ZIRP and ZMP – Krugman – From my point of view, the current slump is just about what we should have expected given that we had a nasty financial crisis and continue to have a lot of over-leveraged players in the system. Ken Rogoff once said that the United States is having a “garden-variety severe financial crisis” — indeed, anyone who read Reinhart and Rogoff on the aftermath of crises more or less expected a prolonged period of weak employment. And I’ve been warning about a protracted liquidity trap, in which even a zero interest rate policy (ZIRP) isn’t enough to raise demand sufficiently, for more than a decade. And yet a number of economists seem determined to find some kind of supply-side explanation for low employment. Via Scott Sumner, I see that Tyler Cowen has been suggesting that workers are unemployed because there’s literally nothing they can do — that they have a zero marginal product. I also gather that this is what the Austrians are saying these days. So, is ZMP a plausible alternative to ZIRP?

Oil shocks and economic recessions  – I’ve just completed a new research paper that surveys the history of the oil industry with a particular focus on the events associated with significant changes in the price of oil. Here I report the paper’s summary of oil market disruptions and economic downturns since the Second World War. Every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession.

The table above itemizes the particular postwar events that are reviewed in detail in my paper. The paper also provides the following summary discussion:

EPA vetoes Arch Coal Company’s West Virginian mountain-top removal permit for its Spruce Mine – Yesterday, the Environmental Protection Agency vetoed the largest mountaintop removal mining permit in the history of West Virginia, and one that has been at the heart of these new coalfield wars for a decade. As usual, Ken Ward of the Charleston Gazette is the go-to guy here: The move is part of an Obama administration crackdown aimed at reducing the effects of mountaintop removal coal-mining on the environment and on coalfield communities in Appalachian — impacts that scientists are increasingly finding to be pervasive and irreversible… …EPA officials this morning were alerting West Virginia‘s congressional delegation to their action, and undoubtedly preparing for a huge backlash from the mining industry and its friends among coalfield political leaders. In making its decision to veto the U.S. Army Corps of Engineers’ approval of the 2,300-acre mine proposed for the Blair area of Logan County, EPA noted that it reviewed more than 50,000 public comments and held a major public hearing in West Virginia

Global Warming and Cold Winters – If you were to look out most windows as of this writing, there is a good chance that you would be presented with an image of winter. And more than a few of you might be asking yourself, "What happened to global warming?" Well, the effects of global warming are all around us. That harsh winter that we are experiencing, it is not proof that global warming is not happening, but rather serves as proof that it is indeed happening, and even a bit faster than we might like to think. It also shows why the phrase "Climate Change" is a better term to describe the effects of man on his environment. But how does a colder winter support the idea of a warming earth? It’s really simple when you look at the evidence.

Chile protests turn deadly as Latin America buckles under rising energy prices –  The world’s southernmost city, with a population of 110,000, remained largely paralyzed today by a general strike as local residents and elected officials demand that the national government maintain subsidies on natural gas, which is widely used in the region to power vehicles, heat homes, and provide energy for businesses. The protests are the latest in a wave of anger in Latin America as governments attempt to reconcile budgets with energy prices, which have climbed to levels not seen since the record highs of 2008. Close on Bolivia’s heels Just two weeks ago, Bolivian demonstrators took to the streets in the week between Christmas and New Year’s to protest against President Evo Morales’ plan to reduce subsidies for gasoline and diesel. Mr. Morales ultimately reversed his decision and reinstated subsidies on oil and gas.

The Fed No Longer Even Denies that the Purpose of Its Latest Blast of Bond Purchases … Is To Drive Up Wall Street The stated purpose of quantitative easing was to drive down interest rates on U.S. treasury bonds. But as U.S. News and World Reported noted last month:  the Fed is purchasing $600 billion in treasuries in hopes that it will push interest rates even lower, spur lending, and help jump-start the economy…. a funny thing has happened. Treasury yields have actually risen since the Fed’s announcement. The following charts from Doug Short update this trend: Click for a larger image Of course, rather than admit that the Fed is failing at driving down rates, rising rates are now being heralded as a sign of success. As the New York Times reported Monday: The trouble is [rates] they have risen since it was formally announced in November, leaving many in the markets puzzled about the value of the Fed’s bond-buying program.. “Rates have risen for the reasons we were hoping for: investors are more optimistic about the recovery,” said Mr. Sack. “It is a good sign.” Last November, after it started to become apparent that rates were moving in the wrong direction, Bernanke pulled a bait-and-switch, defending quantitative easing on other grounds:


Petroleum-based products are part of life – The real issue that needs to be explored is how much your life is surrounded by products made of petroleum. Oil often goes overseas to manufacturing facilities that realign and reshape the molecules of crude oil to create synthetics and polymers (nylon, polyester, Styrofoam, plastics, etc.) used in the everyday items we need. Even a car, which we often only see in terms of gasoline consumption and MPGs, is designed using plastics and synthetics for the bumpers, interiors, radio units and so on. Entire corporations are being built on oil but not in the conventional sense of ExxonMobil or BP. The technology industry’s blossoming success over the past two decades is not just due to its innovative creations. It’s due to its ability to realign carbon molecules from crude oil and petroleum into the alkenes and plastics that become the exterior to an Apple iPhone or the silicon-based motherboard of a Dell Inspiron PC

When will people move away from pure AD theories of unemployment? – Commerce department figures on Friday showed that total sales in 2010 were up 6.8 per cent from 2009, marking the sharpest such increase in more than a decade..

Industrial output is up by 5.9 per cent year-on-year. Yet the labor market is still "eh."  Here is more, but again note it is wrong to reject the AD factor altogether, though it seems to be becoming less relevant over time.  Arguably AD and AS are interacting in unusual and presumably deleterious ways. I have read too many blog posts attacking a caricatured version of either RBC theory or a narrowly defined notion of "structural unemployment" which requires excess demand for labor in significant parts of the economy.  As Arnold Kling points out, the labor market shock can be asymmetric in its effects. From a different direction, here is Scott Sumner criticizing the recalculation argument

 Citigroup Was On The Verge Of Failure, New Report Finds; Rescue Was Based On ‘Gut Instinct’ Citigroup, the nation’s third-largest bank by assets, was on the verge of being closed by regulators the week of Nov. 24, 2008 as depositors rapidly withdrew money and the bank’s counterparties declined to provide it credit, according to a government report released Thursday. The new findings shed light on the degree to which Citigroup, the financial services behemoth with a long history of finding itself in trouble and receiving government support, was actually in danger of failing during the fall of 2008. Until now, few were aware that Citi was perilously close to being shut down.  "We were on the verge of having to close this institution because it can’t meet its liquidity Monday morning," said Sheila Bair, chairman of the Federal Deposit Insurance Corporation, during a meeting the previous Sunday night, according to the report by the Special Inspector General for the Troubled Asset Relief Program.

EPA Blasted as It Revokes Mine’s Permit – WSJ – The Environmental Protection Agency, in an unusual move, revoked a key permit for one of the largest proposed mountaintop-removal coal-mining projects in Appalachia, drawing cheers from environmentalists and protests from business groups worried their projects could be next.  The decision to revoke the permit for Arch Coal Inc.’s Spruce Mine No. 1 in West Virginia’s rural Logan County marks the first time the EPA has withdrawn a water permit for a mining project that had previously been issued.  The EPA said Thursday it revoked the permit, issued by the Army Corps of Engineers in 2007, because it concluded new scientific research on mountaintop-removal mining since then indicated the potential harm to streams and watershed areas surrounding the Spruce project could be significant.  A spokeswoman for Arch said the company was "shocked and dismayed" by the agency’s decision, which it said would block an additional $250 million investment that would create 250 jobs. The company said it would appeal to the courts.

Norway’s $186 Billion Gas Loss to Cement Russian Grip on Supply – Europe may face a shortfall of Norwegian natural gas as soon as 2015 after the country slashed its estimate for undiscovered resources because of a dearth of discoveries from companies such as Royal Dutch Shell Plc.  Europe’s second-largest supplier yesterday cut its estimate for gas yet to be discovered by 31 percent, or 570 billion cubic meters. That’s equal to more than five years of production at current rates and would be valued at about $186 billion based on today’s prices at the U.K’s trading hub.  “This will rack up the pressure on the European Union to develop and secure access to reliable energy,” “The EU will be forced to increase imports from the Middle East and Africa to compensate for and reduce Russia’s domination.”

Bigger Trade Deficits Coming? – Joseph Gagnon, a former Federal Reserve economist now at the Peterson Institute, contends in a new paper that the world’s financial imbalances — such as China’s trade surplus and the United States’ trade deficit — will probably return to record levels in coming years. He argues that the imbalances have narrowed recently only because of the recession (which, for example, has reduced American demand for Chinese exports). Mr. Gagnon suggests that the countries with trade deficits, like the United States, keep interest rates very low and start getting serious about reducing their long-term deficit. He suggests China attack rising inflation by letting the renminbi rise and, over the long term, taking steps to put more money in the hands of consumers and enacting policies that would let households save less than they now are.  Excerpts from the paper


Americans Hate Taxes And The National Debt, Don’t Know What They Want To Cut — Two new polls show the eternal conumdrum that America finds itself in when it comes to Federal spending, the Budget Deficit and National Debt, and taxes. Americans all seem to agree that debt is bad, that taxes shouldn’t go up, and that we need to cut spending, but they aren’t willing to commit to the kind of spending cuts that would be necessary to really solve the problems we find ourselves dealing with. First, there’s a new poll from Reuters that shows, not surprisingly, that Americans are almost universally opposed to raising the debt ceiling:Either they’d have to increase revenue, meaning taxes, or they’d have to start cutting spending, and when it comes to spending, the American public has no idea what it wants.  So, if you’re not going to make big spending cuts, then the only other option is to raise taxes, right? Not according to a new poll from CBS News:

A defense of a working program — Meet the Press David Gregory brings up Social Security in relation to federal debt (this is the push), but Senator Reid responds at least forthrightly. This is noteworthy given the apparent acceptance by politicos that Social Security needs fixing at all. Here is part of the transcript:
MR. GREGORY: Social Security, how does it have to change? What they put on the agenda is raising the retirement age, maybe means testing benefits. Is it time for Social Security to fundamentally change if you’re going to deal with the debt problem?
SEN. REID: One of the things that always troubles me is, when we start talking about the debt, the first thing people do is run to Social Security. Social Security is a program that works, and it’s going to be–it’s fully funded for the next 40 years. Stop picking on Social Security. There are a lot places we can go to…
MR. GREGORY: Senator, you’re really saying the arithmetic on Social Security works?
SEN. REID: I’m saying the arithmetic on Social Security works. I have no doubt it does. Social Security is fine.


 Progress on Overhaul of Corporate-Tax Rules– Top financial executives from several big U.S. companies endorsed the idea of revamping corporate-tax rules following a Friday meeting with Treasury Secretary Timothy Geithner. The session produced no specific breakthrough, signaling many more meetings ahead on the Obama administration’s efforts to overhaul corporate taxes.  Still, executives described the discussion as productive. Much of it focused on the administration’s aim to overhaul corporate taxes in a way that doesn’t add to the budget deficit—a goal known as "revenue neutrality."  Some business executives at the meeting suggested a more lenient standard that could add somewhat to future budget deficits, but also would allow them to keep some existing tax breaks, according to industry officials with knowledge of the situation.

China Lawmaker Says Yuan Appreciation Won’t Help Ease Inflation
- A senior Chinese lawmaker on Saturday said he opposed yuan appreciation and said the rise in the yuan’s value won’t help the country to curb inflation.  "China should keep the yuan stable, and the yuan shouldn’t appreciate," He Keng, deputy director of the financial and economic-affairs committee of the National People’s Congress, told a forum in Beijing.  He also said it isn’t bad for a country to hold a large amount of foreign-exchange reserves. His comments are in stark contrast to the universal opinion held by economists and U.S. politicians that a fast rise in the yuan will help China to curb the country’s burgeoning inflation.

Banks Loosen Purse Strings – U.S. banks are expanding their loans to consumers for the first time since the credit crisis erupted, as lending standards begin to loosen and demand for new loans edges higher.J.P. Morgan Chase & Co., which Friday posted a 47% profit jump for its fourth quarter, said its total loans increased 6% since the end of September. While most of the loan growth came from loans to businesses, the nation’s No. 2 bank by assets said total credit-card balances rose for the first time in two years. Consumers were more willing to pull out their plastic. Credit-card usage was up 10% year-over-year. The bank issued 3.4 million new credit cards in the fourth quarter, up 4% from the same period a year earlier. "We see the consumer is getting stronger," said J.P. Morgan Chairman James Dimon. He added that many Americans are still saving and paying down their debts, which he said will make them better borrowers.

 Copper Deficit May be 600,000 Tons, JPMorgan Says — The world refined copper market is expected to have a 500,000-metric-ton to 600,000-ton deficit in 2011, even with a significantly weaker demand scenario, according to JPMorgan Securities Ltd. Disruptions last year seemed to have wiped out most of mine supply growth,  “As demand further recovers into 2011, supply-side issues will become more influential,” he said. Copper for delivery in three months in London advanced to a record of $9,754 a metric ton on Jan. 4 after rising 30 percent last year as the improving global economy and rising investment demand for commodities prompted buying. The International Copper Study Group is expecting a 435,000-ton global deficit in the refined metal this year. While current prices are sufficient to encourage brownfield and greenfield developments, longstanding issues, including capital availability, relative merit of projects, resource nationalism, and geotechnical issues, remain key impediments for supply increase, said Jansen.

Does a Bad Job Market Lead to More Discrimination? – As I noted in an article today, discrimination charges filed with the Equal Employment Opportunity Commission jumped last year, reaching a record high of 99,922. As you can see, there was also a bump in discrimination claims after the 2001 recession. That increase and the increase last year could largely be explained by cyclical factors: many of the people who once might have been reluctant to accuse a company of prejudice because they feared retaliation have now been laid off and therefore have less to lose from filing a claim.  Additionally, and perhaps more importantly, many people may be claiming discrimination precisely because they are out of a job — that is, they may believe they were improperly targeted for layoff based on their age, sex, race, etc.

Jeff Masters: At least 541 dead in Brazilian floods: Brazil’s deadliest natural disaster in history – Torrential rains inundated a heavily populated, steep-sloped area about 40 miles north of Rio de Janeiro on Tuesday and Wednesday, triggering flash floods and mudslides that have claimed at least 541 lives. Rainfall amounts of approximately 300 mm (12 inches) fell in just a few hours in the hardest-hit regions, Teresopolis and Nova Friburgo. Many more people are missing, and the death toll is expected to go much higher once rescuers reach remote villages that have been cut off from communications. The death toll makes the January 2011 floods Brazil’s worst single-day natural disaster in its history. Brazil suffers hundreds of deaths each year due to flooding and mudslides, but the past 12 months have been particularly devastating. Flooding and landslides near Rio in April last year killed 246 people and did about $13 billion in damage, and at least 85 people perished last January during a similar event.

The Hill: Major bank HSBC calls US ‘significant outlier’ on greenhouse-gas action – One of the world’s largest banks said Thursday there is “positive momentum” in 2011 for climate change-related investments. But the bank says there’s one exception to that rule: the United States.

The global research arm of HSBC, the world’s sixth-largest bank, said Thursday in an investment note that the uncertainty that marked climate investments in 2010 will be replaced this year by optimism.  But HSBC warns that the United States is a “significant outlier” in the world’s move toward policies that reduce greenhouse-gas emissions and encourage investment in low-carbon energy technology.

Unofficial Problem Bank list increases to 933 Institutions  – Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Jan 14, 2011. Changes and comments from surferdude808:  It was a quiet week for the Unofficial Problem Bank List as there were only two additions and one removal, which leaves the list at 933 institutions with assets of $410.4 billion.

JP Morgan Wins: CFTC Position Limits Do Not Apply (To Them) Spot-month position limit levels set at 25% of deliverable supply for a given commodity, with a conditional spot month limit of five times that amount for entities with positions exclusively in cash-settled contracts That’s just horrible. For anybody like JPM that has no intent of taking physical delivery, they will be prevented from accumulating a position that is more than 125% of the total deliverable supply.  What sort of a limit is that??  That’s like trying to limit the damage from auto accidents by ‘limiting’ freeway speeds to ‘no more than’ 175 mph. Also, anybody who might want to actually buy the physical is limited to 25%, so any potential Hunt Bros. need not apply. The outer limits of this game have been exclusively reserved for speculators and manipulators. But it gets worse:
So much for Chicago talk of poaching Oregon business – In the wake of the Measure 66 and 67 tax increases approved by Oregon voters a year ago, Chicago Mayor Richard Daley quickly said he’d be recruiting Oregon businesses to move to his own supposedly more business-friendly city. Wonder what Daley is saying now that Illinois legislators have approved a stunning 66 percent increase in the state’s income tax? Under the new bill, the Illinois personal income-tax rate – 5 percent – will still be much lower than Oregon’s.  But Illinois has high sales taxes.  In 2008, just as the recession was first hitting, the total state and local tax burden in Illinois $4,346 per capita compared to $3,719 in Oregon, according to the Tax Foundation.  Because Oregon had a lower per capita income, however, Illinois residents paid 9.3 percent of their income in state and local taxes and Oregonians paid 9.4 percent.
Sunrise arrives two days early in Greenland – Scientists claim to have discovered more evidence of global warming after the sun rose two days early in Greenland, apparently because melting glaciers have lowered the horizon.  The polar night usually ends on January 13, but this year residents of Ilulissat, the third largest settlement in Greenland, were surprised to see dawn arrive just before 1pm on January 11 after six weeks of perpetual darkness.  Astronomers have ruled out the possibility of the early dawn being a result of a shift of the earth’s axis and Thomas Posch, of the Institute for Astronomy of the University of Vienna, says a change in the horizon is "by far the most obvious explanation".

How to Fix Mortgage Mess in Three Steps –  Much of these toxic assets, as well as many of Fannie and Freddie’s prime mortgages, aren’t performing or will likely default. Nationwide, 8 million mortgages — or one in 10 — are under water, with the property’s value at least 25 percent below what’s owed.  We need a new limited-purpose mortgage system, which confines banks and other mortgage makers to doing just one thing — connecting lenders with borrowers, not leveraging the taxpayer. And we need the government to directly oversee the mortgage initiation process, organize a competitive market in home loans, and fully disclose all the details of mortgages on the Web so investors in these loans will know what they are buying.

    • Step 1: Set up a new government agency — the Federal Financial Authority. The FFA would hire companies to verify, rate, appraise and disclose mortgage applications. These contractors would work exclusively for the FFA, eliminating any conflict of interest. Liar loans and no-doc loans would be history.
    • Step 2: Limit buyers of home loans to doing so only through closed-end mortgage mutual funds. If a fund manager chooses poor mortgages, the value of his fund’s shares will fall, but the fund itself won’t go broke. Mortgage defaults will never again lead to financial-sector collapse.
    • Step 3: Establish an electronic mortgage auction and require mutual funds to purchase loans at this market so borrowers receive the best price (lowest interest rate).
The Chinese Eco-Disaster – When Watts was a child, he was warned: "If everyone in China jumps at exactly the same time, it will shake the earth off its axis and kill us all." Three decades later, he stood in the gray sickly smog of Beijing, wheezing and hacking uncontrollably after a short run, and thought: The Chinese jump has begun. He had traveled 100,000 miles crisscrossing China, from Tibet to the deserts of Inner Mongolia, and everywhere he went, he discovered that the Chinese state had embarked on a massive program of ecological destruction. It has turned whole rivers poisonous to the touch, rendered entire areas cancer-ridden, transformed a fertile area almost twice the size of Britain into desert—and perhaps even triggered the worst earthquake in living memory.

Assets of the top five U.S. banks as a percentage of all U.S. financial firms’ assets. Size has advantages. But in the case of the biggest U.S. banks, it could also be one of the greatest weaknesses in the global financial system. The top five U.S. commercial and investment banks — Bank of America, J.P. Morgan Chase, Citigroup, Wells Fargo and Goldman Sachs — have emerged from the financial crisis larger than ever. As of the third quarter of 2010, they had a total of $8.6 trillion in assets, according to data provider Capital IQ. That’s 13.3% of all U.S. financial firms’ assets, up from 11.8% three years earlier, when the financial crisis hit.

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