Transocean Request to Cap Liability ‘Unconscionable,’ U.S. Says (Bloomberg) — Transocean Ltd.’s request that its liability in connection with what may be the largest oil spill in U.S. history be limited to $26.7 million is “simply unconscionable,” the Ju

More on Hurst and FT Alphaville on Structural Unemployment –  – I’m going to keep hammering on structural unemployment issues at this blog.  I’m hearing rumors that Davos is going to be entirely about “The New Normal” and I want to be ready if that’s the case.  Structural unemployment is also doing a lot of the work of saying that the economy needs to bleed out the badness and be punished for the good times, a long-standing argument.   There’s definitely a problem with housing and foreclosures, but they only speak to a part of the cyclical crisis we are going through. In response to an editorial we discussed, where Raghu Rajan cited the work of Erik Hurst saying that “structural unemployment may account for up to three percentage points of total unemployment. In other words, were it not for construction, the US unemployment rate would be 6.5% – a far healthier situation than today,” Greg Mankiw runs a clarification from Hurst:
 
Opinions on Arithmetic Differ: Both Sides Have a Number – Paul Krugman has been outdone by someone else who works for the New York Times "Opinions on Shape of Earth Differ; Both Sides Have a Point" was exteme but  "In Battle Over Health Law, Math Cuts Both Ways" is the epitome of a nadir.The key word which Krugman missed is "math". To Krugman math is a set of artificially constructed theoretical systems in which meanings are more than usually precise and answers often have a right answer and a wrong answer. For a true journamalist, math is black magic and any claim in math might be true. It is the perfect setting for he said he said.  I do not blame the headline guy. The article by DAVID M. HERSZENHORN is as appalling as the headline. The article contains plainly false claims on matters of fact. One is clear enough that the New York Times must publish a correction.
 

Global Risk and Reward in 2011 – Nouriel Roubini – The outlook for the global economy in 2011 is, partly, for a persistence of the trends established in 2010. These are: an anemic, below-trend, U-shaped recovery in advanced economies, as firms and households continue to repair their balance sheets; a stronger, V-shaped recovery in emerging-market countries, owing to stronger macroeconomic, financial, and policy fundamentals. That adds up to close to 4% annual growth for the global economy, with advanced economies growing at around 2% and emerging-market countries growing at about 6%.  On the downside, one of the most important risks is further financial contagion in Europe if the eurozone’s problems spread – as seems likely – to Portugal, Spain, and Belgium. Spain now seems too big to fail yet too big to be bailed out. The United States represents another downside risk for global growth. In 2011, the US faces a likely double dip in the housing market, high unemployment and weak job creation, a persistent credit crunch, gaping budgetary holes at the state and local level, and steeper borrowing costs as a result of the federal government’s lack of fiscal consolidation.  In China and other emerging-market economies, delays in policy tightening could fuel a rise in inflation that forces a tougher clampdown later, with China, in particular, risking a hard landing.

Why are jobless claims so high this week – Let me say at the outset I don’t think the US government’s seasonal adjustments are accurate. Nevertheless, I will say this: they are close enough for me, especially when looking at trends instead of absolute levels.  What I’m concerned about is the direction of the numbers more than the level. If the unemployment rate or jobless claims are going up that’s bad, if they are going down, that’s good. As for the actual numbers, jobless claims are about as clean and real time a number as you are going to get. I like this data set. The states tally up how many people filed claims for unemployment insurance and pass this on to the federal government. The US federal government then seasonally-adjusts this number based on a factor that they work out well in advance of the jobless claims report.  For example, the seasonal adjustment factors are already set through 2 April 2011. Between now and then, the US Department of Labor will release an updated seasonal adjustment chart through to the end of 2011. 

Should We Buy Geithner’s Resistance to Naming “Systemically Important” Firms? Yves Smith  – According to the Financial Times, Treasury Secretary Timothy Geithner is trying to duck the assignment given the Financial Stability Oversight Council under the Dodd Frank legislation, namely, that of identifying “systemically important” financial institutions: Tim Geithner, the Treasury secretary, has questioned the feasibility of identifying financial institutions as “systemically important” in advance of a crisis, just as the regulatory council he chairs is supposed to start doing precisely that… Note this take was precipitated by a new SIGTARP report that offered rather mild criticism of the bailout of Citigroup last fall, including that it was done ad hoc, based on qualitative considerations. We’ll discuss that report separately.  Of course, Geithner does seem to have a history of being slow to complete tasks assigned to him, and with the benefit of hindsight, there is usually an ulterior motive. For instance, when he took the Treasury Secretary role, his first task was to come up plan for how to deal with the floundering financial system, and it was appallingly bad.

New Jersey Slashes Bond Offerting 51% After Christie’s `Bankrupt’ Comments – New Jersey Governor Chris Christie has learned that talking about state insolvency may have a cost.  About 20 minutes after Christie, 48, told a town-hall meeting in Paramus today that health-care costs “will bankrupt” the state, the New Jersey Economic Development Authority cut its tax-exempt school-related bond offering by more than half to $712.3 million.  “It doesn’t help to try and sell a $1 billion deal on the same day the governor is talking about the state going bankrupt due to health-care costs,” 

Outsized Pay on Wall Street Persists  – Yves Smith  – A piece at Bloomberg today confirms that the financial crisis did nothing to shift the gap between what someone can earn on Wall Street versus more worthwhile lines of work: Wall Street traders discouraged by declining bonuses this month can take solace: They still earn much more than brain surgeons and top U.S. generals. An oil trader with 10 years in the business is likely to earn at least $1 million this year, while a neurosurgeon with similar time on the job makes less than $600,000, recruiters estimated. After a decade of deal-making, merger bankers take home about $2 million, more than 10 times what a similarly seasoned cancer researcher gets (see table below).  It’s important to stress that this is a new pattern. In the stone ages of my youth, top earners in investment banking were on a par roughly with top heart surgeons and when someone became a partner at Goldman, his cash compensation fell sharply. The old line was that partners lived poor and died rich. And their aspirations were modest by contemporary standards: a nice apartment in the better sections of the Upper East side, having their kids in private schools, and having a summer home

Academics urge universities to change culture to value teaching as highly as research – The reward systems at universities heavily favor science, math and engineering research at the expense of teaching, which can and must change. That’s the conclusion of UC Irvine biology professor Diane K. O’Dowd and research professors at Harvard University, Yale University, the Massachusetts Institute of Technology, and elsewhere. Writing in the Jan. 14 issue of Science magazine, the authors note that professors have two responsibilities: to generate new knowledge and to educate students. But, they maintain, "although education and lifelong learning skills are of utmost importance," the promotions, awards and recognition given to science professors all emphasize research, while educating students "often carries the derogatory label ‘teaching load.’" "The problem is the culture of the university, which values research over everything else in the reward and promotion system,"

A lesson for America – THE MEAGER growth in employment during December is a reminder that the recession remains painful, especially for the least educated. The new Republican House leaders may have a cost-cutting mandate, but let’s hope that they don’t get penny-wise and pound-foolish when it comes to human capital. America’s economic future depends on our skills, which means that we need a vigorous new version of the flagship federal education program, No Child Left Behind. America’s unemployment teaches a stark lesson about the value of education. Almost three-quarters of adults with college degrees have jobs; fewer than 40 percent of high school dropouts work. The unemployment rate is 15 percent for high school dropouts, 10 percent for college-less people with high school degrees and less than 5 percent for college graduates. Educating America may be the best way to reduce future unemployment. But just throwing money at schools doesn’t improve education. The big idea of No Child Left Behind was to use federal funding intelligently to create incentives for schools to improve.

EFSF reform to go ahead – Germany accepts the need for an increased lending ceiling of the EFSF and a wider remit; but Germany insists on a wider package that might include a tougher stability pact; one of the options considered in Berlin is not a rise in the lending ceiling, but a rise in the guarantees; Schäuble says a decision could be taken in March; Trichet sends a tough message on inflation, but holds off on signalling higher interest rates; Stark is already talking about second-round effects; financial markets reacted with near euphoria to the Portuguese bond auction success; bond spreads narrow further, and the euro rises; Paul Krugman says Europe must be pretty desperate to celebrate an insolvency-inducing 6.7% interest rats for Portugal; Portugal has been shifting its funding towards direct placements, and shorter maturities; Spanish government plans new capital injection for Caixas; Sarkozy says the Irish cannot expected further European help unless they raise their corporation tax rate; he is also sending further mixed messages on fiscal reform; Hermann van Rompuy, meanwhile, says he does not want to upset the Chinese over the exchange rate: it is too delicate a subject. [more]
 

Marshall Auerback: Chinese Trade Policy Must Focus on Social Consequences You have to have a sense of irony to watch the latest maneuvers on trade with China. Obama continues to turn his administration into “Clinton Mark III”. (Enter Gene Sperling and Jacob Lew, following the revolving door departures of Peter Orszag and Larry Summers). The president continues to turn to many of the very folks who paved the way for China’s eclipse of the US economy. Granting China normal trade status under the World Trade Organization, as President Clinton did during his presidency, facilitated the expansion of China’s external sector, which coincided with a big step-up in the ratio of fixed capital formation to GDP. The WTO entry is how China managed to increase its growth rate from 2002 to 2007, using an undervalued currency to cannibalize the tradeables sector of its main Asian competitors and increasingly hollowing out US manufacturing in the process. At this stage, however, despite the ongoing requests by Treasury Secretary Geithner that “China needs to do more” on its currency, a simple revaluation of the yuan won’t cut it.

The debt ceiling and default – ALMOST everyone takes it for granted that a failure to raise the debt ceiling will eventually force the United States to default on its Treasury debt. This notion is superficially puzzling. The question is addressed in this week’s issue of The Economist. I’ll dig into it a bit more here. A default would result from failure to pay principal or interest. The debt ceiling doesn’t bar either. Treasury can roll over maturing issues so long as the overall stock of outstanding debt doesn’t rise. (A caveat: Treasury must invest surplus Social Security and Medicare taxes by issuing non-marketable debt to the plans’ trust funds, which erodes the remaining capacity for marketable debt.) As for interest, even in today’s straightened circumstances, revenue is more than enough to cover interest charges. The helpful table below from Lou Crandall of Wrightson ICAP shows that in every month this year, projected cash receipts comfortably exceed interest payments
 
 
Fed Watch: Shifting to Autopilot – Incoming data this week suggest the US economy continues to meander on its upward path, albeit at a rate that is decisively lackluster, at least relative to the magnitude of the output gap. That path of growth guarantees the Fed completes the current large scale asset purchase program. But soon we will have to turn our attention to what comes next. The baseline scenario is that the Fed holds pat – holding the balance sheet steady for the remainder of 2011, a scenario endorsed by at least two policymakers this week. Still, we should continue to challenge this assumption.. Thursday we saw some reminders that the path to recovery is not a straight line. First, initial unemployment claims retraced some of the recent declines. Mark Thoma has the story here. To be sure, given the noise in this series, one week of data contains limited information. In general, the downward trend remains intact. Still, it argues against expectations the job market is set to rocket forward. Housing news continues to tell the same old story. The record level of foreclosures in 2010 is not expected to be a record for long, while more evidence collects that housing prices are still falling.

 

  • The U.S. Federal Reserve’s balance sheet expanded in the latest week as the central bank continued with a plan to buy billions of dollars worth of government debt.

    The Fed’s asset holdings in the week ended Jan. 12 climbed to $2.471 trillion, from $2.439 trillion a week earlier, it said in a weekly report released Thursday. The Fed’s holdings of U.S. Treasury securities rose to $1.062 trillion on Wednesday from $1.031 trillion. Much of the increase stems from purchases of securities set to mature over one to 10 years. Meanwhile, Thursday’s report showed total borrowing from the Fed’s discount lending window slipped to $43.96 billion Wednesday from $44.62 billion a week earlier. But borrowing by commercial banks rose to $87 million Wednesday from $ 10 million a week earlier. Thursday’s report showed U.S. government securities held in custody on behalf of foreign official accounts fell to $3.346 trillion, from $3.355 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts fell to $2.611 trillion from $2.621 trillion in the previous week.

     

    Has The Fed Lit Inflation Fuse?

    What do higher commodity prices and a warning on soaring U.S. government debt have in common? Both are fueled by the Federal Reserve’s money presses.

    Both Standard & Poor’s and Moody’s Investors Service warned Thursday that U.S. debts are piling up so fast that our precious AAA rating is at risk. It may not sound that serious, but if we lose our AAA rating we’ll have to pay more — a lot more — to borrow money. That isn’t an issue yet, since under its "quantitative easing" the Fed’s been printing money and buying Treasury and other bonds. In other words, it’s doing what every central banker says it shouldn’t do: monetizing the debt. Our government is spending too much, racking up deficits of over $1 trillion a year. The Fed is encouraging this by printing more money. Eventually this will end — and not necessarily in a gentle way. The U.S. now has $14 trillion in public debt. At the average rate on the 10-year Treasury over the past two years, 3.24%, that $14 trillion costs about $450 billion to service. But if interest rates should rise to, say, their 20-year average of 5.5%, the cost of carrying that debt surges to about $760 billion a year — bigger than the U.S. defense budget.

     
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