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Fed Watch: Dissent - The FOMC statement contained a mini-bombshell, the dissent of Kansas City Fed President Thomas Hoenig. I am skeptical, however, that this dissent is a significant shift in the policy environment. Instead, I view the statement as taking another baby step forward to a normalization of monetary policy now that the financial crisis has eased and that the economic environment has firmed. Many policymakers will simply find themselves increasingly uncomfortable holding rates at rock bottom levels while sitting on a bloated balance sheet -- regardless of the unemployment rate. Short of a significant reversal of recent economic gains, I would be hard pressed to see the Fed back away from a policy stance that is growing tighter, albeit slowly tighter.
Fed Keeps 'Extended Period' Pledge; Hoenig Dissents (Bloomberg) -- The Federal Reserve restated its intention to cease buying $1.25 trillion of mortgage-backed securities in March and maintained its pledge to keep interest rates near zero for an "extended period," opening a rift among policy makers for the first time in a year. Kansas City Fed President Thomas Hoenig dissented, saying the time had come to change the promise to keep rates low. The economy "has continued to strengthen," the Fed said in a statement today in Washington, "although the pace of economic recovery is likely to be moderate for a time."
And Now for Something Completely Different: FOMC Edition Inflation Hawk Admitted to the FOMC's Deflation Henhouse - The Federal Reserve Open Market Committee meeting concluded Wednesday and issued its traditional 2:15pm EST statement, with an interesting, but opaque, notation in the voting footnotes from newly elevated (for 2010) first-stringer Thomas M. Hoenig, President of the Federal Reserve Bank of Kansas City, who voted against the Committee's monetary policy action, based on his belief "that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted":
Fed Lays Ground for End to Stimulus With Recovery Declaration - The Federal Reserve panel in charge of interest rates declared for the first time the U.S. economy is in "recovery" and took several steps to prepare investors for the removal of aggressive monetary stimulus. The Federal Open Market Committee yesterday upgraded its economic outlook, reaffirmed it will end liquidity backstops and a $1.25 trillion program to buy mortgage-backed securities and expressed less confidence inflation will remain "subdued." "This is as close an admission that we are likely to see that the FOMC thinks the recession is over and the economy is on a self-sustaining recovery path,"
Kansas City's Hoenig Wants Fed to Find New Words - The Federal Reserve's first Federal Open Market Committee meeting of 2010 brought a new voting lineup among regional Federal Reserve bank presidents. One hawkish president took the place of another hawk, and the transition appears to have been seamless — bringing a dissenting vote to the committee for the first time in a year.The FOMC voted 9-1 to keep its interest-rate target unchanged at near zero and maintain its language that economic conditions "are likely to warrant exceptionally low levels of the federal funds rate for an extended period." That wording has remained in the FOMC's post-meeting statement since last March. The lone dissenter, Kansas City Fed President Thomas Hoenig, "believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted," the statement said.
Hoenig the hawk - As expected, the Fed's zero rate strategy holds for now, but for the first time in a year there was a dissenting voter: Thomas M. Hoenig… FOMC Statement (our emphasis):
Meltzer on the Fed's Incomplete Exit Strategy- I commend Allan Meltzer's op-ed in yesterday's Wall St. Journal. Meltzer writes: The exit strategy is incomplete. Proponents are guilty of practicing economics without prices. They never say what the interest rate on reserves must be to get banks to hold the approximately $1 trillion of reserves above the minimum they're legally required to hold. That's the critical question. [...] No economist doubts that the Fed can induce banks to hold some more reserves by paying interest. But how much? I do have to say that Meltzer's critique, like Bernanke's strategy, is also somewhat incomplete. What might stop the Fed from raising the interest rate on reserves as high as necessary? He doesn't spell that out
Fed's Kohn: Banks Need to Prepare for Higher Rates - The Federal Reserve's number-two official issued a stern warning to investors, banks and other financial institutions Friday: Don't be complacent, interest rates are going up at some point and it will cause new market turmoil if you're not prepared. "We are in uncharted waters for monetary policy and the financial markets," Donald Kohn, vice chairman of the Federal Reserve, said in a speech to bankers at the FDIC. Rattling off a long list of uncertainties about the outlook – a rising budget deficit, foreign demand for U.S. debt, the strength of the recovery – Mr. Kohn said bankers need to start preparing now for the risk that interest rates could move swiftly in unexpected directions, most likely up."Many banks, thrifts, and credit unions may be exposed to an eventual increase in short-term interest rates," he warned
"No rate hikes likely in 2010..." According to Bloomberg's latest survey of 57 economists the U.S. economy is expected to grow by 2.7% in 2010 and 2.9% in 2011 Indeed, judging by expectations of the future course of U.S. short-term interest rates, the market appears to believe that the U.S. recovery will prove to be stronger than a typical post-crisis recovery. Expectations for higher short-term interest rates are reflected both in the Fed Funds futures market and in the consensus interest-rate projections of leading economists While it is certainly the case that the Fed will eventually have to push its policy rate higher, there is reason to believe that the policy-rate path predicted in Figure 4 might be overly aggressive. Indeed, as we demonstrate below, the market's projection for Fed rate hikes is not consistent with the path forecasted by conventional Taylor Rule models. If we input the Federal Reserve's forecasts for core inflation and unemployment into a variety of Taylor Rule-type models, we actually end up with a zero or negative Fed Funds rate projected for all of 2010 and, in a number of cases, for 2011 as well.
The One Sentence Everyone Needs to Read and Understand - Bruce Bartlett: The Fed has talked openly about new procedures to soak up the bank reserves it has created even as those reserves remain largely idle and unlent. You don't get inflation if there is no money multiplier in play. So long as the banks are just holding the cash, worries about monetary policy leading to inflation are at best a shibboleth.
Fed Weighs Interest on Reserves as New Benchmark Rate (Bloomberg) -- Federal Reserve policy makers are considering adopting a new benchmark interest rate to replace the one they've used for the last two decades. The central bank has been unable to control the federal funds rate since the September 2008 bankruptcy of Lehman Brothers Holdings Inc., when it began flooding financial markets with $1 trillion to prevent the economy from collapsing. Officials, who start a two-day meeting today, have said they may replace or supplement the fed funds rate with interest paid on excess bank reserves. "One option you might want to consider is that our policy rate is the interest rate on excess reserves and we let the fed funds rate trade with some spread to that," Richmond Fed President Jeffrey Lacker told reporters.
Why are 86% of the NY Fed's MBS Purchases Occurring During Option Expiration Weeks? - This data suggests that the Fed's purchases of Market Backed Securities serves not only to artificially depress mortgage rates and the longer end of the yield curves. The purchases occur, with a remarkably high correlation of 86%, during monthly stock market options expiration weeks in the US. "...since July, there has only been one options expiration week whereby the Fed did not buy at least $60 billion of MBS during the options expiration week itself, providing instant and meaningful liquidity during options expiration weeks that have historically had an upward bias anyway! Talk about timing of liquidity injections to get maximum effect in the equities market."
Bernanke's (new) Conundrum – Negative Convexity - The Atlanta Fed put out a report on the status of the Fed's purchases of MBS. The report confirms that 91% of the anticipated $1.25 Trillion of paper has been bought. This leaves about $110b of buying power left for the Fed. There is only nine weeks left until the anticipated time that this program will end. This implies an average of only $10b of intervention per week. The most recent purchase was for $16B. Look for that weekly number to fall pretty quickly from now on. The following graph clearly shows the STEADY accumulation of Agency paper. Now look at the following graph. If you print this out and check with a ruler (I did) you will see that the lowest point on the brown shaded area is 1,200 and the upper band is at 2,400 (1,200 total). The legend states that brown are both Agency Bonds and MBS. As a portion of all long term mortgages pre-pay prior to the stated maturity...
Central banks, debt and deflation - The Economist - WHY are central banks so scared of deflation? The reason, of course, was that banks were worried about repeating the Japanese experience of deflationary stagnation. Irving Fisher described this as the "deft deflation trap"; incomes fall but the debts remain the same in nominal terms and rise in real terms, making them harder to service. This debt trap is what persuaded central banks to cut rates to zero, use quantiative easing and pursue many other support schemes over the last couple of years. In short, if we had not got so indebted, the central banks would have not had to intervene. But of course, you should turn this round. If central banks had not intervened so often in the 1980s, 1990s and noughties, we would not have got so indebted.
Thoughts on the End Game - Over the next several months, we are going to start to explore various aspects of the end game. Whither Japan? Are they actually, as I think, a bug in search of a windshield? What does that mean for the world? How safe is the euro? Everyone over here seems to think Germany will bail out Greece. A breakup seems unthinkable to the people I've been talking to (so far). But what about Spain? Italy? Can you spell moral hazard?The Fed has said it will exit quantitative easing (QE) at the end of March. But what if mortgage rates rise? Where do we find $1 trillion (plus!!!) in US savings to fund the deficit, assuming foreigners buy about $400 billion? By definition, savings and foreign investment and the federal deficit must add up to zero. (We will go into that later - just take it as gospel for now.) How can we run 10% of GDP deficits if the Fed does not print money (as they did by buying Fannie and Freddie paper, which became treasuries, as I outlined last week)? That would require almost a 10% savings rate - with it all ending up in treasuries. How can that happen?
The Fed's Anti-Inflation Exit Strategy Will Fail -Federal Reserve Chairman Ben Bernanke has explained his exit strategy to prevent future inflation. The Fed recently began to pay interest to banks on the reserves they hold in their vaults. Using this new tool, it claims the ability to get banks to keep the money instead of lending it out, thus containing the money supply and inflation.I don't believe this will work, and no one else should. The exit strategy is incomplete. Proponents are guilty of practicing economics without prices. They never say what the interest rate on reserves must be to get banks to hold the approximately $1 trillion of reserves above the minimum they're legally required to hold. That's the critical question.
Issues Versus People - Paul Krugman Blog - NYTimes - Scott Sumner argues that we should be debating the substance of monetary policy, rather than whether Ben Bernanke should be reappointed. I wish it were that simple. Of course the underlying issues involve monetary policy. But the Senate doesn't get a direct vote on that; the only vote it gets is on whether to approve a Fed nominee. And Senators are looking to economic analysts for guidance on that actual vote. Nor is it necessarily the case, as Sumner suggests, that the Obama administration chose Bernanke because it favors the policies it believes he will follow. Again, it's not that simple: administration's choose Fed chairs to appease markets, or to avoid a fight with the other party, or because they think it will look good on TV.
Excess Reserves - If you want a nice, concrete example of something the Fed could be doing to boost employment, look no further than this article on excess reserves (via): Banks' excess reserves, or deposits held with the Fed above required amounts, totaled $1 trillion in the two weeks ended Jan. 13, compared with $2.2 billion at the start of 2007. The Fed created the reserves through emergency loans and a $1.7 trillion purchase program of mortgage-backed securities, federal agency and Treasury debt.By raising the deposit rate, now at 0.25 percent, officials reckon banks will keep money at the Fed and not stoke inflation by lending out too much as the economy recovers. People have wondered for a while what's the Fed's "exit strategy" from the current bout of credit easing, and there you have it.
Economists React: Should Bernanke Stay at the Fed? - WSJ - (a dozen) Journalists, economists, bloggers and others weigh in on the troubles facing Ben Bernanke's confirmation as Fed chairman.
Why Bernanke should be reconfirmed – Econbrowser - readers are well aware that there are a number of issues on which I have concerns about some of the decisions the Fed has made, such as dropping the ball on regulation ([1], [2]), keeping interest rates too low for too long over 2003-2005 ([1], [2]), taking some real risks with the Fed's new balance sheet ([1], [2], [3]), and pretending the Fed had nothing to do with the commodity price boom of 2008 ([1], [2]). Notwithstanding, there is no question in my mind that Bernanke should be reconfirmed as Chair of the Federal Reserve Board. Here's why.
The Internet's Chief Bernanke Apologist Officer Speaks! - DeLong - The internet's Chief Bernanke Apologist Officer? That's me. And I guess I have to speak because Paul Krugman is "agonizing" over the Ben Bernanke question. Paul writes: The Bernanke Conundrum: I'm agonizing — which isn't a place I ever expected to be, and not just because Bernanke hired me at Princeton... And he issues the first count in his bill of indictment: [Bernanke] completely failed to see the trouble building as the housing bubble inflated — and no, it wasn't one of those things nobody could have predicted, since a lot of reputable economists were warning almost frantically about the bubble. Bernanke's failure to see what was right in front of his nose was shared by almost everyone at the Fed —... In rebuttal, let me say that my conversations with senior Federal Reserve officials in 2004-2006 appear to have been very different than those Paul Krugman had.
Bernanke Apologist Watch - Shorter [1] Jim Hamilton (via [2] Brad DeLong):Ben Bernanke's record leaves nine links' worth of things to be desired, but considering the zombie ex-Fed Chair alternatives (plus
Brett Fav-Paul Volcker), he deserves to be confirmed for a second term.I am almost not kidding. Here's what Hamilton actually asks Bernanke's critics: I wonder which of [sic] previous Fed Chairs critics think would be better for the job than Bernanke. Surely you don't think we'd have been better off bringing Alan Greenspan back? [touché] G. William Miller [deceased] fumbled badly with much simpler problems. Arthur Burns [also deceased] is a case study in how not to conduct monetary policy.Would DeLong accept this sort of argument from a Berkeley undergrad seeking a decent grade? The question of far greater interest is why critics should have preferred Bernanke to prospective candidates who might have the combination of background and metabolic function to carry out the job — say, Janet Yellen or Alan Blinder — and might also do better than Bernanke in a pop quiz on the Fed's dual mission.
Why Bernanke should be reconfirmed - Jim Hamilton nails it. Excerpts:Please permit me to suggest that intellectual stamina is the most important quality we need in the Federal Reserve Chair right now. And: How could there possibly be an alternative whom Barbara Boxer (D-CA) and Jim DeMint (R-SC) would both prefer to Bernanke? Elsewhere I have to strongly differ with the Johnson-Kwak proposal that Paul Krugman be selected. The Fed Chair has to be an expert on building consensus and at maintaining more credibility than Congress; even when the Fed screws up you can't just dump this equilibrium in favor of Fed-bashing. Would Krugman gladly suffer the fools in Congress? Johnson and Kwak are overrating the technocratic aspects of the job (which largely fall upon the Fed staff anyway) and underrating the public relations and balance of power aspects.
The Fed's Best Man - A SENATE vote on President Obama's nomination of Ben Bernanke for a second four-year term as chairman of the Federal Reserve is imminent. Rejecting him would be a big mistake, for it would both flog a distinguished public servant who helped avert catastrophe and turn the Fed chairmanship into yet another political football. Washington has plenty of political footballs already.The case for Ben Bernanke starts with his keen intellect. But perhaps more important in these trying times, he has demonstrated great creativity. He has also displayed the courage to put his head on the chopping block for policies he thinks right. And he is now battle-tested. (Disclosure: I am a long-time friend and former academic colleague of Mr. Bernanke.)
Faux News on Fifteenth Street (i.e., the Washington Post) Endorses Bernanke - Given the bias in its news coverage it should hardly be a surprise that the Washington Post editorial board endorsed Ben Bernanke for another term as Fed chairman. Still, the arguments in its editorial are worth noting.To begin with, the title of the piece "scapegoat at the Fed," should give everyone a good laugh to start the week. Umm, isn't Mr Bernanke the Fed chairman and before he took over in 2006 one of the seven members of the Board of Governors? Isn't it the Fed's job to maintain full employment? Is 10 percent unemployment full employment? The fact is that Bernanke either failed to see or opted not to counteract an $8 trillion housing bubble. Any competent economist could see that the collapse of this bubble would wreck the economy. How can you possibly fail more completely in a job than Mr. Bernanke has?
The Quarrel Over Bernanke - NYTimes Forum - Though it appears that he will overcome a filibuster threat, opposition to Mr. Bernanke has grown, along with worsening jobs numbers and public anger over the Fed's failure to regulate banks before the financial crisis. His Democratic and Republican opponents have criticized him as the architect of the Wall Street bailout and being out of touch with the woes of Main Street. How much is Mr. Bernanke to blame for the regulatory failures, the weak recovery and high unemployment numbers? Could a new Fed chairman make a difference?
- Robert Kuttner, The American Prospect
- Tyler Cowen, economist, George Mason University
- Yves Smith, financial analyst
- Mark Thoma, economist, University of Oregon
- Robert J. Barbera, economist, I.T.G.
Why Bernanke's Confirmation Is, and Should Be, in Trouble - No sooner had the New York Times released an initial story that "Opposition Grows Against Second Term for Bernanke," noting opposition from Sens. Feingold and Boxer, than Sen. Harry Reid made a Friday evening announcement that he would support Bernanke. With presumed White House urging, Reid was hoping to head off further erosion in Bernanke's support. But it may not be enough. One unconfirmed vote count late Friday suggested there were still up to 59 Senators undecided, with those supporting/opposing split about 25/16. That was before Reid's announcement. The fact that over half the Senate doesn't know what to do about Bernanke speaks volumes. For such an important position, and with so much already known about Bernanke's record, you'd think Bernanke's fate would be known by now
Why Bernanke Might Be Out by February - Fed Chairman Ben Bernanke may have read his political obituary this morning. Prized by the White House for battling the crisis but despised by Republicans and some liberal Democrats for his perceived Wall Street bias, Bernanke's reappointment never looked like a shoo-in. But the surprisingly sweeping fallout from Republican Scott Brown's election to Ted Kennedy's Senate seat on Tuesday seat continues with reports that Bernanke may now lack the votes. Could Congress boot Bernanke from the post that won him Time person of the year and Foreign Policy's thinker of the year? Should they? His term is up January 31
Is Bernanke Hiding A Smoking Gun? - A Republican senator said Tuesday that documents showing Federal Reserve Board Chairman Ben Bernake covered up the fact that his staff recommended he not bailout AIG are being kept from the public. And a House Republican charged that a whistleblower had alerted Congress to specific documents provide "troubling details" of Bernanke's role in the AIG bailout.Sen. Jim Bunning (R-Ky.), a Bernanke critic, said on CNBC that he has seen documents showing that Bernanke overruled such a recommendation. If that's the case, it raises questions about whether bailing out AIG was actually necessary, and what Bernanke's motives were. A letter Bunning sent Monday to Banking Committee Chairman Chris Dodd (D-Conn.) also refers to an "[e]mail exchange regarding restructuring of assistance to AIG, initiated by Treasury Secretary Timothy Geithner" in March 2009.
What if Bernanke Isn't Reconfirmed - What happens if Ben Bernanke isn't reconfirmed? Well, some folks seem to think it will send markets into a tailspin. But it's worth emphasizing that in literal terms almost nothing will happen. If a left-right coalition of 40 Senators blocks his confirmation, then it's hard to see what other candidate would be more to their liking. You'd have gridlock. But Bernanke's term as a member of the Fed's Board of Governors is actually a 14-year term that doesn't expire for a long time. Consequently, the same Open Market Committee that's making decisions right now would just go on making decisions. Bernanke would, however, be unable to perform the formal responsibilities of the Chairman, so that role would devolve to Donald Kohn, the Vice Chair. Would that be a ridiculous situation for an erstwhile major country with a functioning political system to find itself in?
Bernanke Reconciliation? – Krugman - I've come out, albeit without enthusiasm, in favor of reappointing Ben Bernanke. But this would send a terrible signal:When it comes to progressive priorities in the Senate, there's one standard: 60 votes are needed. But for Ben Bernanke, there's a second standard: 50 will be just fine, thank you.Democratic leaders in the Senate are asking colleagues who are reluctant to support Bernanke's nomination for a second term as Federal Reserve chairman to nevertheless vote with them to end a filibuster and allow a vote on the actual nomination. The reluctant members would then be free to vote no to express their displeasure. I can hardly think of anything more calculated to solidify the view that Wall Street doesn't have to play by the rules that apply to everyone else.
Know Your Feds - Krugman -This isn't a simple question of good versus evil. There are substantive policy disputes, and some very good people are, in my view, on the wrong side of some issues. Volcker is usually a hard-money guy. I haven't had an opportunity to ask him, but my guess is that he's suspicious of quantitative easing, and would be more likely to side with the Fed's inflation hawks than with those of us who think the Fed should expand its balance sheet, target higher inflation, and in general do whatever it takes to bootstrap ourselves out of the liquidity trap.
Bernanke Interlude - WSJ publishes a letter: ...Applying accountability principles, there's no way Chairman Bernanke should be reconfirmed by the Senate, let alone reappointed by the Obama administration....He's been at the helm from the very beginning of this Great Recession. That alone warrants a "no" vote on reconfirmation. At this point, I feel obligated to note that if you're going to declare this The Great Recession—i.e., if you are assuming the chance of having the third Depression is over*—then Bernanke deserves credit, not blame. In addition, the Fed has increased the monetary base (high-powered or wholesale money) by the largest amount ever... inflation is a virtual certainty over the coming decade. This is Gospel for the WSJ editorial page...
Bernanke Part 2 of 2: Leaders Lead, or Just Say No - The world would be a much better place if people had listened to Tom last August:Now some elite opinion favors Ben Bernanke's reappointment, but politicians are irritated over Fed stonewalling of bailout oversight and others (e.g. Dean Baker) point out that Ben Bernanke who put the Fed throttles to the firewall to save the world is also the Ben Bernanke who carried over Greenspan policy until it was too late. Not a strong enough source for you? How about Brad DeLong last August: I am surprised that he is being reappointed. I would have thought that the combination of people angry because he has given too much public money to the banks and people angry because he didn't stop the recession would together make him damaged and that Obama would want to bring in a fresh face--.
The Bernanke confirmation: incompetence, indifference and institutional inertia - Section 2a. Monetary Policy Objectives - The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. [12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).] In black and white, that's the mandate carried by the Chairman of the United States Federal Reserve, Ben Bernanke. He, and others, may not like it, but until the law is changed, it is what it is. (article includes videos of several obviously ignorant senators...)
Wall Street Journal Questions Bernanke's Credibility and Political Will - Last week, Economist Steve Keen made "The Case Against Bernanke". Specifically, Keen says "Bernanke's ignorance of the factors that really caused the Great Depression is a major reason why the Global Financial Crisis occurred in the first place." On Monday, I was delighted to see the Wall Street Journal make a different case against Bernanke. Please consider The Bernanke Nomination Majority Leader Harry Reid declared his support for Mr. Bernanke on Friday, but not before extracting what he said were concessions about future Fed policy. The Fed chief promised, said Mr. Reid, that he would "redouble his efforts" to make credit available and that Mr. Bernanke "has assured me that he will soon outline plans for making that happen, and I eagerly await them." Redouble? The Fed has already kept interest rates at near zero for more than a year, and it is buying $1.25 trillion in mortgage-backed securities to refloat the housing bubble, among other interventions into fiscal policy and credit allocation. Is the Fed going to buy another $1.25 trillion, or promise to keep rates at zero for another 14 months?
Paul Krugman For The Fed - Simon Johnson - The case for Ben Bernanke's reappointment was weak to start with, weakened with his hearings, and is now held together by string and some phone calls from the White House. Bernanke is an airline pilot who pulled off a miraculous landing, but didn't do his preflight checks and doesn't show any sign of being more careful in the future – thank him if you want, but why would you fly with him again (or the airline that keeps him on)? The danger here is uncertainty – the markets fear a prolonged policy vacuum. Fortunately, there is a way to address this. Ben Bernanke should withdraw and the president should nominate Paul Krugman to take his place. Paul Krugman is an expert on monetary policy – he wrote the classic paper on balance of payments crises (and probably could have got the Nobel Prize just for that), his work on Japan in the 1990s shaped everyone's thinking of how to handle potential deflation, and his assessment of the crisis and needed response in fall 2008 was right on the money...
Paul Krugman for Fed Chair: "Crazy" - Paul Krugman says that Simon's idea that he should be chair of the Fed is "crazy." Krugman's point is either that he wouldn't be confirmed or that he wouldn't be able to bring the Open Market Committee along. Maybe he's right about the former; a Republican filibuster does seem reasonably likely. I don't think he's right about the latter; or, more precisely, I don't think it matters. The FOMC is, on paper, a democratic body: they vote. There is a tradition that the votes are generally unanimous because of the perceived importance of demonstrating consensus. Given that we all know there are debates involved, how important is this fiction of consensus? Put another way, I think it would actually be good if we had a non-unanimous FOMC and even a FOMC that voted against its chair now and then.
Should Krugman replace Bernanke? - What would happen if Ben Bernanke withdrew his name from consideration as Fed chairman tomorrow, and Barack Obama picked up the phone and asked Paul Krugman to step into the breach? Bruce Bartlett reckons that "Paul has enough sense not to accept the position even if it is offered–just as Milton Friedman rejected Reagan's offer for him to replace Volcker in 1982″ — but I'm not so sure. After Simon Johnson proposed the idea this morning Krugman said that it was "crazy" — but he did so without saying that he would refuse the job if offered. I think he's sensible to leave the door ajar: it's really hard to say no to a president who asks you to serve your country by taking what Matt Yglesias calls "the single most important domestic policy job in the country". Krugman asks the key question: Does it make sense to deny Bernanke reappointment simply in order to appoint someone who would follow the same policies?
Krugman fed up with Fed chair suggestion - In a blog post early today on the New York Times Web site, Nobel-prize winning economist Paul Krugman (who is always introduced as 'Nobel-prize winning economist Paul Krugman') called the suggestion that the president should nominate him to chair the Federal Reserve "crazy." After acknowledging that his ties to Fed Chair Ben Bernanke made his criticism difficult to write — Bernanke brought Krugman to Princeton — Krugman blasted him, noting that "he has been assimilated by the banking Borg" and completely missed signs that there was "trouble building as the housing bubble inflated." "But it's very hard to think of people with those qualities who have any chance of actually being confirmed, or of carrying the FOMC with them even if named as chairman (which is one reason why this suggestion is crazy)," Krugman wrote.
Congress Is Politicizing the Fed - Teddy Roosevelt once remarked of a financial crisis: "When people have lost their money, they strike out unthinkingly, like a wounded snake, at whoever is most prominent in the line of vision." Late last week, we saw the Senate strike out at Federal Reserve Chairman Ben Bernanke. His nomination for a second term was the first to come into Washington's line of vision in the immediate aftermath of the Massachusetts senatorial election. There are many roadblocks we must overcome to get our economy running again...
The Fed Is Politicizing The Fed - Richard Fisher (President of The Federal Reserve Bank of Dallas) bleats that: There are many roadblocks we must overcome to get our economy running again. Businesses must develop sufficient confidence in the future to begin expanding their order books and payrolls. Banks must be willing and able to lend again. And consumers must regain the wherewithal to open their pocketbooks. Notice what's missing: Households and businesses must have the earnings capacity to be able to borrow based on production, not based on speculative frenzy. The burden of making the tough decisions needed to make our country's economy sound again falls on the sole body responsible for taxing and spending our money: Congress. Really Dick?
Bernanke Divisions in Congress Mirror Public Concerns - The split in the U.S. Senate on Federal Reserve Chairman Ben Bernanke's nomination for a second term mirrors a divide among the American public, according to the latest Wall Street Journal/NBC News poll.About 18% of those surveyed said they were "positive" about Mr. Bernanke, the same share that said they were "negative." Of the rest, 19% called themselves "neutral" and 45% said they were unsure. That puts Mr. Bernanke's ratings slightly ahead of those of Treasury Secretary Timothy Geithner, who had a smaller "positive" share. About 37% of those polled Jan. 23-25 opposed Mr. Bernanke's reappointment and 34% supported it with the rest not sure. That was little changed from a June poll.
Bernanke Confirmed for Second Term as Fed Chief – NYTimes - The Senate gave Ben S. Bernanke a second four-year term as the head of the Federal Reserve on Thursday after critics excoriated the central bank's conduct in the years leading up to the financial crisis. The 70-to-30 vote was the weakest endorsement ever extended to a chairman in the Fed's 96-year history.
Ben Bernanke Reconfirmed: Will He Get the Message? - The large number of negative votes, the concerns that some of the supporters have expressed, and the lukewarm support of the White House until the nomination looked to be in danger ought to send a clear– and correct — message to the Fed. When there is uncertainty about whether to pursue low inflation or low unemployment, low unemployment must prevail. If the Fed moves too fast to unwind the stimulus measures it has in place, increases in interest rates could kill the recovery and employment. But if it moves too slowly, it may have an inflation problem. So far it has not been clear that the unemployment goal is preeminent, and going forward the Fed needs to demonstrate it gives unemployment the highest priority. Inflation must take a back seat whenever there's any doubt about which goal to pursue.
Bernanke May Have Harder Fight Defending Fed After Confirmation - (Bloomberg) -- Ben S. Bernanke, who won Senate approval for a second term as Federal Reserve chairman over a record number of opponents, may now have a tougher fight against threats to the central bank itself. Lawmakers are considering legislation to remove a shield from congressional audits of monetary policy and strip the Fed of bank-supervision powers, measures that Bernanke opposes. The debate over Bernanke's performance has focused lawmaker attention on the powers of the institution, said Vincent Reinhart, a former Fed official. The scrutiny comes as politicians respond to voter anger over government bailouts of Wall Street firms, including the Fed's role in rescues of AIG and Citigroup
A Colossal Failure Of Governance: The Reappointment of Ben Bernanke - Simon Johnson - When representatives of American power encounter officials in less rich countries, they are prone to suggest that any failure to reach the highest standards of living is due in part to weak political governance in general and the failure of effective oversight in particular. Current and former US Treasury officials frequently remark this or that government "lacks the political will" to exercise responsible economic policy or even replace a powerful official who has clearly become a problem.Unfortunately, two massive failures of governance at the level of the Senate also spring to mind: first, the strange case of Alan Greenspan, which stretched over nearly two decades; second, Ben Bernanke, reappointed today (Thursday).
A Modest Proposal for the Fed: Term Limits for Chairmen - WSJ - Ben Bernanke's bloody confirmation battle is yet another sign that Congress, and the public more broadly, are looking for change at the nation's central bank. Congress is playing with many different ideas for how to do that: 1) Fire Mr. Bernanke by denying him a second term (something that's looking less likely as pledges of 'yes' votes from the Senate trickle in); 2) Strip the Fed of its power to regulate banks; 3) Give Congress's Government Accountability Office the power to audit Fed decisions; 4) Give Congress more say on the governance of regional Fed banks. Each of these ideas has a flaw … GAO audits, for instance, could invite congressional meddling on tough decisions about raising interest rates. Taking regulation away from the Fed isn't necessarily going to make regulation better. Here's a proposal that hasn't come up, but maybe ought to be on the table: Term limits for Fed chairmen. Two terms, eight years, and then you step down to a governor's job, which gets 14 years, or leave.
The Fed cannot inflate. Buy Bonds.- Ben Bernanke is famous for saying that the Fed can always inflate if needs be by "dropping money from helicopters".But the Fed cannot "drop money from helicopters". Only the Treasury can. Helicopter drops of money are fiscal policy, not monetary policy, as they create net new financial assets for the non-Govt sector. The Fed cannot inflate. If you think about the mechanisms the Fed has, it becomes clear that they do not have to tools to create inflation. They can control interest rates, but rates are a double edged sword as the non-Govt sector has both borrowers and lenders. Low rates help borrowers but hurt savers, and high rates do the opposite. At a sector level, the impact of interest rates is muddled at best, there certainly is no clear mechanism to generate inflation.
FT – An early warning system for asset bubbles - As policymakers and business leaders gather in Davos this week, much of their conversation will no doubt focus on how to drive a global economic recovery. Yet they should spend just as much time and energy discussing how to prevent the next devastating financial crisis – specifically, how to spot and prick asset bubbles as they are inflating. For many years, some of the world's most prominent central bankers said this was impossible. However, new research from the McKinsey Global Institute shows that rising leverage is a good proxy for an asset bubble – and that the right tools could have identified the recent global credit bubble years before the crisis broke. We urge policymakers to develop these tools and use them to ensure a more stable financial system, thereby avoiding more of the widespread pain and suffering caused by the current crisis. Our new MGI report, Debt and deleveraging: The global credit bubble and its economic consequences, details how debt rose rapidly after 2000 to very high levels in mature economies around the world. But to spot a bubble, we need to know how much debt is too much.
Identifying Bubbles - In response to the barrage of criticism that has been aimed at the efficient markets hypothesis recently, Robin Hanson makes a plea: Look, everyone, this game should have rules. EMH (at least the interesting version) says prices are our best estimates, so to deny EMH is to assert that prices are predictably wrong. And for EHM violations to be relevant for regulatory policy, price errors must be so systematic as to allow a government agency to follow some bureaucratic process to identify when prices are too high, vs. too low, and act on that info. The efficient markets hypothesis makes a stronger claim than just price unpredictability; it identifies prices with fundamental values
U.S. One-Month Bill Rate Negative for First Time Since March - Treasury one-month bill rates turned negative for the first time in 10 months, as issuance declines while investors seek the most easily-traded securities amid a renewal of risk aversion. The rate on the four-week security dropped to negative 0.0101 percent, the lowest since it reached negative 0.015 percent on March 26. The Treasury sold $10 billion of four-week bills on Jan. 26 at a rate of zero percent
WHY DEFLATION REMAINS THE GREATER RISK - The tendency is to argue that more money = inflation. After all, the great Milton Friedman said that inflation is always and everywhere a monetary phenomenon so it must be true, right? Not so fast. Friedman lived in a different time. A time when the velocity of money was stable and the gold standard was still a viable idea. Let's start with the various types of inflation – demand-pull inflation and cost-push inflation. As of now, demand-pull inflation appears unlikely. Recent data shows this is unlikely due to high levels of spare capacity, low capacity utilization rates and generally tepid demand for goods. Despite the oodles of excess money in the system there is nothing in the data that currently suggests this recovery will result in massive demand-pull inflation. In fact, the evidence as of now suggests a potential disinflationary environment. The cost push inflation debate can be answered in one word – jobs.
Dialing back the deflation watch - In the tussle over whether deflation or inflation is the bigger threat I've been firmly in the deflation camp. In the last few weeks, though, I've tiptoed closer to neutral. Core inflation hasn't dropped as much as I'd expected to date, and the drop that has occurred seems entirely due to owners' equivalent rent. Goods prices inflation has been surprisingly sturdy. Yesterday's report by the Congressional Budget Office also prompted me to reexamine my assumptions. The CBO has raised its CPI inflation rate forecast for 2010 to 2.4% from 1.7%, while leaving the 2011 forecast at a still very low 1.3%. It marked down even more its forecast of inflation as measured by the GDP price index
PIMCO: The US Falls Into The Sovereign Debt Ring Of Fire - In the latest PIMCO investor letter, Bill Gross brings up a chart he likes to call "The Ring of Fire." As you can see, this chart/graph details the amount of debt a country has in relation to their GDP. Countries in the fire zone are headed for hell in a handbasket. PIMCO predicts these countries, which include the U.S., will increase public debt to greater than 90% over the next few years, which will in turn stall growth. The most vulnerable countries in 2010 are shown in PIMCO's chart "The Ring of Fire." These red zone countries are ones with the potential for public debt to exceed 90% of GDP within a few years' time, which would slow GDP by 1% or more. The yellow and green areas are considered to be the most conservative and potentially most solvent, with the potential for higher growth.
U.S. Dollar Loves Fed Dissent - WSJ The dollar seems be benefiting from the ever so slightest of hints that the Fed might be prepared to take tiny, baby steps towards tightening. Otherwise, there's not much to explain why the euro is getting very close to falling under $1.40 in aftermath of the FOMC decision. Hoenig dissented with the rest of the FOMC, believing "economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted." Dissenting votes get a lot of attention. They're interesting because they show there's a real debate at the FOMC, and sometimes the position taken by dissenters is more broadly held than the vote really shows.
Unwanted dollars - Another milestone in the financial crisis: the ECB has just reported zero interest in its latest offer of unlimited seven-day dollar liquidity. If I am right, it is only the second time in its 11-year history that this has happened in an ECB liquidity providing operation. The first was in an offer of 84-day dollar liquidity last September. The latest result was not unexpected. At the height of the economic crisis, the joint operations with the US Federal Reserve formed an important part of measures to keep financial markets working. But demand for emergency dollars by eurozone banks has tumbled in recently, as things have returned to normal. The only surprise is that the ECB has not, formally, announced the end of dollar liquidity provision.
Summers Says Dollar to Play Key Role for a Long Time (Bloomberg) -- White House economic adviser Lawrence Summers said the dollar will play a central role in the international financial system for "a long time to come." Summers, speaking at the World Economic Forum in Davos, Switzerland, said the U.S. must pursue economic policies that will support the "fundamentals" of the currency, including reducing budget deficits. Summers, 56, director of the White House's National Economic Council, also defended Obama's plan to impose new rules on bank size and risk, saying they would not interfere with financial institutions' ability to serve customers
Botox Cures – Part 1 - RGE Monitor -The global economy is currently taking the "botox" cure. A flood of money from central banks and governments – "financial botox" - has temporarily covered up unresolved and deep-seated problems. Bad Risks… In 2009 there was a 'recovery' in financial asset prices. The low or zero interest rate policy ("ZIRP") of major central banks helped increase asset prices. Very low returns on cash or near cash assets forced investors to switch to riskier assets in search of return. Even Pimco's Bill Gross discovered that his cash assets paid near zero returns. The chase for yield drove rallies in debt and equity markets. Low interest rates acted like amphetamine as investors re-risked their investment portfolios. High credit spreads for investment quality companies, driven by the panic of late 2008 and early 2009, subsided and rates returned to pre-Lehman levels.
Botox Cures – Part 2 - RGE Monitor - Bad Fiscals… From late 2008 onwards, Government intervention, on an unprecedented scale, has been a dominant factor in economic matters.Governments have spent aggressively, going into or increasing deficits, to increase demand within the economy to offset weak private sector consumption and investment.Central banks have maintained low interest rates, pumped liquidity into the financial system and "warehoused" toxic assets to support the financial system. In the U.S., Fed holdings of MBS reached around $1 trillion. The purchases provided much needed liquidity to banks and reduced potential write-down on these securities. They also helped keep interest rates low and maintained the supply of housing finance. The takeover of and government support for Government Sponsored Enterprises ("GSE"), such as the Federal National Mortgage Association ("FNMA" or Fannie Mae) and the Federal Home Loan Mortgage Corporation ("FHLMC" or Freddie Mac"), was an integral part of the process. The U.S. Government has now agreed to provided unlimited support to Fannie and Freddie.
Would You Choose Economic Growth Over National Autonomy? - A nation borrowing its way toward financial insolvency is not staging an economic recovery even when GDP picks up. What is this recovery that we supposedly need? It is nothing but debt facilitated GDP growth and asset inflation to create a built-in reward for leveraged mega-investors. That's how Wall Street banks "create" the money to pay big bonuses. If elites would put the question in fair terms, the American response would not be ambivalent: 'Would you rather have economic growth or national financial autonomy?' Most patriotic Americans will vote to put national liberties ahead of economic growth (i.e., "recovery"). On the other hand, Wall Street capitalists with little affinity for America's religious and cultural traditions will choose economic growth. Many of them want national partitions to crumble so as to facilitate the dominion of capital everywhere throughout the world. Voters need to understand that elites in both parties are positioning the majority of Americans to lose big.
Economists warn federal deficit growing at unsustainable levels - Concerns over the size of the deficit have fueled public anger directed at Congress and the White House and helped create the Tea Party movement dedicated to lower taxes and shrinking the federal government. They also contributed to Republican Scott Brown's upset victory in a Massachusetts Senate race.The gap between the money the nation takes in and what it spends is higher as a share of the economy than it's been since the end of World War II. Unlike that period, however, the nation is not about to enjoy an increased labor force from returning soldiers. Instead, Baby Boomers are retiring and expanding the rolls of Social Security and Medicare.Even after the economy pulls out of the recession, the debt is projected to grow much faster than the economy.
Deficits As Far as the Eye Can See - Today the Congressional Budget Office released its much-anticipated projections for the budget. As usual, the headline figure is CBO's estimate of the budget deficit, now projected to be $1.35 trillion for the fiscal year, about 9.2% of GDP. That's slightly better than last year–when $1.4 trillion deficits amounted to 9.9% of GDP–but is still the second-worst since World War II. And, as CBO notes, new legislation could easily lift the 2010 figure higher. For example, Congress will likely consider further extensions to unemployment benefits and more war spending, not to mention a possible jobs bill. CBO also projected deficits for the next decade.(graph) They are large and persistent
Obama Endorses Deficit Task Force - President Barack Obama Saturday endorsed a bipartisan plan to name a special task force charged with coming up with a plan to curb the spiraling budget deficit, though the idea has lots of opposition from both his allies and rivals on Capitol Hill. The bipartisan 18-member panel backed by Obama would study the issue for much of the year and, if 14 members agree, report a deficit reduction blueprint after the November elections that would be voted on before the new Congress convenes next year. The 14 would have to include at least half of the panel's Republicans – a big obstacle. "These deficits did not happen overnight, and they won't be solved overnight," Obama said in a statement. "The only way to solve our long-term fiscal challenge is to solve it together – Democrats and Republicans."
Obama Supports Deficit Commission - Some news about the deficit commission:... Also on Saturday, Mr. Obama endorsed a bill scheduled for a Senate vote on Tuesday which would create a bipartisan budget commission and require that its recommendations for slashing deficits would get a vote in Congress this year. But he remained ready to establish a panel by executive order if the vote falls short on Tuesday, despite his support. ... Brad DeLong explains why he thinks a deficit commission is a bad idea if you want to actually do something about the long-term budget problem: Let's pick ten Republican or near-Republican senators typically called "moderates" (some of whom have retired since 2003): Collins, Domenici, Grassley, Gregg, Hatch, Snowe, Specter, Voinovich, Nelson, and Lincoln. Only two of them opposed the unfunded Medicare Part D. Only one of them opposed the 2003 tax cut, And none of them opposed the 2001 tax cut-- So these aren't deficit hawks. These are something else--deficit chickens, deficit doves, deficit turkey-vultures.
How to Spot a Deficit Peacock: Deficit hawks come in a variety of breeds.... And then there is another species of deficit bird all together: the deficit peacock. Deficit peacocks like to preen and call attention to themselves, but are not sincerely interested in taking the difficult but necessary steps toward a balanced budget. Peacocks prefer scoring political points to solving problems. How can you tell the difference between deficit hawks, those who are serious about the dangers posed by persistent, large deficits and deficit peacocks, those who only use those dangers to preen and score political points? It's actually fairly simple. Here are four easy ways to tell when someone isn't taking our budget problems seriously.... 1. They never mention revenues.... 2. They offer easy answers.... 3. They support policies that make the long-term deficit problem worse.... 4. They think our budget woes appeared suddenly in January 2009...
Brad DeLong Gets It When It Comes To A Commission - But Brad DeLong has her number with this post: No Diane, having any budget commission is not necessarily better than not having one. I truly wish this wasn't the case. But when, as Brad points out, a commission is really just an excuse to do less now and a subterfuge for what's really happening, I don't see the value. Given all the failed budget commissions and summits of the past and the fact that the moon and stars don't seem to be in proper alignment for one to succeed now, I'd much rather have members of Congress take their lumps at the next election for not using the power they already have to deal with the deficit than to promise for no apparent reason that somehow a commission is going to be different this time.
Senate Rejects Deficit Commission: President's Budget Panel Voted Down (AP); The Senate has rejected a plan backed by President Barack Obama to create a bipartisan task force to tackle the deficit this year. The special deficit panel would have attempted to produce a plan combining tax cuts and spending curbs that would have been voted on after the midterm elections. But the plan garnered just 53 votes in the 100-member Senate, not enough because 60 votes were required. Anti-tax Republicans joined with Democrats wary of being railroaded into cutting Social Security and Medicare to reject the idea. Obama endorsed the idea after being pressed by moderate Democrats. The proposal was an amendment to a $1.9 trillion hike in the government's ability to borrow to finance its operations.
Rising Criticism for Budget Deficits and Solutions - NYTimes - The proposal for a commission died when its supporters could not muster enough votes in the Senate to push it ahead, reflecting unwillingness among many Republicans to back any move toward tax increases and objections among Democrats to the prospect of deep spending cuts in Medicare and Medicaid. While 53 senators voted for the plan and 46 against, it needed 60 votes to be approved under Senate rules. The alternative panel to be established by Mr. Obama will also come up with recommendations by December to reduce annual budget deficits and slow or reverse the growth of the national debt. But unlike the commission proposal killed by the Senate, Mr. Obama's executive order could not force Congress to vote on a commission's suggestions.
Conrad-Gregg Budget Commission Defeat Was A Deficit Smackdown - What does the 53-46 vote mean for the prospects of deficit reduction? The short answer is nothing good. That doesn't mean that the prospects would have been much better had the amendment been adopted and the commission created. It just means we now have a pretty good indication of what the politics of deficit reduction is at the moment. And it's ugly. Although some will try to make a big deal about the fact that the amendment received 53 out of 99 votes and, therefore, got a majority, that argument doesn't really fly in a world where the U.S. needs 60 votes to do almost anything
Why Would You Ever Cut Social Security? - Bruce Bartlett comments on the demise of the Conrad-Gregg statutory budget commission concept (note that more than fifty, but fewer than sixty, senators supported it): As I wrote the other day, I have always been lukewarm to the idea of a budget commission because I don't think we are ready, politically or economically, for serious deficit reduction. I also have problems with the way the proposed commission would be structured–requiring a supermajority for every recommendation seems like a recipe for gridlock.That said, I have just been appalled by idiocy of the arguments against the commission that appear to have won the day in the Senate. In particular, the idea that revenues should be completely off the table is simply insane. And the idea that Social Security should be completely off limits is only slightly less crazy.I accept, as a matter of political realism, that any budget deal will probably have to include Social Security cuts, primarily because the editorial page of The Washington Post seems to have a hard-on for cutting Social Security. But I don't understand why you'd ever want to cut Social Security. Consider this chart
Everything is Off The Table - According to Ezra Klein, before the Deficit Commission died in the Senate, a 97-0 vote backed an amendment from Max Baucus that would guarantee that the Commission couldn't touch Social Security. RNC Chairman Michael Steel has made "protecting Medicare" from cuts a core plank of the GOP. And of course Republicans don't want to raise taxes or cut defense spending either. But they think the deficit is too high. There's kind of a problem here.
The $700 Billion U.S. Funding Hole; Desperately Seeking A Very Indiscriminate Treasury Buyer - A month ago we observed that in 2010, the supply/demand picture for US fixed income would be very problematic, as there was no immediate apparent substitute to fill the void resulting from the departure of the constant bid provided by the Federal Reserve's Quantitative Easing in both the UST and the MBS markets. The conclusion was that there would need to be a dramatic increase in demand for debt securities across the board, with an emphasis of Treasuries and MBS. Today, we focus on the most critical segment of debt issuance for 2010 - those ever critical US Treasuries, without whose weekly uptake by various investors, the multitrillion budget deficit will become unfundable. Using estimates from Morgan Stanley for 2010 Treasury supply and demand, the conclusion is that there will be a demand shortfall of at least half a trillion, and realistically $700 billion, to satisfy the roughly $1.7 trillion in net ($2.4 trillion gross) coupon issuance in the upcoming year.
Conservatives Don't Care About the Deficit - I think that at the moment the DC establishment (and, it seems, the American people) care too much about the deficit. But what's especially galling is that you can't get the establishment to see that the conservative movement doesn't care at all about the deficit. Progressives range from people who care a bit about the deficit to people who care a lot, but conservatives almost to a man don't care at all. Consider: When Obama tried to reduce the deficit by reducing the growth in Medicare spending, conservatives lambasted him. When he tried to reduce the deficit with higher taxes, conservatives lambasted him. And when he tried to add a very modest dose of restraint to the defense budget, they lambasted him. But there's simply no other way to reduce the deficit.
Attention: Liberals and Progressives - Take it as given that U.S. fiscal policy is unsustainable. It was unsustainable before Obama became President, and one can argue that he has made it worse. It was unsustainable before Bush became President, and one can argue that he made it worse. That is not the issue here.The issue is whether this unsustainability should be considered a moral problem. What "unsustainable" means is that the current government is making promises that it cannot reasonably expect to keep. The promises that are being made to future beneficiaries of Medicare and Social Security, to bondholders, and to others will not all be kept. In other words, our leaders in Congress and the Administration are lying, but we are not sure at this point who is going to bear the burden of those lies.
The US's shrinking - and then growing - deficit - The Congressional Budget Office today released its outlook for the budget deficit. No surprise: the deficit, as a proportion of GDP, is expected to fall considerably from 9.9 per cent in 2009 to 2.6 per cent in 2015, after which it will rise again. (see table) What's going to make it go up after 2015? Health care, of course. Here's a pretty phenomenal graph from the Center for Economic and Policy Research based on the CBO's projections from last year (which have changed slightly, but the overall trend is still the same).
CBO: Federal deficit projected at $1.35T - The Senate on Tuesday rejected a plan backed by President Barack Obama to create a bipartisan task force to tackle the federal deficit this year, despite glaring new figures showing the enormity of the red-ink threat.The special deficit panel would have attempted to produce a plan combining tax increases and spending curbs to be voted on after the November elections. The measure went down because anti-tax Republicans joined in opposition with Democrats wary of being railroaded into cutting Social Security and Medicare.The vote to kill the deficit task force came hours after the nonpartisan Congressional Budget Office predicted a $1.35 trillion deficit — $4,500 for every American — for this year as the economy continues to slowly recover from the recession. The budget deficits facing Obama and Congress are large and intractable, and the CBO's new deficit prediction is roughly equal to last year's record $1.4 trillion ocean of red ink. That means the government is borrowing to cover 40 percent of the cost of its programs.
The CBO's look at the numbers (the Director's Blog post) suggest it isn't going to work out too well for the Obama Administration and whatever administration follows on. Now granted this is just a projection and quite a bit could happen between now and 2020. However, the idea that the Obama Administration is going to reduce the deficit by half simply isn't all that likely without playing fast and loose with the numbers sort of reminiscent of the Bush Administration (projecting a high deficit number so that when the actual deficit comes in lower credit can be taken for reducing the deficit). And the long term effects of this debt will act as a drag on the economy.Those accumulating deficits will push federal debt held by the public to significantly higher levels. At the end of 2009, debt held by the public was $7.5 trillion, or 53 percent of GDP; by the end of 2020, debt is projected to climb to $15 trillion, or 67 percent of GDP. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket. CBO projects that the government's annual spending on net interest will more than triple between 2010 and 2020 in nominal terms (from $207 billion to $723 billion) and will more than double as a share of GDP (from 1.4 percent to 3.2 percent).
CBO Testifies before the House and Senate Budget Committees on the Budget and Economic Outlook - Director's Blog - I testified about CBO's Budget and Economic Outlook to the House Budget Committee yesterday morning and to the Senate Budget Committee this morning. In both testimonies I highlighted several points from the Outlook...
Senate Approves Amendment to Raise Debt Ceiling by $1.9 Trillion- The Senate approved legislation Thursday increasing the federal government's borrowing limit by $1.9 trillion, enough to enable the Treasury to pay its bills through 2010. The 60-39 vote was strictly along party lines with no Republicans joining the Democratic majority to approve the legislation. Once the increase is signed into law, the federal government will be able to borrow up to $14.3 trillion, by far the highest amount of debt it has ever held on its books. The current limit of around $12.4 trillion would have been breached by the end of February. House lawmakers must still take up the legislation and are expected to do so next week, according to a senior House Democratic aide.
Our Debt Is Getting Scary - But overhanging his ambitious agenda is a darkening cloud of debt as we were reminded Thursday when the senate voted to raise the nation's debt limit by $1.9 trillion. The CBO director recently noted that debt held by the public totaled $7.5 trillion, or 53% of GDP, at the end of 2009. Of perhaps greater concern, this frightening percentage only looks to get worse. By the end of 2020 the debt is expected to climb to $15 trillion, or 67% of GDP. America is a resourceful country but these projections are beginning to look scary. America's enormous debt has consequences, says one money manager who stopped by my office on Thursday. He sees America's debt burden driving up Government bond yields because, he believes, foreign buyers will demand it— not because they expect an outright default by the U.S. but because they know America's way is the more subtle 'inflation default'. Higher bond yields will be the first of many penalties Americans pay because we have allowed the nation's debt to grow and grow
Why we should expect low growth amid debt- Reinhart & Rogoff: (FT) -As government debt levels explode in the aftermath of the financial crisis, there is growing uncertainty about how quickly to exit from today's extraordinary fiscal stimulus. Our research on the long history of financial crises suggests that choices are not easy, no matter how much one wants to believe the present illusion of normalcy in markets. Unless this time is different – which so far has not been the case – yesterday's financial crisis could easily morph into tomorrow's government debt crisis. In previous cycles, international banking crises have often led to a wave of sovereign defaults a few years later. The dynamic is hardly surprising, since public debt soars after a financial crisis, rising by an average of over 80 per cent within three years. Public debt burdens soar owing to bail-outs, fiscal stimulus and the collapse in tax revenues. Not every banking crisis ends in default, but whenever there is a huge international wave of crises as we have just seen, some governments choose this route.
What a Potentially Sustainable Budget Outlook Looks Like - This is a chart from CBO's new outlook report. Note that deficits get down to the 2 1/2 to 3 percent of GDP range within five years. Note that revenues rise and spending falls, but that revenues do most of the heavy lifting (5 percent of GDP out of the 7 percent of GDP reduction in the deficit). Note that this assumes CBO's "current law baseline" where tax cuts expire as written in current law. Hold that thought.Here's Concord's press release reacting to the CBO report. More to say tomorrow, but here's the one-minute version: to get to sustainability, within the first five years it's all about revenue policy and avoiding the deficit-financed extension of tax cuts, and beyond that (but still, ideally sooner rather than later), we'll have to figure out how to bend that darned health cost curve, because even with a reformed tax system, we won't be able to keep up with health spending on its current path.]
Officials say stimulus bill to cost $75B more - Last year's $787 billion economic stimulus bill is going to be even more expensive – $75 billion more. That's the finding in Tuesday's Congressional Budget Office estimate of the costs of the economic stimulus bill, which mixed tax cuts and lots of spending in an effort to jump-start the economy. The estimate provides more ammunition for Republicans who say the stimulus has been long on spending and short on creating promised jobs. Almost half of the additional cost, $34 billion, is because the food stamp program won't be able to take advantage of lower-than-expected inflation rates and will instead have benefits set by the stimulus bill.
Democrats look to new budget rules to tame deficit - Democrats are trying to toughen budget rules to make it more difficult to run up the deficit with new tax cuts or federal benefit programs, a move Republicans say is a recipe for tax increases. The proposal by Senate Majority Leader Harry Reid, D-Nev., would make it harder to extend permanently some tax cuts that expire at the end of this year, renew health care subsidies for laid-off workers that expire next month, or offer more help to states for Medicaid for the poor.Some middle-class tax cuts would not be affected, and extended unemployment benefits for the long-term jobless may also be exempt.
Not liberal or conservative, just incoherent - IN ITS updated global forecast released this morning, the IMF warns against "premature and incoherent exit" from government support for the economy. "Incoherent" nicely describes the policy debate in Washington. Partisans have aimed their poison at the Federal Reserve and at the government's fiscal policy choices but what, exactly, do they want? The logical implications of their complaints are contradictory at best and dangerous at worst. Start with the Fed. On the right, they're angry about quantitative easing which they say is monetising deficits. On the left, they're angry about lax regulation of banks. Both are furious at bail-outs of banks and AIG, and both think the Fed created a bubble with its low interest rates. So the Fed, presumably, should shrink its balance sheet, end its asset purchases and liquidity programmes, order banks to raise underwriting standards and raise rates to nip the next bubble in the bud. And this is going to bring unemployment down?
Doing As Much As We Can Do, Now - I expect that some fiscal-hawkish senators will still let the perfect be the enemy of the good, claiming to be voting against the amendments that they would have written differently, that they think (or claim to think) do not go far enough. But imperfections aside, we should keep in mind that these three types of measures–caps for annual discretionary spending, PAYGO for new mandatory spending and tax cuts, and a commission for reforms to the existing entitlement and tax systems–are complementary, not competing, proposals, and that if we really want to make progress on reducing the deficit anytime in the next decade as well as sustainably over the longer run, we really need all three and then some
Value-Added Tax: No Easy Fix for the Deficit - There is a growing call by backers of bigger government for Congress to impose a value-added tax (VAT) on top of all the other taxes Americans already pay. A VAT is similar to a national retail sales tax but is collected at every stage of business production until its entire burden ultimately falls on the consumer. VATs are common in other countries, especially in the European Union (EU).[2] Despite the perception that VATs are difficult to evade, data show that fraud to avoid the VAT is widespread in the EU. In fact, the fraud is causing revenue shortfalls large enough that many EU countries are scrambling to prevent the abuse.[3]
Officials: Obama will propose three-year spending freeze - President Barack Obama will propose a three-year freeze in non-security discretionary spending, senior administration officials said Monday. His budget proposal, to be unveiled in part with Wednesday's State of the Union speech and in detail next week, will urge Congress to keep overall spending at $447 billion a year for agencies other than those charged with national security and mandatory-spending programs such as Social Security and Medicare. The freeze would take effect with the 2011 fiscal year starting Oct. 1 ...
President Obama concedes defeat - On an exciting phone call with progressive internet writers earlier this evening, a senior administration official outlined the Obama administration's plan to call for a freeze in non-security discretionary spending spending starting with the Fiscal Year 2011 budget. Described as an effort to balance concern with a "massive GDP gap" in the short run and "very substantial budget deficits out over time," the plan calls for the FY 2011 budget to be higher than the FY 2010 budget, but then for non-security discretionary spending to be held constant in FY 2012 and FY 2013. (Let me note right here that all of the reporters on the call, myself included, screwed up and forgot to seek clarification as to whether this is a nominal freeze or a real dollar freeze).The freeze would not apply to the Department of Defense, the Department of Veterans Affairs, the Department of Homeland Security, or to the foreign operations budget of the State Department. So is this an across-the-board freeze like we've heard Republicans call for?
Obama, Deficits, Freezes, and Commissions - It has been an interesting day for us fiscal policy wonks. Over my morning muffin, I digested President Obama's plan to freeze some domestic spending for the next three years as well as his package of aid to the middle-class. Then, I spent a few hours chewing over the CBO's latest budget projections. Finally, I watched the Senate trash the bipartisan budget commission. Add it all up, and we are pretty much where we started, although some important issues are becoming clearer. To take things slightly out of order, In today's budget update, CBO figures the 2010 deficit will be about $1.35 trillion, or 9.2 percent of GDP. We could cut the deficit in half by 2012 if Congress allows the Bush tax cuts to expire, lets the Alternative Minimum Tax bite 30 million middle-class Americans etc.—none of which is going to happen.
Obama Wants to Limit Government Spending Despite High Unemployment and a Fragile Economy - The long-term budget problem is due to primarily one thing, rising health care costs. Everything else is dwarfed by that problem. If we solve the health care cost problem, the rest is easy. If we don't solve it the rest won't matter. This was an opportunity for Obama to explain the importance of health care reform and how it relates to the long-term debt problem. Why not emphasize this?: Instead we get cheap political tricks that are likely to backfire. How will this look, for example, if there's a double dip recession, or if unemployment follows the dismal path that the administration itself has forecast? This seems to be a case of the former Clinton people in the administration (or wannabees) trying to relive their glory days instead of realizing that those days are gone, the world is different now and it calls for different solutions.
Barack Herbert Hoover Obama? - DeLong: For some time I have been worried about fifty little Herbert Hoovers at the state level. Right now it looks like I have to worry about one big one. What we are talking about is $25 billion of fiscal drag in 2011, $50 billion in 2012, and $75 billion in 2013. By 2013 things will hopefully be better enough that the Federal Reserve will be raising interest rates and will be able to offset the damage to employment and output. But in 2011 GDP will be lower by $35 billion--employment lower by 350,000 or so--and in 2012 GDP will be lower by $70 billion--employment lower by 700,000 or so--than it would have been had non-defense discretionary grown at its normal rate. (And if you think, as I do, that the federal government really ought to be filling state budget deficit gaps over the next two years to the tune of $200 billion per year, the employment numbers are more like 3.3 and 3.7 million in 2011 and 2012, respectively.)
This Is Such a Disaster in the Making II - DeLong - The Economist: "I understand the arguments from supporters... this is a political gambit... it won't actually amount to much... a tool with which to co-opt the president's moderate antagonists.... If this is the best the president can do, Democrats, and the country, are in for a very long few years": RA: There really is no good way to interpret this turn of events. From the standpoint of the purely economical, this is a huge mistake. Even if we assume that the economy will be strong enough in 2011 to handle budget balancing, this proposal is practically worthless. The administration has said this will produce $250 billion in savings over ten years, but as The Economist noted in November, the fiscal deficit will be over $700 billion in 2014 alone, and will grow from there. Non-defence discretionary spending is nothing; those who are serious about long-term budget sustainability talk about defence, they talk about entitlements, and they talk about revenues. In other words, this will do very little about the deficit, and it will do even less to convince markets of the credibility of the American effort to trim the deficit.
Obama Liquidates Himself - A spending freeze? That's the brilliant response of the Obama team to their first serious political setback? It's appalling on every level. It's bad economics, depressing demand when the economy is still suffering from mass unemployment. Jonathan Zasloff writes that Obama seems to have decided to fire Tim Geithner and replace him with "the rotting corpse of Andrew Mellon" (Mellon was Herbert Hoover's Treasury Secretary, who according to Hoover told him to "liquidate the workers, liquidate the farmers, purge the rottenness".) It's bad long-run fiscal policy, shifting attention away from the essential need to reform health care and focusing on small change instead.
Don't mention the war spending - I was already bristling at the implication that while plenty of waste could be found on the non-defence side of the budget, every last dollar spent at Defence, State, Homeland Security, and Veterans Affairs was crucial in preventing attacks. But then Mr Nabors addressed a question concerning how the freeze would be carried out. And in noting that not all programmes would be treated equally—that some would face budget cuts while others enjoyed spending increases—he compared the selective trimming to the president's decision last year to cut funding for...the F-22.
$300 billion F-35 fighter jet - The US deficit, and its related total debt, are awesome worries. Military outlays need to be reviewed, by qualified analysts who have not bought into the climate of continuing to clothe the emperor in nothing. Those outlays that are not "worth the expenditure of scarce taxpayer resources" in the military program need to be "cut".Naval Open Source Intelligence reports: "Deputy Defense Secretary William Lynn on Thursday [21 Jan 10] underscored the Pentagon's commitment to Lockheed Martin Corp's $300 billion F-35 fighter jet, saying the U.S. government and its allies still planned to buy 3,000 of the new fighters over time.The pentagon's commitment, like a drunken sailor, is toward the $300B for lockheed and the $600B in sustainment costs that the fighter jet represents. "Heavily invested" means we need to throw good money after bad.
Obama's Spending Freeze Is A Budgetary Fig Leaf. - This evening, the White House leaked President Obama's proposed three year freeze on non-defense discretionary spending not including certain Homeland Security, Veterans' Affairs, and International Affairs programs. That spending would be capped for the next three years at its current level of $447 billion, saving $250 billion over the next 10 years. That sounds like at lot of money, but it's not much when compared to the roughly $6 trillion of non-defense discretionary spending in the current services baseline budget. Most of that $250 billion will occur in the last five years of the next decade. With the decline of American Recovery and Reconstruction Act stimulus spending over the next few years, both OMB (Table S-3 on p.28) and CBO (Table 1-5 on p.20) show declining non-defense discretionary outlays from FY11 through FY13 already. Every little bit helps, but this is barely a budgetary fig leaf.
Tiny Jobs Ideas for Main Street, Big Spending Freeze for Wall Street - Robert Reich - President Obama today offered a set of proposals for helping America's troubled middle class. All are sensible and worthwhile. But none will bring jobs back. And Americans could be forgiven for wondering how the President plans to enact any of these ideas anyway, when he can no longer muster 60 votes in the Senate. The bigger news is Obama is planning a three-year budget freeze on a big chunk of discretionary spending. Wall Street is delighted. But it means Main Street is in worse trouble than ever. A spending freeze will make it even harder to get jobs back because government is the last spender around. Consumers have pulled back, investors won't do much until they know consumers are out there, and exports are miniscule.
The Democrat's Circular Firing Squad Set To Go Into Hyper-Mode After News Of Obama's Spending Freeze - Did Obama just seal the Democratic party's fate in November by leaking word of a coming 3-year discretionary spending freeze? Let's quickly point out why this already sounds like a political blunder: It won't do jack to control the budget. It only affects 17% of the budget, and that 17% isn't the part that's growing like crazy. It won't do anything to make conservatives like him. It will piss off liberals -- royally. And indeed that last one is already happening. The Atlantic's Marc Ambinder reports that labor and other liberal special interest groups are venting fury at The White House this evening. Liberal blog Samefacts.com announces that Obama's "self-inflicted lobotomy" proceeds apace. Red-hot netroots site FireDogLake is predictably appalled.
Rachel Maddow Shames White House Economist Bernstein on Obama's Phony "Spending Freeze" - The White House "floated" a lead balloon Monday by telling everyone that Obama's next budget proposal, due February 1, will include a "spending freeze" on several categories of discrectionary spending. It's a complete head fake: there's no freeze, and all they're doing is playing to the unrelenting stupidity of those, like Sen. Evan Bayh, who think the way to put people to work is to spend less money....But Rachel Maddow was correct in her give-no-quarter humiliation of the otherwise sensible Jared Bernstein. Every competent macro economist (well, excluding some freshwater folks) tells us that during a serious, high unemployment recession and "jobless recovery," like the one strangling our economy, government should be spending more to create jobs, not less...
What Will the Spending Freeze Amount To? I did some of the de rigeur outraged base stuff on my twitter feed last night over the proposed post-FY 2011 freeze in non-security discretionary spending. But all that said, it's far from clear what this will mean in practice. For one thing, the implications of freezing non-security discretionary spending at FY 2011 levels depend a lot on what those FY 2011 levels are, and we don't yet know the answer to that question. More to the point, however, we don't know what the details of the proposals are. We've heard a lot of conservative politicians over the past 18 months tout the idea of non-specific across the board freezes or cuts in discretionary spending. That's a terrible idea, and it's not what Obama's proposing. Instead, he's aiming for what you might call a "cut and invest" strategy—slashing certain programs and boosting others. And I think anyone who looks at it would have to admit that there is, in fact, a lot of discretionary spending on programs of little value. My personal view is that Obama's OMB team is absolutely first-rate, so even though I don't endorse the overall zero goal, I'm pretty sure their proposal will consist of wise choices about what can stand to be cut and what needs increasing.
When a Freeze Isn't a Freeze - As I said, the best you can say is that it's an irrelevant political gimmick. But it's horrible politics, short term and long term. I don't care how well poll-tested it is. People always say they like stuff like that, but what they really care about is cash in their pockets.
Obama's Budget Freeze – First, while the freeze is stated as applying to domestic, discretionary budget authority, after allowing for the stimulus package of last year — which raised spending in order to increase the economic growth rate and reduce unemployment, it clearly reduces the effect of the stimulus. And that already looked too small. So the freeze runs directly counter to what turned out to be the signature policy of the administration's first term. Second, while the numbers are small – they amount, very roughly, to 1/6th of 1% of GDP per year accumulating year by year — they will certainly have the effect of reducing employment and growth. Third, the freeze clearly puts an end to any effort to supplement state budgets, or have any sort of jobs program. So we are done with fiscal policy.I am a proud budget deficit terrorist. But I don't understand the logic here. We have a horrible long run budget and debt problem, but this is way too small to change that.
Surprise! We got you a spending freeze - The Center for American Progress is, far and away, the most plugged-in think tank in town. Many of us watch their reports and releases because they're often the first indication of where White House policy and messaging is moving. Not this time. Six days ago, CAP released a report meant to help people spot "deficit peacocks": folks who "like to preen and call attention to themselves, but are not sincerely interested in taking the difficult but necessary steps toward a balanced budget." Among the targets? Those who claim that we could get the budget back to sustainability if we only cut out earmarks, or say that the solution is to simply freeze discretionary spending, are just peddling fiscal snake oil...
Obama Campaigns Against Spending Freezes Proposed by McCain – video
The White House's Brain Freeze - First reactions aren't always the best ones, but my first reaction to tonight's news is that it's a mistake on par with John McCain's "suspending my campaign" gaffe. I'll let the economists talk about the wisdom of curtailing government spending in the middle of a massive consumption deficit, but what concerns me more is the politics. Specifically, the sort of cognitive dissonance that is going to be created in the mind of the average voter when the White House is promising to freeze spending on the one hand (or, more accurately, this will be the media caricature of their gambit), and on the other, trying to defend its stimulus and its health care reform package, trying to excuse the bailout package as a necessary evil, and perhaps trying to champion new programs. Sure, the story is probably being somewhat overreported, and the spending "freeze" will only apply to certain types of spending. And it's applied relative to the already-elevated levels of spending from the FY2010 budget, and not some earlier baseline. There's more bark here than bite, in other words: "freeze on discretionary spending" means something different on K Street than it does on Main Street.
Obama's Learning Freeze - I defer to Noam on the administration's motives for announcing this spending freeze and on the real impact of the freeze on spending. But I want to say two things about it. First, if it was done to appease bond traders (where have we have heard that before?), it is ridiculous. Interest rates aren't exactly soaring these days. It is not 1993. Second, whatever the administration's motive--whether it was to appease bond traders or tea-partiers--and whether the effect on the actual budget is large or small, the administration's announcement is an admission of abject failure. Obama was, after all, a professor, as were two of his main economic advisors, Larry Summers and Christina Romer, but in the past year, they have failed utterly to explain to Americans (let alone the bond traders) how deficits function in recessions.
Obama faces backlash on spending freeze - President Barack Obama was on Tuesday facing a growing backlash from his liberal base in advance of Wednesday night's State of the Union address in which he will make fiscal deficit reduction a top priority for his administration. This shift, which appeared to be aimed at appeasing voters concerned about government spending following his party's stinging defeat in last week's Massachusetts Senate race, includes plans for a three-year partial domestic spending freeze. However, the political difficulties of Mr Obama's shift to the centre were already apparent on Tuesday, with liberal Democrats reacting angrily to the president's new focus on fiscal discipline and Republicans saying it was too little, too late.
The "spending freeze" in context - THE Congressional Budget Office is just full of sunshine this morning: The Congressional Budget Office projects that if current laws and policies remained unchanged, the federal budget would show a deficit of $1.3 trillion for fiscal year 2010. That amount would be slightly smaller than the 2009 deficit but, as a share of the economy as a whole...it would still be the second largest since World War II...Those estimates are not intended to be a prediction of actual budget outcomes; rather, they indicate what CBO estimates would occur if current laws and policies remained in place...That should provide a little perspective on the $250-billion-over-ten-years freeze on "non-security" discretionary spending.
White House Spending Freeze: Useless or Harmful? - The initial reaction to the three year discretionary non-defense spending freeze that Barack Obama is proposing, is that this is not the time. In the middle of a deep recession is no when you want to be cutting government spending. However, it seems that the freeze will not come until 2012. At which point my analysis moves to reaction #2: this is not going to work. For one thing, it's a very small percentage of the budget. It's supposed to save $250 billion over ten years, with the bulk of those savings coming in the out years, since the freeze is not indexed to inflation. That's trivial in light of an accumulated deficit of trillions over the same time period.But even then, it's not likely to work. Congress has to make this happen, and though there is a lot of wasteful government spending, virtually all of it comes attached to some motivated interest group with at least one congressman in its pocket.
Obama's State of the Union Tax Proposals - President Obama assuring us that we could jump-start job creation through tax cuts for businesses and gain needed relief for families through tax cuts for middle-class households. What Obama offers is, as usual, a mixed bag--too much of the same old tax cuts favored by the right for decades , which have not been proven to do much to create new jobs, but some good programs that merit passage. I've got strong doubts that an accelerated depreciation provision amounting to a 10% tax cut for businesses and costing $38 billion can be considered an effective jobs bill, even when it is generously offered to small businesses. Similarly, more preferences for capital gains (exempting them from taxes when the money is invested in small businesses) goes the wrong way--without much assurance of real job creation.
Same As He Ever Was - Paul Krugman Blog - NYTimes - These days quite a few people are frustrated with President Obama's failure to challenge conservative ideology. The spending freeze — about which the best thing you can say in its favor is that it's a transparently cynical PR stunt — has, for many, been the final straw: rhetorically, it's a complete concession to Reaganism.But why should we be surprised? Here's one from the vault. Two years ago, I was deeply frustrated with Obama's apparent endorsement of the Reagan myth. There was a lot of delusion among progressives who convinced themselves, in the face of clear evidence to the contrary, that Obama was a strong champion of their values. He wasn't and isn't.
Pretending To Be Stupid - Krugman - When people ask me what I think of the Obama administration, I have a stock answer: they're not stupid and they're not evil, which represents a vast improvement. I stand by that position. But it's sad that they apparently feel the need to pretend to be stupid: [F]amilies across the country are tightening their belts and making tough decisions. The federal government should do the same. (Applause.) So tonight, I'm proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year. Starting in 2011, we are prepared to freeze government spending for three years. (Applause.) Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don't. And if I have to enforce this discipline by veto, I will. (Applause.)
March of the Peacocks - Krugman - Last week, the Center for American Progress, a think tank with close ties to the Obama administration, published an acerbic essay about the difference between true deficit hawks and showy "deficit peacocks." You can identify deficit peacocks, readers were told, by the way they pretend that our budget problems can be solved with gimmicks like a temporary freeze in nondefense discretionary spending. One week later, in the State of the Union address, President Obama proposed a temporary freeze in nondefense discretionary spending. Wait, it gets worse. To justify the freeze, Mr. Obama used language that was almost identical to widely ridiculed remarks early last year by John Boehner, the House minority leader.
Krugman: America Is In Serious Trouble And Our Government Is Too Wimpy And Incompetent To Do Anything - Paul Krugman trashes the "deficit peacocks" like President Obama who pretend to care about the mountain of debt we're building up without actually doing anything about it. The LAST thing we want to do right now, Krugman says, is cut spending, because it's the only thing keeping us out of depression. But we do need a plan to increase spending now and cut it sharply later...and that's what our government is incapable of providing. From the NYT: The nature of America's troubles is easy to state. We're in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that's keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.
Making sense of Obama's bank reform plans - VoxEU - Obama's sweeping proposal for financial regulation took the world by surprise. Here two of the world's leading professors of finance explain why it is step in the right direction from the standpoint of addressing systemic risk. They also point out a number of drawbacks that should be fixed.
The Volcker Revolution - Providing Some Much Needed Answers - While many pundits will obsess over the markets' gyration in this past week, and make it into a major headline in the quest for eyeballs, the truth is that the S&P turning negative for the year was merely a sideshow (the next real market crash will be much more memorable). No - the real story was the advent of Paul Volcker to his rightful place on the, well, right of President Obama, coupled with the now imminent departure of Geithner and Summers, and the massive question mark that now hangs over Goldman Sachs. Who could have believed that the implications of one Senatorial election could be so profound, yet that is precisely the stuff black swans are made of. The new regime is here, and like it or not, it brings with it a new framework of variables. Yet shifting from the past and looking at the future, the question now becomes what should investors focus on? Just who is this Paul Volcker who will now be the President's seemingly primary economic advisor, and more importantly, what will his policies be like? Luckily, an extensive blueprint already exists...
Volcker's axe is not enough to cut banks to size - Would it really be possible to draw and, more importantly, police a line between legitimate activities of banks and activities "unrelated to serving their customers"? If institutions were encouraged to lend to customers, would they be allowed to securitise and sell those loans? Would they be allowed to hedge the risks of lending? If not, why not? If yes, when does this become speculation? Again, how is size to be measured for a global bank? Would it be relative to the global market, to the market in each country it operates in or in some other ways? And what would happen to foreign banks operating in the US?
Volcker Expected to Testify on White House's 'Volcker Rule' in Senate on Feb. 2 - The Senate Banking Committee is expected to have a hearing Tuesday, Feb. 2, to hear from former Federal Reserve Chairman Paul Volcker about the White Houses recent proposal to limit the size and risk of big U.S. banks.
The Volcker effect on PE - As speculation over the impact of the Volcker vagaries on banks' ownership of private equity assets continues, the Private Equity Council in New York has done a quick tally-up of banks' direct investment in PE funds. As you'd imagine, from the perspective of the PE industry itself, the numbers are not pretty: Next up, since the Volcker rule may or may not outlaw "sponsorship," we can look at how much banks have raised for PE funds from other sources, such as institutions and family offices Answer: $80bn over the past five years, more than half of which came courtesy of Goldman Sachs Principal Investment Area. All of which means the PE industry must be hoping that the politicians start focusing on the following chart. If you want to hit the banks, why are you punching at the wrong target?
The Second Clinton? - On the one hand, last week's Volcker-fest signaled that the Obama administration wants to get tough on Wall Street. Given that they almost certainly don't have the votes in the Senate (and probably not the House, either), this may have been a purely political calculation, and it remains to be seen how much substance lies behind the marketing. But even so it was probably smart politics, since it forces Republicans to either go along (which ain't gonna happen) or come out in favor of hedge funds and proprietary trading. On the other hand, what the —-? The New York Times reports that Obama is planning to call for a three-year freeze on non-security discretionary spending, which means everything except Medicare, Medicaid, Social Security, the Defense Department, Homeland Security, and the VA–that is, everything except the vast majority of the budget. This at a time when the unemployment rate is at 10%.
The Quants: Formula for a Financial Crisis - WSJ - On Thursday, President Barack Obama proposed new rules to curb a number of Wall Street's risky—and highly profitable—trading activities. One target: The secretive trading operations within banks that use large doses of leverage, or borrowed money, to make huge bets on the market. Wall Street says the regulations are unnecessary, and since the financial crisis struck, most banks have cut back on these trading outfits. But when the downturn first hit in the summer of 2007, several of them were among the first to suffer, and collectively they lost billions over a matter of days.
In his new book, "The Quants," Wall Street Journal reporter Scott Patterson suggests how this new breed of mathematicians and computer scientists took over much of the financial system—and the damage they inflicted in the 2007 meltdown.
Will the 'Volcker Rule' Do Anything? - Last Thursday, to great fanfare, President Obama announced what appeared to be a major change in policy toward the financial sector. The president's words and body language marked a significant departure, with much more confrontation towards the banks than has been the case under this administration so far: Unfortunately, as we drill down into the details, learn more from background briefings, and follow various messengers around news outlets, the extent of true policy change may be far from overwhelming.
Is The "Volcker Rule" More Than A Marketing Slogan? - At the broadest level, Thursday's announcement from the White House was encouraging – for the first time, the president endorsed potential new constraints on the scale and scope of our largest banks, and said he was ready for "a fight". After a long tough argument, Paul Volcker appeared to have finally persuaded President Obama that the unconditional bailouts of 2008-2009 planted the seeds for another major economic crisis.But how deep does this conversion go? Increasingly, however, there are very real indications that the conversion is either superficial (on the economic side of the White House) or entirely a marketing ploy (on the political side). Here are the five top reasons to worry....
Off with their heads - At last the Obama administration seems to be contemplating a decisive move against America's banking elite. Until now it has been a very different story – essentially a victory for the big bankers At the critical moment of crisis and rescue – from September 2008 to early 2009 – the Bush and Obama administrations blinked. There was no serious thought of deposing the bankers, who had helped to cause the crisis, or of breaking up their banks. Ordinarily, if an industry plunges into crisis, you expect a serious shake-up. Even if there was some bad luck mixed in with manifest incompetence, the presumption generally is: if your company requires a government rescue, top management needs to be replaced.
Volcker has the measure of the banks (FT) Since Paul Volcker stood by Barack Obama a week ago as the US president unveiled banking reforms devised by "this tall guy", the "Volcker rule" has provoked angst on Wall Street and in Washington. Critics complain that it is a populist measure designed to distract attention from the Democrats' political woes; that it is impractical; that it would put US banks at a disadvantage to European ones; that its target is wrong; and that it would let investment banks escape. Some of these objections, particularly the last, have weight, yet the Volcker rule – that deposit-taking banks would not be able to engage in proprietary trading, or to own hedge funds or private equity firms – is the first time any government has proposed a sensible structural remedy for the problems created by bailing out banks in 2008. For that reason, I welcome the conversion of the US president to splitting up banks rather than letting them remain too big to fail and relying on tough regulation, higher capital charges and mechanisms for winding them down if they get into trouble.
Under fire, Wall St. puts money to work - The Globe and Mail - Banking industry is well represented in Washington - with three lobbyists for every member of Congress. Prof. Ferguson, a vehement critic of Wall Street's pervasive influence in Washington, found that Barack Obama, who would go on to win the Democratic nomination and presidency, and John McCain, the Republican nominee, were both drawing a whopping 36 per cent of their campaign money from the financial industry.
Wall Street's $26m lobbyists gear up to fight Obama banks reform - Banks are mobilising a smooth-running lobbying machine in Washington to battle Barack Obama's plans to limit the size and scope of Wall Street institutions, as financial services firms gear up to stop a shake-up that could slice away large chunks of their operations. Their influence on Capitol Hill is broad – the top eight US banks spent $26m (£16m) on lobbying efforts last year, an increase of 6% on 2008 despite their financial woes, according to Congressional records. And in the first 10 months of 2009, the financial industry donated $78.2m to federal candidates and party committees – more than any other business sector – according to political research institute the Centre for Responsive Politics."The power of the financial services sector in this city has not dissipated at all … they've just done things in a quieter way,"
Obama Hypocrisy Watch: Obama Rips Lobbyists, Then Gives Them Private Briefings - This is what Obama said in the State of the Union address: We face a deficit of trust – deep and corrosive doubts about how Washington works that have been growing for years. To close that credibility gap we must take action on both ends of Pennsylvania Avenue to end the outsized influence of lobbyists; to do our work openly; and to give our people the government they deserve. From The Hill: A day after bashing lobbyists, President Barack Obama's administration has invited K Street insiders to join private briefings on a range of topics addressed in Wednesday's State of the Union. The invitation stated, "The White House is encouraging you to participate in these calls and will have a question and answer session at the end of each call. As a reminder, these calls are not intended for press purposes."…A handful of lobbyists told The Hill on Thursday morning that they received the invitations and were planning to call in.
Quelle Surprise! Proposed Restrictions on Proprietary Trading are a Joke - Yves Smith - True to form, the White House set forth a sketchy program to limit the proprietary trading activities of banks, and it is a vote for the status quo which is being tarted up as something else. I'm amazed that someone of Volcker's stature is allowing himself to serve as the branding for ideas that are sound on a high-concept level, but are being gutted in implementation. The press reports have been suitably vague, but two ideas appear to be central, and they were confirmed by a press background briefing that a kind correspondent sent me. They serve to neuter this supposed reform (I am beginning to think we need to ban the use of the word "reform"; Team Obama has absconded with it. For them "reform" = "anything we do here that sounds important enough that a Cabinet member could talk about it for five minutes". If they keep this up long enough, which they seem determined to do, the term will be utterly useless.) You can drive a supertanker though the loopholes in this proposal...
The Devil is in the Exemptions - We've been discussing financial regulatory reform for well over a year now, and unfortunately, the discussion is still taking place at a very high level of abstraction. Of course, the real battles in financial regulation aren't fought at the theoretical level, nor are they fought at the statutory level. The real battles are fought in comment letters on proposed and interim regulations, in SEC no-action letters, and in various (carefully selected) requests for exemptions. It's not enough to say, "We should limit Wall Street's risk-taking if they're going to have access to the federal safety net." At some point, people have to start getting specific. Here are two specific regulatory changes I'd like to see. They both involve Reg W, so you just know they're exciting.
Financial Services: From Servant to Lord of the Economy - Here is an interesting chart that shows the ascendancy of the financial sector in the US. Commercial banking is largely an administrative function, with a few highly paid decision makers, and many lower paid functionaries and clerks that make a decent if unspectacular wage commensurate with a utility function. Starting with the Reagan privatization revolution, the finance sector began to grow in importance, moving from a utility serving the capital distribution and storage needs of the real economy taking a relatively small percentage of real output, to a dominant force in the national decision making process, controlling the allocation of capital through its powerful influence and lobbying in Washington, placement of its supporters in political positions of power, and the consolidation of the mainstream media into an oligopoly of four or five major corporations. Now we have a financial sector dominated by a relatively few number of multinational corporations that are certainly not utilities serving the productive economy.
Stop the Presses! Deep Thoughts From Jeremy Grantham - Jeremy Grantham's latest is a must read, not least of all for this terrific encapsulation of prop trading, which everyone now believes was just a wonderful and innocent little byproduct of a broken system. Grantham calls it for what it truly is: Everyone in Congress, and anywhere else for that matter, knows prop desk trading (banks trading their own capital like a hedge fund) is a conflict of interest. They may or may not think it important or that it caused this or that problem, but they know it's a real conflict. Congressmen, since when wasn't conflict of interest and poor ethical standards reason enough to change the law? But since we bring it up, of course prop trading was indeed the rot at the heart of our financial problems
Moral Hazard and the Crisis: - Ryan [Avent] doesn't quite seem happy with the conclusion that moral hazard didn't have much to do with this particular crisis, but I think it's the right one. As I argued last year, when it comes to institutions, the moral hazard explanation for what went wrong doesn't really hold much water. In a way, the moral-hazard argument ascribes far too much foresight, intelligence, and rationality to the banks. It assumes they were coldly calculating the chances and consequences of failure and forging ahead nonetheless, when the reality seems to be that for the most part they were blissfully ignorant and arrogant about the flaws in their lending and investment strategies. The crisis, in that sense, was caused less by the fact that the banks were too big to fail than it was by the fact that they never seriously considered the possibility that they might fail.
Too interconnected to fail = too big to fail? - VoxEU- Did allowing financial institutions to become "too big" play a role in the financial crisis? This column argues that being "too interconnected" is also a factor, and that US accounting standards should recognise gross derivatives exposure on the balance sheet to make this interconnectedness, and the resulting exposure, clear.
Wall Street Banks: Too Big To Discipline? - In 2009 the leading issue of moral hazard was "too big to fail." Not surprisingly, the more things change, the more they stay the same. As the congressional bank hearings of 2010 unfold, the new touchstone of moral hazard is "too big to discipline." The heads of Morgan Stanley, J.P Morgan and Bank of America argue that they cannot be reproved in practice or disciplined by being broken up because their gargantuan size is necessary for the health of American banking in a global environment. 'Make us pay, and you'll pay,' is their mantra! Here's how it works: Morgan Stanley's Mack says the bank wants special "leeway" to protect itself if it has to put more skin in the game, otherwise the bank might choke on its own cooking. Goldman Sach's Blankfein — the Lord's self-proclaimed helper — observes that the marketing of dangerous mortgage securities helped reduce the bank's risk (of holding those securities after creating them). J.P Morgan's Dimon implies that it was regulators' fault that they were duped by banking lobbyists, for "that is what democracy is about." Of all the claims made by these executive miscreants, none is more egregious than the 'we're just doing business as normal' claim by J.P. Morgan's Dimon. What is Dimon talking about? He is speaking of Wall Street's intention to pass along to the American public most of the fees and taxes that the Obama administration hopes to levy upon it to help pay for more entitlement programs.
The little-known reason why investment banks got too big, too greedy, too risky, and too powerful. - The surviving investment banks are bristling at efforts aimed at recouping taxpayer losses and forestalling a repeat of the panic of 2008: congressional proposals to tax bonuses, President Obama's planned tax on large banks' liabilities, and his suggestion that banks be prohibited from using taxpayer-insured funds for proprietary trading. That last proposal would " restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs," says Steve Bartlett, CEO of the Financial Services Roundtable, the trade group for megabanks. But if the banks want us out of their business, they should get out of our business first. We've (barely) lived through a 40-year period in which investment banks have imposed themselves on us. They effectively moved into our house, raided our fridge, and set the joint on fire. Now they're complaining that our renovation efforts are cramping their style.
Rep. Dingell: If Banks Are Too Big, Break Them Up - In the latest broadside from Democrats against big banks, U.S. Rep. John Dingell (D., Mich.) introduced a bill Tuesday that would direct the government to simply break up banks deemed too large to fail. Banks ordered to restructure would also face higher capital requirements. The bill, called the "Financial Services Industry Stability Act of 2010," goes much further than legislation that passed the House of Representatives in December, which would give the government more power and discretion to determine if a company is too big to fail (that bill wouldn't necessarily require these firms be broken up). It's unclear whether Rep. Dingell's bill will attract much support, though there is at least one ominous sign for banks: his proposal was modeled after a section of the Endangered Species Act.
Too Small to Succeed? - His plan would limit both the size of banks and the kinds of assets they are allowed to invest in. In other words, the government would take one the most regulated industries in the country – and regulate it more. Unfortunately, this plan, if implemented, would go against much of what economists know about the value of size. Moreover, it would do nothing to address the real problem: "moral hazard." As Columbia economist Calomiris pointed out last fall, when it comes to banks, size has its advantages. A bank that wants to deal in a large international market is better off if it's big. Those who deal with it are also better off because, to the extent that there are economies of scale, some of the cost savings make their way to customers. Also, all other things equal, the larger the bank, the more diversified it is. The more diversified it is, the less likely it is to fail
Financial reform checklist - Here's a useful thing from Barclays Capital banking analysts Jonathan Glionna and Miguel Crivelli. It's a checklist of the steps to various financial reforms; Financial reform being, for the moment, the Financial Reform Bill, Basel III banking regulations, that US banking tax, and US president Barack Obama's planned limitations on the size and scope of financial institutions — part of the so-called Volcker rule.
Fixing the Financial System by Reinventing Debt - The financial sector came to represent an abnormally large share of the U.S. economy over the past decade. It needs to shrink. And bashing makes things smaller, right? Still, it's usually more interesting (and definitely more HBRish) to think about reinventing rather than tearing down. My colleague David Champion recently offered up a list of several wonkily interesting financial-system reforms we ought to focus on. They included a Capital Markets Safety Board, central clearing and margin collateral for derivatives markets, and more (not less, as the banks want and have so far gotten) mark-to-market accounting. Well, here's another idea that's been making the rounds among economists and finance profs but doesn't seem to have gotten much traction in the wider world: the reinvention of debt.
What banks do and don't want out of new regulation - The buzz in the halls here at Davos continues to be about financial regulation. Yesterday the world's largest banks had a closed-door strategy session, and tomorrow they're meeting with regulators and policy makers, including U.S. Congressman Barney Frank. This afternoon Deutsche Bank CEO Joseph Ackermann gave an update on what the financial services folks are thinking. A lot of these guys get together at what the World Economic Forum calls a "governors meeting," and Ackermann was explaining to an auditorium full of people what they talked about. Pretty quickly, though, Ackermann fell into the "woe is us" routine, complaining that a few rotten apples had given the entire financial services industry a bad name: "Seldom have so few done damage to so many." Really? We're going to do that again?
Global financial regulatory reform falls apart - Felix Salmon Is financial reform shattering into so many different pieces that it'll never become the strong, coherent, globally-unified project that it needs to be to get popular support and avoid regulatory arbitrage? I fear so. For one thing, there are literally more representatives of Bill Clinton here in Davos than there are of Barack Obama. If the Obama administration is serious about its newest ideas for regulatory reform, especially the Volcker Rule, it would have made a great deal of sense to send Paul Volcker — or at the very least someone like Austan Goolsbee — to Davos, to try to get the rest of the world excited about it. But they didn't.And even the president himself doesn't seem to wedded to it. Here's the relevant bit of his address last night:
Financial system reform from first principles - VoxEU - The debate over reform of the financial system has intensified even as the crisis has started to recede. This Policy Insight argues that too much investment activity has been able to operate without detection by regulators. To prevent a repeat crisis, regulators must have an informational advantage over market participants to assess the weaknesses in the financial system as they develop.
A proposal for genuine financial reform - "Is the president finally getting serious about real financial reform? Last Thursday, Obama called for the biggest regulatory crackdown on banks since the 1930s, proposing strict limits on the size of financial institutions and a ban on risky activities such as proprietary trading and internal hedge funds." So writes Marshall Auerback in a new policy paper. Although the proposed regulations are a good start, Auerback argues, "a more broadly based approach, which incorporates all financial services intermediaries, might ultimately be required."Please read Marshall Auerback's timely new paper (PDF, 5pp.).
BANKING REFORM VS. BANKING REFORM - David Champion of the Harvard Business Review is unimpressed with the Obama administration's proposal on banking reform. In fact, he's downright dismissive: "The Obama reform... seems to be neither radical nor particularly useful, except perhaps as political theater," Champion writes. Of course, that's far from the consensus view, at least when surveying the movers and shakers. Britain's central banker Mervyn King seems to be in favor of Obama's plan. Ditto for OECD's secretary general.
Alistair Darling warns Barack Obama over banking reforms In an interview with The Sunday Times, the chancellor made clear that he saw serious shortcomings in the American approach. "It is always difficult to say ex ante that you would never intervene to save a particular sort of bank," he said. "In Lehman, for example, there wasn't a single retail deposit, but the then American administration allowed it to go down and that brought the rest of the system down on the back of it. "You could end up dividing institutions and making them separate legal entities but that isn't the point. The point is the connectivity between them in relation to their financial transactions."
International Rift Grows Over Financial Reform – NYTimes. Recent comments by Prime Minister Gordon Brown and chancellor of the Exchequer Alistair Darling highlight the different approaches to overhauling financial regulation. Mr. Brown's government favors a global tax on financial transactions; President Obama has called for a levy on banks based on the size of liabilities, excluding deposits, as well as a divestiture of proprietary trading and hedge-funds and private-equity fund activities . Mr. Brown seemed nonplussed with the American approach. "In the American circumstances, it may be necessary for the private-equity and hedge-fund work to be separated," Mr. Brown said on Monday, according to Bloomberg News. "We don't have that issue here."
Lord Myners calls time on 'greed is good' bank culture - Guardian - Lord Myners, the City minister, has called for an independent review of the investment banking industry and the "greed is good" culture that he says has permeated many areas of society.Barely a year since taxpayers funded a multibillion-pound bailout of the industry, investment banks have bounced into profit and are paying out big bonuses. As executives at Goldman Sachs, the highest profile City player, begin to tell staff of their annual bonus payments tomorrow , Myners calls for a rethink. He warns the industry it cannot continue to rely on taxpayers' "charity".
Meryvn King Calls for Structural Overhaul to Banking Industry - Mervyn King, the governor of the Bank of England, gets it. Why does he have so little company on this side of the pond? King discussed what it would take to fix the financial services industry, and it's more ambitious than anything you see under consideration in the US. Per the Independent: The Governor said he advocated a "three-legged stool" approach to shake up the industry. This would consist of raising capital requirements, the creation of living wills for winding up banks if they fail, and an overhaul of the industry's structure…Changes would not occur overnight, he warned. "Whatever the pros and cons of various alternatives, the system that has the least going for it is the present system.
Mervyn King rubbishes Gordon Brown's Tobin plan, allies himself with Barack Obama – Telegraph - Addressing the influential Treasury Select Committee, Mervyn King dismissed Mr Brown's plan for a tax on financial transactions, the so-called "Tobin tax". He said: "I don't know anyone on the international circuit who's enthusiastic about it ... Of all the measures being considered, the Tobin tax is probably at the bottom of the list." The Prime Minister has been a staunch advocate of the tax since first floating the idea at November's G20 meeting at St Andrews. Earlier this month, he wrote in a newspaper article that "the IMF is looking at ... a global financial transactions tax" and, in December, the Treasury said "international coordination is both feasible and enforceable".
Volcker plan: Central bankers' chorus of support -It took them a while to react, but central bankers are beginning to voice their approval of US plans to limit bank trading, aka the 'Volcker plan'.Yesterday Mervyn King voiced his approval, saying that, thanks to Mr Obama's plan, 'radical reform' was at last on the table. He qualified his support by saying any measures should be part of a 'major structural change'; one proposal alone would not solve the problem.Today Jean-Claude Trichet has added his support, saying the US plans were a 'step in the right direction' and that the ECB was examining the plans with great care. "They go in the same direction of our own position, namely ensuring that the banking sector focuses on financing the real economy, which is its key role," he said. He added that international co-ordination was important.
Post-Shame - It seems to me that over the past decade, in the United States, the state and a narrow circle of powerful interests—banks, energy companies, and private health insurers in particular—have simply given up trying to persuade the rest of us that their interests were our interests. Could we be moving in the twenty-first century to a state that practices domination without hegemony? Or, to put it in plain English, will the state shamelessly turn itself completely over to serving the interests of a powerful few without bothering to pretend that it's not? And if it does, how should we respond?
Q&A With Simon Johnson On Financial Reform - Last May, former chief economist of the IMF, Simon Johnson, wrote an Atlantic article explaining how policymakers should act to avoid allowing banks to break the U.S. economy again. Now that financial reform is finally underway in Washington, we thought it might be useful to touch base with Johnson to get his views on the reform effort thus far. Our questions and his answers are below
Blaming Bonuses is Politically Easy but Wrong - A senior aide to a Congressman emailed me regarding the debate on Capitol Hill. I responded: Nell Minow knows what she is talking about, but this paragraph on page 5 is the money shot: But the key is the board. It is unfathomable to me that many of the very same directors who approved the outrageous pay packages that led to the financial crisis continue to serve on boards. We speak of this company or that company paying the executives but it is really the boards and especially their compensation committees and until we change the way they are selected, informed, paid, and replaced we will continue to have the same result. Until we remove the impediments to shareholder oversight of the board, we cannot hope for an efficient, market-based system of executive compensation.Pay can't be reformed unless corporate governance is reformed.
Wall Street Firms Cut Pay, 'Buckling' to Washington (Bloomberg) -- Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.'s investment bank slashed their compensation in the fourth quarter, responding to political pressure that will probably persist as details of bonuses for their top executives emerge in coming weeks. The three Wall Street firms set aside $39.9 billion for pay in 2009, below the 2007 record of $44.7 billion. The total fell short of the $46.1 billion five analysts expected this month and is almost $10 billion less than what some analysts estimated in October.
Are Obama and Geithner on the same page? - It sounds as though there's some disagreement between President Obama and Treasury Secretary Tim Geithner about what exactly is being proposed in the latest populist plan to rein in Wall Street's biggest banks. Tom Petruno of the LA Times notes that, in this PBS interview last night, the main man at the Treasury Department demurred when pushed on the subject of "breaking up the banks". In looking at the transcript, it seems clear that there's some kind of a disconnect.
Doubts at Fed Over A.I.G.'s $30 Billion Payout - NYTimes - Weeks after rescuing the American International Group with an $85 billion taxpayer loan in late 2008, Federal Reserve Board officials rejected a proposal that would have forced the insurer's trading partners to return $30 billion in cash that they had received from A.I.G. in the preceding months. The Fed chose instead to let the banks keep the cash and to receive additional billions from taxpayers. This decision was made, internal documents show, after two Fed governors expressed concern that such a plan might be "a gift" to the company's trading partners, including Goldman Sachs and Société Générale, a major French bank.
A Rift at the Fed Over the Bailout of A.I.G. - NYTimes - New documents submitted to Congressional investigators examining the 2008 rescue of the American International Group show that officials at the Federal Reserve were deeply divided over the structure of the bailout and its long-term implications.At the same time, regulators had to contend with major banks that were A.I.G.'s trading partners and were unwilling to accept a discount from the government when closing out the contracts the banks had struck with the insurance giant. Ultimately, the government decided to make the banks whole on the contracts, a decision that the documents say was approved by Timothy F. Geithner, the Treasury secretary who, at the time, was president of the Federal Reserve Bank of New York.
More on N.Y. Fed's Actions on A.I.G. Details - NYTimes - As a House oversight committee prepares for a Wednesday hearing over the government's handling of the American International Group's bailout — an event that will feature testimony from Treasury Secretary Timothy F. Geithner — more documents are emerging about efforts to keep details of that rescue confidential.Documents obtained by The New York Times on Sunday disclose correspondence between the Federal Reserve Bank of New York, A.I.G. and the Securities and Exchange Commission over how to keep elements of the bailout from being publicly disclosed. Among them is a request by the New York Fed to the S.E.C. that essentially would have locked up most of the documents pending a confidentiality review. Read the unearthed correspondence after the jump
The Press Angle of the Fed's Backdoor-Bailout Cover-up - Whatever Tim Geithner's New York Fed was trying to hide in the AIG backdoor bailout was so volatile it was deemed worthy of national-security-like classification, and the Fed reacted to media FOIA requests for information by withholding more information. Reuters, gets the scoop on emails that detail the discussion between the Fed, AIG, and the SEC. Hello! They really didn't want that information out there. Which, of course, means we really need that information out there.
Fed E-Mail to Geithner Cites Bank Benefit From AIG - Bloomberg -- Tim Geithner, who has denied that the financial condition of American International Group Inc.'s bank counterparties was a consideration in structuring the insurer's bailout, was told by a senior colleague that the rescue was a way to remove "uncertainty" for the firms. Buying mortgage-linked assets from banks was better "from a financial-stability perspective" than other plans to shield AIG from losses on contracts guaranteeing the bonds, Margaret McConnell, then a Federal Reserve Bank of New York vice president, wrote in an e-mail to Geithner on Oct. 22, 2008. Geithner led the New York Fed at the time of AIG's rescue and McConnell's e-mail
Revealed: See Who Was Paid Off In The AIG Bailout - A key question at the heart of the controversial bailout of AIG is just how much money the government lost. The Federal Reserve and Treasury Department have worked to keep that number secret and to conceal who was on the winning end. An unredacted document obtained by the Huffington Post list the damage in detail. Goldman Sachs alone, for instance, got $14 billion in government money for assets worth $6 billion at the time -- a de facto $8 billion subsidy, courtesy of taxpayers.The list was produced as part of a congressional investigation led by the House Oversight and Government Reform Committee into the federal bailout of AIG.
SEC mulled national security status for AIG details (Reuters) - U.S. securities regulators originally treated the New York Federal Reserve's bid to keep secret many of the details of the American International Group bailout like a request to protect matters of national security, according to emails obtained by Reuters.The request to keep the details secret were made by the New York Federal Reserve -- a regulator that helped orchestrate the bailout -- and by the giant insurer itself, according to the emails. The emails from early last year reveal that officials at the New York Fed were only comfortable with AIG submitting a critical bailout-related document to the U.S. Securities and Exchange Commission after getting assurances from the regulatory agency that "special security procedures" would be used to handle the document.
Oddities of the Blackrock-AIG report - TIME - So far it appears the most noteworthy document of the 250,000 pages obtained by the House Committee on Government Oversight and Reform, which is holding a hearing on Wednesday on AIG's government bailout, is a 44-page powerpoint presentation put together by bond firm Blackrock analyzing the insurer's ability to negotiate haircuts on its largest CDS contracts. Blackrock made the presentation on November 5, 2008, to either AIG or the Federal Reserve Bank of New York, or more likely, since the bailout was in full swing by then, both. It was later decided that AIG should pay all of the counterparties 100 cents on the dollar, which since the government was making the payments ended up being essentially a backdoor bailout to Goldman Sachs and a number of European banks.Many have drawn the conclusion that the Blackrock report suggests that AIG had to pay 100 cents on the dollar. Not sure I agree. Nonetheless, that conclusion has led a number of people to wonder what else AIG, the Federal Reserve, and Tim Geithner might be hiding. So I have spent the morning going through the confidential Blackrock-AIG report and here are some oddities it includes. You can decide if hiding this stuff was worth the lengths the Fed went to try to keep it hidden
Is There An Overlooked Reason for Fed Secrecy on AIG? - Yves Smith - I have a nagging suspicion that the people who are pouring through various AIG-related disclosures may be missing key points or snookered into interpretations that may be unduly flattering to various banksters.The focus of the recent investigations into Fed secrecy relative to AIG takes up the theme that the Fed was anxious to hid the fact that it had paid out 100% of the value of toxic CDOs to various AIG counterparties. That is because that concern crops up repeatedly in internal communications. A second reason cited is that the Fed wanted to hide who benefitted most from the rescues (as in seeing the various transactions would allow one to see which CDOs had the deepest discounts). I have trouble with theory 2.
Under Fire, Geithner Calls A.I.G. Bailout Essential - NYTimes - The questioning was heated and sometimes took on the air of a cross-examination as Mr. Geithner said that a collapse of A.I.G. would have been catastrophic and would have put the United States at risk of a Great Depression. His critics on the House Oversight Committee, most of them Republicans but some Democrats, made clear that they had heard this many times before and that they wanted something else. In fact, Mr. Geithner has appeared on Capitol Hill 22 times since becoming Treasury secretary a year ago, often to answer questions about A.I.G. "We're getting a lame story," Mica, of Florida, complained. "I don't know why we shouldn't request your resignation."
Geithner Defends Big AIG Payouts - WSJ - Treasury Secretary Timothy Geithner batted back an assault from U.S. lawmakers Wednesday over the bailout of American International Group Inc., saying he took "full responsibility, and great pride" in his decisions, including a controversial one to pay banks in full on contracts they had with the insurer. In the widely anticipated House hearing, members of both parties lambasted Mr. Geithner and his former employer, the Federal Reserve Bank of New York, for giving banks a "piggybank full of taxpayer dollars" and then adopting an "absolute code of silence" in resisting disclosure of the transactions.Mr. Geithner repeatedly characterized the government's choices in the giant insurer's rescue as "tragic" and "terrible." But he maintained that the November 2008 decision to pay off banks in full to tear up $62 billion in contracts that were causing AIG to bleed cash was the right one
Secretary Timothy F. Geithner Written Testimony House Committee on Oversight and Government Reform January 27, 2010 - (15pp pdf)
The Geithner - AIG Hearings - I spent all morning watching Treasury Secretary Tim Geithner's testimony before the House Committee on Oversight and Government Reform. Fortunately, I can summarize it for you briefly: a string of representatives repeatedly questioned Geithner on why AIG's counterparties were paid off at par - 100c on the dollar - and Geithner repeatedly answered (not a direct quote now, ) "As I said previously, that was the best option available at the time for the American Taxpayers." Geithner insisted that there was no intermediate option, like 90c on the dollar, because such a restructuring of the contracts would have constituted a default, which would have resulted in all financial hell breaking loose in the United States.Later, Hank Paulson repeated this claim. In addition, Geithner testified that he had recused himself from decisions related to the disclosure of the payouts, and that it was not his decision to keep the payouts under wraps. A string of Congressmen then told Geithner that they didn't believe him.
Bernanke Answers Questions on AIG - WSJ - In the following letter sent to Rep. Darrell Issa (R., Calif.) Fed Chairman Ben Bernanke responds to questions about American International Group: (text)
AIG failure would have meant 'complete collapse' of financial system, Paulson says - Former Treasury Secretary Henry M. Paulson is sticking with the party line: Allowing AIG to sink would have unleashed economic Armageddon, he says."Had AIG failed I believe we would have seen a complete collapse of our financial system, and unemployment easily could have risen to the 25% level reached in the Great Depression," Paulson says in remarks prepared for the House Oversight and Government Reform Committee. The panel is probing the details of the $182-billion bailout engineered by the Federal Reserve in September and October 2008. Specifically, the committee is probing whether major AIG creditors including Goldman Sachs Group -- which Paulson chaired from 1998 to 2006 -- in effect got "back-door bailouts" because the Fed allowed AIG to pay them in full. As for AIG's payments to Goldman and other creditors, Paulson pleads ignorance.
Geithner's AIG Bailout - Geithner's answer boiled down to this: the decision in early November 2008 to pay 100 cents on the dollar was part of a broader effort to save AIG and it prevented an economic catastrophe; and when he was nominated to serve as treasury secretary, he recused himself "from involvement in monetary policy decision, policies involving individual institutions, and day-to-day management of FRBNY." Geithner said he therefore had nothing to do with the nondisclosure decision in December 2008. But Geithner didn't recuse these AIG matters up from his office, he recused them down to the vice president of the NY Fed. Apparently, decision-making over tens of billions of dollars of taxpayer money wasn't deemed a top-level priority by him or his predecessor, former Treasury Secretary Henry Paulson, who also testified. In fact, Congresswoman Marcy Kaptur discovered through her questions that no formal recusal agreement outlining Geithner's new responsibilities (or lack thereof) was ever executed.
AIG Doc SEC Dubbed "Confidential" Until 2018 - This is the document the Congressman was talking about during his opening remarks in today's committee interviews — It was dubbed confidential by the SEC at the NYFRB's request until 2018, and subsequently uncovered via committee subpoena. PDF here - Scribd Embed here - UPDATE: Huff Po has more
Breaking: Darrell Issa Requests Subpoena in AIG/Fed Bailout Cover-Up - Yves Smith - Rep. Darrell Issa of the House Oversight Committee has asked to Committee Chairman Towns to subpoena more documents from the Fed regarding its decision-making process in the AIG bailout. Readers have no doubt noted that the efforts so far have been to try to infer how much Geithner was involved in this process. We've noted before that this focus falls short, that major decisions on AIG MUST have also gone to the Board of Governors, or at least to Bernanke. Issa believes there is evidence that says Bernanke overruled his staff and authorized the rescue: Request by Darrell Issa for subpoena for further Fed documents.
AIG Scandal: Fed as Chump or Fed as Crony? - Yves Smith - No matter which way you look at it, the picture that is emerging of the Federal Reserve, as revealed by the ongoing probes into its AIG bailout, is singularly unflattering. The explanations for its actions can only support one of two interpretations: that the Fed was a chump, taken by the financiers, or a crony, and was fully aware that it was not just rescuing AIG, but doing so in an overly generous way so as to assist financial firms in a way it hoped would not be widely noticed or understood. The problem with this sort of back-door subsidy, aside from its dubious propriety, is that at best, it's sorta random (who benefits isn't necessarily who is in most need or more deserving of help, just who happens to be lucky enough to be associated with AIG train wreck), and at worst, it rewards stupidity and duplicity.
AIG, Logic, Insanity, and Tim "I Saw Nothing" Geithner --Go read: If you're only reading one post, see FT Alphaville, which incorporates and expands upon...Tom Adams and Yves Smith's posting at Naked Capitalism discussing the document and the reality of the situtation....the document itself is available from either The Long Room or the Huffington Post. If the FRB of NY really believed that their only option was payment in full and not telling anyone about it, then Tim Geithner's leadership abilities make Ben Bernanke look like Dwight Eisenhower.
New York Fed documents reveal more detail about AIG bailout - On the frenzied day in September 2008 when the federal government bailed out insurance giant American International Group, Timothy F. Geithner logged dozens of calls with top Wall Street executives, Washington regulators, political leaders and even investor Warren Buffett. Records show that Geithner participated in nearly 70 calls between 7:45 a.m. and 10 p.m. on Tuesday, Sept. 16, as officials worked to stabilize AIG -- first through private loans and finally through public assistance. They feared the company's collapse might trigger other failures and endanger the financial system. Geithner spoke most often to Federal Reserve Chairman Ben S. Bernanke and then-Treasury Secretary Henry M. Paulson Jr., as well as with AIG chief executive Robert Willumstad. He also shared numerous calls with top financial executives, including Lloyd Blankfein of Goldman Sachs, Jamie Dimon of J.P. Morgan Chase and Vikram Pandit of Citigroup.
Goldman Sachs Drove Most Costly AIG Bargain, Document Shows -(Bloomberg) -- Goldman Sachs Group Inc. was the most aggressive bank counterparty to American International Group Inc. before its bailout, demanding more collateral while assigning lower values to real estate assets backed by the insurer, documents obtained by lawmakers show. A month before the September 2008 rescue, Goldman Sachs approached AIG about tearing up contracts protecting the bank against losses on collateralized debt obligations, or holdings backed by mortgages, according to a BlackRock Inc. presentation dated Nov. 5, 2008. Goldman Sachs was the only counterparty willing to cancel the credit-default swaps and bear the risk of further CDO losses, provided that AIG make payments based on the bank's larger-than-average estimate of market declines. "Goldman Sachs is the least risk-averse counterparty," according to the presentation, which was prepared by the asset manager for AIG and later given to the Federal Reserve Bank of New York. The firm is "the only counterparty willing to tear up CDS with AIG at agreed-upon prices and retain CDO exposure."
Goldman Viewed as Favored by Regulators, Fed Says (Bloomberg) -- Goldman Sachs Group Inc., one of the biggest recipients of funds from the U.S. bailout of American International Group Inc., was seen by the public as favored by regulators, according to an internal Federal Reserve Bank of New York e-mail. The public perception was a reason to reject a December 2008 media request for the names of securities purchased from banks during AIG's rescue, according to the e-mail released yesterday. If the names of the assets were released, the banks, including Goldman Sachs, would be identified as beneficiaries, New York Fed employee Danielle Vicente wrote in the Dec. 4, 2008, e-mail to Fed counsel James Hennessy. The New York Fed has said that releasing the names of banks that were paid to fulfill $62.1 billion in AIG guarantees could hurt the insurer and its counterparties. The internal e-mail, obtained this month by a House oversight committee, indicates Vicente was also concerned that the AIG rescue would be viewed unfavorably if it was known that Goldman Sachs and non-U.S. banks received funds.
Subpoenaed Documents Show Goldman Sachs Offered to 'Tear Up' AIG Derivatives Contracts at 'Right Price' Before NY Fed Took Over Negotiations This is not without complexity. Let us go over what we know. AIG has said they were negotiating "tear-ups" with counterparties at 50 cents on the dollar before the NY Fed told them to 'stand down' in negotiations with counterparties. 'Stand down' was the exact language from emails unearthed last week by Hugh Son of Bloomberg. Goldman openly admits that they were willing to tear up contracts with AIG for the 'right price,' as you will see below. But Goldman CEO Lloyd Blankfein told Angelides and the FCIC panel last week that they were 'never asked' by the the New York Fed negotiators, working on behalf of AIG, to accept any haircut, or less than 100 cents on the dollar. The only logical conclusion is the following -- somebody's lying.
NUCLEAR: Did Goldman Offer To Tear Up AIG CDS? – Oh oh. Remember, Blankfein testified in front of the FCIC at 10:12 AM on 1/13 that he never got a request to take less than 100 cents on the dollar for AIG credit default swap contracts. Well then what's this that Zerohedge dug up? As everybody knows, AIG got a huge government bailout in September 2008 to help make payments on derivatives contracts with banks, including Goldman. Yet in the previous month, Goldman approached AIG about "tearing up" its contracts, according to a November 2008 analysis by BlackRock, then an adviser to the New York Fed. WHAT? Oh yeah. Here's the link to the Zerohedge article, and the paper in question is right here:
The Next Subpoena For Goldman Sachs - Simon Johnson - Yesterday's release of detailed information regarding with whom AIG settled in full on credit default swaps (CDS) at the end of 2008 was helpful. We learned a great deal about the precise nature of transactions and the exact composition of counterparties involved. We already knew, of course, that this "close out" at full price was partly about Goldman Sachs – and that SocGen was involved. There was also, it turns out, some Merrill Lynch exposure (affecting Bank of America, which was in the process of buying Merrill). Still, it's striking that no other major banks had apparently much of this kind of insurance from AIG against their losses – Citi, Morgan Stanley, and JPMorgan, for example, are not on the list. This information is useful because it will help the House Oversight and Government Reform Committee structure a follow up subpeona to be served on Goldman Sachs...
AIG exec's big loan from Blankfein - Call them the friends of Lloyd Blankfein. Months before the government negotiated a cushy deal in which the hobbled American International Group paid several banks top dollar for esoteric securities that had collapsed in value, a top AIG official got himself a sweet deal on a mortgage from Blankfein's firm, Goldman Sachs. Rodney O. Martin, chief operating officer of AIG's life insurance unit, and his wife, Deborah, got a 30-year, $4 million loan from Goldman's bank to buy an apartment at 15 Central Park West, which Blankfein calls home. Under the terms of the mortgage, the Martins were charged a 4.8 percent interest rate, and were required to make interest-only payments for the first 10 years. The interest rate was about two percentage points less than the average rate at the time. The loan came just before several banks, including Goldman, received billions from AIG to settle derivatives contracts under a plan sanctioned by the Federal Reserve Bank of New York.
What Congress missed at AIG-Geithner hearing - As a matter of course, one congressman yesterday brought up Geithner's past tax troubles. And everyone mentioned the apparent conflict of interest that occurred when AIG was bailed out by taxpayers and Goldman Sachs -- Paulson's old firm -- just happened to score enormous benefits. At one point, Paulson was asked to stay for an additional eight minutes of questioning. When the clock hit 10 minutes, Paulson asked to be excused like he suddenly had a bathroom emergency. But Paulson and Geithner were very lucky that their interrogators really didn't know what they were doing, so they took their inquisition down a dead end. What do I mean? The main line of questioning is about AIG…The problem is, Paulson and Geithner have an easy explanation that they invoked over and over.
AIG's mysterious Schedule A finally revealed - Reuters - Reuters has obtained a copy of the five-page document the giant insurer and the New York Fed had asked the Securities and Exchange Commission to keep confidential. The effort by the New York Fed to keep the document under wraps has sparked a furor on Capitol Hill and was the subject of a hearing on Wednesday by House Committee on Oversight and Government Reform. The unredacted version of the "Schedule A – List of Derivative Transactions" fills out some of the missing pieces in the AIG bailout, in which an entity set-up by the New York Fed effectively funneled tens of millions of dollars to 16 big U.S. and Europeans banks that had bought credit default swaps from the insurer. The unredacted version of the Schedule A enables some to identify all of the 178 mortgage-related securities, or collateralized debt obligations, that AIG wrote insurance-like protection on.
Secret Banking Cabal Emerges From AIG Shadows. - BusinessWeek - The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter. Wednesday's hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials. We're talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system -- apart from the matter of AIG's bailout -- deserves further congressional scrutiny. Treasury Secretary Timothy Geithner was head of the New York Fed at the time of the AIG moves. The hearing before the House Committee on Oversight and Government Reform also focused on what many in Congress believe was the New York Fed's subsequent attempt to cover up buyout details and who benefited. By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn't subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.
U.S. Opens Probe Into AIG's Payout to Partners - WSJ - A U.S. government investigator is opening a probe into disclosures made as part of the government's rescue of American International Group Inc. when the company's trading partners were paid billions in November 2008. Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program, plans to tell a U.S. House panel Wednesday that he is investigating whether there was any "misconduct relating to the disclosure or lack thereof" surrounding the deals, in which banks who had traded with the giant insurer got paid in full on $62 billion in bets on soured mortgage securities.
AIG Draws $2.4 Billion From Fed Credit Line, Most Since October (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., increased its borrowing under a Federal Reserve credit line by the most since October to repay debt from an expiring government commercial paper program.AIG owes $25.8 billion on the line, about $2.4 billion more than last week, according to Fed data released yesterday. The draw has increased for six straight weeks. The company said in November that it may borrow additional funds from its five-year Fed credit line to make payments on maturing commercial paper.AIG, which got a $182.3 billion government bailout, had relied on the U.S. commercial paper program as firms including MetLife Inc. and General Electric Co. reduced their use of government-backed funds. New York-based AIG said it lost access to traditional sources of liquidity after the 2008 rescue.
Additional Perspectives on the AIG Fiasco While Tim Geithner may hope the AIG situation is now dead and buried, it is likely anything but, with the recently launched investigation into disclosure fraud by the SIGTARP, and the relentless efforts by Darrell Issa to metaphorically crucify the tax-challenged treasury secretary currently ongoing.As these noble pursuits continue, we ask two simple questions: In Yesterday's hearings, it became clear that everyone essentially recused themselves of any oversight over the AIG disclosure issue, including Hank Paulson, with most, even Bernanke, claiming they had no control over the counterparty decision-making process. We ask - then who did? Why did the Fed not guarantee AIG's assets ahead of the firm's implosion. Surely, the realization, which as everyone trumpets these days, that AIG's failure would have destroyed the world should have been known to at least one person in authority?
Darrell Issa's Special Report On AIG Could Be The End Of Geithner - We are currently going through the recently released Special Report by Darrell Issa: "Public Disclosure As A Last Resort: How the Federal Reserve Fought to Cover Up the Details of the AIG Counterparties Bailout From the American People," and a cursory perusal indicates that this could be proverbial end for Tim Geithner....this section is critical: When asked directly if he was involved in the efforts by the FRBNY to prevent disclosure of the AIG counterparty payments, Secretary Geithner responded, "I wasn't involved in that decision." On January 8, 2010, FRBNY General Counsel Thomas Baxter wrote Ranking Member Issa to clarify the role of then-President Geithner: However, documents received by the Committee suggest that Secretary Geithner was, at a minimum, engaged personally in reviewing what information about the AIG bailout would be revealed to Congress and the public.
The Question Geithner Can't Escape: Why Pay Off AIG's Partners? - The latest political clamor over AIG, poised to combust next Wednesday at a House hearing on backdoor payments to banks that made risky deals with the company, centers on the Federal Reserve's effort to conceal details of those payments. But senior officials, including Treasury Secretary Timothy Geithner, have so far evaded a key question: Why were AIG's trading partners fully paid with taxpayer money instead of being told to take a loss? "They chose to pay some people off entirely," Bill Black, an economics and law professor at the University of Missouri and a leading critic of the government's bailout managers, said in an interview. "They have never given a coherent explanation of why those particular folks. Under their own logic, there was no reason to pay off these parties at 100 cents on the dollar."
Tim Geithner Had Some Chats About The AIG Bailout He Wasn't Involved In - Timmy G, who, as we know is getting really frustrated with the whole AIG bailout storyline, apparently had a nice convo with Warren Buffett, Jamie D. and Lloyd on the day AIG was bailed out, at least according to phone logs submitted by the Fed in response to a subpoena last week from the House Oversight and Government Reform Committee. Tim- who will testify next week- is maintaining, he never "looked at AIG memos" and that he "wasn't involved in any AIG decisions." Actually, he doesn't even have any idea what AIG is. That talk with the big boys? Wasn't him on the phone. Now leave him alone. Go harass Ben.
The Nation: Geithner Must Go : NPR - The first casualty of the president's political debacle will likely be Timothy Geithner, the severely over-confident treasury secretary well known as a lapdog of Wall Street. Geithner was effectively repudiated by the president last week when Barack Obama abruptly announced a new, more aggressive approach to financial reform. But the immediate threat to Geithner is the scandal of collusion and possibly illegal behavior gathering around the Federal Reserve Bank of New York for its megabillion-dollar takeover of insurance giant AIG. Tim Geithner is standing in the middle of the muck because he was still president of the New York Fed in the fall of 2008 when it rescued AIG with tons of public money (now totaling $180 billion). The facts of the deal are catching up with him now and none are good, since they raise doubts about his competence and his public integrity. This scandal has smoldered for several weeks in newspaper business sections, but is about to grab front-page attention. The House Oversight Committee, chaired by Edolphus Towns, has turned up damning evidence and called Geithner to testify the week of January 27. Committee investigators are poring through some 250,000 e-mails and subpoenaed documents and finding smoking revelations. House Republicans smell blood. House Democrats, given the present climate of popular discontent, are unlikely to rally around tainted goods. Perhaps the most explosive revelation is that Geithner's subordinates at the New York Fed instructed AIG executives to evade securities law and conceal from the public the $62 billion the insurance company paid out on contracts with the largest investment houses and banks.AIG was already bankrupt and 80 percent owned by the government, kept afloat solely with the billions being injected by the central bank. Yet the Fed told the company to pay off the bankers at full value—100 percent on the dollar—without negotiating a better deal for the public.
Is Geithner Toast? - Why would Geithner have wanted to hide the size of the bailout? And who did this really benefit? Treasury Secretary Tim Geithner's job is on the line. That seems to be the consensus of just about every Wall Street executive who deals with the White House on economic matters, and congressional staffers involved in financial-policy issues. The lousy economy he inherited last January got even worse under his watch. And while Main Street continues to suffer with a staggering 10 percent unemployment, Wall Street was handing out record bonuses, the direct result of "too big to fail" policies Geithner has advocated, and the president's flawed economic agenda of higher taxes on small businesses. The only question is how much longer Geithner can hang on
Geithner: Dead Man Walking? - Ritholtz: As the pile of revelations regarding the NY Fed's bailout of AIG gets deeper and uglier, the sense that Treasury Secretary — and former NY Fed President — is a short timer. Jim Bianco mentioned Geithner was a dead man walking — and He has been for sometime. The White House is just waiting for the right time to dump him.That might be true — and changing the preserve the status quo parts of the Economic team is a good idea. But what does that say about Summers? In some quarters, he is the most important person on the planet — Politico shows the President's calendar everyday. He has a daily economic briefing at 10AM everyday when he is in town. This briefing is run by Summers. In other words, Summers controls the economic information flow to the President. With this as a job description, Treasury Secretary is a step down . . .
Goldman Parachute Awaits Geithner to Ease Fall: (Bloomberg) -- Treasury Secretary Timothy Geithner is scheduled to testify to the House Oversight and Government Reform Committee tomorrow. The hearing is certain to be good theater. Whether it reveals good government, or a government working for the few at the expense of the many, is another matter. If it turns out Geithner failed to act in the best interest of taxpayers in the bailout of American International Group, Inc., he is unworthy of the public trust and should step down. Axing Geithner might be good for president and Treasury secretary alike. Obama would be seen as an ally of the people. Geithner would be free to claim his just reward: that plum offer from Goldman Sachs. The circle would be squared. Obama would have his man on the inside.
Geithner on fixing recessions - Treasury Boss Tim Geithner offer this testimony before Congress on the AIG bailout...I could, of course, devote considerable blog space to dissecting and rebutting nearly every sentence Secretary Geithner wrote. In the end, though, that would be tedious and depressing. I will limit myself to a few simple observations.The Secretary seems to have little time for the hypotheses that (a) there is always choice, (b) for every choice there is opportunity cost, (c) aggressively activist fiscal and monetary policy before and during his tenure largely created the economic crisis, and (d) the frenetic, unpredictably lurching policy initiatives on his watch have significantly increased uncertainty in market, making a bad situation worse. Why, o why--apart from the answers found in the voluminous public choice literature about the incentives and constraints facing government officials—would he say such foolish things?
Geithner On Move Your Money: Not A Good Idea - Treasury Secretary Timothy Geithner does not think that Move Your Money is a good idea. Geithner addressed the campaign against too-big-to-fail banks during a recent interview with Politico. While Geithner said he understood the anger against bailed out banks and said that it was fair for bank customers to expect more, he did not explain why he thought that it was a bad idea.
The Problems With The Bank Tax,- Last week the Obama administration announced a plan to impose significant new taxes on banks. It was high political drama. ... The whole tone of the announcement was that of a trip to the woodshed for misbehaving banks. The tax was presented as punitive. The problem here is not the taxes per se. It is that the administration elected to treat the imposition as populist political theater. In doing so it missed the opportunity to articulate a well-reasoned economic policy to deal with too-big-to-fail institutions. .Another problem with treating the tax as punitive rather than regulatory is that it gives the banks and other financial institutions the ammunition to fight it. This administration tends to treat too many of the economic problems it faces as political. They end up being far less effective.
U.S. may exempt Treasuries from new bank tax -sources (Reuters) - The Obama administration is considering exempting U.S. Treasuries from its proposed new tax on banks in order to prevent disruption in the world's most important funding market, market sources said. Wall Street fears President Barack Obama's proposed tax to recover bailout funds could deter banks from tapping short-term loans in the repurchase market -- also known as the repo market -- ultimately making borrowing more expensive. Bankers have taken their concerns to the Treasury Department, which says it is aware of the potential pitfalls and is weighing ways to side-step them. Sources familiar with the discussions said the suggestions included a carve-out for Treasury securities in the assessment of the new tax -- which the White House wants to levy on non-deposit liabilities of banks with assets over $50 billion -- or a method of risk-weighting assets so that risker instruments would be taxed at a higher rate than safer, more liquid securities such as Treasuries.
Don't exclude Treasuries from the bank tax- I'm not a fan of excluding Treasuries from the proposed new bank tax. For one thing, Treasuries are assets, not liabilities: they're technically not covered by the tax in the first place. What's really being talked about here is the repo market, which has grown far too big, and which has made it far too easy for banks to borrow money at ultra-short maturities. It's true that if the repo market shrank dramatically, that might conceivably reduce demand for Treasuries so much that, as JP Morgan has suggested in a research note, the revenue from the fee could be completely offset by the Treasury's increased costs of borrowing. On the other hand, estimates of the effects of reduced demand on Treasury prices are notoriously unreliable.
Banks must raise billions to fend off crisis, says IMF - The world's biggest banks face an impending funding crisis, with a "wall of maturities" fast approaching, and must raise billions more in capital in the coming years, the International Monetary Fund (IMF) has warned. In comments which will reignite fears of a relapse into a second financial crisis, the IMF said that banks have yet to bolster their balance sheets sufficiently and could be vulnerable to a whole range of shocks in the coming months. It also indicated that with governments including the UK and the US borrowing so much in the next few years, there was an increasing chance of a sovereign debt crisis, something which could trigger chaos for public and private sectors alike.
Insure depositors, not banks - Rather than insuring banks, the government should insure depositors individually for losses they suffer on deposits at any FDIC-approved bank, up to a pretty high limit (say $1 million, indexed to inflation). Ordinary households would be unaffected by this change, as most families hold balances far less than the insurance cap. They could continue to deposit funds at the FDIC-approved bank of their choice without fear. Affluent households would no longer be able to play the wasteful game of evading insurance limits by splitting funds among different types of accounts and institutions. The affluent would be expected to monitor and help discipline the firms in which they invest. This is both fair and politically credible. It's fair, because pushing wealth forward in time requires hard information work, and those who wish to push a lot of wealth forward (and earn interest on top!) should contribute to the effort. It's credible, because ex post facto bailouts for underinsured depositors would be a hard sell when the underinsured include only wealthier depositors, who would not be reduced to penury but, at worst, to a level of affluence most households never achieve, simply by maxing out their government insurance.
Overdraft Fee Regulation and the End of Free Checking? - Ron Lieber has a thoughtful column about the future of free checking. Consumers have become quite used to free checking over the last 15 years or so. The impetus for the column is whether the Fed's new overdraft regulations, scheduled to go into effect in July (new accounts) and August (existing) accounts this year will change the financial equation such that free checking is no longer viable. The potential impact of the Fed's overdraft regulation impact is greatly over-hyped. The Fed's overdraft regulation is very weak, especially in comparison to legislation proposed in the Senate and House....
Bank Sues Victim To Avoid Replacing $200k In Stolen Funds - What constitutes adequate security for a bank? PlainsCapital Bank in Lubbock, Texas says what it currently has is enough, and if after all that some crooks still manage to steal your money, it's not the bank's fault. The bank has preemptively sued a business customer, Hillary Machinery, to absolve itself from any liability on what it couldn't get back from the more than $800,000 that was stolen by foreign hackers last November. PlainsCapital argues that it uses every reasonable security method to protect its customers' assets, and it points out that the attackers used valid login credentials. But I'd hope any bank I loan my money to would employ multiple security protocols in the event a particular wall is breached, as in this case. Things like, I don't know, looking for suspicious transaction patterns. Or noticing when a customer's newly authorized computer has an IP address located in Romania instead of Plano, TX.
Swiss halt deal with U.S. that IDs Americans with secret UBS bank accounts - Americans who hid money from the Internal Revenue Service in secret Swiss bank accounts may escape exposure, at least for now. An agreement between the U.S. and Swiss governments that was supposed to blow the cover on 4,450 accounts at Switzerland's largest bank is in danger of collapse. The Swiss government said Wednesday that it has suspended the disclosure of information to the United States under the agreement and may seek to renegotiate the deal. The announcement came days after a Swiss court ruled that it would be illegal for Switzerland to comply with the August accord. The court essentially declared that long-standing secrecy protections trumped the agreement. The decision came in a test case involving a UBS account holder who was fighting to stay in the shadows.
Suspending Money Market Redemptions Is Now Legal; SEC Approves New Money Market Regulation In 4-1 Vote - Zero Hedge discussed a month ago the disastrous prospects of what would happen if the new proposal contemplated by the SEC, which would allow the suspension of redemptions from Money Market Funds, were to pass. Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC's just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: "We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares." Too bad investors' hardships considerations ended up being completely irrelevant
Money Market Funds: No Longer Safe - Here's something you won't see talked about much - unless you dig for it. Zerohedge covered it - the fact that money markets are no longer guaranteed liquid. But look at what The Wall Street Journal had to say: Money-market funds could be forced to pay out less interest under new federal rules designed to make them sturdier.With memories still raw from the 2008 meltdown of Reserve Primary Fund, the Securities and Exchange Commission released rules on Wednesday that require funds to hold more liquid and higher-quality assets and disclose the value of their assets per share more frequently. This makes it sound as though the funds will be safer - and more liquid - right? Well, don't be so sure. Buried in there is this: Suspension of Redemptions: The new rules permit a money market fund's board of directors to suspend redemptions if the fund is about to break the buck and decides to liquidate the fund...
SEC Makes Money Funds Boost Cash After Industry Run (Bloomberg) -- U.S. regulators will require money- market mutual funds to boost holdings of cash and easy-to-sell securities and are weighing further changes the $3.24 trillion industry says might prompt customers to invest elsewhere. Funds must be able to sell 10 percent of their assets in one day and 30 percent within a week under rules approved today by the Securities and Exchange Commission. The SEC's 4-1 vote also imposed new restrictions on buying lower-rated securities and required more disclosure on declines in funds' share prices. "These rules will take important initial steps toward making money-market funds less vulnerable to runs," SEC Chairman Mary Schapiro said at a meeting in Washington.
Ailing Banks Favor Salaries Over Shareholders (NYT) Finding the winners on Wall Street is usually as simple as looking at pay. Rarely are bankers who lose money paid as generously as those who make it. But this year is unusual. A handful of big banks that are struggling in the postbailout world are, by some measures, the industry's most magnanimous employers. Roughly 90 cents out of every dollar that these banks earned in 2009 — and sometimes more — is going toward employee salaries, bonuses and benefits, according to company filings. Amid all the commotion over the large bonuses that many bankers are collecting, what stands out is not only how much the stars are making. It is also how much of the profits lesser lights are taking home.
Banker Pay Illustrated - The New York Times has an article today about how banks are choosing to reward its employees more than shareholders. This phenomenon has been noted before, particularly in the case of Goldman Sachs. There, some shareholders have complained about the amount of compensation. The Times article, in delightful chart format, shows exactly why shareholders should be so unhappy. The NY times says: Roughly 90 cents out of every dollar that these banks earned in 2009 is going toward employee salaries, bonuses and benefits. And here's a chart with some more detail:
Why Are We Donating $2,000 Per Family to Wall Street Bonuses? - President Obama didn't tell us in his State of the Union address. The deficit hawks won't crow about it. Don't expect the Tea Party or Rush and Beck to highlight our generosity either. But the sad fact is this: During the worst year since the Great Depression, with 30 million people out of work or forced into part-time jobs, Wall Street is awarding itself $150 billion in bonus money.....and it comes from us! That's $500 for every man, women and child in the country -- $2,000 for a family of four. (Maybe we should try deducting it from our income taxes as a charitable donation.) Had we not bailed out the financial sector, there would be no bonus pool this year. Zip, zero, ziltch.
Banks Help Employees With Wall Street Pay – WSJ - Despite their tough talk about clamping down on pay, banks and securities firms are using other financial perks to ease the toll on employees. Bank of America Corp. and Citigroup Inc. are doling out shares that employees can sell within months—much sooner than normally allowed. Other giant banks, including Goldman Sachs Group Inc. and Royal Bank of Scotland Group PLC, let certain employees borrow money to relieve personal cash crunches. And some U.K. banks have considered raising base, or cash salaries—funds that won't be subject to the country's new 50% tax on bonuses. Such moves are a contrast to concessions recently made by large financial firms in hopes of defusing public anger, and political retaliation, over the comeback of sky-high compensation. Many banks and securities firms are paying bonuses with a bigger percentage of stock. Goldman, for example, sharply reined in pay and benefits during the fourth quarter. This week, the firm told partners that 60% of their 2009 bonuses will be in the form of restricted stock.
The "FDIC lotto" reason banks aren't lending - "A California Banker" writes to Mish, giving yet another reason why banks aren't lending: If you're a bank with a relatively healthy balance sheet with adequate capital, (like us)you want to maintain surplus capital in order to stay on the FDIC's list of banks they can transfer the loans and deposits from a failed institution into. The problem here is that healthy banks end up competing with each other to have the largest capital surplus and therefore the greatest chance of being anointed in this manner by the FDIC. If everybody was lending, the FDIC would still have to place failed banks' assets and deposits with someone. But instead we get the opposite corner solution, where nobody is lending — except, presumably, for banks which are close to failure and need all the interest income they can get. I wonder whether the FDIC has anybody thinking about how to counteract this syndrome.
This Is What SHOULD Be Happening (FHLB Suit) - This is exactly what I have advocated for the last two years: Morgan Stanley, UBS and Barclays were among banks sued by Federal Home Loan Bank of Seattle, which seeks to recoup more than $2 billion it paid for certificates backed by faulty mortgages. The banks made misleading statements about the asset-backed securities and the credit quality of the mortgage loans that backed them when they sold them to Federal Home Loan, according to six complaints filed in state court in Seattle last month and transferred to federal court starting Jan. 22. The banks also made misleading or "untrue" statements about underwriting guidelines of mortgage-loan originators who were "failing frequently, and increasingly frequently, to follow quality-assurance practices intended to detect and prevent fraud," according to the complaints.
Treasury official, experts wary of commercial real estate crisis Nancy Wentzler, chief economist and deputy comptroller in the Office of the Comptroller of the Currency (OCC), said that while banks started showing slight improvement in their balance sheets in 2009 compared to 2008, the recovery is fraught with risks and commercial real estate is still in the doldrums."We are all waiting for commercial real estate to really hit its stride in terms of credit quality problems and that's very likely to come as we make our way through 2010," Wentzler said. "We are watching that very carefully -- the hotels and you can imagine the multi-family, the apartments, the office buildings -- and significant problems as you would imagine in the boom-bust states like California and Florida and parts of the Midwest."
US banks face risks, could spark downgrades -S&P - (Reuters) - Commercial real estate losses could erode capital at U.S. banks, and ongoing government support may be necessary, especially if the economy worsens, Standard & Poor's said on Wednesday. "We also believe that the combination of elevated credit costs, higher capital requirements, and weak earnings could result in additional bank downgrades in 2010," the rating agency said in a report. "If the economy performs worse than expected, banks could be hit with another wave of significant write-downs, "resulting in a potentially serious threat to weaker banks' capital positions," the rating agency said. The falling value of assets ranging from prime mortgages to commercial real estate loans "could, once again, test confidence in the banking system," S&P said.
Rising Commercial Loan Problems Threaten Regional Banks - Now that most of the TARP money received by the major U.S. banks has been repaid and massive profits and huge bonuses are once more bringing smiles to the faces of American bankers, one might be tempted to conclude that the worst has now passed for the U.S. financial system. However, there are now increasing signs that some more ill-placed bets from the past could once again gate-crash this little party, and quickly turn smiles into tears. According to a recent study issued by Foresight Analytics, a California-based real estate research firm, a tsunami of bad commercial real estate loans is set to hit the U.S. financial system over the next few years, with the mid-cap banks being most at risk of being swamped by the flood.
CRE in SoCal: Vacancy Rates Up, Rents Fall - Overall office vacancy in the fourth quarter in Los Angeles, Orange, San Bernardino and Riverside counties was 18.5%, a substantial jump from 14.4% a year earlier, according to commercial real estate brokerage Cushman & Wakefield."Vacancies are up, and I believe they will continue to go up this year as we have continued job losses," Right now, many firms have shrunk but are still renting the same amount of space they had in fatter days. Before they can grow enough to expand into bigger offices, they need to do enough hiring to fill up what they already have. "All the vacant space out there still doesn't reflect all the jobs that were lost,"
Tishman Speyer: The Grand Walkaway - It's not just homeowners in Phoenix or Miami who are walking away from their mortgages. Tishman Speyer Properties, a big and you would think sophisticated real estate outfit, is doing the stroll on a $4.4 billion mortgage. The company is turning over the keys to more than 11,000 apartments in New York City's sprawling Peter Cooper Village and Stuyvesant Town apartment complex in lower Manhattan, which it bought in 2006 through a partnership that includes investment firm Blackrock. Forget loan modifications; forget Help for Homeowners. This baby was beyond help, The walkaway is bad news for the creditors who inherit a property currently valued at $1.8 billion—
CRE and Moral and Social Constraints to Strategic Defaults - The Stuyvesant Town deal is one of several Tishman Speyer did at the top of the market that the company is trying to save. But the company itself isn't threatened. It took advantage of easy credit and investors' eagerness to buy into real estate during the good times. As a result, it didn't put much of its own cash into deals. Yes, Tishman and Blackrock tried for a loan modification, but when they couldn't obtain one on acceptable terms, they choose to walk away because the property is worth far less than they owe even though they could afford to continue to make the payments. Imagine a homeowner who bought at the top, "took advantage of easy credit", put little or money down, and now finds themselves owing far more than the property is worth. And now imagine they hear of large landlords (or Morgan Stanley last year) just walking away from CRE loans. Does that reduce the social stigma and contribute to residential strategic defaults?
Commercial real estate prices likely to continue falling: Moody's - Prices of commercial real estate properties were battered in 2009, and those price declines are likely to continue. According to Moody's Investors Service, CRE prices rose 1 percent in November. But that trend won't be sustained, Moody's managing director Nick Levidy said. "We anticipate further deterioration in property fundamentals and increases in cap rates," he suggested, acknowledging that "the worst of the value declines is likely over." In the long term, Moody's anticipates, CRE prices will flatten out at roughly 30 to 40 percent below their peak values. Aggregate prices are 43 percent below peak at present.
President Obama Didn't Mention That the Losses Incurred by Fannie and Freddie Were Profits for the Banks - In the context of discussing President Obama's plan to impose a tax on the country's largest banks, the Washington Post told readers that, "he did not mention that the biggest banks had paid back their bailout money, often with the government reaping a profit, although that has not been the case with the large insurer AIG or the auto companies." This is one of the pieces of information that President Obama did not share with his audience. He also did not share the fact that Fannie Mae and Freddie Mac have already lost more than $100 billion. These losses result from buying mortgages from banks for an amount that exceeds their value. In effect, Fannie and Freddie's losses are the banks' profits since they prevented the banks from having to incur these losses.
Freddie Mac: Delinquencies Increase Sharply in December - Here is the monthly Freddie Mac hockey stick graph ... Freddie Mac reported that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 3.87% in December 2009, up from 3.72% in November - and up from 1.72% in December 2008. "Single-family delinquencies are based on the number of mortgages 90 days or more delinquent or in foreclosure as of period end ..."
Fannie Mae: Delinquencies Increase Sharply in November - Earlier I posted the Freddie Mac delinquency graph. And here is the monthly Fannie Mae hockey stick graph ... (note that Fannie releases delinquency data with a one month lag to Freddie).Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 5.29% in November, up from 4.98% in October - and up from 2.13% in November 2008.
Fannie Mae, Freddie Mac delinquencies rise - Fannie Mae and Freddie Mac's home loan delinquencies rose 4.2 per cent in October and the companies modified more mortgages under President Barack Obama's anti-foreclosure program, the Federal Housing Finance Agency said. The number of borrowers at least 60 days behind on home loans owned or guaranteed by Fannie Mae and Freddie Mac rose to 1.65 million in October from 1.59 million in September, and has more than doubled since a year earlier, FHFA said in a report today. Delinquencies of 60 days or more as a share of mortgages serviced by the companies rose to 5.4 percent, from 5.2 per cent."
Fannie, Freddie Chase Bad Mortgages - It is payback time for Fannie Mae and Freddie Mac on some mortgages sold to the finance companies by lenders."Stuck with about $300 billion in loans to borrowers at least 90 days behind on payments, Fannie and Freddie have unleashed armies of auditors and other employees to sift through mortgage files for proof of underwriting flaws. The two mortgage-finance companies are flexing their muscles to force banks to repurchase loans found to contain improper documentation about a borrower's income or outright lies. The result: Freddie Mac required lenders to buy back $2.7 billion of loans in the first nine months of 2009, a 125% jump from $1.2 billion a year earlier. Fannie Mae won't disclose its figure, but trade publication Inside Mortgage Finance said Fannie made $4.3 billion in loan-repurchase requests in the first nine months of 2009.
Russia tried to force a bailout of Fannie and Freddie, Paulson writes - Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said. Paulson learned of the "disruptive scheme" while attending the Beijing Summer Olympics, according to his memoir, "On The Brink." The Russians made a "top-level approach" to the Chinese "that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies," Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.
Barney Frank Says Fannie, Freddie Bye Bye - WSJ - "As I believe, this committee will be recommending abolishing Fannie Mae and Freddie Mac in their present form and coming up with a whole new system of housing finance."Such a salvo from U.S. Representative Barney Frank (D., Mass.) sent shares of the government-sponsored (and government-controlled) housing entities lower this morning.That Fannie and Freddie are a mess of misplaced priorities, culminating from years of public/private influence, is no secret. That the two companies — which went into Federal conservatorship in September 2008 — continue to trade publicly is an even larger conundrum.The U.S. government has poured more than $100 billion into the companies, providing a government backstop to Fannie and Freddie in their role as owners/guarantors of more than $5 trillion in home mortgages.Re-privatization of the companies looks to be off the table. And nationalization, too, may not be in the cards.
Fannie Mae Economist: US Home Price Decline Not Over Yet -(Dow Jones)- The rebound in the will be weaker than usual, with housing likely remaining a drag on it through 2012, (FNM) chief economist Doug Duncan said Tuesday. "It's going to be a modest recovery," Duncan said at a housing conference sponsored by Fannie Mae, a federal housing-finance firm based in Washington, D.C. He expects positive growth, but warns "it won't be strong." Duncan forecasts that U.S. growth will be half the typical 6.5% annual rate seen coming out of a recession, with the economy weighed down by excess housing supply and cautious consumers and lenders.
Housing recovery could take a decade, economists warn - Even as the housing market shows signs of improvement, including in new data released Tuesday, economists warn that it could take up to a decade for many homeowners to regain equity in their homes, while some people in the hardest-hit regions of the country may not see a recovery during their lifetime. Home prices have fallen 30 percent since reaching their peak in 2006, and many economists think they will take another tumble this year as more foreclosures pile on the market. The pace of recovery will vary throughout the country, with homes in the most battered markets taking the longest to regain value. Meanwhile, millions of homeowners who are "underwater" -- owing more on their mortgages than their homes are worth -- face years of negative equity that puts them at a higher risk of foreclosure.
Fake Homeownership - I saw an ad for apartment rental opportunities in Sacramento, CA. The rent was very cheap, but you had to post a gigantic security deposit, sign away rights related to eviction and give proof that you've never been convicted of a crime. Digging a bit deeper, it was clear that the owner was an out of state company that was buying up sections of foreclosed homes in abandoned neighborhoods. And what they needed was less a "renter" but a controlled "squatter." If left alone, these buildings would become homes for the homeless, gang activity, looters and pranksters, etc. So what the investment company wanted to do, since they wanted to sell the properties as homes in the long run but couldn't in the short run, was get someone to squat in these buildings for them; they were looking to hire a respectable squatter. I think that's a good metaphor for what homeownership is like with a regime of subprime loans...
Update on Residential Investment by CalculatedRisk - This is an update of some (5) graphs in a post last month: Residential Investment: Moving Sideways.
The Post Still Has Not Heard of the Housing Bubble - It apparently takes a long time for news to get to Washington, or at least to the Washington Post. It apparently still has not heard about the housing bubble -- you know that $8 trillion asset bubble whose crash gave the country the worst downturn since the Great Depression. The Post ran a major front page article about the withdrawal of government support for the housing market without ever once discussing the bubble and where prices stand in relation to their long-term trend. In fact, the article did not even discuss such basics of the housing market as vacancy rates (record highs) and trends in rents (falling in nominal terms for the first time ever).
Dean Baker: We're Still In a Housing Bubble - WSJ - Home prices have posted six months of gains, according to the Case-Shiller home price index, released this morning. But some housing bears say that the fundamentals don't support those price gains and that, even once the market finds a bottom, home prices aren't likely to show significant appreciation for many years to come. Housing economist Dean Baker, the co-director of the Center for Economic and Policy Research, laid out his case at a risk conference last week for why we still have a housing bubble. Adjusted for inflation, home prices are still 15-20% higher than they were in the mid-1990s. "There's no plausible fundamental explanation for that," he says.
Time To Sell A Home Upon Completion Hits Record 13.9 Months, 50% Longer Than Prior Year - zero hedge - Yesterday's uptick in the housing inventory backlog (from 7.6 months supply to 8.1) has another corollary, which, as David Rosenberg points out, is the median amount of time it takes builders to sell a completed unit. The number is now 13.9 months: an all time record, and 50% higher than a year ago. Good thing all that shadow inventory is nothing to be worried about as Cramer says.
What Housing Recovery? Nationwide, Defaults Are on the Rise -- Seeking Alpha - RealtyTrac is out this morning with a year-end look at foreclosures. I think it is a terrible report. There is not going to be a recovery in housing until the defaults have been stabilized at manageable levels. The broad economy is not going anywhere either. There is no plan on the table to stop what is surely coming. The government programs have delayed things by an average of nine months. That means that most of the millions of government sponsored ReFi's from 2009 will blow up this year. We paid a bundle for those ReFi's. They cost us last year, we will pay again for them this year. Little has been accomplished.
Mortgage Bulls Bid Fed Adieu (WSJ) Conventional wisdom holds that the end of the Federal Reserve's $1.25 trillion mortgage-buying spree will be catastrophic for housing. But a growing number of investors are betting that the fears are overstated and mortgage rates won't soar when the Fed leaves the market in just over two months.Following a two-day policy meeting, the Fed on Wednesday reiterated its plan to end the program on schedule. The policy makers ignored weak home-sales data that had some observers, worried the market wouldn't be able to wean itself from Fed support, expecting an extension. Fed officials believe they can pull back successfully. ...
The impact of the Fed's mortgage-backed securities purchase programme - VoxEU - Should the Fed scale back its ownership of mortgage-backed securities? This column analyses the effect of the programme on mortgage interest rates. Controlling for prepayment and default risk suggests the programme has had little or no impact, and that the Fed could gradually cut the size of its portfolio without a significant impact on the mortgage market.
Obama Should Take On The Banks By Reducing Mortgage Principals For Underwater Borrowers - According to the New York Times, the Obama administration is looking to revamp its foreclosure prevention program, the Home Affordable Mortgage Program (HAMP), which has been limping along for several months now. The expected changes will streamline some of the income verification procedures and may "include greater assistance for homeowners no longer able to make mortgage payments because their paychecks have shrunk." Calculated Risk was unimpressed, writing that the proposal "sounds like another delaying tactic." And yes, simply streamlining some of the documentation issues on the borrower side doesn't seem like it will do much good, considering how slowly even fully documented modifications are moving and the trouble (or lack of interest) that lenders have had getting their end of the deal in order.But the Times also reported that the administration has "begun to consider a new push to reduce loan balances." "They are looking at equity forgiveness," said a financial industry executive who speaks regularly with Treasury officials. "There have been a lot of meetings on that."If true, this is a good sign, as "underwater" mortgages (where the homeowner owes more than the property is worth) are still a huge problem for which we have few solutions. According to the latest data, about one in four U.S. borrowers is underwater, and not only are most mortgage modifications not reducing principal for borrowers, but many are actually increasing the principal owed.
U.S. May Retool Mortgage Program to Help Underwater Homeowners (Bloomberg) -- The Obama administration's $300 billion Hope for Homeowners program may be retooled to help the growing number of Americans who owe more than their properties are worth as current anti-foreclosure efforts fail to account for these "underwater" borrowers. The changes would be at least the third lease on life for the program, which began in October 2008 during the Bush administration and has so far helped just 96 of the 400,000 homeowners originally targeted.
Underwater, but Will They Leave the Pool? - NYTimes: Why is the mortgage default rate so low? After all, millions of American homeowners are "underwater"... Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away...Some homeowners may keep paying because they think it's immoral to default. ... But does this really come down to ... morality? A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a "norm asymmetry." In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits.
Non-Recourse Mortgage Borrowers Have Already Paid for Their Option to Walk Away: [M]illions of American homeowners are "underwater.".... In Nevada, nearly two-thirds of homeowners are in this category. Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away from them.... Some homeowners may keep paying because they think it's immoral to default. This view has been reinforced by government officials like former Treasury Secretary Henry M. Paulson Jr., who while in office said that anyone who walked away from a mortgage would be "simply a speculator — and one who is not honoring his obligation." (The irony of a former investment banker denouncing speculation seems to have been lost on him.)... The morality argument is especially weak in a state like California or Arizona, where mortgages ...[are] secured [only] by the home itself.... [B]orrowers in nonrecourse states pay extra for the right to default without recourse. In a report prepared for the Department of Housing and Urban Development, Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed...
Recourse: One of the Dangers of "Walking Away" - From Bloomberg: Lenders Pursue Mortgage Payoffs Long After Homeowners Default [L]enders are exercising their rights to pursue unpaid mortgage balances. To get their money, they can seize wages, tap bank accounts and put liens on other assets held by debtors....As we've discussed before, the recourse laws vary by state. As an example Florida is a recourse state, however in California purchase money is non-recourse. If the borrower walks away in California, the lender is stuck with the collateral. However, if the borrower in California refinanced their home, then the lender usually has recourse, and can pursue a judicial foreclosure (as opposed to a trustee's sale), and seek a deficiency judgment. Usually 2nd liens have recourse too.
Mortgage Servicing Performance I: Underwater and That Social Trust Thing - Steve Waldman of interfluidity has an interview up at mortgage calculator where he discusses, among many other things, his statement: "I think that the moral thing for most borrowers to do, under present circumstances, is to default on loans when it is in their financial interest to do so." You should check it out. There's a lot of arguments for "strategic defaults" which we will leave to the side for right now. The counter-argument is that lending has an element of "social trust" norms build into it, a trust that isn't easy to replicate and once broken it is very difficult to rebuild. The small, difficult to quantify but ever present, elements of these norms are what form the glue of many of our credit markets. Lenders trust borrowers, and borrowers can trust lenders, and this takes the rough edges off the credit market.
Mortgage Servicing Performance II: Predatory? - So we talked about a recent report about mortgage modifications, the Analysis of Mortgage Servicing Performance, here. I asked back in August whether or not the Mortgage Modification plan has failed, and nothing in this report, which is the latest in data collection by 12 state attorneys general and three state banking supervisors, makes me think otherwise. If you are also reading the on the ground journalism, say this excellent article by Mary Kane, the closer you get to it the more of a disaster it looks...So I'll ask the obvious question. Is the current system predatory? I'm not a lawyer, and I know there isn't a good working definition of what constitutes predatory lending. But let's take a look at two separate charts in the report.
2009 UNITED VAN LINES MIGRATION STUDY - United Van Lines recently released its annual migration report (pdf), based on where its customers moved to. For the second year in a row, the District of Columbia was the top destination for moving Americans. On the other end of the spectrum, Michigan had the highest percent of outbound moves, for the fourth consecutive year.
Case Shiller House Prices Increase Slightly in November - S&P/Case-Shiller released their monthly Home Price Indices for November this morning. This monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). This is the Seasonally Adjusted data - some sites report the NSA data. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The second graph shows the Year over year change in both indices. The Composite 10 is off 4.5% from November 2008. The Composite 20 is off 5.3% from November 2008. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.
A Look at Case-Shiller, by Metro Area (January Update) -WSJ - The S&P/Case-Shiller 20-city home-price index, a closely watched gauge of U.S. home prices, was mostly flat in November from a month earlier. The index declined 5.3% from a year earlier. For the first time in 19 months, some of the cities the 20-city index posted a year-over-year price gain. Dallas, Denver, San Diego and San Francisco are in positive territory from a year earlier. "While these data do show that home prices are far more stable than they were a year ago, there is no clear sign of a sustained, broad-based recovery," Just five of the 20 areas saw monthly price gains in November. Phoenix posted the largest gain at 1.1%. Chicago fared the worst with a 1.1% drop.
U.S. Economy: Existing Home Sales Fell in December (Bloomberg) -- Sales of existing U.S. homes plunged more than anticipated in December, showing the dependence of the housing market on a government tax credit. Purchases slumped 17 percent the month after a government tax credit was originally due to expire, the biggest decline since records began in 1968, to a 5.45 million annual rate, the National Association of Realtors said today in Washington. The median sales price increased for the first time in two years. First-time buyers rushed to complete deals before the $8,000 government incentive was due to end, pushing sales up 28 percent in the three months to November. The subsequent extension and expansion of the credit to include closings through June signal demand will strengthen in the first half of 2010, while raising the risk the market will then slow anew should jobs remain scarce.
Existing Home Sales decline Sharply in December - The NAR reports: December Existing-Home Sales Down but Prices Rise; 2009 Sales Up : Existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 16.7 percent to a seasonally adjusted annual rate of 5.45 million units in December from 6.54 million in November, but remain 15.0 percent above the 4.74 million-unit level in December 2008. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. The second graph shows nationwide inventory for existing homes. The third graph shows the 'months of supply' metric for the last six years. Months of supply increased to 7.2 months in December.
New Home Sales Fall 7.6% In December - From the Census Department: Sales of new one-family houses in December 2009 were at a seasonally adjusted annual rate of 342,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.6 percent (±14.6%)* below the revised November rate of 370,000 and is 8.6 percent (±15.2%)* below the December 2008 estimate of 374,000. The median sales price of new houses sold in December 2009 was $221,300; the average sales price was $290,600. The seasonally adjusted estimate of new houses for sale at the end of December was 231,000. This represents a supply of 8.1 months at the current sales rate. An estimated 374,000 new homes were sold in 2009. This is 22.9 percent (±2.9%) below the 2008 figure of 485,000.
New Home Sales Decline Sharply in December - The Census Bureau reports New Home Sales in December were at a seasonally adjusted annual rate (SAAR) of 342 thousand. This is a sharp decrease from the revised rate of 370 thousand in November (revised from 355 thousand). The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted). Note the Red columns for 2009. In December 2009, a record low 23 thousand new homes were sold (NSA); this ties the previous record low set in December 1966. The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales fell off a cliff, but after increasing slightly, are now only 4% above the low in January.
Ebbing US home sales hint prices may fall again-S&P - A recent decline of U.S. home sales is swelling the supply of houses and may push prices down, adding to losses from an earlier three-year slide, said rating agency Standard & Poor's in a statement on Friday." The recent fall in home sales is boosting the number of existing homes on the market, which grew to a 7.2 months supply in December from 6.5 months in November, S&P said. In coming months, "an expanding default and foreclosure pipeline of 2005-2007 vintage mortgage loans may push the 'shadow' inventory of distressed U.S. housing even higher," which could impede the market's stability, S&P added.
MBA: Mortgage Applications Decline - The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey The Market Composite Index, a measure of mortgage loan application volume, decreased 10.9 percent on a seasonally adjusted basis from one week earlier. ..."Refinance activity fell substantially last week," said Michael Fratantoni, MBA's Vice President of Research and Economics. "Although rates remain low, there appears to be a smaller pool of borrowers who are willing and able to refinance at today's rates." The Refinance Index decreased 15.1 percent from the previous week and the seasonally adjusted Purchase Index decreased 3.3 percent from one week earlier. This graph shows the MBA Purchase Index and four week moving average since 1990.
Existing Home Inventory: A long way from Normal - WSJ writes about existing home inventory: Housing Momentum Builds but Perils Persist Inventories of homes listed for sale are down sharply across the U.S. and have reached very low levels in some areas ... The decrease in supplies has sparked a return of bidding wars on lower-end properties in some neighborhoods, but the national picture is mixed. We've been discussing the bidding wars on low end properties since last spring - and that frenzy was driven by a combination of a high number of foreclosures at the low end pushing down prices (what housing economist Tom Lawler called "destickification"), and the first time home buyer tax credit. In some areas - like San Diego - the frenzy has moved up to more expensive areas. But the national picture is still ugly.
Middle class a difficult American dream, Commerce Dept. study finds - Reaching and staying in the middle class is an attainable goal – but one that's getting harder to hit, according to a new report from the Commerce Department. Compared with two decades ago, families on the middle rung are dealing with ever-increasing costs, said researchers from the Economics and Statistics Administration who compiled data for Vice President Joe Biden's Middle Class Task Force. After rising in the 1990s, family incomes fell the next decade as expenses related to housing, education and healthcare rose much faster than the overall inflation rate. Housing prices jumped 56% since 1990, even accounting for inflation, while tuition for a four-year public college soared 60% and healthcare insurance premiums and out-of-pocket costs skyrocketed 155%
Obama plans to help a middle class `under assault' - Declaring America's middle class is "under assault," President Barack Obama unveiled plans to help hurting families pay their bills, save for retirement and care for their kids and aging parents. Obama's proposals won't create jobs, but he said they could "re-establish some of the security that's slipped away." His remarks aimed to lift the nation's dour mood and show he is in touch with the daily struggles of millions of people as resentment runs high about lost jobs and the economy. The initiatives amount to a package of tax credits, spending expansions and new mandates on employers to encourage retirement savings by workers. Most of them will be included in Obama's budget for the fiscal year starting Oct. 1, and they will require approval from Congress. Obama will release that budget Feb. 1.
Middle Class Benefits Proposed by President Obama - President Barack Obama proposed five new middle class benefits that will be detailed in his budget next Monday I am very concerned about the strength of our economic recovery during the second half of this year, but these tax cut won't have much impact on the recovery until at least a year from now if Congress passed them this spring. We won't see official cost estimates until Monday morning, but these will undoubtedly add significantly to the deficit:
- Doubling the child care credit
- Funding child care for 235,000 additional children
- Supporting elder caregivers with counseling, training, transportation, and temporary respite care
- Ensuring Federal Student Loan payments won't exceed 10% of income
- Establishing automatic IRA's and expanding the saver's credit for working families
Can the government make you get an IRA? - Probably, but that doesn't mean Obama's proposals will help workers. The administration's main olive branch is a package of tax cuts, rebates and policies created by the Joe Biden-led Middle Class Task Force. It's a grab bag of feel-goodies like student loan forgiveness and a larger tax credit for child care. Obama alluded to a few of these in the State of the Union; more detail had already been given at another speech two days earlier. Several of the proposals touched on last night and outlined in more detail by the Middle Class Task Force are part of a push to improve and standardize American retirement planning. This is where Obama could do the most good—but whether average workers or financial service firms and insurance companies will be the chief beneficiaries remains to be seen.
America Increasingly Looks Like A Developing Nation As 30% Of Americans Rapidly Approach Poverty, Or Are Already There - A shocking report from Brookings exposes just how massive America's poverty problem is. While substantial reductions in poverty were made during the 1990's, America's poor have been rocked by the dual economic downturns since 2000. The result is that poverty grew at twice the rate of U.S. population growth from 2000 - 2008, and now encompasses 39.1 million Americans. If one were to expand the definition of poverty to merely 'poor' (yet still very poor), then a eye-popping 30% of the nation lives no higher than twice the poverty base line. ...see Brookings
Poverty and the American Suburb - If 1 in 8 Americans is currently on food stamps then household budgets are clearly stressed enough to be affected by changes in the price of gasoline. Given that oil (and gasoline) made its biggest advances starting in 2004, it was revealing to see the latest study on poverty from the Brookings Institution. Their study showed what many in the peak oil community have been forecasting for years: poverty growth in the US between 2000 and 2008 was strongest in the suburbs:By 2008, suburbs were home to the largest and fastest-growing poor population in the country. Between 2000 and 2008, suburbs in the country's largest metro areas saw their poor population grow by 25 percent—almost five times faster than primary cities and well ahead of the growth seen in smaller metro areas and non-metropolitan communities. As a result, by 2008 large suburbs were home to 1.5 million more poor than their primary cities and housed almost one-third of the nation's poor overall.
A More Permanent Underclass - The big ocean of blue in the graph represents the portion of the unemployed who have lost their jobs, with the lighter blue section showing those whose jobs are gone permanently. There are multiple ways to explain why permanent job-losers represent a higher share of the unemployed this time around. Maybe many of the jobs gained in the boom years were built on phantom wealth. Or maybe exponential advances in technology over time. That might suggest that innovation and automation displace more and more workers by the time each recession rolls around. Whatever the underlying cause, the result is concerning: Compared to previous recessions, many more of the employment gains in this recovery will have to come from new jobs. But the new skills they will need take a long time to acquire.
The Growing Underclass: Jobs Gone Forever - Last night, President Obama talked about the need to put people back to work, calling job growth the "No. 1 focus in 2010." But one major obstacle to that goal — and one that has so far gone mostly unacknowledged — is that many of the jobs slashed during this recession are not coming back. Lots of the bloodletting we've seen in the labor market has probably been permanent, not just cyclical. Many employers have taken Rahm Emanuel's famed advice — never waste a crisis — to heart, and have used this recession as an excuse to make layoffs that they would have eventually done anyway. Some economists refer to this as the "cleansing effect" of recessions.
U.S. households struggle to afford food: survey (Reuters) - Nearly one in five U.S. households ran out of money to buy enough food at least once during 2009, said an antihunger group on Tuesday, urging more federal action to help Americans get enough to eat.Nationwide polling found 18.2 percent of households reported "food hardship" -- lacking money to buy enough food -- in 2009, according to the group. That is higher than the government's "food insecurity" rating of 14.6 percent of households, or 49 million people, for 2008. Households with children had a "food hardship" rate of 24.1 percent for 2009 compared with 14.9 percent among households without children. Twenty states had rates of 20 percent or higher. Seven Southern states led the list. The figures were based on responses to the question, "Have there been times in the past 12 months when you did not have enough money to buy the food that you or your family needed?"
Sugar Tariffs Cost Americans $2.5 Billion in 2009 - The chart above displays refined sugar prices (cents per pound) using monthly data from the USDA for: a) U.S. wholesale refined beet sugar price at Midwest markets and b) the world refined sugar price. Due to trade restrictions on imported sugar coming into the U.S. at the world price, the U.S. sugar beet producers have a sweet deal, assisted by their government enablers, who protect them from more efficient foreign sugar growers who can produce cane sugar in Central America, Africa and the Caribbean at half the cost of beet sugar in Minnesota and Michigan. Of course, there's no free lunch, and this sweet trade protection comes at the expense of American consumers and U.S. sugar-using businesses, who have been forced to pay twice the world price of sugar on average since 1982
U.S. Cattle Herd Falls to 1958 Low as Losses Climb, Survey Says – (Bloomberg) -- The U.S. cattle herd may have shrunk to the smallest size since 1958, as mounting losses during the recession spurred beef and dairy producers to cull animals, analysts said. Wholesale choice-beef prices averaged $1.4071 a pound last year, the lowest level since at least 2004, as U.S. job losses climbed and meat demand waned. Corn, the main ingredient in livestock feed, jumped to a record $7.9925 a bushel in 2008 on the Chicago Board of Trade, and prices averaged about $3.79 last year, the third-highest annual average since at least 1959. "There's not much incentive to be building herds," said John Nalivka, the president of Sterling Marketing Inc., a livestock-industry consulting company in Vale, Oregon. "Costs of production across the cow-calf sector and in dairy have gone up in the past two years, and prices have come down" for beef and milk, he said.
Welfare Reform - Oddly there seems to be almost a consensus that welfare reform was a good policy. I think this is based entirely on the fact that, by pure coincidence, it was implemented during the late 90s boom. You do know that there are over 6,000,000 food stamps recipients in the USA with 0 cash income (nothing to live on but food stamps) don't you ? I'd say that situation has a whole whole whole hell of a lot less than nothing to do with " any type of progressive or liberal agenda," It is also true that TANF enrollment has barely increased during the first 16 months of the current recession (warning out of date pdf from an advocacy organization or try the official very slow opening link don't blame me blame HHS gluttons for boredom can go to the index for maybe more data) and is about one third of peak AFDC enrollment. Welfare reform caused and is causing immense human suffering. There are desperately desperately poor people in the USA (I define that as income less than half the poverty line) because the social safety net was destroyed by a bill signed into law by Clinton.
Happy peasants and miserable millionaires: Happiness research, economics, and public policy - VoxEU - What measures of human wellbeing are the most accurate benchmarks of economic progress and human development? This column presents new research suggesting that while people can adapt to be happy at low levels of income, they are far less happy when there is uncertainty over their future wealth. This may help explain why different societies tolerate such different levels of health, crime, and governance, and why US happiness plummeted during the global financial crisis but has since been restored despite incomes remaining lower.
A toy model of money, growth, and inequality - My intuition goes like this: when people are relatively poor, they spend nearly all their income on real goods and services with care, in ways that yield positive returns in present and future consumption. As people grow wealthy, they spend an increasing fraction of their wealth on financial assets, purchases of which only imperfectly translate to productive mobilization of real goods and services. To make my life as a modeler easier, I conjecture that financial assets are phenomenally inefficient — not only do they fail to yield any positive return, but the net expenditure of real goods and services for financial assets is "thrown into the sea". We'll see that despite this, under not-entirely-outrageous assumptions, it might be optimal for wealthy agents to purchase an ever larger "stock" of financial assets, but that by doing so rather than mobilizing real resources, they exert a drag on aggregate growth.
The credit crunch: bad for your pocket, worse for your psyche - The evidence comes from economists, Paola Giuliano of UCLA and Antonio Spilimbergo of the IMF. Giuliano and Spilimbergo rely on answers to the General Social Survey, which has been conducted in the US almost every year since 1972. Because each survey participant has an identified home region, Giuliano and Spilimbergo can compare survey answers with the economic performance of the region in question. (The regions are large: the US is divided into nine.) Regional economic performance can be choppy, so the researchers looked for outliers: when regional growth fell into the bottom 5 per cent of all regions and all years in the sample, the researchers counted this as a severe regional recession. This turned out to be a year in which the regional economy shrank by 3.8 per cent or more. The question is: what impact did these severe regional recessions have on locals' answers in the General Social Survey? The results are striking. Recessions do alter perceptions...
Radical Inequality Is Literally Killing Us - Wilkinson and Pickett both work as epidemiologists. They study the health of populations, and, over recent decades, pioneering work by Wilkinson has helped reveal the most reliable foundation for good health and long life. Want to live long and prosper? Go live in a relatively equal society. Over 200 studies since the early 1980s have now documented that people living in societies where wealth has concentrated at the top of the economic ladder live significantly shorter, less healthy lives than people who live in societies that spread their wealth more evenly. And we're not talking just poor folks here. All people in unequal societies do worse. Middle-income people in the United States, the world's most unequal developed nation, have shorter lifespans than middle-income people in Japan, Sweden and a host of other more equal nations.. On everything from homicides and teen pregnancies to drug addiction and levels of trust, people living in more equal nations do better — from three to 10 times better — than people in societies where treasure tilts to the top.
Is Barter Countercyclical? - The Wall Street Journal says that barter is countercyclical. Barter increases in recessions, like now, and decreases in booms. Can anyone confirm this? Because that fact (if it is a fact) is really important in understanding the nature of business cycles and recessions. Countercyclical barter is exactly what one would predict from a monetary (deficient aggregate demand) theory of recessions. It makes no sense from a real business cycle or recalculation theory of recessions. And the very existence of barter, even in normal times and booms, is evidence in favour of doing macroeconomics with monopolistic competition.
The Sex Trade: Is it Demand or Supply Causing a Drop in Prices? - Toronto Star: The vices – smoking, drinking, sex – are usually bulletproof during a recession, says economist Perry Sadorsky, who teaches at York University's Schulich School of Business. So if the sex trade is hurting, "we are in the most serious depression since the 1930s. This shows the magnitude of the decline. It is deep and it is problematic."Sex workers say their incomes began plummeting last fall, with johns pleading poverty and haggling over prices, and prostitutes bidding against each other."There are 60 people on the street, but they are all sex workers and there's no money for anybody," says Ray, who, like other prostitutes, did not want his real name used. "This economy is causing a lot of misery."
A Growing Share of Americans' Income Comes from the Government - While most eyes were focused on the better-than-expected gross domestic product data for last year's fourth quarter, this week's report from the Commerce Department's Bureau of Economic Analysis also included details on U.S. personal income. Along with wages and salaries, dividends and interest income, this category includes personal current transfer receipts, which the BEA defines as "income payments to persons for which no current services are performed and net insurance settlements." That is, government social benefits (and, to a very minor extent, net transfers received from businesses). As you can see from the following graph, while the relationship between personal income and GDP has not changed all that much over the course of the past six decades, the share of income accounted for by transfer payments has jumped more than 200 percent.
A limited speech by a constrained president - Obama said high unemployment would be his number one focus this year. No wonder, as it is the issue of most concern to voters, and the biggest reason their support for the president and Congress is falling. The president made some proposals — money for small business lending and a tax credit for hiring — which may help at the margins. But the new initiatives would probably cost around $100 billion, a fraction of the $300 billion or so in stimulus spending so far, which has not prevented the unemployment rate from climbing to 10.0 percent currently from 7.7 percent at the start of 2009. Good luck finding an economist — even inside the Obama administration — who has great expectations from the proposed new spending. As it is, the Congressional Budget Office predicts unemployment will remain close to 10 percent heading into 2011, a forecast echoed by many private economists.
"Obama Sounded Like a Good Old-Fashioned Mercantilist" - One item that stood out as different was the acknowledgement that we are on our way to export-led growth, if we are to have growth at all. President Obama sounded like a good old-fashioned mercantilist with his claim that we would double exports in five years and support 2 million more jobs through those exports. The problem is that if (net) exports don't lead the way, then consumption or investment must fill the void if the private sector is going to take care of this on its own. But neither of those seems likely to grow fast enough to accomplish this, at least not anytime soon, and there's some question whether they will return to their pre-crisis levels, consumption growth in particular.
4 Week Moving Average of Initial Unemployment Claims Rises 3rd Straight Week - In a trend that will drive both the Fed and the administration crazy if it lasts too much longer, weekly unemployment claims are moving in the wrong direction. Please consider the Unemployment Insurance Weekly Claims Report. In the week ending Jan. 23, the advance figure for seasonally adjusted initial claims was 470,000, a decrease of 8,000 from the previous week's revised figure of 478,000. The 4-week moving average was 456,250, an increase of 9,500 from the previous week's revised average of 446,750. Chart of 4-week Moving Average
CBO Says Jobless Rate Won't Turn Down Until Mid-Year - WSJ -The Congressional Budget Office's new economic and deficit forecast is out today, a week before the White House updates its forecast. Highlights:
- CBO expects that the unemployment rate, now 10%, will rise before turning down in the second half of the year, averaging 10% in the last three months of 2010. It sees a very gradual decline in unemployment in 2011 to an average of 9.1% in the fourth quarter of that year.
- CBO doesn't expect the jobless rate to reach 5% — the level it deems consistent with the usual rate of job turnover in U.S. labor markets — until 2016.
- The agency estimates the U.S. economy shrank at by 0.4%, adjusted for inflation, between fourth quarters of 2008 and 2009, and predicted it'll grow by 2.1% over the four quarters of 2010 and 2.4% over the four quarter of 2011,
A Historical Look at the Labor Market During Recessions - Dallas Fed - WWII-present - (analysis & tables, & 6 charts) The current recession will almost surely be the longest of the post-World War II era, although the official end date has yet to be determined. The only way it would not exceed the 16-month duration of the 1973 and 1981 recessions is if the NBER concludes that the current recession ended in April 2009 or earlier. To compare current and past recessions, we created scenarios by plotting the recent evolution of the unemployment rate against all post-World War II downturns. We used the rate prior to the current episode—4.7 percent in November 2007—as the common starting point.[2]
Interactive Map: Unemployment Rate by County -(wash post) More than a year after the meltdown of the financial markets, the unemployment rate continues to edge up providing evidence that the economy, though expanding, has not yet grown enough to end the brutal conditions facing American workers. Using data from the Bureau of Labor Statistics, this map shows how each county is faring.
The Decline: The Geography of a Recession - Watch the deteriorating transformation of the U.S. economy from January 2007 - approximately one year before the start of the recession - to the most recent unemployment data available today. (youtube)
Long Term Unemployment: Less than Actual Out of Work -- The number of unemployed for more than 26 weeks is a data point published by the DOL (U.S. Dept. of Labor). However, this number is far short of the actual long term lost labor impact in the economy. This discussion starts with the DOL reported number and will expand from there.One out of 25 in the labor force is out of work more than 26 weeks. That amounts to 40% of the unemployed. This graph from the 5-Min. Forecast provides some historical reference. Long term unemployment is more than 1.5 times the level of the next worst previous recession. The number unemployed for more than 26 weeks is 6.1 million. The number of permanent jobs loss (jobs that will never be refilled) is 5.0 million from the peak in employment in November, 2007. This calculated from the 57% permanent job loss shown in the following graph multiplied by 8.9 million total drop in employment.
Dude, Where's My Job? - The initial estimate is that fourth quarter GDP grew at a blistering 5.7% annual pace. With the usual caveats--third quarter GDP estimates started high and then were revised down to a much more modest level--that's great news. But man cannot live by GDP alone. I'd argue that the better measure of whether the economy has returned to health is employement--at least, that's when the improvement starts to translate into improvements in peoples' real lives. Prolonged unemployment is one of the most crippling things that can afflict people in the modern world.Yet despite a second consecutive quarter of growth, prolonged unemployment is what we're stuck with.
Somebody enjoyed 5.7 percent GDP growth but most of us just got this lousy T-shirt - So how does one square 5.7 percent GDP growth in the fourth quarter with real unemployment of 17 percent? Part of it is a statistical fluke from lean inventories. Yet another issue is all the cheap money propping up the financial services sector, which is now larger than manufacturing. I bet it will be revised down. In any event, the entire year saw the biggest contraction since 1946, when the wartime economy was winding down, and we continue in uncharted and scary territory. DeLong makes the point, "You expect 8 quarters over which real GDP has not grown to see a rise in unemployment of 2.78 percent— and 8 quarters over which real GDP has fallen by 1.62 percent to see unemployment rise by 3.5 percent and not 5.2 percent A world in which the unemployment rate were not 10 percent but rather 8.3 percent would be quite a different world than the one we live in ..."
Nattering Nabobs of Economic Ignorance - A little neo-Hooverite nonsense from the AP: Wages and benefits paid to U.S. workers posted a modest gain in the fourth quarter, ending a year in which recession-battered workers saw their compensation rise by the smallest amount on records going back more than a quarter-century. The anemic gains have raised concerns about the durability of the economic recovery. The fear is that consumer spending, which accounts for 70 percent of economic activity, could falter if households don't have the income growth to support their spending.With 10% unemployment, you'd think it just might dawn on them that wages might fall or remain relatively flat as part of the great recalculation
Wages and benefits rise weak 1.5 percent in 2009 - Wages and benefits paid to U.S. workers posted a modest gain in the fourth quarter, ending a year in which recession-battered workers saw their compensation rise by the smallest amount on records going back more than a quarter-century. The Labor Department said Friday that wages and benefits rose by 0.5 percent in the three months ending in December. For the entire year, wages and benefits were up 1.5 percent, the weakest showing on records that go back to 1982.The 1.5 percent increase in total compensation in 2009 was about half the 2.6 percent increase in 2008 and both years represented the smallest gains for the government's Employment Compensation Index.
Ford to Begin Hiring at New Lower Wages - Ford Motor Co. will announce Tuesday it is adding a second shift at its Chicago assembly plant, creating 1,200 jobs and enabling the company for the first time to hire some new union workers at significantly reduced wages. The contracts that Ford, General Motors Co. and Chrysler Group LLC signed in 2007 allow the auto makers to fill jobs vacated by older workers who leave or retire with new hires earning a little more than $14 an hour on average—about half what current workers received when they started. Newer workers also get reduced benefits.
I was surprised this number was such a big one - Organized labor lost 10% of its members in the private sector last year, the largest decline in more than 25 years. I meant to blog this the day I read it but somehow I forgot to; here is one source. I haven't seen it receive much discussion in the econ blogosphere. For one thing, it's a sign that the union wage premium isn't so stable.
Interactive Map: Unemployment Rate by County - More than a year after the meltdown of the financial markets, the unemployment rate continues to edge up providing evidence that the economy, though expanding, has not yet grown enough to end the brutal conditions facing American workers. Using data from the Bureau of Labor Statistics, this map shows how each county is faring.
All Aboard? Obama to Announce High-Speed Rail Grants - President Barack Obama and other top administration officials plan to take to the road Thursday to announce some $8 billion in grants for high-speed rail infrastructure.A White House official said Obama will travel to Tampa, Fla., to announce grants to 31 states under the recovery act for state governments to begin developing new high-speed rail corridors or upgrade lines for future high-speed rail or intercity rail service. Thursday's awards will include projects on 13 major corridors, as well as smaller awards to improve parts of existing lines. The grants are part of the administration's planned $13 billion investment in high-speed rail. Remaining funds will be issued through the annual budget process.
A New Price Tag for Stimulus: $862 billion, not $787 billion - Amongst its usual cracker jack budget projections yesterday, the Congressional Budget Office provided a few toy surprises for budget watchers. One is an updated estimate of the direct budget costs of the 2009 stimulus bill, officially known as the American Recovery and Reinvestment Act (ARRA).CBO originally estimated that ARRA would cost $787 billion from 2009 through 2019. Its new estimate is $862 billion, about $75 billion higher. Key changes to the estimate:
- Food stamps (officially known as the Supplemental Nutrition Assistance Program): $34 billion more than expected
- Build America Bond program: $26 billion more
- Unemployment compensation: $21 billion more
- Medicaid: $3 billion less than expected
- Other spending: $3 billion less
The stimulus plan, unemployment and economic theory: Why I don't believe in fairies - For the past nine months I have been presenting some new ideas at academic conferences where economists have been grappling with the current financial crisis. The participants and the papers are always the same. Half of the papers are about the quantitative effects of fiscal policy. If government spending goes up by one dollar, how much will income go up? The answer varies from zero to three depending on the assumptions made by the economist to disentangle cause and effect. Administration economists claim that the multiplier is 1.5. Well at least we got it right on average! This reminds me of the statistician joke. Two statisticians go deer hunting. One fires off a shot and misses by ten feet to the left. The second fires off a shot and misses by ten feet to the right. They both shout out triumphantly: We hit it!
Good Thing We Had All That Stimulus - Mark Thoma linked to some terrific data from the Dallas Fed which shows just how awful the labor market has been during this recession, relative to past recessions. Greg Mankiw has a terrific graph showing that the labor market is far worse than what the Obama team predicted would happen without any stimulus. It would be reasonable to conclude that the stimulus has been useless at best and counterproductive at worst which is exactly what I predicted would happen.
Wisdom of Crowds: Fiscal Stimulus Edition - Americans are far from sold on fiscal stimulus: A CNN/Opinion Research Corporation survey released Monday morning also indicates that 63 percent of the public thinks that projects in the plan were included for purely political reasons and will have no economic benefit, with 36 percent saying those projects will benefit the economy.Twenty-one percent of people questioned in the poll say nearly all the money in the stimulus has been wasted, with 24 percent feeling that most money has been wasted and an additional 29 percent saying that about half has been wasted. Twenty-one percent say only a little has been wasted and 4 percent think that no stimulus dollars have been wasted.
Too Dumb to Thrive - Absolutely amazing poll results from CNN today about the $787 stimulus package: nearly three out of four Americans think the money has been wasted. On second thought, they may be right: it's been wasted on them. Indeed, the largest single item in the package--$288 billion--is tax relief for 95% of the American public. This money is that magical $60 to $80 per month you've been finding in your paycheck since last spring. Not a life changing amount, but helpful in paying the bills. The next highest amount was $275 billion in grants and loans to states. This is why your child's teacher wasn't laid off...and why the fire station has remained open, and why you're not paying even higher state and local taxes to close the local budget hole.
Of Fate And Fumbles - Krugman - All indications are that the top people believed that the economy would start adding jobs and unemployment would start falling fairly quickly even without a big stimulus. I don't know why they hadn't taken on board the lessons of the past two recessions, plus that of financial crises elsewhere, but they clearly hadn't. Instead, the administration played it safe — or thought it was playing it safe. Moderate-sized stimulus, non-disruptive bank policy. The trouble, of course, was that this was anything but safe. By the time it was clear that those measures had been inadequate, the political will to do more had evaporated; government intervention was seen as a failed policy. Betting that the economy would largely take care of itself was, it turned out, a deeply risky strategy — and the bet went bad.
The Politics of Industrial Renaissance - Reviving American manufacturing may be an economic and strategic necessity, without which our trade deficit will continue to climb, our credit-based economy will produce and consume even more debt, and our already-rickety ladders of economic mobility, up which generations of immigrants have climbed, may splinter altogether. That's no guarantee, however, that American manufacturing will actually be revived. The forces arrayed against it -- chiefly, finance and big retailers, Wall Street and Wal-Mart -- have tremendous political clout. The epochal shift that's overtaken the American economy over the past 30 years -- from making things to making debt -- is not easily reversed. The two main economic sectors to have profited by that shift -- finance, which has compelled manufacturers to move offshore in search of higher profit margins, lower wages, and fewer regulations; and retailers, who have compelled manufacturers to move offshore in search of lower prices for consumers and higher profits for themselves -- have a clear interest in perpetuating the current economic order.
Lawmakers Are Hunting for Ways to Rekindle Hiring - NYTimes - Legislators are showing renewed interest in proposals for a government subsidy to encourage new hiring. President Obama last month endorsed the idea of a tax incentive for companies that add jobs, Faced with populist anger about economic conditions, Washington has been looking for ways to promote job growth, with things like public works projects and aid for states. Many of these proposals, however, have been stymied by a partisan divide over economic policy and concerns about the deficit. A tax break that would appeal to both workers and buinesses could potentially bridge that divide, assuming that some problems are worked out. The biggest challenge is how to create a policy that minimizes businesses' ability to manipulate the system, but that is still simple enough for employers to actually understand and use.
Senate Democrats Draft $82.5 Billion Jobs Plan -Top Senate Democrats have drafted an $82.5 billion "jobs" plan that would help small businesses, boost spending on road construction and mass transit, and give local governments money to retain teachers. The draft document proposes $20 billion for a job creation tax credit and $12.5 billion to retrofit homes and businesses to make them more energy efficient. It has not been publicly released but a summary was obtained by The Associated Press. The plan also would rescind $150 billion in unused Wall Street bailout authority.
The Schumer-Hatch jobs strategy - Chuck Schumer and, surprisingly, Orrin Hatch have partnered on a proposal with some real job-creation merit: We have an idea that is simple, straightforward and easy to explain and administer. In fact, it is so simple that the legislative text of the proposal is only a few pages long — a rarity when it comes to tax policy. Here's the idea: Starting immediately after enactment, any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll tax on that employee for the duration of 2010. The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That's it. Simple to understand, and easy to explain.
A Payroll Tax Break for Jobs - NYTimes - WITH the national unemployment rate at 10 percent, and more than 15 million Americans looking for work, ideas to spur job creation are at the forefront of everyone's minds. While we may represent different political philosophies, we recognize that high unemployment — particularly long-term unemployment — is not a liberal problem or a conservative problem; it's a national problem that takes a huge toll on families. The idea for some sort of jobs tax credit is percolating again, but the jobs credit that existed in the late 1970s was of limited success, and it was excruciatingly complicated. We have an idea that is simple, straightforward and easy to explain and administer.
America's Employment Dilemma - DeLong - There are always two paths to boost employment in the short term. The first path is to boost demand for goods and services, and then sit back and watch employment rise as businesses hire people to make the goods and services... The second path is not to worry about production of goods and services, but rather to try to boost employment directly through direct government hiring. The first path is better: not only do you get more jobs, but you also get more useful stuff produced. The problem is that it does not take effect very quickly. Thus, policies .needed to be put in place about a year ago... Some countries – China, for example – did, indeed, implement such job-creation policies a year ago and are already seeing the benefits. Others, like the United States, did not, and so unemployment remains at around 10%.
Obama unveils tax breaks to spur jobs growth, hike wages - The proposal would give businesses a $5,000 tax credit for each worker hired in 2010 and subsidize wage increases by reimbursing Social Security tax increases for businesses that expand their payrolls. "This is a simple, easy to understand mechanism that will cut taxes for more than 1 million small businesses," Obama said. "It'll give them an incentive to hire more people and a little bit of extra money to pay higher wages, to expand work hours, or invest in their company." The incentives would be capped at $500,000 for each business, meaning they would mostly benefit small firms. The tax break on pay increases would apply only to workers making $106,800 a year or less. The proposal is a variation of an idea that Congress rejected a year ago.
Job creation--tax cuts are not the right tool - Not unexpectedly, the "think tanks" that claim to be nonpartisan but that conduct research sponsored by corporate interests and support "capital market" solutions to economic problems are at it again pushing more tax breaks for the huge corporations that just gained more legislative clout with the Supreme Court's foolish decision in Citizens United. See, for instance, the Milken Institute's, Jobs for America: Investments and policies for economic growth and competitiveness (Jan. 2010) (sponsored by one of the biggest of the "bad guys" pushing corporate tax cuts all the time, the National Association of Manufacturers). The Milken report wants the government to do the following: reduce the corporate tax rate...increase the R&D credit... let companies export technology products to produce products abroad... invest in infrastructure projects...The Milken report, in other words, espouses many of the same policies applied by the Bush II administration. They didn't create jobs under Bush and there's no reason to think they would now
Financial Aid to the States Is the Long-Hanging Fruit Here - DeLong - There is one area of automatic stabilizers for which it is not too late. We could act right now to create some state-level automatic stabilizers, rather than let our state governments exert downward pressure on the economy by acting even more like fifty little Herbert Hoovers. Large federal aid packages to the states to prevent big additional cuts to state and local government services starting in July is one of the very best things we could do. Of course, it is unlikely to happen. Senators dislike transfers to states. State governors use those transfers to accomplish initiatives, and then run against senators to take their jobs. Yet another reason why we would all be better off without a U.S. Senate...
'Underemployment' tops 20 pct in 3 states - President Barack Obama said in his State of the Union Wednesday that "one in 10 Americans still cannot find work." But in nine states the figure is much worse -- closer to one in five, according to Labor Department data released Friday. The figures are a stark illustration of how tough it is to find a full-time job, even as the economy has grown for two straight quarters. The official unemployment rate of 10 percent doesn't include people who are working part-time but would prefer full-time work, or the unemployed who have given up looking for work. When those groups are included, the devastation in many parts of the country is clear: Michigan's so-called "underemployment" rate was 21.5 percent in 2009, the highest in the nation. California's was 21.1 percent, while Oregon's was 20.7 percent. In another three states -- South Carolina, Nevada, and Rhode Island -- the underemployment rate is above 19 percent. And in three more -- Arizona, Florida and Tennessee -- it's above 18 percent.
America's 10 Biggest Cities: A Debt Report Card (Forbes interactive slide show: hover over each city to see the debt and then click on next; example):New York, N.Y.Unfunded pension liability: $59.5 billion. Moody's bond rating: Aa3. America's biggest city flirted with bankruptcy in 1975. Today it has the biggest debt load at $64.8 billion or $7,760 per resident. Debt as a percentage of personal income is at the highest level since 1980.
U.S. Municipal Bond Rating Cuts Triple in 2009, Moody's Says - Ratings for 279 state and local-government tax-backed bonds were reduced last year, up from 81 in 2008, according to a quarterly report released today. Including bonds backed by revenue, such as those of hospitals and housing authorities, seven ratings were raised for every 10 reduced, the lowest ratio in at least two decades. Credit-rating cuts for California, Illinois and Arizona pushed the value of downgraded tax-backed bonds to $199.8 billion, the most in at least two decades. Including revenue- backed issues, $256.3 billion of debt was reduced, or about 9 percent of the $2.8 trillion municipal market
Running out of budget gimmicks, states face grim years - Financial issues are forcing states into calamitous binds about what they can do. Most of them are afraid to impose their sales taxes on services, the very area in which more of the economy is moving. And the coming fiscal year, experts are predicting, may be almost as grim as the states run out of budget gimmicks, rainy day funds and the infusion of federal stimulus money that helped them, finally, to balance their current budgets. The states' cumulative 2010 and 2011 budget shortfalls may be about $350 billion — a third of a trillion dollars — estimates the Center on Budget and Policy Priorities. Why such grim news? Sales and personal tax receipts, which soared in the last decade because of the hot, credit-driven consumer economy, cratered with the recession. The pre-recession revenue levels, Governing reports, "will either take an unusually long time to recover, or never do so." "
States' Fiscal Agony: No End In Sight? - THIS may be the most calamitous fiscal year states have known in decades," reports Governing magazine, the 23-year-old bible on state and local governance.The coming fiscal year, experts are predicting, may be almost as grim as states run out of budget gimmicks, rainy-day funds and infusion of federal stimulus money. The states' cumulative 2010 and 2011 budget shortfalls may be about $350 billion, estimates the Center on Budget and Policy Priorities.Why? Sales and income tax receipts, which soared in the last decade because of the credit-driven consumer economy, cratered with the recession. The pre-recession revenue levels, Governing reports, "will either take an unusually long time to recover or may never do so."
New York Mayor Bloomberg to Call for Cut of 4,286 City Jobs (Bloomberg) -- New York Mayor Michael Bloomberg plans to present a preliminary budget tomorrow that will cut 4,286 employees from city payrolls for the 2011 fiscal year beginning July 1, administration officials said. The administration intends to fire 934 workers and reduce 3,352 through attrition, according to the plan. No police, firefighters, sanitation or corrections officers would be affected. The city's workforce exceeds 300,000. The mayor wants to prevent eliminating 2,500 educators by proposing they reduce raises in the next two years for teachers and principals, to 2 percent from 4 percent for the first $70,000 in pay, said the officials, who work for the mayor and requested anonymity before the proposal's official release. The administration confronted a $4.93 billion budget deficit at the July 1 start of this fiscal year. In November, the mayor ordered savings totaling $484 million in the current fiscal year and $1.12 billion next fiscal year, requiring the personnel reductions, the officials said.
NYC Faces $1.3 Billion Cut Under Paterson, Mayor Says (Bloomberg) -- New York City faces $1.3 billion in cuts and would have about 19,000 fewer city employees under the state budget that New York Governor David Paterson proposed for next fiscal year, Mayor Michael Bloomberg said. Bloomberg made the assessment in remarks prepared for a joint budget hearing of the state Senate Finance and Assembly Ways and Means committees today. The city, with a budget of about $60 billion, faced a $4.1 billion deficit in the 2011 fiscal year beginning July 1, without accounting for reduced state aid. The state confronts a $7.4 billion gap in its proposed $134 billion budget through March 31, 2011. Each has seen revenue decline due to Wall Street losses, reduced bonuses and fewer real estate transactions. The mayor said he intends to present his preliminary budget to the City Council on Jan. 28.
NYC may lay off 19,000 workers if state cuts aid (Reuters) - New York City will have to lay off more than 10,000 public workers, in addition to 8,500 teachers, if the state legislature approves the $1.3 billion of cuts the governor proposed in his deficit-closing budget, Mayor Michael Bloomberg said. The mayor, in a speech to the legislature, estimated 3,150 police officers would be cut, reducing the force's "operational strength" to 1985 levels. About 1,050 firefighters would have to be let go, along with 900 correctional officers, and the city would have to cut its daily inmate population by 1,900, he said. The number of at-risk children that service workers monitor would fall to 2,700 from 9,000, Bloomberg said.
Most Low-Wage Workers Are Cheated of Pay, Report Finds - NYTimes - More than half of the low-wage workers in New York City are routinely being cheated of some of the meager pay that is due them, according to a report to be released on Thursday by the National Employment Law Project. The average worker in a low-wage job in the city lost out on $58 a week, more than $3,000 a year, because he or she was not paid minimum wage or overtime, or because of some other violation of labor laws, according to the report [pdf]. These workers, including laundry employees, home health care aides, deliverymen and grocery baggers, would still earn less than $400 a week, on average, if they were being paid fairly, according to the report. In all, the report estimated, more than 315,000 workers were denied some of their deserved pay, amounting to a loss of more than $18.4 million a week — nearly a billion dollars a year — to the workers, and therefore to the neighborhoods where they spend their paychecks or to the families to whom they send money.
State Comptroller Says Current Year Deficit Closer to $1 Billion - New York State Comptroller Thomas DiNapoli is warning the state could end this fiscal year (ends March 31st) $1 Billion dollars in the red. That is twice as big as the deficit being projected by Governor David Paterson. DiNapoli says that's largely due to pressure on Wall Street to change the way it hands out bonuses. The changes will likely impact the state's tax revenue during this quarter, when the state typically receives a boost from Wall Street."The boost in revenue that we'd expect because Wall Street came back stronger, faster -- if it's paid not as cash, but as stock and other deferred revenues, we're not going to see the boost in revenue. That's one of the big unknowns at this time in terms of how we're going to close out the current fiscal year.".
Unemployment Woes Complicate Kansas Budget Debate - A need for Kansas to raise money to cover payments to unemployed workers has created a new problem for legislators and groups hoping to prevent budget cuts across state government by raising taxes. The state expects its Unemployment Insurance Trust Fund to run out of money by mid-February and to borrow funds temporarily from the federal government to keep benefits flowing. Kansas law requires businesses to refill the fund, which triggered a $209 million increase in their payments for this year. Meanwhile, Democratic Gov. Mark Parkinson and the Republican-controlled Legislature are wrestling with a projected budget shortfall of nearly $400 million for the fiscal year that begins July 1.
N.J. Faces $2 Billion Budget Gap, Forecaster Says (Bloomberg) -- New Jersey, the third-most indebted U.S. state, faces a $2 billion budget gap in the current fiscal year, the Office of Legislative Services said. The figure is double the estimate of former Governor Jon Corzine. Revenue will fall $1.2 billion below target in the period ending June 30, while rising joblessness and other fallout from the U.S. recession will force the state to spend $669 million more than anticipated on social services, said David Rosen, the chief budget forecaster for the nonpartisan agency. Sales-tax revenue alone is running 6 percent below a year earlier, he said. State tax collections nationwide fell the most in 46 years in the first three quarters of 2006, the Albany, New York-based Rockefeller Institute of Government reported Jan. 7. The worst economic slump since the Great Depression has forced states to cut spending, raise taxes and pass down costs to local government.
Funding law adds another $238 million to shortfall - The $580 million reduction in revenue projections ordered by the Nevada Economic Forum on Friday is just the first shoe to drop on the state's beleaguered budget. The other shoe, the statute guaranteeing public school funding, will add well over $200 million to that total. Under Nevada Revised Statutes, state government must protect K-12 education from unanticipated reductions in sales tax revenues that school districts depend on to pay for teacher salaries and educational programs. Fully 2.6 cents of the sales tax collected in Nevada goes to K-12 education in the 17 county school districts. That law was enacted to protect public schools from budget shortfalls that could force teacher layoffs and program cuts halfway through the school year.
The Oregon Tax Vote - Yesterday, the citizens of Oregon ratified a large tax increase on corporations and the wealthy. The top personal income tax rate will rise by two percentage points and the minimum tax on corporations will also rise, including a new tax even on those with no profits to report, according to a Wall Street Journal report. According to Tax Foundation data, this would make the top rate in Oregon 13 percent This vote is considered a bellwether because the state has previously been supportive of tax limitation measures. Also, it appears that populist anger, which has previously been channeled toward the anti-tax tea party movement, may have the potential to swing in the other direction when people are faced with cuts in programs with wide support.
DOES OREGON COUNT AS A 'MESSAGE,' TOO? - Oregon voters since 1990 have limited property taxes, rejected sales taxes and vetoed across-the-board income taxes. But with 87% of the ballots counted, the measure to raise income taxes on households earning more than $250,000 a year, and individuals earning more than $125,000, was winning with 54.1%. A second measure to raise the state's corporate income tax was ahead with 53.6%.One can only assume that Republicans will see these results, notice that usually-tax-averse voters just endorsed tax increases, and interpret Oregon's vote as "sending a signal" about the kind of economic policies Americans want to see right now. Or maybe not.
Bradbury would create 'Bank of Oregon' if he were governor - The state of Oregon should have its own bank so taxpayer dollars could help fund local businesses instead of boosting the profits of big multinational banks, says Bill Bradbury, Democratic candidate for governor and former secretary of state. Bradbury announced his proposal today in Portland as part of his plan to find jobs for more Oregonians. The state bank, modeled on one in North Dakota, would form the cornerstone of his jobs proposal, he said. "It's time to make Oregon's money work for Oregonians," Bradbury said. Small businesses are hurting because banks are squeezing off credit necessary for growth.
Study puts state budget hole at $12.8 billion - A state budget review conducted by a Chicago economic think tank pegs the Illinois deficit at $12.8 billion. The total, compiled by the Civic Federation in a report released Friday, shows the hole in the current budget has grown nearly $2 billion to $5.7 billion. The next budget, which needs to be approved in the coming months and takes effect July 1, will not only carry that hole over, but will be written without billions in federal stimulus money and bear the responsibility of paying back loans used to try to balance current spending. Added all up, the deficit reaches $12.8 billion, the federation says
Illinois is Broke - By July, Illinois will be $130,000,000,000 (that's BILLION!) in debt. This crushing load hampers the state's ability to fund public schools and universities, health care, and other essential public services. Most of that money is owed to the state's pension funds and retiree health care plans. And YOUR SHARE of that debt is $25,000 per household. How did this happen? Basically, Illinois spends $3 for every $2 it takes in. Only in Springfield is this kind of math possible. The state accomplishes this by borrowing or by simply ignoring its unpaid bills. And it has been doing so for years. This year alone, Illinois will be short more than $14,000,000,000. Things are so bad that Illinois now has one of the worst budget deficits in the nation. This has to stop! Financial disaster is on the horizon. We can no longer ignore the problem.
Will Illinois Go Bankrupt Because of Scott Brown? - A sharp reader offers the following hypothesis: Illinois is fundamentally bankrupt. It has less than $1 million in cash, pays vendors net 90, and owes its state university $450 million that it cannot pay. Oh, and it also has $60 billion in unfunded pension liabilities. Now that the Republicans have 41 votes in the Senate, Illinois can't count on any federal aid. The President's home state will thus become insolvent.(For some background on Illinois's budget woes, see this link.)My reader expresses similar concerns about California (where Governor Schwarzenegger's budget assumes $6.9 billion in federal aid) and New York.All of which raises a question for policymakers and municipal bond investors.
Granholm seeks to retire 46,000 to address deficit - Granholm unveiled her reform plan Friday at a meeting of Lansing Rotary Club at the Radisson Hotel - five days before she is scheduled to give her State of the State address. The plan encourages state employees with 30 years or more of service to retire by forcing them to contribute 3 percent of their salary toward retirement effective Oct. 1 - and eliminating their retirement vision and dental care if they refuse to step down. In exchange, eligible employees would earn a slightly higher pension. "It's more stick than it is carrot," said Ray Holman, spokesman for United Auto Workers 6000, a union that represents 17,000 state administrative workers, social service caseworkers and other employees."We're open to talking to the governor about (other) early retirement proposals. This amounts to a 3 percent pay cut."
State layoffs to affect PERS assets -Nevada — Massive layoffs of state employees could induce many long-term workers to retire and potentially affect the assets of the Public Employees Retirement System, its top official said today. Gov. Jim Gibbons plans to call the Legislature into a special session to deal with sagging tax revenues. Employee representatives have said laying off workers, cutting pay and reducing or eliminating some programs are his most likely options. PERS has $22 billion invested to pay for retirement for its 40,000 retirees and 104,000 active members, which include local government employees, teachers and general state government employees. The money now covers 72.5 percent of what PERS estimates ultimately will be needed to pay their retirement costs, down from a peak of 83.4 percent.
California Controller: State Will Be Out of Cash in March Unless Budget is Cut - State Controller John Chiang issued a stern warning Friday about California's cash reserves, telling legislative leaders and Gov. Arnold Schwarzenegger they must act on nearly $9 billion in budget cuts the governor is seeking by March — or the state will run out of cash to pay its bills.Without making those cuts — which Chiang says will pump $1.3 billion into the state's checking account — California would be broke by April 1, no fooling. The state wouldn't climb back to what's considered a safe level of cash on hand, $2.5 billion, until later that month, when tax revenues are expected to begin flowing into Sacramento.
It's official: CalPERS loses $500 million on New York apartment deal - The California Public Employees' Retirement System officially has lost a $500-million stake in the biggest deal ever in the U.S. for a single piece of residential property.The owners of Stuyvesant Town and Peter Cooper Village, a complex of 56 buildings with 11,000 rental units near the East River in Manahattan, have agreed to turn the property over to creditors after defaulting on $4.4 billion in debt. CalPERS had committed 26.5% of the partnership led by Tishman Speyer Properties and Black Rock Inc.
CalPERS, CalSTRS funding levels plunge - A decade ago, when the stock market was booming, the funding levels of CalPERS and CalSTRS were both over 100 percent, a projection that assets would be more than enough to meet pension costs in the decades ahead. Now the funding levels of the nation's two largest public pension funds have dropped below what some regard as the acceptable minimum, 80 percent, and for different reasons are not likely to bounce back anytime soon. Reflecting heavy losses in the historic stock market crash and other investments, a new report says the funding level of the California State Teachers Retirement System dropped to 77 percent last June — 58 percent without "smoothing" that spreads out losses.
California Teachers Pension Fund $42.6 Billion Short (Bloomberg) -- The California State Teachers Retirement System, the second biggest U.S. public pension, will need to ask taxpayers for more money after investment losses left it underfunded by $42.6 billion. The pension's unfunded liability, the difference between assets and anticipated future costs, almost doubled from $22.5 billion in June 2008, according to a report Chief Executive Officer Jack Ehnes will deliver to the board Feb. 5. The fund will ask lawmakers next year for an increase of as much as 14 percent to what the state and school districts already pay toward employee retirement benefits, said the report, which was posted on the fund's Web site today.
California Public Pension Costs Have Grown 2,000% in a Decade - The unsustainable public pension problem is exemplified in California, where the state must cough up money to keep the defined-benefit program paying out to keep its promises. Voting for increases in public pension benefits is popular, since it's an expensive debt that won't come due for a while. A while is starting to be now in California: backfilling pensions is pulling $3 billion out of the general fund each year. Costs for the pensions have grown 2,000% in the past decade, while state revenues grew by just 24%.
Our kids will inherit pension-bond debt - The term "pension bond" sounds innocuous enough. Surely issuing bonds to shore up pension plans is a good thing, isn't it? Actually, no. In fact, these bonds represent the purest form of generational theft. Here's how they work.The city of Houston maintains pension plans for its employees. These plans guarantee qualifying employees a certain amount of monthly retirement income. Each year the city and the employees contribute money into a trust to fund these future payments. Periodically, the city hires actuaries to estimate how much should be set aside each year and to assess whether the amounts in the trust funds are sufficient to make the future payments. I am sure you will not be shocked to learn that the city has not set aside enough money to fund the future payments. The amount of the shortfall is subject to a fair amount of guesswork but is currently probably in the $2 billion to $3 billion range.
Medicaid draining state's wallet - Put aside the furor about national health care reform. Florida leaders have a more immediate problem. With jobs disappearing and incomes sinking, Floridians are increasingly turning to the government-run Medicaid program for health care -- driving up costs and playing a major role in a potential $3 billion state budget shortfall next year. The shortfall could lead to cuts in Medicaid, which serves low-income, elderly and disabled people, while also forcing lawmakers to make tough election-year spending choices among health and education programs. Medicaid is jointly funded by the state and federal governments, and Florida faces a shortfall of as much as $1.8 billion in paying for its share during the fiscal year
CBO: Medicare Spending to Reach $528 Billion in 2010 - Gross spending on the Medicare program is expected to total $528 billion in 2010, $735 billion in 2015, and $1,038 billion in 2020, according to the Congressional Budget Office. The CBO also expects for Medicare spending to rise (as a percentage of gross domestic product (GDP) from 3.5 percent in 2009 to 4.6 percent in 2020. CBO estimates Social Security, Medicare and Medicaid will account for about 70 percent of mandatory spending (excluding offsetting receipts) in 2010. However, by 2020, this percentage is expected to climb to 80 percent of mandatory spending under current law. Under current law, the CBO also reports that Medicare and Medicaid spending (combined) is expected to grow faster than the economy, reaching 6.6 percent of GDP by 2020 and potentially reaching 10 percent by 2035
Medicare/Medicaid spending a national 'threat,' says CBO - The Congressional Budget Office (CBO) cites federal healthcare spending as "the single greatest threat" to the United States' budget stability in its new report, The Budget and Economic Outlook: Fiscal Years 2010 to 2020. Under current law, Medicare spending will reach $1,038 billion in 2020, with Medicaid spending coming in at $458 billion. In 2009, higher unemployment drove up Medicaid spending by 9 percent ($18 billion). For the previous 10 years, the program's average annual growth rate had held at 7 percent. Medicare outlays also rose faster than average, jumping by 10 percent ($39 billion). Medicare and Medicaid spending, exclusive of stimulus spending, should continue to grow at a combined average rate of about 7 percent a year between 2011 and 2020."
Obama to propose further Medicaid help for states - The Obama administration will propose giving cash-strapped states about $25 billion worth of help with their Medicaid budgets when presenting its 2011 budget on Monday, a White House official with knowledge of the plan said Friday. The proposal would extend for six months - until July of next year - the help that states got in last year's economic stimulus bill with their Medicaid programs. Under the Medicaid initiative, the federal government takes on a higher share of state Medicaid costs, with every state getting an additional 6.2 percent of its Medicaid budget paid for by the feds. States with higher unemployment rates get additional help.
Most parents don't realize their 4- or 5-year-olds are overweight or obese - Half of the mothers who took part in a study thought that their obese four or five year-old was normal weight, as did 39 per cent of the fathers, according to the February issue of Acta Paediatrica. When it came to overweight children, 75 per cent of mothers and 77 per cent of fathers thought that their child was normal weight.More than 800 parents of 439 children took part in the study, carried out by researchers from the University Medical Centre Groningen in The Netherlands. Five per cent of the children were overweight, four were obese and the rest were normal weight. "As well as asking them to provide information on their child's height and weight, they were also asked to provide information on their own vital statistics" says Professor Pieter Sauer from the Department of Paediatrics
Funding Public Health Care With a Publicly Owned Bank: How Canada Did It - The good news is that this means there is still a chance of getting legislation that includes what Obama's supporters thought they were getting when they elected him - a universal health care plan on the model of Medicare.That still leaves the question of price, but all industrialized countries except the United States have managed to foot the bill for universal health care. How is it that they can afford it when we can't? Do they have some secret funding source that we don't have? In the case of our nearest neighbor Canada, the answer is actually that they do. At least, they did for the first two decades of their national health service -- long enough to get it up and running.
Health Bill Stalled, Obama Juggles an Altered Agenda - NYTimes - The White House on Thursday signaled the outlines of its strategy for breaking the partisan logjam holding up President Obama's agenda, saying Democrats would move quickly to underline their commitment to fixing the broken economy and to build an election-year case against Republicans if they do not cooperate. With Mr. Obama's health care overhaul stalled on Capitol Hill, Rahm Emanuel, the White House chief of staff, said in an interview that Democrats would try to act first on job creation, reducing the deficit and imposing tighter regulation on banks before returning to the health measure, the president's top priority from last year.
NY pols stunned to learn Obama administration opposes funding for 9/11 health bill - The Obama administration stunned New York's delegation Thursday, dropping the bombshell news that it does not support funding the 9/11 health bill. The state's two senators and 14 House members met with Health and Human Services Secretary Kathleen Sebelius just hours before President Obama implored in his speech to the nation for Congress to come together and deliver a government that delivers on its promises to the American people. So the legislators were floored to learn the Democratic administration does not want to deliver for the tens of thousands of people who sacrificed after 9/11, and the untold numbers now getting sick. The 9/11 bill would spend about $11 billion over 30 years to care for the growing numbers of people getting sick from their service at Ground Zero, and to compensate families for their losses.
Ezra Klein: Rahm Emanuel makes me very pessimistic about health-care reform - According to the New York Times, the "White House on Thursday signaled the outlines of its strategy for breaking the partisan logjam holding up President Obama's agenda." With Mr. Obama's health care overhaul stalled on Capitol Hill, Rahm Emanuel, the White House chief of staff, said in an interview that Democrats would try to act first on job creation, reducing the deficit and imposing tighter regulation on banks before returning to the health measure, the president's top priority from last year. It is continued statements of commitment from the key players paired with a continued stretching of the timetable. Like everything else in life, policy initiatives grow old and die, even if people still love them.
It's Not Rahm's Fault. It's Obama's Fault - Obama could have proposed a bill that expanded coverage and raised taxes to pay for it. True, that would have pissed off voters who really don't like tax increases. Instead, he proposed raising taxes and instituting some ominously vague, to-be-determined, 'scientific' and anti-democratic restraints on health care treatments. This successfully pissed off voters who really don't like tax increases and voters--mainly older voters--worried about being denied treatments. The combination of losing the anti-government voters and losing seniors may prove fatal. ... If it does, it won't be David Axelrod's fault, and it won't be Rahm Emanuel's fault. It won't even be Peter Orszag's fault. It's Obama's fault. Obama's the one who fell for Orszag's Laffer-curve-like, win-win, 'this will save money' line, and who raised the issue at every opportunity in the middle of 2009. It's Obama who became infatuated with--and ordered his staff to read--Atul Gawande's amorphous New Yorker curve-bending argument and Ron Brownstein's even-less-convincing-than-it-seemed-at-the-time cheerleading piece. It was Obama who eagerly let himself get suckered into discussing end-of-life rationing in the pages of the New York Times.
The Phantom Policy Conflict - Paul Krugman - The idea that Obama made a mistake by focusing on health care instead of the economy seems to be catching on on the left as well as on the right. But my question remains: what are we talking about, specifically? Maybe, maybe, a relatively small job-creation program could have been pushed through this fall. And maybe, if it had been sufficiently unorthodox — say, a job-creation tax credit — it might have had enough bang for the buck to make a noticeable difference. But aside from that, what? We could have had a lot of speeches about the economy. Would that have helped, absent a policy to make things better?
Pelosi Determined to Get Health Reform Done - Nancy Pelosi is a rare leader who actually puts accomplish things that impact people's lives in a positive way at the center of what she's doing. And you see that loud and clear in this statement of her determination to do health reform: As I said to some friends yesterday in the press, we will go through the gate. If the gate is closed, we will go over the fence. If the fence is too high, we will pole vault in. If that doesn't work, we will parachute in. But we are going to get health care reform passed for the American people for their own personal health and economic security and for the important role that it will play in reducing the deficit
House Doesn't Trust White House or Senate On Health Care - House Democrats are dramatically divided on how to get health care passed in part because they don't trust the White House or Senate to live up to their promises. TPMDC has been speaking with House Democratic leadership aides, administration officials and those close to the health care negotiations to get a sense of where the talks are going, if anywhere. We've sketched out the plans being floated by members, but a big hangup is that more than half of House Democrats don't want to pass the Senate version of the bill with the promise that the bigger differences they've already been hammering out would be fixed with a second bill. The bottom line is that many members feel betrayed by the White House and Senate and just don't trust that a fix would pass. If their fears pan out, members would be left with a more conservative bill than they passed last fall, and none of the compromises they negotiated with union leaders on how to pay for health care.
Using Reconciliation Process to Enact Health Reform Would Be Fully Consistent With Past Practice: Some critics have charged that using reconciliation to enact a major change in policy, such as health reform, would be unprecedented and would represent a gross misuse of the process. A review of the past use of reconciliation demonstrates, however, that this charge is incorrect: Congress has employed reconciliation many times to make major policy shifts. These include sweeping welfare reform enacted in 1996, massive tax cuts in 2001 and 2003, and creation or expansion of several health coverage programs. Using reconciliation to help enact health reform would be consistent with past congressional practice The sharp break with past practice took place in 2001, when Congress used reconciliation to enact a large tax cut that greatly increased federal deficits and debt. Prior to 2001, every major reconciliation bill enacted into law reduced the deficit.
Coal and Treasuries - Surprisingly, or perhaps perversely, 2010 sees an accelerated continuation of the 10 year trend in developing world coal demand and developed world credit growth. For all of its reflationary firepower, the OECD has at best eased the acute phase of deflation while sparking strong inflation in the Non-OECD. Here in the developed world we continue to see asset price deflation in real estate, though notably, our purchasing power has started to fall in the aggregate in both the US and in Britain. (In China, inflation threatens to rage. ) The problem for the OECD is that energy demand in the Non OECD does not translate well to demand growth for US Treasuries or UK Gilts. Coal prices are strong however because US utilities may not require more coal but pan-Asian utilities continue to build capacity, and the trajectory higher continues.
Appalachian States Should Look Beyond Coal - Coal production in Central Appalachia is likely to continue its 12-year decline, and an environmental consulting firm said Tuesday it's time policy makers and legislators in four states work to diversify the region's economy. A report issued by Downstream Strategies of Morgantown predicts production in West Virginia, Kentucky, Virginia and Tennessee will fall nearly 50 percent within a decade and urges those states to adopt laws, low-interest loan programs and other measures to support the development of renewable energy sources. The report blames the decline in part on increased competition from other coal-producing regions and other sources of energy, such as natural gas. It also points to the depletion of the most accessible, lowest-cost coal reserves and increasingly stringent environmental regulations.
W.Va. Gov Slams Federal 'Cap and Trade' Bill - ABC News - A day after meeting with environmentalists concerned about surface mining, Gov. Joe Manchin asked the Legislature to approve a symbolic resolution affirming that coal is still king in West Virginia. They condemn federal legislation aimed at reducing carbon emissions with so-called "cap and trade" programs, and express support for investment in new energy industry technologies aimed at reducing pollution from coal. The resolutions warn that the federal legislation, which has passed the U.S. House of Representatives but stalled in the Senate, would cost West Virginia 10,000 jobs by 2020 and shrink its gross domestic product by $750 million in the same period. They also state with confidence that coal will continue to be a dominant source of electrical power, as overseas demand rises.
North Dakota Coal-to-Fuel Plant is Still on Hold - Developers of a coal-to-liquid fuel factory proposed for western North Dakota say a decision on whether to build the $4 billion plant depends on a change in political climate. And backers are asking for a second extension of state aid to study the project. "We still see the project as viable with great payback," said David Straley, a North American Coal Corp. spokesman. "But until we get a read on the next Congress, we're still in a holding pattern."
Post Peak Mexico - Each year brings fresh updates to the body of peak oil research but I thought the recent An Explanation of Oil Peaking, R.W. Bentley, University of Reading 2009 was particularly good reading. Bentley does such a good job of explaining in direct terms a simple model for peak oil, without excluding any of the attendant complexity. (This would be a very good introduction for someone new to the subject). I especially liked his articulation of how the total production arc for, say a country or a region, is a sequence composed of the largest fields eventually giving way to many smaller fields. That description made me think of the post-peak production profile of the United States, with its long-life extension at levels well below the 1971 peak. And, it also brought to mind Mexico. The chart you see here includes the latest updated production, provided just today by PEMEX. Total crude oil for the month of December comes in at 2.590 mbpd. This is a slight uptick to November's 2.553 mbpd. Of course, the real story in the chart is that Mexico can never, and will never, get back to its peak year of 2004.
Oil Prices and China - Two weeks ago I suggested it might be time to start looking for signs of demand destruction for oil (like we did in the first half of 2008). So far domestic demand (as far as vehicle miles) is still increasing slightly, however demand growth in China might be slowing ... From MarketWatch: Oil slumps on expected rise in supplies, China worries Oil futures fell on Tuesday, pressured by concerns that China's attempt to slow its growth will curb demand and expectations that U.S. crude-oil supplies are rising.
Oil demand has peaked in developed world: IEA (Reuters) - Oil use in rich industrialized countries will never return to 2006 and 2007 levels because of more fuel efficiency and the use of alternatives, the chief economist of the International Energy Agency said on Thursday. The bold prediction, is significant because the IEA advises 28 countries on energy policy and its oil demand forecasts are closely watched by policymakers. "When we look at the OECD countries -- the U.S., Europe and Japan -- I think the level of demand that we have seen in 2006 and 2007, we will never see again," Flat or declining OECD demand may ease any strain on oil prices caused by ever-growing consumption in emerging economies. The Organization for Economic Cooperation and Development (OECD) countries will account for 53 percent of world demand in 2010, according to the IEA.
America's Love Affair with the Automobile May Be Coming to an End. - The U.S. fleet has apparently peaked and started to decline. In 2009, the 14 million cars scrapped exceeded the 10 million new cars sold, shrinking the U.S. fleet by 4 million, or nearly 2 percent in one year. While this is widely associated with the recession, it is in fact caused by several converging forces. Future U.S. fleet size will be determined by the relationship between two trends: new car sales and cars scrapped. Cars scrapped exceeded new car sales in 2009 for the first time since World War II, shrinking the U.S. vehicle fleet from the all-time high of 250 million to 246 million. Market saturation may be the dominant contributor to the peaking of the U.S. fleet. The United States now has 246 million registered motor vehicles and 209 million licensed drivers--nearly 5 vehicles for every 4 drivers. When is enough enough?
The electric car: Turn out the lights - Toronto Globe and Mail - Sure, the cost of operating one of these cars will be cheaper than running the gas-powered one you're replacing, but will the lithium-ion battery stand up to years of driving? Whether car batteries prove to be an economically viable way of storing energy remains to be seen (gasoline carries about 20 times more energy per pound) but storing power and generating it are two very different things. Batteries, lithium-ion or otherwise, need to be charged by an external power source. And just where is the energy charging all those batteries going to come from? Just which part of the continent's power grid has that type of spare capacity?
US Must Transition to Clean Power by 2012 or Miss the Chance : CleanTechnica - If the US was smart, we would be funding a massive switch to renewable energy now, while we still can. By 2012 we could be out of luck. China is sitting on the only currently mined sources of many of the rare earth minerals needed to build electric cars, solar panels and wind turbines. Reasonably enough, having developed the resources, China wants to keep them for its own needs, that is has planned for. But we are not smart. Even before the Supreme Court ruling this week, we already allowed fossil interests to dictate our energy policy by allowing the purchase of both policy makers and the formerly public airwaves to impede smart energy policy. In no other democracy is such corruption allowed. The result is that we will be out of the ability to protect ourselves from peak oil from 2012 to at least 2020 (the earliest that new rare earth mines outside China might begin to come online). If we don't pass effective climate legislation this year, we will miss that crucial transition window.
Obama Said to Seek $54 Billion in Nuclear-Power Loans (Bloomberg) -- President Barack Obama, acting on a pledge to support nuclear power, will propose tripling U.S. loan guarantees for new reactors to more than $54 billion, an administration official said. The additional loan guarantees in Obama's budget, which will be released Feb. 1, are part of an effort to bolster nuclear-power production after the president called for doing so in his State of the Union address Jan. 27. In a conference call with reporters, Energy Secretary Steven Chu today announced a panel to find a solution to storing the waste generated by nuclear plants. For the 2011 budget, the department will add $36 billion to the $18.5 billion already approved for nuclear-power plant loan guarantees, according to the official, who asked not to be identified because the budget hasn't been released. Congress started the program in 2005 to encourage new plant construction, but the department has yet to issue a loan guarantee.
Unintended Consequences of Government Policies: The Depletion of America's Wetlands - In an analysis that appeared in 1990 in the American Economic Review, Adam Jaffe of Brandies University and I demonstrated that the depletion of forested wetlands in the Mississippi Valley – an important environmental problem and a North American precursor to the loss of South American rain forests – was exacerbated by Federal water-project investments, despite explicit Federal policy to protect wetlands. Forested wetlands are among the world's most productive ecosystems, providing improved water quality, erosion control, floodwater storage, timber, wildlife habitat, and recreational opportunities. Their depletion globally is a serious problem; and preservation and protection of wetlands have been major Federal environmental policy goals for forty years. From the 1950s through the mid-1970s, over one-half million acres of U.S. wetlands were lost each year. This rate slowed greatly in subsequent years, averaging approximately 60 thousand acres lost per year in the lower 48 states from 1986 through 1997. And by 2006, the Bush administration's Secretary of the Interior, Gale Norton, was able to announce a net gain in wetland acreage in the United Sates, due to restoration and creation activities surpassing wetland losses.
Is The Real Action On Climate Policy In The States? | The New Republic The only people who can really make a dent in U.S. energy policy are wandering around Capitol Hill, right? It's Congress or bust? Well, maybe. But that option's not looking too bright these days, given the fog around whether Congress will even pass a climate bill this year (or next year, or…). So maybe it's time to figure out if the states really could get together and pick up the slack. The person to ask would be Terry Tamminen, who advised Arnold Schwarzenegger on climate policy back when California was drafting its plan to reduce carbon emissions 25 percent by 2020. Since then, Tamminen has traveled around the country trying to convince other governors to adopt their own climate plans—Florida's Charlie Crist was another early convert. "You have thirty-three states with climate plans."
Courts as Battlefields in Climate Fights - Kivalina, an Inupiat Eskimo village of 400 perched on a barrier island north of the Arctic Circle, is accusing two dozen fuel and utility companies of helping to cause the climate change that it says is accelerating the island's erosion. Blocks of sea ice used to protect the town's fragile coast from October on, but "we don't have buildup right now, and it is January," said Janet Mitchell, Kivalina's administrator. "We live in anxiety during high-winds seasons." The village wants the companies, including ExxonMobil, Shell Oil, and many others, to pay the costs of relocating to the mainland, which could amount to as much as $400 million.
The SEC Goes Green - SEC just voted, 3-2, to offer "interpretive guidance" to companies on making public the threats posed to their business by climate change. This sounds marvelous: we love transparency and the environment. But though one hates to be the dour libertarian voice panning some feel-good consensus measure . . . well, this is deeply silly. Rising sea levels are not a good thing (IMHO), but they are a slow-moving disaster, which companies will have ample time to disclose as they actually happen. (And aside from the owners of beachfront hotels or real estate in Manhattan's downtown financial district, I'm hard pressed to think of companies that are at material risk from the rise).
Minimal climate goal set by Australia- AUSTRALIA has declared it will not go beyond a 5 per cent cut in greenhouse gas emissions by 2020 without guaranteed action by major emitters including the US, China and India. The Government's formal submission to the Copenhagen Accord - the widely criticised agreement hatched between the US and major developing countries at the conference last month - pledges to cut emissions between 5 and 25 per cent below 2000 levels. It is the same range taken to the December meeting, bucking some expectations the Government would commit to a specific target. Climate Change Minister Penny Wong said the Government would stick to its minimalist position unless there was substantial and verifiable action internationally. If the impasse in global climate negotiations is not resolved in 2011, the Government will set a 5 per cent target under its proposed emissions trading scheme, giving business certainty for the planned start of full trading in July 2012.
10% decrease in water vapor in the stratosphere over the last 10 years has slowed Earth's warming trends, researchers say - A decrease in water vapor concentrations in parts of the middle atmosphere has contributed to a slowing of Earth's warming, researchers are reporting. The finding, they said, offers part of the explanation for a string of years with relatively stable global surface temperatures. Despite the decrease in water vapor, the study's authors said, the overall trend is still toward a warming climate, primarily caused by a buildup in emissions of carbon dioxide and other heat-trapping gases from human sources. "This doesn't alter the fundamental conclusion that the world has warmed and that most of that warming has to do with greenhouse gas emissions caused by man," said Susan Solomon, a climate scientist at the National Oceanic and Atmospheric Administration and the lead author of the report, which appears in the January 29, 2010, issue of the journal Science.
Ice is 'rotten' in the Beaufort Sea Recent observations show that Beaufort Sea ice was not as it appeared in the summer of 2009. Sea ice cover serves as an indication of climate and has implications for marine and terrestrial ecosystems In early September 2009, satellite measurements implied that most of the ice in the Beaufort Sea either was thick ice that had been there for multiple years or was thick, first-year ice. However, in situ observations made in September 2009 by Barber et al. show that much of the ice was in fact "rotten" ice -- ice that is thinner, heavily decayed, and structurally weak due to a uniform temperature throughout.
Arctic 'Melt Season' Is Growing Longer, New Research Demonstrates - New NASA-led research shows that the melt season for Arctic sea ice has lengthened by an average of 20 days over the span of 28 years, or 6.4 days per decade. The finding stems from scientists' work to compile the first comprehensive record of melt onset and freeze-up dates -- the "melt season" -- for the entire Arctic. The longer melt season, described by Thorsten Markus of NASA's Goddard Space Flight Center in Greenbelt, Md., in the Journal of Geophysical Research -- Oceans, has implications for the future of Arctic sea ice. Open water that appears earlier in the season absorbs more heat from the sun throughout summer, further warming the water and promoting more melting. "This feedback process has always been present, yet with more extensive open water this feedback becomes even stronger and further boosts ice loss. see: Larger image.
Indian glaciologist fires back at skeptics - "It is a fact that global warming is happening. If the Arctic Sea ice is melting, how can the Himalayan glaciers not be melting?" glaciologist Syed Iqbal Hasnain asked indignantly. Amid the brouhaha over last week's retraction by a United Nations body of its 2007 report that the Himalayan glaciers would disappear by 2035, global warming skeptics quickly seized on the error, noting the rash of media reports on the issue, which they believe bolstered their position. But Hasnain, who found himself at the center of the Himalayan meltdown controversy, said it is "ridiculous" to assume that the glaciers are not melting.
Developed nations urged to honor climate change pledges to poor countries - The Boston Globe Brazil, South Africa, India, and China, called yesterday for developed countries to quickly begin handing over the $10 billion pledged in Copenhagen to poor countries to help them deal with the effects of climate change. The first funds should go to the least developed countries, including small island states and African countries, said Xie Zhenhua, China's top climate change negotiator after a meeting of the representatives of the four nations in New Delhi. The four developing world giants - known as BASIC - also said they would submit their plans for combating climate change to the UN this week.
A new kind of eco-terrorist - Al-Qaida leader Osama bin Laden has called in a new audiotape for the world to boycott American goods and the U.S. dollar, blaming the United States and other industrialized countries for global warming. In the tape, aired in part on Al-Jazeera television Friday, bin Laden warns of the dangers of climate change and says that the way to stop it is to bring "the wheels of the American economy" to a halt. He says the world should "stop consuming American products" and "refrain from using the dollar," according to a transcript on Al-Jazeera's Web site.
Imported from Asia: Ozone - Ever wonder how the western US has high ozone levels when the winds usually blow in off the Pacific Ocean? Did you think it was all from the cars clogging the freeways? Turns out, it is caused in part from emissions of ozone generating air pollutants from Asia. A study by the National Oceanic and Atmospheric Administration (NOAA) shows that Springtime ozone levels above western North America are rising, primarily due to air flowing eastward from the Pacific Ocean, a trend that is most significant when the air originates in Asia. These increases in ozone could make it more difficult for the United States to meet Clean Air Act standards for ozone pollution at ground level, according to a new international study published online Jan. 20 in the journal Nature.
Emerging Markets, Copper Tumble at Quantitative Tightening - Beijing is clamping down on Chinese bank loans and its M2 money supply, and central banks in Australia and India are expected to tighten their money policies soon. Adding to the jittery tone, US President Barack Obama's has shocked investors, by moving to sever the White House's clandestine partnership with the Oligarchic banks on Wall Street, thus removing a key prop for the US-stock market. Emerging markets including Brazil, China, and India accounted for the bulk of global growth last year, as the developed world struggled with high unemployment, soaring public debt, and badly impaired banks. Private capital flows into emerging markets equaled $435-billion last year, as lenders and traders were once again tempted by riskier assets, and shifted money out of safe-haven assets like government bonds. Capital flows were sustained by better growth prospects and carry traders attracted to higher interest rates in emerging Asia and Latin America.
China Wealth Fund Weighs New Commodities Bets After 2009 Gains - (Bloomberg) -- China's $300 billion sovereign wealth fund is considering new investments in resource-related companies after bets on commodities producers from the U.S. to Kazakhstan paid off in 2009. China Investment Corp. increased spending on energy and minerals assets last year to profit as the global economy recovers. The Beijing-based fund avoided the worst of the credit crunch in its first full year in 2008 and may have had a return of more than 10 percent in 2009. CIC has had "early" talks for direct investments in Brazil, the world's second-biggest iron-ore exporter, and Mexico, the No. 2 silver producer, CIC pumped about $10 billion into commodity-related companies in the second half of 2009, according to data compiled by Bloomberg. With China's reserves at $2.4 trillion and swelling by an average of $37.8 billion a month last year, CIC has asked the government for another $200 billion, the Economic Observer reported Nov. 21, citing a person it didn't identify.
Really Good News From China and Brazil - Clive Cookson reports that there's been a "64-fold increase in [Chinese] peer-reviewed scientific papers since 1981": China scientists lead world in research growth. Projecting ahead: Jonathan Adams, research evaluation director at Thomson Reuters, said China's "awe-inspiring" growth had put it in second place to the US – and if it continues on its trajectory it will be the largest producer of scientific knowledge by 2020. Chinese research in chemistry and materials science is especially strong. Although its quality remains mixed, Chinese research has also become more collaborative, with almost 9 per cent of papers originating in China having at least one US-based co-author. Meanwhile the volume of research coming out of India and, especially, Brazil has been growing as well. Brazil stands out in health, life sciences, agriculture and environmental research. It is a world leader in using biofuels in auto and aero engines.
The myth of Chinas blithe consensus – Pettis -This will be an unusual entry in that rather than focus on economic analysis I want to address one of the too-widely-repeated myths common outside China which, I think, may distort some of our understanding of China's growth trajectory. One of the more absurd claims often made by foreign observers with little knowledge of China is that only "foreign pundits"are worried by China's debt levels, the undervaluation of the currency, the financial system, or the development model. Chinese scholars, according to this line, are actually very bullish about everything happening in China and agree very broadly on the measures that have been taken, and so the opinions of foreign worriers should be heavily discounted because clearly they cannot know more than the locals. This is wrong on two counts.
China Cracks Down on Banks' Loan-Sale Practice - WSJ - BEIJING—China's banking regulator has quietly cracked down on banks selling their loans to trust companies, taking aim at a little-understood category of transactions that had fueled concerns about transparency in the banking system. The transactions at issue had enabled banks to move loans off their balance sheets by temporarily selling them to Chinese trusts, lightly regulated companies that then repackaged the loans into financial instruments for clients. The banks promised to repurchase the loans any time between a few weeks and a few years later.
The China Fix - In my more than two decades in China, I have seldom seen the foreign business community more angry and disillusioned than it is today. Such sentiment goes beyond the Internet censorship and cyberspying that led to Google's Jan. 12 threat to bail out of China, or the clash of values (freedom vs. control) implied by the Google case. It is about the perception that antiforeign attitudes and policies in China have been growing and hardening since the global economic crisis pushed the U.S. and Europe into a tailspin and launched China to its very uncomfortable stardom on the world stage. Visiting CEOs' banquet-table chatter is now dominated by swapping tales of arrogant and insolent Chinese bureaucrats and business partners. The litany includes purposefully inconsistent and nontransparent enforcement of regulations, rampant intellectual-property theft, state penetration of multinationals through union and Communist Party organizations, blatant market impediments through rigged product standards and testing, politicized courts and agencies that almost always favor local companies, creative and selective enforcement of WTO requirements ... The list goes on.
Rethinking The Population Crisis_- A crisis is developing among the nearly 100 million households throughout China, one that has been building gradually and will affect the country greatly in the near future. This crisis involves the imminent risk of negative population growth (NPG). It's hard to imagine that China, for years concerned about a population explosion, could be worried about too little growth. The country has a population of 1.32 billion people, and though that total is still going up, the increases are getting smaller and smaller. So even though China's population has increased since 2000, when compared with the previous generation in terms of the actual number of children born, the birthrate has declined 40 percent. According to demographic researchers, Chinese couples have an average of only 1.5 children, which is well below the replacement rate of 2.1. That means the population will inevitably begin declining in the near future. The impact will be huge, all but unavoidable and may take a century to reverse.In terms of the country's policy on population control, 2010 will be a crucial year because of three key factors. First, the consistently low birth rate since the 1990s will cause a noticeable contraction in newly available labor. The section of the population between 20 and 24 years of age will decrease sharply from 125 million in 2010 to just 68 million in 2020, a 50 percent decline in only 10 years.
Why Do the Chinese Save So Much? - Some have attributed the savings primarily to Chinese corporations rather than households. Others point to a precautionary savings motive: because Chinese people are worried about costs of healthcare, education and old-age pensions and are unsure about how much these costs might change over time, they respond by saving more. Other explanations point to habit formation or financial development."But these explanations do not tell the whole story, and possibly are not the most important part of the story," says Wei. Instead, Wei hypothesized that an important social phenomenon is the primary driver of the high savings rate: for the last few decades China has experienced a significant imbalance between the number of male and female children born to its citizens. There are approximately 122 boys born for every 100 girls today, a ratio that translates into cutting about one in five Chinese men out of the marriage market when this generation of children grows up.A skewed sex ratio is fueling a highly competitive marriage market, driving up China's savings rate and with it the global trade imbalance.
It Begins: China Gets Drunk On Credit Card Debt - The Chinese real estate bubble is in full swing, but the country's citizens maintain a reputation for being thrifty and not taking on much debt. All that is about to change. Big time. In fact, it already is. A source in China confirms that in just the last few months, several of his colleagues -- as many as 30% of the employees at a medium sized IT services firm -- who never once had a credit card have started using them. Not just that, they're rolling over debt equivalent to 25% of their monthly salary. Remember, these are people with almost no experience with debt. This is not surprising. As the middle class emerges, and people have stable jobs, credit cards offer a quick shortcut to a nice jump in standard of living. Beyond that, other dynamics, such as the gender imbalance, will compell men to spend more for mating and competition purposes
Is China a Bubble? - A friend of mine who does just about all of his business providing a very specific service to selling to companies who do business with China. My friend tells me he believes "China is a bubble" which very much resembles the dot com bubble and the housing bubble. According to him, this is the resemblance - there is no due diligence to speak of on any deal involving China, not from the Chinese and not from the Westerners dealing with them, and all the deals are being done with "other people's money" and heavily leveraged. The Westerners also have the sense that it is China's time. So if you ask them about a particular deal they're doing and why they're doing it, if you scratch hard enough, it comes to because "its China." That includes the very biggest private equity funds in the world...
Caterpillar Hopes China Doesn't Send the World Through the Windshield - Global manufacturers, reliant on China as a growth engine, are keeping a close eye on that nation's moves to cool its economic expansion to avoid inflation. Only about 7% of Caterpillar's $33 billion in sales last year were in China, but China's growth is also driving up commodity prices. That filters through the global economy in ways that create demand for machinery all over the world: For instance, not only do copper miners in Chile need more of Cat's mining machines, but copper miners with fat paychecks then fuel another wave of demand for machines to build new houses, highways and shopping centers.
China beats U.S. in gov. Smart Grid funding with $7.3B - The Chinese government will be sinking $7.3 billion into the creation of a cleaner, more energy efficient Smart Grid in 2010, actually beating out the U.S.'s investment in the same area by more than $200 million, and rising to the top of the global list of Smart Grid leaders.The news indicates how Asia's largest country is getting serious about distributed energy generation, renewable sources like solar and wind, and transmission inefficiencies — all of which a more developed Smart Grid would tie together. It has become such a priority there, that China is actually spending more on grid improvements than it will on power generation projects. This is a major turnabout for the nation, which has been growing its energy infrastructure as fast as it can to promote economic growth. Still, the sum committed to building a smarter grid may not be enough.
Global supply of rare earth elements could be wiped out by 2012 - It's the bubble you've probably never heard of: The rare earth bubble. And it's due to pop in 2012, potentially devastating the industries of western nations that depend on these rare elements.What industries are those? The automobile industry uses tens of thousands of tons of rare earth elements each year, and advanced military technology depends on these elements, too. Lots of "green" technologies depend on them, including wind turbines, low-energy light bulbs and hybrid car batteries. In fact, much of western civilization depends on rare earth elements such as terbium, lanthanum and neodymium. So what's the problem with these rare elements? 97 percent of the world's supply comes from mines in China, and China is prepared to simply stop exporting these strategic elements to the rest of the world by 2012. If that happens, the western world will be crippled by the collapse of available rare earth elements. Manufacturing of everything from computers and electronics to farm machinery will grind to a halt. Electronics will disappear from the shelves and prices for manufactured goods that depend on these rare elements will skyrocket.
Toyota Secures Lithium Supply in Argentina - Lithium will play a bigger role in the auto industry, especially at Toyota, which has plans to sharply boost its hybrid and electric vehicle production this decade. The lightest metal on the periodic table, lithium is a key ingredient in lithium-ion batteries—currently found mostly in cell phones and laptops but expected to be more widely used in future automobile batteries. "This generation and the next generation of batteries in automobiles ... is going to be lithium,"
India secures China pledge on trade surplus - India has claimed Wen Jiabao, the Chinese premier, has given his personal commitment to rebalance a booming bilateral trading relationship skewed overwhelmingly in China's favour by non-tariff barriers. New Delhi asked Beijing to take "corrective steps" to address a growing trade imbalance between the world's two fastest-growing large economies in high level meetings in the Chinese capital this week. Among the corrective steps recommended by Anand Sharma, India's commerce minister, was the abolition of restrictions on Indian exports to China of products including information technology, Bollywood films and fresh food. In the first Joint Economic Group meeting between the two countries for four years, China undertook to buy more value-added goods from India, according to the Indian delegation. India's commerce ministry also said it had extracted a commitment from Mr Wen "that both sides could work together to ensure more balanced trade
Huawei Points Way Into India - In an apparent attempt to overcome deeply embedded suspicion and concern, Chinese telecommunication giant Huawei has pledged to expand its operations in Bangalore, the Silicon valley of India. Such a bold expansion from Huawei, which already has a leg up in the Indian telecommunications market but is believed to have ties with the Chinese People's Liberation Army (PLA), could be a welcome development for other Chinese state-owned companies wanting to do business in India but which have been under the scanner of Indian security agencies.
India Raises Reserve Requirement More Than Forecast (Bloomberg) -- The Reserve Bank of India told lenders to set aside more deposits as reserves than economists predicted after raising its growth and inflation forecasts. Stocks and bonds fell. Governor Duvvuri Subbarao increased the cash reserve ratio to 5.75 percent from 5 percent, exceeding the median forecast for a half-point move in a Bloomberg News survey, an RBI statement showed in Mumbai today. The bank kept benchmark interest rates unchanged. The decision is India's biggest step yet toward raising borrowing costs as inflation and asset-bubble concerns reverberate across Asia. China, Malaysia and the Philippines moved closer toward raising rates this month and Australia and Vietnam have already done so, spurring a sell-off in stocks and bolstering the outlook for currency gains in the region.
Why trade war is very likely to break out this year - For two years some commentators have been arguing that the contraction in global demand set off by the 2008 crisis would lead almost inevitably to a trade war, following much the same path that the world took in the 1930s. With anger already being expressed over disordered currency markets by several leaders before the meeting of the Group of Seven wealthy nations in Iqaluit, Canada, next month, it is beginning to look as if 2010 will be the year that proves them right.This should cause alarm. A breakdown in trade will slow the global recovery and create hostility and mistrust between major economies, making a resolution of important global problems, including the environment, terrorism and nuclear proliferation, unlikely. If trade issues are to be resolved optimally, policymakers in the leading economies must begin by understanding how difficult the problems are for their counterparts. Like the US before the 1930s Great Depression, China has benefited from a decade of surging productivity growth and an undervalued currency to claim an outsize share of global manufacturing and a relatively small share of global consumption, which requires it to export the surplus abroad.As long as global demand surged, this was not a problem. But the global financial crisis set off a contraction in debt and of excess demand in overconsuming countries. China, like the US in 1930, has done everything it can to maintain its ability to export excess production, but Asian trade rivals and western importers, like Europe in 1930, are having none of it. The result is that trade is increasingly the centre of conflict, as it was after 1930.Since, as in 1930, each side has misunderstood or underestimated the others' problems, it is hard to imagine trade disputes being resolved optimally. Escalating tensions, aggressive actions and reactions and a slower global recovery are more likely.
Chinese Trade Elasticities, Updated - The price and income elasticities of Chinese trade flows are key parameters in the debate regarding the importance of Renminbi revaluation in achieving rebalancing. [0][1] I was hoping to update my estimates to incorporate data spanning the recent crisis, but Shaghil Ahmed at the Fed beat me to the punch with a new working paper that includes data spanning the recent downturn in Chinese trade flows...Are Chinese Exports Sensitive to Changes in the Exchange Rate? The paper uses up-to-date data (through 2009Q2), and specifications analogous to those used in Cheung, Chinn and Fujii, but using cumulative FDI as the supply shift variable, and estimated in first differences.
IMF Revises Up Its Global Economic Forecast - IMFdirect - The IMF has revised upwards its forecast for growth in the global economy saying it is recovering faster than previously expected. It sees world growth bouncing back from negative territory in 2009 to a forecast 3.9 percent this year and 4.3 percent in 2011.But the recovery is proceeding at different speeds around the world, with emerging markets, led by Asia relatively vigorous, but advanced economies remaining sluggish and still dependent on government stimulus measures, the IMF said in an update to its World Economic Outlook, published on January 26. IMF Chief Economist Olivier Blanchard says the recovery right now is still very much based on stimulative policies by government, while IMF Managing Director Dominique Strauss-Kahn has warned that countries risk a return to recession if anti-crisis measures are withdrawn too soon.
Davos 2010: Chinese Central Banker Zhu Min Warns Of New Asian Crisis - China's deputy central bank chief Zhu Min warned that tighter US monetary policy could spark a sudden outflow of capital from emerging markets, evoking the 1990s Asian financial crisis. A rapid withdrawal of funds would not only cause volatility in the currency exchange markets, but could also generate currency moves similar to those during the Asian crisis of over a decade ago. "Capital flows - it's a real risk this year for the economy," Zhu Min told participants at the World Economic Forum's annual meeting in Davos.
New York Forum: The New, More Focused Davos? - If Richard Attias — who produced the World Economic Forum for 13 years and launched the Clinton Global Initiative — has his way, the answer is yes. While the global elite descend on Davos this week, Attias is busy planning for the New York Forum, to be held in New York City in June. The event is designed as a "cooperative dialogue among the world's top CEO's, financial leaders and government regulators," according to an announcement. "Davos is very global now and it's a great forum but you have over 300 sessions, about all issues from health to culture to sports to even anti-aging," "And we know living in New York that the major, major issue today is to try to find solutions for the economy. How can we help social issues, how can we finance health if we don't have a very healthy economy? So I thought it is definitely the time to focus, to discuss, to work on economic issues."
How to give a Davos opening address - Nicolas Sarkozy gave a rather predictable speech to kick off the World Economic Forum today. He started out with fiery populism, talking about how "without state intervention, the world would have imploded", and how globalization had created, pre-crisis, "a world where everything was given over to capital, and nothing to labor, in which the entrepreneur gave way to the speculator". But then, after bashing excessive pay packages and warning of dire consequences if Davos Man didn't change his ways, he spent most of his speech becoming vaguer and vaguer, devolving into standard Davos platitudes, and talking — as all Davos speakers do — about being bold and tackling poverty and changing the world and so on and so forth. By the time it was all over, he had proposed absolutely nothing concrete, and the assembled plutocrats were happy to give him a loud ovation.
Blame Davos? - PSD Blog - The World Bank - Felix Salmon pens an amusing, yet depressing, Davos diatribe: It's not like CEOs and billionaires (and billionaire CEOs) need any more flattery and ego-stroking than they get on a daily basis, but Davos gives them more than that: it allows them to flatter and ego-stroke each other, in public. They invariably leave even more puffed-up and sure of themselves than when they arrived, when in hindsight what the world really needed was for these men (it's still very much a boys' club) to be shaken out of their complacency and to ask themselves some tough questions about whether in fact they were leading us off a precipice. Now that it's clear that many of them were leading us off that cliff, there's still no sign of contrition, although you can be sure that a few fingers will be pointed at various past attendees who aren't here to defend themselves. Is anybody here seriously examining the idea that Davos was institutionally responsible, at least in part, for the economic and financial catastrophe which befell the world in 2008?
Will the will to take on difficult issues disappear? - Here are further glimpses of the Davos kaleidoscope. The global attempt at addressing imbalances - the "mutual assessment programme" being orchestrated by the International Monetary Fund - may well run into the sand this year. That would be a great pity.What is needed is political commitment at a high level. The concern is that, with the crisis largely over, the will to take on difficult issues - exchange rates, for example - will disappear. It was easy for everybody to agree to expand spending and ease monetary policy last year. Now it all gets harder. It would be depressing if top politicians forgot how close the world economy came to disaster just over a year ago. But they may well do so, all the same. The relationship between the US and China is widely accepted as central. These behemoths look quite similar. Both can respond well to crisis, but neither seems able to deal with long-term structural weaknesses. I am also increasingly concerned that stimulus - especially fiscal stimulus - will be withdrawn too soon.
At Davos, the globalizers are gone - For 40 years there's been a consensus view at the Davos World Economic Forum that globalization's increasingly free cross-border flow of ideas, information, people, money, goods and services is both irreversible and a powerful force for prosperity. As with meetings of the G7 group of industrialized nations, there was broad agreement on the proper role for the state in the performance of markets. Sure, a French cabinet official and an American investment banker might spar over the relative merits of state paternalism and Anglo-Saxon labor laws, but the bargaining table was still reserved for champions of Western-style free market capitalism. But for the first time, some of the most powerful folks inside the Davos event are challenging the value of globalization. These aren't the have-nots of years past. These are the men and women driving some of the world's fastest-growing economies.
Davos - Greece Says Being Targeted As Euro Zone "Weak Link" - Greek Prime Minister George Papandreou said on Thursday his country was being targeted as a "weak link" in the euro zone but had no plans to pull out of a bloc it said would help restore stability. Financial markets are gripped by the fear Athens will not be able to service its heavy debt, putting pressure on the euro and even raising speculation as to whether Greece could be forced out of the currency bloc."This an attack on the euro zone by certain other interests, political or financial, and often countries are being used as the weak link, if you like, of the euro zone," Papandreou told the World Economic Forum in Davos.
A Greek bailout, and soon? | The Economist - IN Brussels policy circles, the question asked about a bailout of Greece used to be: are European Union governments willing to do this? Now, I can report, the question among top EU officials has changed to: how do we do this? Twice in the past 48 hours I have heard very senior figures—both speaking on deep background—ponder the political mechanics of how large sums in external aid could be delivered to Greece before it defaults on its debts: a crisis that would have nasty knock-on effects for the 16 countries that share the single currency. One figure said yesterday that heads of government could not wait "forever" to take decision. That means a decision in the next few months, at most. Greece's draft plans for reducing its deficit from around 13% to 3% in three years did not seem credible, said this source. Thus a crisis loomed.
Bailout time - The main story in European newspapers this morning is that the EU has began to organise a bailout for Greece. Le Monde and FT Deutschland have extensive and detailed coverage of the story. There are currently talks among government on how to assemble a credit to Greece, but FTD says Angela Merkel is still reluctant to commit, unless there is much clearer evidence than so far that Greece is genuinely consolidating. The issue will come up at the February 11 economic summit in Brussels. Le Monde says the talks are still in a preparatory stage, and nothing has been decided yet.
Funds Flee Greece as Germany Warns Of "Fatal" Eurozone Crisis - Germany has triggered a near-panic flight from southern European debt markets by warning that there will be no EU bail-outs, even though it fears the region's economic crisis has turned dangerous and could prove "fatal" for the entire eurozone. George Papandreou, the Greek premier, said in Davos that his country had been singled out as the weak link in a "attack on the eurozone" by speculators and political foes. "We are being targeted, particularly by those with an ulterior motive."
Bond markets soaking up Greece - Greece announced a 5-yr 8 billion euro deal today (as expected) – yesterday I called this a Hail Mary. Well, the Hail Mary worked! Books are closed, and the deal is well over subscribed (i.e., strong demand for the deal). Evidently, the talk is that there is natural demand for this product, via the rest of Europe, to shore up the value of the bonds over the near term. But that's it, because credit default swaps haven't moved, remaining elevated well-above the Q4 2008 crisis point. The credit-default swap (CDS chart) strips out the interest rate risk, leaving a measure of credit risk. Across the remaining PIIGS countries, CDS spreads in Ireland and Italy are relatively stable, while those of Portugal and Spain are seeing pressure in the wake of recent Greece developments.
Roubini: Greece Is Bankrupt - Are we concentrating too much on sovereign debt concerns? Not according to Noriel Roubini, who can still live up to his pessimistic reputation. "Greece is bankrupt," Roubini told CNBC.com at WEF. "Look, they have to ask China to help them out." Greece is trying to get trying to entice China to buy 25 billion euros ($35 billion) in bonds, according to published reports Wednesday. If the situation becomes dire enough the European Union will be forced to help bail Greece out because it's such a threat to the monetary union, he said.
No Wonder Greece Is Bankrupt: It's So Corrupt That Nobody Pays Any Taxes - It's no wonder that Greece is such a financial disaster -- hardly anyone pays taxes. It's one of the most corrupt countries in Europe according to report by Transparency International, on par with 'cocaine-infested Columbia'. Thus it's pretty hard to fund the country's expenses: Bloomberg: So many Greek companies and employees cheat on their taxes that a third of all economic activity delivers no revenue to the government, the Finance Ministry says. Some Greeks say tax evasion is rooted in the Ottoman Empire's control of the country for centuries until the 1820s. "We very much lack a tax conscience," says Ilias Plaskovitis, the Finance Ministry's general secretary. "Some trace it back to the Ottoman Empire, when tax evasion was resistance to foreign powers."
Greek Debt Swap Counterparty Risk May 'Spook' Market (Bloomberg) -- Greece's economic woes will "spook" the derivatives market because of concern the nation's banks may struggle to honor their credit-default swap trades, according to BNP Paribas SA. Asset quality at the country's lenders will deteriorate as the economy slows, forcing them to mark down about 40 billion euros ($56 billion) of government bond holdings, Funding costs are also rising as the European Central Bank tightens its lending criteria, Frieser wrote. "What will spook the markets is CDS counterparty risk, our understanding is that Greek banks were active CDS players, and there is no way of finding out about these particular exposures,". "As long as Greek sovereign and bank spreads remain under pressure, this will weigh on the wider European banking sector."
Who's selling Greek CDS? - As Greek sovereign CDS spreads continue to widen and underperform today, we ask ourselves the question more pressingly about who is most exposed. We hate to break the news, but it is impossible to say. We detail cash exposures below from the information available to us. However, what will spook the markets is CDS / counterparty risk (our understanding is that Greek banks were active CDS players), and there is no way of finding out about these particular exposures. Therefore, as long as Greek sovereign and bank spreads remain under pressure, this will weigh on the wider European banking sector. FT Alphaville has heard this rumour before. Greek banks selling CDS would make some sense. It's essentially a win-win bet. If Greece doesn't default on its debt, protection-sellers will likely earn a nice profit. If it does, well, the Greek banks will probably be crushed anyway.
Greece, Portugal Debt Concerns Start to Infect Companies, Banks (Bloomberg) -- Investor concerns about the ability of Greece and Portugal to lower their budget deficits is starting to hurt the debt of national utility companies and banks. The cost to insure Greek sovereign debt against default surged to a record today, spurring a rise in credit-default swaps on Hellenic Telecommunications Organization SA and National Bank of Greece SA. Swaps on Portugal Telecom SA and Energias de Portugal SA jumped as the perceived risk of holding their government debt rose. "If you fear a Greek crisis then you should not only avoid government bonds but corporates as well," said Philip Gisdakis, head of credit strategy at UniCredit SpA in Munich. "And if you fear Greece you should also fear Portugal and Spain."
Low-Flying PIIGS (Barron's) GREECE WAS THE WORD DOMINATING global capital markets last week as concern about the debt of the so-called PIIGS of Europe sent their yields soaring. Ironically, those worries worked to the benefit of the securities of the largest debtor nation, the U.S. Still, the week may mark a watershed, with the realization that governments no longer could borrow without limit. Sovereign debt, long seen a riskless asset in modern financial markets, no longer is presumed as such. And with governments' credit lines running out, harsh choices are being forced upon them and their citizens. By week's end, the markets for bonds of the rudely named PIIGS -- Portugal, Italy, Ireland, Greece and Spain -- settled down after volatile swings that have posed the greatest threat to the viability of the euro since the common currency was introduced just over a decade ago."
Europe feels chill of 10pc unemployment - Unemployment hit 10 per cent in Europe on Friday, amid rising inflation and a weakened euro currency according to new data that shows recession-mired Spain bearing the brunt of a jobless recovery. The human cost of post-recession, structural economic rebirth could be seen in updated European Union data when the seasonally-adjusted unemployment rate for the 16 euro countries hit a miserable one in 10 in December. The news came on top of rising inflation with separate official figures showing the annual rate of price rises hitting 1.0 per cent, a new peak after falling to an all-time low of minus 0.7 per cent six months earlier. The rising prices also come at a time when the euro is losing ground against the dollar with the European currency's value having slipped considerably from a November peak of 1.50 dollars to currently trade at under 1.40 dollar
Default-Bet Anomaly: Firms Over Countries - Worries about the heavy debts of a number of countries have gotten so extreme in some places that investors are betting that some businesses in those nations are more creditworthy than the nations themselves. Five-year credit-default-swap contracts that protect $1 million of debt of Spanish banks, such as Banco Santander SA, cost about $10,500 annually; but it costs about $12,000 to buy similar protection for Spain's debt itself. The investors are making the bets using credit-default swaps, which pay off when a bond defaults. The anomaly reflects nervousness about all the debt racked up by various nations, as well as relative optimism about some top-rated companies with healthy balance sheets.
European banks need €83bn - Yep. Another day and (yet) another note on the impact of the Basel proposals.And this one is pretty frightening. Morgan Stanley's Huw van Steenis reckons Europe's big banks will need to find €83bn by 2012, or shrink their risk-weighted assets by 11 per cent, or €1,000bn. Here are the key conclusions from his 115-page report, which hit clients' desk on Wednesday morning:
Fitch, ECB sound alarm on European national debts - The Fitch credit rating agency and the European Central Bank issued strong warnings on Tuesday about the weight of European government debt threatening financial markets and economic recovery this year. Fitch said that on average nearly one fifth of national output would be absorbed by debt costs, but in some countries such as Italy, France and Ireland it would be about one quarter. But the biggest and best borrowers should attract lenders without undue problems but at higher interest rates, Fitch said.
US, Europe Debt Levels Not Sustainable: ECB's Trichet The current levels of budget deficits in both Europe and the U.S. are not sustainable and Europe's economic recovery will only be modest, European Central Bank President Jean-Claude Trichet told CNBC Thursday. We all have a very, very big challenge... The levels of public finance deficit are non-sustainable on both sides of the Atlantic, that's absolutely clear,"."Confidence is vital to the recovery and without it the money spent on trying to stimulate the economy would be wasted, Trichet said.
Euro Sovereign Debt Crisis Expands - A leading story in Germany's Spiegel Online, datelined from Davos, Switzerland, site of the ongoing economic summit, carries the alarming headline, "Economists Warn of Domino Crash." It's report begins: "Greece is on the verge of a crash, and Europe fears for the Euro." The debt crisis in Greece, with Spain not far behind, is breaking out as a threat in Europe at the same time as the drastic crisis precipitated by Obama's downfall in the United States.Despite the safety net organized by private banks to buy Greek bonds Jan. 25, the Greek (and Euro) financial crisis is worsening, with Greek spreads yesterday climbing to 405 points, to settle back at 390, still higher than the day before. Secondly, Spain is now in the line of fire, with Spanish spreads for the first time higher than Italian spreads. Italian three-years bonds yesterday suffered, with the government deciding to sell a little bit less than scheduled in order not to pay penalties. And Moody's has put Portugal under watch.\
Russia's Sovereign Debt - Russia will become the biggest issuer of sovereign debt in emerging markets during the next decade as its aging society pushes up pension costs, exceeding revenue from oil, Bank of America Merrill Lynch said in an note as part of its predictions for the next 10 years. Russia will remain reliant on revenue from oil as it will have "limited success in investing the oil windfall," the bank said. The country will also have another "bust" during the decade ahead and will also increase taxes on income to pay for pensions, it said
Deleverage This, My Friend – McKinsey has out a new report with some useful figures showing the rise of leverage worldwide, where it must fall, and the corresponding GDP consequences. (charts & tables)
Rogoff: Global Economy to Crash if It Keeps Gorging on Debt (video) - World economy likely to crash and burn if it keeps gorging on debt, Kenneth Rogoff, professor of economics at Harvard University, told CNBC in Davos Thursday. Tom Glocer, CEO of Thomson-Reuters added that some of the weakness from last year still has to be worked through.
Over 100 Debt, Price, Hype and Asset Bubbles Ready to Burst in 2010 - Over a month ago I updated one of my posts from 2008 on price bubbles. It's been so popular, that a further revision seems warranted...so here they are> While the US housing and gold bubbles have gotten the bulk of media attention, here are over 100 bubbles from the Decade of Speculation or today's Bubble Economy. It challenges the long held assumption by mainstream economists that you can't have a back to back financial calamity . A financial crisis has to be punctuated by growth and recovery. Maybe not this time.
The Bank of Japan does… nothing - In essence, the Bank of Japan has done nothing and said nothing after its monthly meeting today. Policy remains on hold and pretty much the only change in language is to note the effect of higher oil prices on deflation (it's a bit less severe). Of more interest arethe new forecasts of the policy board (table): The numbers say that the BoJ policy board has become quite a lot more confident about 2010 growth since last October and thinks that deflation in 2010 and 2011 will be less severe than previously thought, largely due to higher oil prices,
Japan rescinds war on deflation - At least that is the way I read today's monetary policy release. According to the statement released today: "The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent." However, The statement curiously omits the following statement from statement item 6. of the previous release: The Policy Board has concluded that it is appropriate to further disseminate the Bank's thinking on price stability, by stating more clearly that the Policy Board does not tolerate a year-on-year rate of change in the CPI equal to or below 0 percent and that the midpoints of most Policy Board members' "understanding" are around 1 percent. I don't know why the Bank of Japan would rescind their commitment to 0 percent when the median inflation projection being negative all the way through 2011, although improved from its latest forecast in June 2009
Beef Bowl With Side of Deflation - NYTimes - Japan's big three beef bowl restaurant chains, the country's answer to hamburger giants like McDonald's, are in a price war. It is a sign, many people say, of the dire state of Japan's economy that even dirt-cheap beef bowl restaurants must slash their already low prices to keep customers.The battle has also come to epitomize a destructive pattern repeated across Japan's economy. By cutting prices hastily and aggressively to attract consumers, critics say, restaurants decimate profits, squeeze workers' pay and drive the weak out of business — a deflationary cycle that threatens the nation's economy. "These cutthroat price wars could usher in another recessionary hell," "If we all got used to spending just 250 yen for every meal, then meals priced respectably will soon become too expensive,"
Japan Forecasts Bond Sales to Swell 16%, Fueling Debt Concern - (Bloomberg) -- Japan may increase bond issuances in each of the three years from April 2011, the Ministry of Finance forecasts, adding to concern that the government is struggling to contain the world's largest public debt. Sales of new bonds may climb to 51.3 trillion yen ($570 billion) in the year starting April 2011, according to a ministry document. That would be a 16 percent increase from next fiscal year's projected 44.3 trillion yen. Bond sales are rising to plug deficits as tax revenue declines and spending increases to prop up the stagnating economy. Standard & Poor's this week cut its outlook on Japan's AA credit rating, saying Prime Minister Yukio Hatoyama lacks a plan to rein in the budget shortfalls.
Japan Says Debt to Grow at Faster Pace in Fiscal 2010 (Bloomberg) -- Japan's national debt is set to rise to 973 trillion yen ($10.8 trillion) by the end of fiscal 2010, according to the Finance Ministry. The total is 8 percent more than the projected 900 trillion yen for the period ending March 31, when debt grew 6.3 percent from a year earlier, the ministry said today. It was the first time it released estimates for the year beginning April. Japan, with a shrinking population and entrenched deflation, may see its debt burden jump to 246 percent of gross domestic product by 2014, according to the International Monetary Fund.
BOJ Said to Be Open to Expanding Emergency Loans, Bond Buying - (Bloomberg) -- Bank of Japan policy makers are prepared to consider expanding an emergency-loan program for banks and increasing purchases of government debt should the recovery falter, people with knowledge of the matter said. The central bank's board will leave interest rates and its lending program unchanged tomorrow, 16 of 17 economists said in a Bloomberg News survey. How it responds in coming months will depend on the extent of any further economic shocks -- such as a surge in the yen to November's 14-year high -- the people said on condition of anonymity because the talks are private.
Federal deficit hits $36 billion eight months into fiscal year - Ottawa's budgetary deficit ballooned to more than $36 billion two-thirds of the way into the fiscal year as the recession and its aftermath took a heavy toll on spending and revenue, the federal Finance Department said Friday. The department's latest accounting shows the government experienced a $4.4-billion shortfall in November, bringing the deficit to $36.3 billion - a sharp contrast from where it stood last year, when it clung to a $39-million surplus. Despite the big jump in November, the accumulated deficit put Ottawa broadly in line its estimate for a record $56.2-billion shortfall by March 31, the end of the fiscal year. The department said the deficit is almost entirely due to the impact of the recession: higher spending on things such as employment insurance and the government's stimulus program and lower receipts from individual and corporate taxpayers.
UK banks downgraded by credit rating agency - Britain's banking industry was downgraded by the international credit rating agency, Standard & Poor's, as a result of the country's "weak economic environment" and the banks' "high" dependence on state support.In its second major intervention in Britain in the past year, the agency announced that it was demoting Britain's banking industry by one tier to its Group 3 out of 10. Banks in Canada, France and Germany are in the first and second groups. The agency, which placed Britain on "negative watch" last May, said it had acted in light of Britain's "weak economic environment, the reputational damage we believe has been experienced by the banking industry, and what we see as the high dependence on state-support programs of a significant proportion of the industry". The government has a majority stake in two banks – RBS and Northern Rock.
20% VAT Looming as Ministers Face Mounting Debt Crisis - A hike in VAT is 'inevitable' after the election as the government grapples with a mounting debt crisis, experts warned yesterday. The Treasury will have to lift the tax from 17.5 per cent to 20 per cent to raise an extra £12 billion of revenue a year, according to analysts at consultancy Oxford Economics. The next Government may also have to delay the state retirement age to 68 in order to cope with the biggest debt crisis since the Second World War, the report said. The warning came as official figures revealed the UK government has borrowed almost £330 million a day so far in the current financial year - the most on record. Figures from the International Monetary Fund show the UK has seen the sharpest increase in its debt burden of any Group of Seven nation since the start of the financial crisis.
Economists: 'Desperately Disappointing' U.K. GDP Figures - The U.K. economy crept back into growth in the fourth quarter, data out Tuesday showed, narrowly emerging from a deep recession that began in the second quarter of 2008. However, growth in the fourth quarter was far less than expected, raising questions about a possible extension of the Bank of England's quantitative easing, or QE, policy and worries about a double-dip recession. Below, economists react. (7 ops)
Soros: 'bleak outlook for UK' - George Soros, the hedge-fund billionaire who made a fortune from speculating on sterling's weakness in the early 1990s, has warned that the outlook for the UK economy is "bleak." Click here for a transcript of the interview In an interview with me this morning, he warned that growth prospects for the UK and US were poor -- because households and governments in both countries had borrowed far too much and would have to repay their debts in coming years. Soros said that the prospects for the UK were worse than the US, because the British government is approaching the limits of what it can comfortably borrow from investors to finance public spending. He added that the sources of the UK's financial weakness were excessive borrowing by individuals for house purchases and a financial sector that had also borrowed and lent too much.
UK Credit Cards, Mortgages & Loans Now Exceed the Value of the UK Economy - According to a recent research study by ThinkingMoney, UK Household debt has reached a staggering GBP1.35 trillion in June, more than the country's Gross Domestic Product, which is estimated at GBP1.33 trillion. This means the UK's 60 million people currently owe more than the entire country can produce in one year. With the UK having the seventh largest GDP in the world, this is deeply concerning. Those carrying the bulk of the debt include young families and 20-something adults who have just purchased their first home. Today, many members of this demographic carry GBP10,000 to GBP15,000 worth of student debt, in addition to a mortgage that equates to three times their annual income.
Ukrainian Black Lung Death Toll Over 1000, Over A Quarter-Million Hospitalized - The mutated version of the H1N1 Swine Flu is truly wrecking havoc throughout Eastern Europe, with the Ukrainian death toll now clocking in at 1005 dead, according to Before It's News. And to make matters worse, over 250,000 have been hospitalized over the deadly flu strain; that number is set to rise.
BBC News - Economic growth 'cannot continue' - Continuing global economic growth "is not possible" if nations are to tackle climate change, a report by an environmental think-tank has warned. The New Economics Foundation (Nef) said "unprecedented and probably impossible" carbon reductions would be needed to hold temperature rises below 2C (3.6F). Scientists say exceeding this limit could lead to dangerous global warming. "We urgently need to change our economy to live within its environmental budget," said Nef's policy director. Andrew Simms added: "There is no global, environmental central bank to bail us out if we become ecologically bankrupt."
World hunger and the locavores - At the Davos conference center, waiting for the panel on "rethinking how to feed the world" ..It featured two heads of state; two agribusiness CEOs; a representative from the World Bank; and Bill Gates. All of them looked at food mainly as a matter of logistics and problem-solving, and they seemed to do so with real good will and good motives. Essentially the problem is that the people on the panel have internalized the principles of comparative advantage and free trade to the point at which they are more or less incapable of thinking any other way.But he knows (and the panelists know too) that a system of globalized agriculture can break down, as we saw during the commodity boom of 2008. As the price of soy and rice and wheat soared, exporters started hoarding rather than selling, and importers couldn't obtain necessary supplies at any price. As the World Bank's Ngozi Okonjo-Iweala noted, Ukraine had 5 million tons of surplus wheat, but the international food markets were very thin, and it was extremely difficult to get that wheat exported. The system didn't work like it was meant to: when put to a real-world test, it broke down.
The Food System and Resilience - For something as critical as food, it is common sense that society should design for resilience. Reliability in food production in the face of change requires a system capable of rapid evolution. Resilience is therefore a core principle of sustainability. Unfortunately, our daily bread relies on a food system that is not resilient. As I have explained before, this state of affairs is an outcome of government policies, financial pressures, cheap fossil fuels, and market forces in play over the past several decades. The result is a food system dominated by relatively few large actors, which creates conditions of rigidity and brittleness.
Bill Gates Warns Of Dystopian Future - Bill Gates said he fears Earth might become a post-industrial wasteland plagued by heat, chronic food and energy shortages, and rampant disease unless governments and private organizations invest more time and money solving what the Microsoft chairman believes are the world's most pressing problems."If we project what the world will be like 10 years from now without innovation in health, education, energy, or food, the picture is quite bleak," said Gates, in his annual letter from the Bill & Melinda Gates Foundation, published earlier this week.