In The Wake Of Victory –  This has not been an easy week for believers in a brighter future. As I write this week’s post, food prices in the global market are soaring toward levels that brought mass violence two years ago, driven partly by climate-driven crop failures and partly by the conversion of a noticeable fraction of food crops into fuel ethanol and biodiesel; the price of oil is bumping around somewhere skywards of $86 a barrel, or right around two and a half times the level arch-cornucopian Daniel Yergin insisted not that long ago would be oil’s long-term price; the latest round of climate talks at Cancún are lurching toward yet another abject failure; and bond markets worldwide are being roiled by panic selling as the EU’s Irish bailout has failed to reassure anybody, investors in US state and local bonds realize that debts that can’t be paid back won’t be paid back, and even the riskier end of commercial paper is beginning to look decidedly chancy.

How Banks Pawned Junk to the Fed – Lehman Brothers’ collapse in the fall of 2008 inspired panic on Wall Street, but it also presented a little-noticed opportunity for the country’s remaining elite banks: They could now receive cheap Federal Reserve loans without posting quality collateral. As part of an emergency loan program, the Fed accepted as collateral more than $1 trillion in junk-rated investments from Citigroup, Morgan Stanley and others, according to data released Wednesday by the Fed. Banks pledged more than $490 billion in particularly risky collateral –  which credit rating agencies classified as Triple-c or below. Some collateral included mortgage-backed securities and other risky investments. The Central Bank’s program, known as the Primary Dealer Credit Facility, was a cheap overnight loan system for banks that was similar to the Fed’s discount window. The day after Lehman’s collapse JPMorgan, Goldman Sachs, Citigroup and Morgan Stanley collectively pledged more than $100 million in collateral that was rated Triple-c or below. On a $4 billion loan that day, Morgan Stanley posted $32 million in junk-rated collateral. The week after, Bank of America started pledging junk and never looked back.

When You Should Not Adapt in Place – Most of the people who take Adapting-In-Place, reasonably enough, are doing so because they intend to stay where they are or fairly nearby in the coming decades. They know that they may not be in the perfect place, but for a host of reasons – inability to sell a house, job or family commitments, love of place…you name it, they are going to stay. Or maybe it is the best possible place for them. But I do think it is important to begin the class with the assumption that everything is on the table. Because as little as each of us likes to admit it, it is. There will be many migrations in the coming decades, many of them unwilling and unwanted. And it is always easier (not easy) to consciously choose to step away before you are forced to leave than it is to abandon in pain and storm and disaster your home and never be fully able to return. So it is important to ask – who should not stay in place?For some people, getting out of Dodge is the way to go. That is, I think that some people should absolutely consider leaving where they are, and doing sooner, rather than later, because they have little or no hope of successfully remaining in place.

 “Principles and Guidelines for Deficit Reduction”: Joseph Stiglitz Proposes an Alternative Plan – This paper outlines proposals which should reduce the deficit by more than the goal of $4 trillion, increase growth, reduce the deficit/GDP ratio, and put the country on a more sustainable path. It offers an enunciated set of criteria against which we can judge the framework of shared sacrifice proposed by the Fiscal Commission. Key findings: Deficit reduction is not an end in itself, but a means to other objectives. Spending that increases debt but simultaneously (over the long run) increases GDP can lower the debt-to-GDP ratio. Proposals from the Fiscal Commission Chairmen will lead to a less progressive tax system and a more divided society. Deficit reduction goals must not be achieved on the backs of the less politically powerful or sacrifice the national interest to special interest groups. Read Working Paper 5: “Principles and Guidelines for Deficit Reduction

Gauging the Odds of a Double-Dip Recession – FRB Dallas – Public sentiment says the recession isn’t over. Never mind that the National Bureau of Economic Research (NBER), the arbiter of recessions, declared that the Great Recession of 2008 and 2009 officially ended in June 2009. An unrelenting pessimism constrains the recovery as consumers spend reluctantly while paying down debt, gripped by persistent fears of unemployment. The economy grew at a 2.5 percent annualized pace in the third quarter, according to the second estimate of real gross domestic product (GDP), a moderate improvement after two quarters of decelerating growth during the recovery. This tepid expansion has raised concern that things could get worse again before getting better and that the likelihood of another recession may have risen. Does the slow growth necessarily foretell a double dip? Just as a bicycle requires momentum to stay upright, history tells us that once the economy slows to a sluggish growth rate, it will likely fall into a recession. This “stall speed” appears to be 2 percent annual real GDP growth. Every recession since 1970 has been preceded by expansion of less than 2 percent, though there was a false alarm in 1995. The second estimate of third-quarter GDP shows real output rising 3.2 percent over the past year (Chart 1).

How The Bailouts Hurt Small Banks and Benefited Big Finance – I hope when Federal Reserve Bank of Kansas City President Thomas Hoenig is explaining to Republicans why they should be worried unemployment might come down too quickly, he takes a (very long) break from that argument to discuss this New York Times editorial, Too Big to Succeed. I still largely agree with the opinions he writes there, that the financial system is too concentrated and too top-heavy, leaving Too Big To Fail on the table, and this has been exacerbated by the bailouts. Matt Yglesias and others have pointed out that Hoenig “is an employee of a coalition of a medium-sized banks who don’t want competition.” That’s a fair point, but it is important to remember how much the bailouts were primarily a mechanism that benefitted the largest institutions at the expense of smaller ones. Community and medium-sized banks have a right to be pissed as a result of the recent bailouts.  They also should fear that future bailouts, when they come if Dodd-Frank and resolution authority doesn’t work, will wipe them out entirely.

Oh, the Outrage… –A part of the Fed’s mandate is to serve as lender-of-last-resort. What does this mean? It means that it stands ready to discount what it perceives to be good quality paper at a rate less than the market discounts such paper. This means lending cash at a lower-than-market interest rate on a short-term loan, if the debtor is in a position to put up high-grade collateral. This is what happens at the Fed’s discount window. This is what happened with the Fed’s other emergency lending facilities. The Fed was doing what Congress (representing the wishes of its citizens) has mandated.  What was the result? All the loans due have been paid back with interest. Yes, that’s right. Contrary to the impression one gets from the media, the Fed did not "give" people or firms money. It lent them the money on a short term basis and in exchange for high-grade collateral (even if ascertaining the quality of collateral in emergency conditions can sometimes lead to mistakes).

What might monetary policy success look like? – Atlanta Fed’s macroblog – As 2010 nears its end, my colleagues and I are beginning the process of evaluating performance in the past year and setting goals for the year ahead. In that process, one question is pressed: What does success look like? It is a good question for monetary policy, and one I touched on a couple of posts back. As in that post, I’ll cite my boss, Atlanta Fed President Dennis Lockhart: "I think it is important to stress that our experience in dealing with inflation versus deflation is not symmetric. In the event of a policy overshoot, inflation containment requires the implementation of the mostly familiar strategy of raising short-term interest rates. In the event of an undershoot, however, dealing with a deflationary spiral and the attendant real consequences would be far less familiar territory for policymakers." So, in President Lockhart’s view, there is the statement of objective—insurance against an unwanted deflationary spiral. And the measure of success? Again from President Lockhart, as quoted in my previous post:

Obama, GOP in quiet talks to extend tax cuts The White House and congressional Republicans have begun working behind the scenes toward a broad deal that would prevent taxes from going up for virtually every U.S. family and authorize billions of dollars in fresh spending to bolster the economy. Negotiations have accelerated in recent days as Congress has confronted deadlines for extending a series of tax cuts that expire at the end of the month, renewing emergency jobless benefits and keeping the government funded into next year. The talks mark the dawn of a new era on Capitol Hill, with resurgent Republicans holding far more leverage and commanding a more prominent role in crafting legislation. The private discussions, which parallel a more public set of talks, have left many Democrats grousing that President Obama is being too quick to accommodate his adversaries, who are still a month away from taking control of the House and expanding their presence in the Senate.

The Truth About the Federal Budget Deficit – Don’t get me wrong. The projected federal budget deficit will be a problem eventually. So it’s prudent to take steps so the federal government doesn’t go broke in the future. Let’s be clear about the long-term deficit problem. It’s not Social Security. Social Security’s shortfall is modest. It arises because so much income has gone to top earners in recent years that the payroll tax covers a smaller percentage of overall income than was planned for. I should know. I used to be a trustee of the Social Security trust fund. The obvious answer is to lift the cap on income subject to Social Security payroll taxes, now $106,800, to about $150,000. Nor is the real problem Medicare. It’s what lies behind Medicare’s projected growth: the explosive growth in medical costs. Attempts to cap Medicare without dealing with the underlying problem of soaring medical costs — as the deficit commission recommends — will cause a firestorm. Sarah Palin’s “death panel” scare was nothing compared to what will happen if Medicare payments are capped yet the underlying drivers of health-care costs aren’t addressed

Why "Recession-Proof" Jobs Are a Myth – When President Obama proposed a federal pay freeze recently, there must have been quite a few civil servants who thought, "Whoa! This isn’t supposed to happen!"In private firms, pay freezes have become as common as Post-It notes. But government jobs, you’ll recall, are supposed to be "recession-proof" and far less susceptible to the strains of a weak economy. The government has never said that, exactly, but lots of career experts have, and if the compact was never overt it was at least well understood: Government jobs tend to come with lower pay and prestige, but with benefits and job security that make up for it.[See 20 industries where jobs are coming back.] No longer. As with so many other things, many of the old assumptions about safe jobs and stable careers have been shattered by the grueling economic transformation we’re still in the middle of. Yet the ubiquitous lists of best careers and recession-proof jobs continue to propagate the phony idea that some lines of work are immune to economic stress. Here are some of the careers recommended by outfits like CareerBuilder, Forbes, Time, HR World, and Associated Content, along with the more sobering reality:

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