Redacted Version of the December 2010 FOMC Statement

SPD in favour of eurozone bonds – as crisis worsens ahead of summit – Steinmeier and Steinbrück break ranks with Merkel – and accept the principle of eurozone bonds; favour a three-step solution: haircuts for Greece, Ireland and Portugal, ringfencing of Spain and others, and the introduction of eurozone bonds, up to some ceiling of GNP; shift in position undermines government’s claim that eurozone would never find majority in Bundestag; Asselborn says Merkel’s behaviour had been “theatrical”, and accuses Germany and France of arrogance; the crisis yesterday spread further to Spain, as bond yields reached new eurozone records; the good news from Spain are data showing a reduced reliance on ECB funding; S&P put Belgium on a downgrade watch because of a lack of government; Germany accepts the principle of an ECB capital increase; Wolfgang Münchau, meanwhile, compares the political response to the crisis to Hans Christian Andersen’s Emperor.[more]

Ratings agency Moody’s on Wednesday warned it may downgrade Spain’s debt because the government is vulnerable to a borrowing crunch next year, when the recapitalization of weak banks could prove more costly than expected for public finances. The agency, which lowered Spain’s rating from Aaa to Aa1 in September, says it will review the rating again because of high financing needs in 2011 but does not expect the country to need a bailout. The government’s bond yields have risen to high levels in recent weeks amid Europe-wide debt market turmoil. Investors fear that countries like Spain or Portugal will have trouble handling heavy debt loads and require emergency help, like Greece or Ireland. Spain is considered a risk because it is still struggling to emerge from nearly two years of recession, has the highest unemployment rate in the eurozone and a swollen deficit.

 Consumer Price Index increased 0.1 percent in November – The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment. The index for all items less food and energy rose 0.1 percent in November [Core CPI], its first increase since July. The index for shelter rose 0.1 percent in November, the same increase as the previous month. The rent index rose 0.2 percent, its largest increase since March

MBA: Mortgage Applications decline, Mortgage rates rise sharply – The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey – The Refinance Index decreased 0.7 percent from the previous week. This is the fifth straight weekly decline for the Refinance Index. The seasonally adjusted Purchase Index decreased 5.0 percent from one week earlier. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.84 percent from 4.66 percent, with points increasing to 1.34 from 0.94.  This graph shows the MBA Purchase Index and four week moving average since 1990. The four-week moving average of the purchase index is at about the levels of 1997 – and about 17% below the levels of April this year – suggesting weak existing home sales through the end of the year and into January.
Financial Crisis Panel In Turmoil As Republicans Defect; Plan To Blame Government For Crisis – The four Republicans appointed to the commission investigating the root causes of the financial crisis plan to bypass the bipartisan panel and release their own report Wednesday, according to people familiar with the commission’s work.The Republicans, led by the commission’s vice chairman, former congressman and chair of the House Ways and Means Committee Bill Thomas, will likely focus their report on the explosive growth of subprime mortgages and the heavy role played by the federal government in pushing mortgage giants Fannie Mae and Freddie Mac to purchase and insure them. They’ll also likely focus on the Community Reinvestment Act, a 1977 law that encourages banks to lend to underserved communities, these people said. The Republicans’ report is expected to conclude that government policy helped inflate the housing bubble and that prices weren’t expected to crash because the government pushed homeownership so aggressively. They say that the report will note that once the bubble burst, a financial panic followed because firms weren’t adequately prepared.

Unemployment and migration –  I see Austin Frakt has some interesting thoughts about how unemployment insurance may be decreasing migration: I wonder to what extent UI benefits discourage migration. North Dakota could use some workers. Nevada has too few jobs. Yet we’re paying people in Nevada whether they have a job or not. I doubt many would move to North Dakota anyway. Paying them not to makes it less likely. But how much less likely? This reminds me of something I proposed awhile ago, which is to let the unemployed front-load their unemployment insurance if they use it to move. Here is what I wrote:So what policies could we pass to make the unemployed better off and incentive them in a way that speeds up the structural unemployment adjustment process? One idea is relocation vouchers. If you offer relocation vouchers to unemployed workers who move a minimum distance from their current residence, then you could incentivize labor to move where it is needed away from where it is no longer needed. The demand for this type of voucher can be seen in the piece from Catherine Rampell on structural unemployemt that Avent was commenting on…
More Immigration, Higher House Prices – I have an op-ed about how immigration could be used to increase house prices. I’ll put the whole thing below the fold, but it’s also worth noting another recent study that supports the results of the study I cite in my piece. Importantly, this study provides evidence that immigration raises house prices even in housing markets with low price inflation and rent control, and even when the immigration amounts are modest. The impact they find, which is for Switzerland, is that a 1% increase in immigration causes a 2.7% increases in home prices. To my knowledge it is still the case that every study on this issue, which is admittedly few, has found that immigration has a positive impact on house prices. Here is what I wrote, with more below the fold: Amid reports of continuing declines in home prices, it’s safe to say that government policies designed to prop up those prices have failed. More than 14 percent of home mortgages are delinquent or in foreclosure, and 23 percent of homeowners owe more on their homes than they’re worth. At this point, it may seem as if we have to let prices fall until they find a bottom. But we haven’t yet tried one of the easiest and least costly options for helping the housing market: more immigration.
European Central Bank Plays Cat and Mouse Over the Euro – On one side is the , which is spending billions to prop up Europe’s weak-kneed bond markets and safeguard the common currency. On the other side are hedge funds and big financial institutions that are betting against those same bonds and, by extension, against the central bank, that mighty symbol of Europe’s monetary union. The strains grew Tuesday, when European finance ministers made no pledge to increase the emergency fund that the European Union has put in place to help protect the euro. The head of the International Monetary Fund, meantime, urged Europe to take broader action to fend off speculators. “The game now is one now of cat and mouse,” said Mohamed A. El-Erian, chief executive of the bond giant Pimco.
Retail Sales increase 0.8% in November – On a monthly basis, retail sales increased 0.8% from October to November(seasonally adjusted, after revisions), and sales were up 7.7% from November 2009.  This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline). Retail sales are up 12.8% from the bottom, and only off 0.3% from the pre-recession peak.  The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 6.9% on a YoY basis (7.7% for all retail sales). Here is the Census Bureau report:

Is deleveraging just a delusion? Well, that was quick. The new frugality lasted all of two years. Is that good or bad? One takeaway from the newly minted Federal Reserve quarterly flow of funds report is that America has stopped paying down debt. Not the most reassuring picture Private sector debt fell by $165 billion in the third quarter. That is just a quarter of the rate of decline a year ago, Capital Economics notes. But what’s more, government debt issuance more than canceled out that drop, expanding by $380 billion during the period ended in September. That gap, if you can bear it, stands to get even bigger in coming quarters should Congress approve the deficit-expanding tax deal reached this month by the White House and congressional Republicans. That shift is not exactly reassuring the many fiscal hawks who warn that U.S. profligacy will not end well. They say the wider the budget gap, the bigger the mountain of debt sitting atop U.S. assets. Both of those trends, they claim, will push the dollar toward collapse in an inflationary crisis reminiscent of a banana republic.

Any Talk of Recovery Is False – Have you noticed the latest sound bites coming from the punditry in the corporate mainstream media? Here’s the latest wisdom flowing from Wall Street, Washington DC, and mega corporations: The economy is recovering and employment is growing. Consumers are deleveraging, saving, and using cash for purchases. Retailers are doing fantastic as consumers increase spending. How can consumers be deleveraging, saving, and increasing spending at the same time? Let’s examine the facts. The fallacy that the economy is recovering and employment is growing can be put to rest by an examination of the Bureau of Labor Statistics data: The number of Americans employed over the last few years is as follows:

2007 — 146.0 million

2008 — 145.5 million

2009 — 139.9 million

2010 — 138.9 million

It seems there are 7.1 million less employed people than there were three years ago. Contrary to the spin from the White House, there are 1 million less people employed today than during the horrific 2009 year. Luckily, another 6 million people left the work force, or we’d really have a problem. The truth is that if the government actually counted everyone in the country who wants a job, the unemployment rate isn’t 9.8%, but 23% — and it continues to rise

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