Banking Congress in Frankfurt.

The Bundesbank’s chief and the ECB’s Italian president have much in common - When Mario Draghi took over as president of the European Central Bank at the beginning of this month, it was felt that he had to prove his credentials in Germany. That task is made harder by calls on the ECB to act as backstop to troubled Italy, Mr Draghi’s home country, and to contain a sovereign-debt crisis that is raising borrowing costs for most euro-zone countries, while driving them down in Germany. This week Jens Weidmann, the head of the Bundesbank, Germany’s central bank, raised the bond-market pressure on Italy and on Mr Draghi by saying that central-bank support for government finances would be illegal. Mr Weidmann told the Financial Times that the ECB could not act as a lender of last resort for countries, because in doing so it would transgress EU treaties banning direct financing of states. It would be counter-productive as well, argued Mr Weidmann. The roots of the euro-zone crisis lay with governments, and providing them with cheap financing would only reduce pressure for reform.

A sense of surrealism - TIMING in central banking, just as in politics, is everything. Originally, Jens Weidmann, the head of the Bundesbank, was supposed to speak before Mario Draghi, the new president of the European Central Bank (ECB) at the European Banking Congress, held today in Frankfurt. But a late change of the agenda had Mr Draghi be the first to take the stage in Frankfurt’s old opera house (which, ironically, only a few weeks ago was the site of a furious argument over the ECB’s role in the crisis between Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president). Yet even more than the speaking order, it was the stridency of views in his first public speech outside the ECB, which drove home the point that Mr Draghi has no intention of playing second fiddle to Mr Wiedmann. Mr Draghi dwelled on the need for discipline and reform in the euro zone’s periphery. While stressing the consistency of the ECB’s efforts to control inflation, and the need for it to maintain the credibility of its inflation target, Mr Draghi passed responsibility for solving the sovereign debt crisis right back to Europe's politicians

Franco-German Battle over the ECB Intensifies - With an ever-increasing number of countries becoming infected by the debt contagion spreading across the Continent, serious questions have been raised as to whether the EU is even able to help out its struggling members. And the heart of the increasingly tense debate as to what should happen next has become the ongoing clash between France and Germany. Should the European Central Bank (ECB) become the lender of last resort or not? On Wednesday, France reiterated its affirmative answer to that question. In comments to the newspaper Les Echos, French Finance Minister Francois Baroin demanded that the ECB step in to do everything in its power to prop up the common currency. "We want to deploy all European institutions, including the ECB, to find the best possible answers to the crisis," he said. Baroin added that the US Federal Reserve "actively intervenes" in times of need, as do the central banks of Britain and Japan. The ECB, he demands, should do the same.

The ECB's internal contradictions  - Nick Rowe - The Eurozone news is really depressing. I think things are going to be very bad very soon.  The ECB doesn't like inflation uncertainty; it wants to keep inflation predictable and just below 2%. The ECB doesn't like buying the bonds of Eurozone governments. The ECB, presumably, wants to preserve the Euro and preserve its own existence. Everything the ECB is currently doing seems almost designed to lead to the exact opposite of what it wants. The ECB is currently buying limited quantities of Eurozone government bonds. But it has made no public commitment, conditional or otherwise, to do so in future. It doesn't want to buy more.Suppose the ECB made a very public commitment to buy unlimited quantities of the bonds of any Eurozone government, if ever the interest rate on those bonds rose above (say) 5%, conditional on "good behaviour" of those Eurozone governments. If it did that, and also loosened monetary policy more generally, most Eurozone governments would be able to get back to solvency, their bonds would become safe liquid assets, and their bond yields would fall below 5%. By promising to buy the bonds in unlimited quantities if necessary, the ECB would most likely have to buy none. It could even start selling the bonds it already owns, if it wanted to.

PIGS Inflation Continues Strong - I am at an exec offsite for my employer yesterday and today and cannot blog properly.  However a quick note that October inflation figures are out for the Eurozone, and the mystery of moderately strong inflation in the PIGS countries continues. Overall, the Eurozone had 3% inflation over October 2010, with all the PIGS countries coming in near or above the average: Greece 2.9%, Spain 3%, Italy 3.4%, and Portugal 4%.  Ireland continues to be the main exception at 1.5% - the only one of the troubled peripheral countries with lower inflation than Germany at 2.9%.  So the idea that these peripheral countries have deeply depressed economies and will slowly disinflate their way to competitiveness doesn't seem to be working out.  I continue to be mystified as to why sellers have enough leverage to increase prices here. Across the Eurozone, transportation continues to be the strongest component at 5.8% with housing a close second at 5.1%.  Inflation without unprocessed food or energy was 2.0%.

Spain's Indignant movement gears for new struggle (Reuters) - The thousands of protestors who filled town squares across Spain earlier this year are getting ready to take to the streets again when the new government brings in harsh austerity measures. The "Indignados" (Indignant), as they came to be known, have kept their heads down in the run-up to Sunday's elections and called for voters to boycott the two main political parties. Polls predict a sweeping victory for the centre-right People's Party (PP) over the ruling Socialists (PSOE) and it is expected to unleash a wave of spending cuts and labour reforms to combat the debt crisis that is roiling the euro zone. Disillusion with Spain's political establishment was a driving factor of the protests, especially among the young people who are bearing the brunt of Spain's 21 per cent unemployment. "I suppose I'll vote on Sunday but it isn't really important. The big demos will come with the real issues - cutbacks,"

‘Nobody’ leads polls ahead of election - So deep is the general disgust with the country’s bickering political class that if there was a political party called Nobody it would have a clean sweep in an early general election slated for February 19. Where voters were once largely divided between the two parties that have ruled the state since the collapse of the junta in 1974, a vacuum now threatens to plunge the country into longer-term political chaos. In an opinion poll issued on November 13 by pollsters MRB, the answer "Nobody/I don't know/Another party" scored a combined 29.7 percent among those asked, the highest score of any other answer in the survey. The trend has been growing for months as citizens fed up with lender-prescribed austerity measures to ward off default increasingly blame traditional parties for their woes. The February election is unlikely to produce a clear winner. "There is no party out there which can bring something new, bring a solution or take us out of the crisis,"

EU staff threaten strike action over belt-tightening — - EU staff unions on Friday threatened strike action next week to protest belt-tightening measures as the bloc goes on an austerity diet. A statement from an "Inter-institutional Joint Front" representing the 55,000 staff across the European institutions has called an assembly on Tuesday following a breakdown in conciliation talks with the European Commission. European staff wages vary widely: from 2,650 euros ($3,580) per month before tax and social welfare payments, to 23,000 euros gross for each of the 27 national EU commissioners. Staff are concerned by a bid to overhaul staff rules and by a letter signed by 17 of the 27 European Union states that criticises automatic wage adjustments and links the possibility of wage hikes to the economic situation. The 17 austerity-driven nations also say an increase in retirement age from 63 to 65 is not sufficient.

Chart of the Day: Euro probability - Although it doesn’t provide a probable timeline, the chart is illustrative, if a little optimistic in my opinion of the weighted probabilities. A fiscal union – the logical choice, but a cultural and geo-political backward step – is probably less than 10% given the aversion of the non-Germanic States fear of a centralised, German-dominated Europe.  Or as Nigel Farage (reluctant UK member of the European Parliament) put it recently (VIDEO): “We are now living in a German dominated Europe. Something the European project was actually supposed to stop.”

Number of the Week: More Stress, More Physical Euros - 9.7%:

Euros in circulation as a percentage of euro area M2. Let’s say you lived in a European country where there the possibility of a euro exit was becoming less remote by the day. Thinking that through, you might worry that the euros you have in the bank might suddenly be converted into a currency of uncertain value that we will call the lirchma. You might also worry about your ability to access your cash in any form, since your country’s financial institutions might have to shut down for a while as they tried to get clarity on what the new currency is worth, sort out contracts — and prevent a bank run from depositors rushing to pull their lirchma and convert them into euro. It’s an exercise that might convince you to hold a few more cold, hard euros in cash. And indeed, Europeans’ preference for cash in hand over cash in the bank seems to be growing. In September, currency in circulation accounted for 9.7% of euro area M2 — a money supply category that also includes close substitutes for money such as savings accounts, checking deposits and retail money market funds. That is up from 8.9% at the start of 2009. The other thing to do if you were worried about your country exiting the euro would be to put your money in another country. There’s some of that going on as well.

Incredible Europeans - Krugman - I had some hopes for Mario Draghi; he has just done his best to kill those hopes. In his view, it’s all about credibility, defined thusly: Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term. This is the major contribution we can make in support of sustainable growth, employment creation and financial stability. And we are making this contribution in full independence. Unbelievable. Right now, the ECB has too much credibility on the inflation front; the spread between German nominal and real interest rates, which is an implicit forecast of the inflation rate, is pointing to disastrously low medium-term inflation: On the other hand, there has been a severe loss of credibility in the promises of European governments other than Germany to repay their debts: There are strong self-fulfilling aspects to this crisis of confidence — which is why Europe desperately needs the ECB to act as lender of last resort, and short-circuit the vicious circles. But no, the ECB will defend its credibility. And it will end up as the highly credible defender of the value of a currency that no longer exists.

On Capital Flight and Forced Repatriation - There are some folks in America who will wake up this morning and read that Jefferies has been sued for its role in a bond deal with MF Global and they will vote with their feet (Zero hedge Link). They will close their accounts with JEF and move to a safer address. That’s an example of capital flight.  Every time that something stupid crosses the tape from one of the EU deep thinkers the US bond market catches a bid. Yet another example of capital flight.  I could go on for a bit with this. There are dozens of examples. All around the globe one can find evidence that money is moving around with the sole purpose of finding someplace “safe”.  There was (IMHO) a very significant development on this front last week. A move is being made in Brussels to “force” the Swiss government/banks to transfer all of the assets of Greek citizens back to the Greek banks. For a Greek this means that your money is hostage. It has been functionally expropriated. It will be transferred into a banking system that is fraught with risk. Some portion of the money that goes back to Greece will certainly be lost.

Jim Grant: "Central Banks Are Insolvent" (video) On what the ECB will do:The ECB has expanded its balance sheet mightily under Trichet. We have a new leader and we have a new imperative. I dare say Europe is going to print money. On central bank monetization and its implications:The Italian yields did not fall on their own. It raises questions of overall integrity of market prices. In the US the Fed has nationalized the yield curve. In Europe much the same is going on: the SNB is expanding its balance sheet at astonishing rates of speed. The world over there is seeing immense money printing and there is a huge race to debase on the behalf of the sponsors of paper money. Central banks are insolvent: The ECB has a ratio of non-AAA rated assets to equity of 14 to 1. What the ECB has been doing is stepping in where private money fears to tread. In the private sector we call that heading for trouble... The New York Fed is leveraged 100 to one.

ECB Backs $27 Billion Weekly Limit on Government Bond Purchases, FAZ Says - European Central Bank governing council members have agreed on a 20 billion-euro ($27 billion) weekly upper limit for sovereign debt purchases as resistance among members grows, the German newspaper Frankfurter Allgemeine Zeitung reported. The ECB council meets every other week to decide on an upper limit for bond purchases used to stem rising yields as the European debt crisis widens, the newspaper reported, without saying where it obtained the information. Members met again late yesterday to discuss lowering the level, FAZ said. Council members from the Netherlands and Austria have added their voices to skepticism over the bond-purchase program, the newspaper said. Those objecting to buying include Bundesbank President Jens Weidmann, Executive Board member Juergen Stark and Yves Mersch, governor of Luxembourg’s central bank, FAZ said.

How much of an ECB guarantee would be needed? - Here is one recent report (insightful throughout, FT link): But the scale of the problem is bigger than in 2008. Mr King notes there is $3,000bn of government bonds trading with spreads of more than 150bp to German Bunds. There were only $2,000bn CDOs outstanding at the peak. The population of Germany is about 81 million, if you wish round that up to about 100 million, if you include some of the smaller Triple A countries.  In other words, that is a guarantee of $30,000 per German, or $120,000 for a household of four.  Note in passing that an ECB guarantee either requires recapitalization of the central bank or a higher rate of inflation, unless you think the whole thing is a self-sustaining free lunch and all the liquidity problems would vanish (unlikely, at this point).  In any case a guarantee has to at least put resources on the table. As of 2007, the median net wealth in Germany was about 15,000 euros per person, or well under the proposed guarantee, the exact figure depending on how you make the exchange rates over 2007-2011 commensurable. 

Citigroup’s Buiter Says Europe Must Stop Default Now: -- Europe has as little as days or weeks to act to avoid a default by a euro-region country, Citigroup Inc. Chief Economist Willem Buiter said today. “Time is running out fast,” Buiter said in an interview on Bloomberg. “I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging down the European banking system and North America with it. So they have to act now.” Inaction by Europe’s leaders and resistance from the European Central Bank to expand purchases of government bonds raised the prospect of contagion to so-called core euro nations such as Finland and Austria. Italy’s 10-year-bond yield opened today above the 7 percent threshold that prompted Greece, Ireland and Portugal to seek bailouts. Yields on Spanish five-year government securities today reached 5.82 percent, the highest since before the euro was created in 1999. Bonds issued by countries from Finland to Austria slid yesterday, driving up their premiums over benchmark German securities.

Citi's Willem Buiter Says Europe Could Just Have Days Before A Financial Catastrophe - This is a fantastic interview with Citi's Willem Buiter on Bloomberg TV. You can hear the anger in his voice as he argues that Europe may have a matter of days before an unnecessary default and a financial catastrophe. The answer: the ECB must act fast, and ignore the Germans who don't get it. While some people don't think that the ECB can really monetize sovereign debt this way, Buiter believes there's absolutely nothing preventing the ECB from doing whatever it wants on the secondary market. This summary of the key points and quotes was provided to us by Bloomberg TV. You can watch the full video here. Buiter on Europe's crisis: "Time is running out fast. I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now." "The only two guns in town, one is only theoretical, and that is increasing the size of the EFSF to 3 trillion. It should happen but it can't for political reasons. The other one, the only remaining share is the ECB. They may have to hold their noses while they do it, and if they don't do it, it's the end of the euro zone."

Blooey - Krugman - Two weeks ago I wrote about the Blooey Factor: Most Italian debt may be held by stolid domestic players, but at the margin are financial institutions that are quite possibly going to be forced to cut their holdings if Italian interest rates rise, because this will reduce the value of the bonds they already hold. So things could quite possibly go blooey in the very near future.Today’s Times: Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral. Experts say the cycle of anxiety, forced selling and surging borrowing costs is reminiscent of the months before the collapse of Lehman Brothers in 2008, when worries about subprime mortgages in the United States metastasized into a global market crisis. Also:The eurozone infection this week moved decisively from the periphery of the continent to its core. Many investors are no longer just fretting about the possibility of a default here or there. They are now starting to worry about the chances of the euro itself breaking up. Bond markets may be putting as high a probability as 25 per cent on a split, according to Citi analysts. And what is the new president of the ECB doing? Lecturing people on the need for discipline.

Europe prepares for breakup - Overnight Angela Merkel addressed her party congress calling for an overhaul of the European Union: German Chancellor Angela Merkel called for an overhaul of the European Union, advocating closer political ties and tighter budget rules, in her most explicit prescription for ending the debt crisis. Speaking to her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig today, Merkel said leaders must create a “new Europe” by deepening ties in the 27-nation EU. At the same time, she repeated Germany’s rejection of jointly sold euro bonds. “The task of our generation now is to complete the economic and currency union in Europe and, step by step, create a political union,” Merkel said. “It’s time for a breakthrough to a new Europe.” CDU delegates also voted and approved a motion to permit euro nations to exit the currency without exclusion from the European Union, however they they rejected an amendment to change the voting rights at the European Central Bank so that it is corresponded to the size of each nations economies.

Euro Double-Bind: Both Paths Lead to Disintegration - Is there anything that hasn't already been said about the Eurozone's structural flaws and the absurdity of the half-baked "solutions" tossed together by its frenzied, fumbling leadership? Perhaps not, but we can fruitfully boil the mess down to a simple double-bind.  The double-bind can be stated thusly:

  • 1. If the European Central Bank (ECB) tries to save the private banks and bondholders by printing trillions of euros to buy up the mountain of hopelessly impaired sovereign bonds, then Germany will rebel and renounce the euro as an act of self-preservation. Germany knows that money-printing robs savers and the productive via the stealth theft of inflation, and its people will not stand idly by while their wealth is destroyed by ECB euro-printing.
  • 2. If the ECB renounces money-printing, then the only economy solvent enough to fund the 3-trillion-euro bailout with actual cash is Germany, which will rebel against this debt-serfdom by renouncing the euro.

There are only two paths, and they both lead to the same end-state: dissolution of the euro and the EU's monetary union.

U.K. unemployment hits 8.3%, highest since 1996 -- The number of unemployed British workers rose 129,000 to 2.62 million in the three months ending in September, pushing the unemployment rate up to 8.3% from 8.1% in the three months ending in August, the U.K. Office for National Statistics reported Wednesday. The unemployment rate is the highest since 1996, while the total number of unemployed is the highest since 1994, the ONS said. The number of workers claiming jobless benefits rose 5,300 in October, the ONS said. Economists had forecast a rise of 22,500.

Bank of England to downgrade UK growth forecasts - The Bank of England is set to give a gloomy update on the state of the British economy, sharply downgrading growth forecasts and issuing a stark warning on the eurozone debt crisis. The Bank is expected to cut its 2011 and 2012 growth forecast to about 1pc from its August forecast of about 2pc when it publishes its latest quarterly Inflation Report on Wednesday. Sir Mervyn King, the Bank’s Governor, is likely to emphasise there are serious downside risks to the UK growth outlook because of the threat posed by the eurozone’s continued problems. "The ongoing crisis in the eurozone, along with its negative economic and financial effects, is likely to weigh heavily on the Bank’s forecasts," said Rob Harbron, economist at the Centre for Economics and Business Research. As well as highlighting the increasing uncertainty surrounding the eurozone debt crisis, Sir Mervyn will say diminishing business and consumer confidence in the UK had weakened the outlook for the domestic economy.

The Very Brave BoE - Krugman - The new Bank of England inflation report (pdf) is out, and it offers a defense of the Bank’s decision to pursue expansion, not contraction, despite 5.2% headline inflation. It’s basically a core inflation argument. The Bank says that a lot of recent inflation reflects temporary shocks: And it believes that underlying, domestically caused inflation is falling: As regular readers might guess, I very much agree. But I think you have to give credit to Mervyn King and company for nerves of steel here. They are under terrific pressure to panic over inflation, much as the ECB did when it raised rates earlier this year — a disastrous decision that is one of the reasons Europe is falling apart right now. The BoE arguably should be doing much more — raise that inflation target! — but compared with its bigger sister institution across the Channel, it has been an admirable example of courage under fire.

The Anatomy of Global Economic Uncertainty - Mohamed El-Erian - The sense of uncertainty prevailing in the West is palpable, and rightly so. People are worried about their futures, with a record number now fearing that their children may end up worse off than them. Unfortunately, things will become even more unsettling in the months ahead.The United States is having difficulties returning its economy to the path of high growth and vigorous job creation. Thousands of people have taken to the streets of US cities, and thousands of others in Europe, to demand a fairer system. In the eurozone, financial crises have forced out two governments, replacing elected representative with appointed technocrats charged with restoring order. Concern about the institutional integrity of the eurozone – key to the architecture of modern Europe – continues to mount. This uncertainty extends beyond countries and regions. Each development, and certainly their occurrence in tandem, points to the historic paradigm changes shaping today’s global economy – and to the anxiety that comes with the loss of once-dependable anchors, be they economic and financial or social and political. Restoring these anchors will take time. There is no game plan as of now, and historic precedents are only partly illuminating. Yet two things seem clear: different countries are opting, either by choice or necessity, for different outcomes; and the global system as a whole faces challenges in reconciling them.

No comments: