"National Theater, Washington, D.C. Earl Carroll instructing showgirls in Vanities. For a decade or so, annual productions of Earl Carroll's Vanities ("Through these portals pass the most beautiful girls in the world") were a staple of the theatrical stage, "treading the fine line between titillation and indecency"
Ilargi (with reporting by VK): I know, perhaps I should have written today about Egypt, Jordan, Yemen, Tunisia etc., before it all gets totally out of hand over there (the military has now entered Cairo, government buildings are on fire). We’ll do that over the weekend, provided absolute mayhem will wait that long.
Or I could have written about these two seemingly (?!) inconsistent headlines: "Ford posts best profit since 1999" and "Ford Shares Plunge on Q4 Profit Drop", and the fact that Ford shares are off over 12% on it. That sounds like fun. Got to love that kind of stuff. But I want to do the Congressional Budget Office's (CBO) Budget Report first.
And no, in case you were asking yourself that question, I have no physical evidence of anyone in the CBO actually lurking on a pipe or engaging in other forms of substance abuse, but reading their Budget Report, you do get to wonder. And not just about the CBO; judging from the looks of what we see coming out, all of Washington would seem to be at risk of failing a standard bloodtest.
There are a number of issues with the CBO Budget Report which, when taken together, make the report, in my view, border on criminal negligence. The way I see it is that at a moment in time when millions of Americans are hitting rock bottom, losing jobs, losing homes, losing hope and perspectives, projecting positives based on assumptions that lack any and all credibility is not a trifle matter. These people need help, not a snort of a crack pipe.
Here's a valid comparison: the value of the CBO report is on par with that of Moody's "model" for rating mortgage backed securities, as Matthew Leising and Katrina Nicholas at Bloomberg write: both are complete and utter nonsense.
Moody’s Assumed 4% Annual Home Price Rises in 2003 Bond Rating ModelMoody’s Corp. assumed U.S. home prices would rise 4 percent a year when it developed a model in 2003 to rate mortgage-backed securities, according to the Financial Crisis Inquiry Commission. Prices instead plunged 28.5 percent from July 2006 through the low reached in February last year, according to the Chicago- based National Association of Realtors.
The Automatic Earth's roving reporter VK has been going through the CBO Budget Report and rightly concludes: "It is ugly":
• The CBO is projecting a $1.5 trillion deficit this fiscal year (which is $414 billion - or 38%- more than the CBO predicted only last August!), and a cumulative deficit of $12 trillion over the next decade. Think that sounds bad? Just wait till you hear the assumptions they make.
1) They expect total revenues to rise 43% in the next 2 years alone and 129.6% over the coming decade (from $2.162 trillion in 2010 to $4.963 trillion in 2021). Also, revenue collection as a percentage of GDP is projected to go up from the current 14.9% of GDP to an average of 19.9% of GDP. Please note: this is Federal revenue, and does not yet include tax increases at state or municipal level.
2) Not only do they expect spectacular federal tax revenue increases through real GDP growth rates peaking at 3.4%, and overall price increases consistently being below 2.3%, they are telling us that this spectacular growth in a benign environment is going to be achieved while they project the following to occur:
- Sharp reductions in Medicare's payment rates for physicians (as scheduled) by the end of 2011. If this doesn't materialize, projected deficits will be 6% of GDP rather than the projected 3.6%.
- No tax cuts or unemployment benefits will be extended beyond their designated time frame. Meaning payroll tax goes back up, while the Alternative Minimum Tax break, lower tax rate provisions, deductions and credits all expire. This should increase revenues to 20.8% of GDP by 2021, higher than the 40 year average of 18%.
- Discretionary spending will rise at the rate of inflation (or rather, of price increases, which they project to be low) instead if the MUCH faster rate of increase seen over the last 12 years.
So even with high growth assumptions, low inflation, rising taxes, the unemployment rate falling to 5.2% by 2021, and higher revenues, the debt held by the public - which is a subset of the total government debt (currently $14 trillion plus)- will STILL more than double, from the present $9.018 trillion to $18.253 trillion (and triple from 2009's $6 trillion).
They're expecting 2.5 million jobs every year for the next decade. That's 208,334 new jobs every single month for 120 months! The number of people employed is expected to rise to 160 million (full time + part time). However, there are projected to be between 335 to 350 million people in the US in 2021, up from the present 311 million or so. Hence, about 150,000 jobs per month will be needed just to have a static unemployment rate.
To wit, from Arthur Delaney at the Huffington Post:
Unemployment Rate To Remain Above 9 Percent Through 2011, Will Remain Above 'Natural Rate' Until 2016: CBOJames Galbraith, an economist who teaches at the University of Texas, says CBO's structural unemployment claim is an after-the-fact rationalization for previous failed forecasts. (CBO's 2009 forecast predicted 8 percent unemployment in 2011 and 6.8 percent unemployment in 2012. Galbraith's been beating up on CBO since before then.)
"There never was any reason to believe that employment would bounce back, as CBO had previously forecast, in the wake of the financial meltdown, and no reason now to think that the problem lies with deficient skills for any class of workers," Galbraith told HuffPost. "[The CBO forecast] is a purely mechanical exercise idea based on the fact that in the past we've always rebounded to a natural unemployment rate of 5 percent. What that means is you never take into account that the system broke in any serious way."
VK: • Oh, and the government's mandatory healthcare spending programs plus Social Security will rise from 10% of GDP to 16% over the next 25 years.
The CBO's projections are high in fantasy, yet the debt burden becomes ever more crushing. That is the mathematical reality of debt.
On debt held by the public, the CBO states:
"Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly $9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 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 over the next decade. CBO projects that the government’s annual spending on net interest will more than double between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to 3.3 percent."
Other VK tidbits:
- About a 16% rise in employment but tax revenue is expected to rise a whopping 129.6% by 2021??!!! So salaries are expected to go up 48% per employee ?!. And aggregated wages are going up 70% in 10 years from $6.403 trillion to $10.865 trillion.
- Gross Federal Debt is expected to rise by 85% from the end of 2010 to $25.1 trillion in 2021. If the population hits 340 Million by then, that's $73,800 per citizen. Up from the $43,400 per citizen it was at the end of 2010. Ergo: a 70% rise in debt per citizen in 10 years.
- Social security + Medicare + Medicaid + Net Interest Payments = $27.212 trillion over 2012-2021. Total budget outlays = $46.055 trillion over 2012-2021. So SS, Medicare, Medicaid & Interest will consume 59.1% of the cumulative budget over the next decade. These are nothing but transfer payments from the young to the old.
- They're expecting Fannie & Freddie to eat up only $48 Billion from 2012-2021?!? I'll say, these guys are hardcore optimists.
- Also, gross interest payments are $8.133 trillion. Don't know how they're receiving $1.86 trillion in income from social security, retirement funds(civil service + military), Medicare and unemployment insurance trust funds?? Plus interest earned from loans to the public is $822 Billion? To get a net interest payment of $5.447 trillion over 2012-2021?!
Sure, the CBO itself states that its numbers "understate the budget deficits that would occur if many policies in place were continued, rather than allowed to expire as scheduled under current law [..]", but then hides behind the fact that it can only assume those policies will be discontinued, since current law says so. No word on the likelihood of that to happen.
And that's by no means all. They also assume 2.5 million jobs created every year for 10 years, and for real estate investment to rise, for a 3.4% average rise in real GDP over the period. Based on what?
What it comes down to is that even the most positive of CBO's projections will only be achieved if and when this whole series of present measures and laws are allowed to expire. And total federal revenues increase by 129% by 2021!!. And even then debt held by the public will rise from $6 trillion in 2009 to $18 trillion in 2021, or 77% of GDP (which is thus supposed to rise to $23.3 trillion).
Debt held by the public will triple from 2009-2021.
And that is under the rosiest scenario the CBO has to offer. Which they know very well is unrealistically positive.
If and when you peel away sufficient layers of this onion of a report, the picture you see is as bleak as it is dark. Basically, the only way to bring down unemployment is by raising public debt through the ceiling, and taxing Americans like a nutcracker squeezing their family jewels. In other words, even if jobs can be found, they will pay wages so low, and will be taxed so high, that they’ll hardly even be fit to be called "living wages".
And that in turn will mean housing prices must of necessity keep falling. Which will invalidate the entire report and all its projections and "conclusions".
It makes no difference what Wall Street does, or what the markets do. In the end, the US economy is all about housing. If you lower wages and/or raise taxes, home affordability crashes, more homeowners go underwater, more homes are foreclosed on, mortgage based securities lose even more value, and down the line the banks will either draw their terminal breath or come knocking for more bail-outs, which will raise the debt even more. Rinse and repeat. There's no way out anymore. The engine has seized up. If credit is the lubricant of our economic system, that lubricant has contracted a fatal viscosity problem.
And this is just the federal level: states and municipalities are 110% certain to raise their taxes as well, and by huge margins, only to balance their books, even as they will at the same time slash jobs and services to the bone.
So how do you make homes affordable again? There's only one way to do that. Allow prices to fall. Get Fannie and Freddie out of the game, let the supply and demand mechanism of the markets decide. Only, and this is very important for everyone to finally understand, that is considered impossible by those presently in power, since it would murder all the major banks, which have been designated too big to fail, in the wink of an eye, as well as Fannie and Freddie, and that would add many trillions of dollars to the debt scale.
- To create jobs means we must go into debt much deeper than we already have (says the CBO), which will lead to ratings downgrades, which will lead to much higher interest payments on the debt, all of it, which will lead to higher taxes, which will greatly lower consumer spending, which will raise unemployment, which will in turn hammer home prices, which will break the banks unless they're bailed out once again, in which case we will go into debt much deeper than we already have.
- Not creating jobs means even more jobs will vanish, which will hammer home prices, lower tax revenues and slash services, which will make more jobs disappear, which will further lower tax revenues, which will bankrupt local governments, which will raise unemployment, which will in turn hammer home prices, which will break the banks unless they're bailed out once again, in which case we will go into debt much deeper than we already have.
There is no way this one is not going to hurt like nothing we ever imagined.
The Budget and Economic Outlook: Fiscal Years 2011 Through 2021
by Douglas Elmendorf- Congressional Budget Office Director's Blog
The United States faces daunting economic and budgetary challenges. The economy has struggled to recover from the recent recession: The pace of growth in output has been anemic compared with that during most other recoveries and the unemployment rate has remained quite high.
Federal budget deficits and debt have surged in the past two years, owing to a combination of the severe drop in economic activity, the costs of policies implemented in response to the financial and economic problems, and an imbalance between revenues and spending that predated the recession. Unfortunately, it is likely that a return to normal economic conditions will take years, and even after the economy has fully recovered, a return to sustainable budget conditions will require significant changes in tax and spending policies.
This morning CBO released its annual Budget and Economic Outlook. I will discuss the economic outlook first and then turn to the budget outlook. CBO expects that production and employment will expand in the coming years but at only a moderate pace, leaving the economy well below its potential for some time. We project that real GDP will increase by about 3 percent this year and again next year, reflecting continued strong growth in business investment, improvements in both residential investment and net exports, and modest increases in consumer spending.
But we have a long way to go on the employment front. Payroll employment, which declined by 7.3 million during the recent recession, rose by only 70,000 jobs, on net, between June 2009 and December 2010. The recovery in employment has been slowed not only by the slow growth in output but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers.
We estimate that the economy will add roughly 2.5 million jobs per year over the 2011–2016 period, similar to the average pace during the late 1990s. Even so, we expect that the unemployment rate will fall only to 9.2 percent in the fourth quarter of this year, and 8.2 percent in the fourth quarter of 2012. Only by 2016, in our forecast, does it reach 5.3 percent, close to our estimate of the natural rate of unemployment.
CBO projects that inflation will remain very low both this year and next, reflecting the large amount of unused resources in the economy, and will average no more than 2.0 percent a year between 2013 and 2016.
Economic developments, and the government’s responses to them, have—of course—had a big impact on the budget. We estimate that, if current laws remain unchanged, the budget deficit this year will be close to $1.5 trillion, or 9.8 percent of GDP. That would follow deficits of 10.0 percent of GDP last year and 8.9 percent in the previous year, the three largest deficits since 1945. As a result, debt held by the public will probably jump from 40 percent of GDP at the end of fiscal year 2008 to nearly 70 percent at the end of fiscal year 2011.
If current laws remain unchanged, as we assume for CBO’s baseline projections, budget deficits would drop markedly over the next few years as a share of output. Deficits would average 3.6 percent of GDP from 2012 through 2021, totaling nearly $7 trillion over that decade. As a result, the debt held by the public would keep rising, reaching 77 percent of GDP in 2021.
However, that projection is based on the assumption that tax and spending policies unfold as specified in current law. Consequently, it understates the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law. For example, suppose instead that three major aspects of current policy were continued during the coming decade:
- First, that the higher 2011 exemption amount for the alternative minimum tax (AMT) is extended and, along with the AMT tax brackets, is indexed for inflation,
- Second, that the other major provisions in the recently enacted tax legislation that affected individual income taxes and estate and gift taxes were extended, rather than allowed to expire in January 2013,
- And third, that Medicare’s payment rates for physicians’ services were held constant, rather than dropping sharply as scheduled under current law.
All of those policies have recently been extended for one or two years. If they were extended permanently, deficits from 2012 through 2021 would average about 6 percent of GDP, rather than 3.6 percent, and cumulative deficits over the decade would be nearly $12 trillion. Debt held by the public in 2021 would rise to almost 100 percent of GDP, the highest level since 1946.
Beyond the 10-year projection period, further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place. Spending on the government’s major mandatory health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and insurance subsidies to be provided through exchanges—along with Social Security will increase from roughly 10 percent of GDP in 2011 to about 16 percent over the next 25 years.
To prevent debt from becoming unsupportable, the Congress will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches. The longer the necessary adjustments are delayed, the greater will be the negative consequences of the mounting debt, the more uncertain individuals and businesses will be about future government policies, and the more drastic the ultimate policy changes will need to be.
But changes of the magnitude that will ultimately be required could be disruptive. Therefore, Congress may wish to implement them gradually so as to avoid a sudden negative impact on the economy, particularly as it recovers from the severe recession, and so as to give families, businesses, and state and local governments time to plan and adjust. Allowing for such gradual implementation would mean that remedying the nation’s fiscal imbalance would take longer and therefore that major policy changes would need to be enacted soon to limit the further increase in federal debt.
Why the CBO may not believe all its own deficit projections
by Peter Grier - Christian Science Monitor
The CBO predicts a deficit of $1.5 trillion for 2011, but then steadily falling amounts through 2014. Good news? Not really. The CBO had to make assumptions about US policies its officials seem to have little faith will be implemented.
The Congressional Budget Office issued updated figures today that predict the budget deficit for fiscal year 2011 will be a flaming huge $1.5 trillion. That’s about $414 billion bigger than the CBO last August figured this year’s shortfall would be. And yes, it would be a record in terms of absolute dollar red ink for Uncle Sam.
Things get better in 2012 though, according to the CBO’s new budget and economic outlook. Budget deficits would "drop markedly," especially if measured as a percentage of national economic output, according to the report. With the economy recovering and some government spending programs ending, the 2012 shortfall will be $1.1 trillion, representing about 7 percent of US gross domestic product, say the CBO’s budgeteers. In 2013, those figures will be $704 billion and 4.3 percent of GDP, and in 2014 they’ll be $533 billion and 3.1 percent of GDP.
That’s what the CBO predicts, anyway. But here’s the interesting thing: the CBO does not appear to really trust its own deficit projections for 2012 and beyond.
Why is that? Because the CBO can only crunch numbers and make predictions based on existing law. And CBO officials sound as if they do not believe that Congress and the White House will permit a number of scheduled money-saving moves to happen.
The CBO’s new figures "understate the budget deficits that would occur if many policies in place were continued, rather than allowed to expire as scheduled under current law," writes CBO director Douglas Elmendorf on his blog. For instance, sharp reductions in Medicare payment rates for physician services are scheduled to kick in at the end of this year. Will they? It’s unlikely – Congress has been postponing these cuts via last-minute so-called "doc fix" bills for years.
Similarly, provisions that limit the reach of the Alternative Minimum Tax are scheduled to expire at the end of 2011. Congress has always shielded middle-class taxpayers from the AMT’s bite in the past.
Then there are the Bush tax cuts, which were extended in last year’s lame duck congressional session per bipartisan agreement. That extension expires in 2013, and the CBO has to do its math on the assumption that the expiration goes through. If Congress goes ahead and permanently heads off all these project changes "deficits from 2012 through 2021 would average about six percent of GDP, rather than 3.6 percent," writes Elmendorf.
And what of the deficit beyond this 10-year projection period? There lie monsters, according to the CBO’s outlook. Spending on the government’s major mandatory health programs, such as Medicare and Medicaid, will help drive deficits to peaks beyond our current experience, says the new report.
"To prevent debt from becoming unsupportable, the Congress will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches," writes Elmendorf. "The longer the necessary adjustments are delayed, the greater will be the negative consequences of the mounting debt."
Deficit Outlook Darkens
by Damian Paletta, Janet Hook and Jonathan Weisman - Wall Street Journal
The federal budget deficit will reach a record of nearly $1.5 trillion in 2011 due to the weak economy, higher spending and fresh tax cuts, congressional budget analysts said, in a stark warning that will drive the growing battle over government spending and taxation.
At that size, the deficit—up from $1.29 trillion in 2010—would be roughly $60 billion more than the White House projected last summer, the nonpartisan Congressional Budget Office said Wednesday. Last year's tax-cut package alone will add roughly $400 billion to the deficit, the CBO said. As a percentage of the nation's economic output, the 9.8% deficit would be the second-largest since World War II, behind only the 10% level in 2009.
The grim outlook landed a day after President Barack Obama outlined plans to push for new spending that he said would help keep the U.S. globally competitive in his State of the Union speech, and the data could complicate that effort. Republicans have dismissed the president's plans as ignoring the more pressing need to reduce the deficit.
Wednesday, the battle lines sharpened. "This report is a reflection of the gross mismanagement of our nation's finances," said Rep. Tom Price (R., Ga.). "It should make every American think twice about the latest calls by the president to increase spending at a time when Washington can clearly not afford to pay its bills." Democrats argued that the bleak outlook for unemployment justified spending in a still-fragile economy, a line they intend to use to resist the GOP push for cuts. When asked whether current spending levels should be maintained, Sen. Patty Murray (D., Wash.), a member of the Senate Democratic leadership team, said: "We can't have a fire sale."
Mr. Obama saw the dichotomy up close Wednesday in Wisconsin, on a post-speech trip to a state where Republicans made big gains in November's elections. Speaking to workers at Orion Energy Systems, an energy-efficiency and solar company, he said: "If we, as a country, continue to invest in you, the American people, then I'm absolutely confident America will win the future in this century as we did in the last."
But on arriving in the state, he was greeted by a skeptical letter in the Milwaukee Journal Sentinel from Wisconsin's newly elected Republican Sen. Ron Johnson. "We must pursue policies that will first limit and then begin to reduce the size, scope and cost of government," wrote the freshman senator, owner of a polyester and plastics maker.
And the state's new Republican governor, Scott Walker, who attended the event, reiterated his own stance on cutting spending after the speech. As one of his first acts in office, Mr. Walker rejected the stimulus-funded high-speed rail link that had been planned between Milwaukee and Madison. "The train has left the station in Wisconsin," he said. "We're going to focus on things we can afford."
The forecast will no doubt frame the coming months of debate. The first real tests of Mr. Obama's spending priorities will come when the White House releases its 2012 budget Feb. 15, spelling out proposed spending increases and cuts. On the same day, House Republicans hope to begin debating a bill to extend government spending beyond the current expiration date of March 4. Less than a month later, Treasury officials predict the U.S. could hit the $14.3 trillion debt ceiling unless Congress raises it.
The deficit numbers do little to simplify a related thorny problem—what to do about the unwieldy U.S. personal tax code. The payroll tax holiday expires in a year, and extending it would add to the deficit. The possibility of a bigger revamp likely won't get taken up until after the 2012 elections. Many of the budget-cutting proposals from Democrats and Republicans focus on a relatively small part of the U.S.'s $3.5 trillion budget: the roughly 15% that accounts for nonsecurity, discretionary spending. But the deficit is being driven by programs that are more politically difficult to cut, such as the Medicare health plan for seniors and Social Security.
"The United States faces daunting economic and budgetary challenges," CBO Director Douglas Elmendorf said. The White House and Republicans could try to put together a package of changes that would raise the debt ceiling while cutting spending, though a deal could prove hard to reach and could trigger a backlash from rank-and-file lawmakers in both parties.
House Budget Committee Chairman Paul Ryan (R., Wis.), a key negotiator who delivered the GOP rebuttal to the State of the Union speech, plans to use the new CBO numbers to set a ceiling for discretionary spending for the remaining seven months of the 2011 fiscal year. Republicans are eyeing cuts of between $60 billion and $100 billion in federal spending. White House officials are pushing for mostly flat spending.
Mr. Obama proposed on Tuesday a five-year freeze on nonsecurity discretionary spending, a move officials say will save $400 billion over 10 years. But his State of the Union speech focused more on the need to continue investing in education and infrastructure than on the need to cut spending. He did, however, open the door for potential changes to some of the government's most costly programs—including Medicare, Medicaid and Social Security.
Republicans argue the White House isn't taking the country's fiscal problems seriously enough. "To boost private-sector job creation and help the economy grow, we need to cut spending and enact serious budget reforms to ensure we keep cutting spending," House Speaker John Boehner (R., Ohio) said. The CBO report offered a sobering look at both the short-term and long-term fiscal outlook. It projected the unemployment rate would fall from 9.4% now to 9.2% by the end of this year and then to 8.2% by the end of 2012. It projected the unemployment rate wouldn't fall to typical pre-recession levels—about 5.5%—until 2016.
Meanwhile, the U.S. debt is expected to increase rapidly in the coming years, compounded by rising health-care costs, the aging baby boomer generation and soaring interest payments. By 2017, the level of U.S. debt subject to the debt ceiling will hit $20.9 trillion, the CBO projected. Democrats and Republicans are clamoring to introduce proposals to cut spending. Twenty Senate Republicans introduced a constitutional amendment to balance the federal budget. Meanwhile, 13 senators introduced a bill that would prevent lawmakers from receiving an automatic pay raise each year.
Several top Democrats on Wednesday said the CBO report was troubling, but warned Republicans against using the data to slash spending in the short-term. "I don't think that's the way to solve the problem," Senate Budget Committee Chairman Kent Conrad (D., N.D.) said. He called for a fundamental overhaul of tax and spending rules that would address the long-term fiscal problems.
Unemployment Rate To Remain Above 9 Percent Through 2011, Will Remain Above 'Natural Rate' Until 2016: CBO
by Arthur Delaney - Huffington Post
The jobs crisis isn't going anywhere, according to the latest forecast from the nonpartisan Congressional Budget Office, which puts the national unemployment rate above 9 percent through 2011 and 8 percent through 2012. Unemployment will fall to a more "natural rate" only in 2016, when CBO estimates it will reach 5.3 percent -- a projection roughly in line with private-sector figures.
"The recovery in employment has been slowed not only by the moderate growth in output in the past year and a half but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers, that have hindered the reemployment of workers who have lost their job," CBO's report says.
The degree to which the unemployment crisis is structural, as opposed to cyclical, is hotly debated by economists, with progressives like Paul Krugman arguing that structural unemployment is a fake problem "which mainly serves as an excuse for not pursuing real solutions." Many argue that the even drop in employment across industries shows that lack of overall demand is the problem, with stimulus spending the answer. Others have said pay disparities between workers with different levels of education show the problem is at least partly structural.
James Galbraith, an economist who teaches at the University of Texas, says CBO's structural unemployment claim is an after-the-fact rationalization for previous failed forecasts. (CBO's 2009 forecast predicted 8 percent unemployment in 2011 and 6.8 percent unemployment in 2012. Galbraith's been beating up on CBO since before then.)
"There never was any reason to believe that employment would bounce back, as CBO had previously forecast, in the wake of the financial meltdown, and no reason now to think that the problem lies with deficient skills for any class of workers," Galbraith told HuffPost. "[The CBO forecast] is a purely mechanical exercise idea based on the fact that in the past we've always rebounded to a natural unemployment rate of 5 percent. What that means is you never take into account that the system broke in any serious way."
The most unusual factor of the jobs crisis is how long some people are going without work. Long-term unemployment has surged since the unprecedented mortgage meltdown that clobbered housing prices and launched the Great Recession in December 2007. Some 6.4 million people -- 44.3 percent of the 14.5 million unemployed -- have been out of work for six months or longer, and 1.4 million have been out of work for two years or longer. This is the worst long-term unemployment situation in the United States since the Great Depression.
CBO's report says the long-term unemployed lose familiarity with developing technologies as their job-finding social networks deteriorate, but it hints at another reason those folks can't find jobs: Employers don't want them because nobody else does. The Congressional Research Service says the 1.4 million "very long-term unemployed" hail from all educational backgrounds. "Workers who are unemployed for long periods may face even greater obstacles in finding a new job," the CBO report says. "Some employers may assume that long-term unemployment is a signal that a worker is not good at his or her job."
Indeed. Just check out this Craigslist ad for a restaurant manager in Salisbury, Md.: "Must be currently employed or recently unemployed." As HuffPost has reported, this is a common requirement for many jobs, even if it sometimes goes unstated.
CBO chief: Deficit problem really comes down to health care costs
by Tom Curry - Msnbc.com
The day after the Congressional Budget Office released its new estimate of a $1.5 trillion budget deficit for this fiscal year, CBO chief Douglas Elmendorf told the Senate Budget Committee that health care is the biggest driver of the budget problem.
Responding to a question from Sen. Rob Portman, R-Ohio, who asked him to identify the single largest fiscal challenge facing the United States, Elmendorf said, "the part of the spending that is growing very rapidly, and much faster than GDP, is spending on the government's large health care programs, both because of the aging of the population … and because of rising health spending." He added, "The crucial underlying factor here … is the rising number of older Americans, relative to working Americans, and the rising cost of health care, relative to other things in the economy."
This should come as no surprise, Elmendorf said. "Those fundamental forces have been foreseen for decades and, I think, are inexorable under current policies." The CBO's budget estimate released Wednesday projected that over the next several years, Medicare spending will grow at an average annual rate of nearly 7 percent, while Medicaid will grow at an average annual rate of 9 percent – even while the nation's economy itself is growing at a rate of less than 3 percent a year. (Medicaid is the government's insurance program for poor people of all ages, but the elderly and disabled account for 70 percent of its outlays.)
He also said that a sudden onset of investor skittishness about the federal government's creditworthiness could cause an interest rate shock. "The swings in sentiment that drive fiscal crises are not usually telegraphed very well ahead of time. They often occur very suddenly," Elmendorf told Portman. "It's very difficult to predict what will happen if there's a sudden shift of sentiment against buying U.S. Treasury debt."
Elmendorf stuck to the CBO forecast that the health care law Congress passed last year will reduce future deficits. He repeated CBO's previous estimate said repeal of the law would add $230 billion to future deficits over the next several years. At the hearing Elmendorf also gave a word of praise to the soon-to-be-ending $814 stimulus program, calling it "an important boost to output and employment."
The stimulus has gotten little attention in President Obama's State of the Union speech or in the budget debate in recent days. In response to Sen. Bill Nelson, D- Fla., Elmendorf said "The waning of the effects of the Recovery Act … is one of the reasons that the economy isn't growing more rapidly over the next few years in our projection." Nelson said people don't appreciate the stimulus because most of the money wasn't in the form of bridges and other visible infrastructure, but in "a massive infusion of money" to state governments "that people don't ordinarily see -- such as Medicaid spending as well as education."
But Elmendorf then brought the conversation back to the topic of the moment: the debt -- pointing out to Nelson that the stimulus had the unhealthy effect of adding to the debt. "The large accumulation of debt to pay for the Recovery Act and the automatic stabilizers (such as unemployment insurance)… in the past few years has pushed debt to GDP up in a way that creates damage and risks."
UK consumer confidence suffers 'astonishing collapse'
by Emma Rowley - Telegraph
Britons' confidence in the economy and their finances has suffered its biggest drop in close to 20 years, raising fears that the Government's austerity onslaught will set off a self-feeding downward spiral. The most closely-watched barometer of consumer confidence revealed an "astonishing collapse" in January as the VAT rise took effect, according to market research group GfK NOP.
The first taste of the fiscal tightening to have a widespread impact on consumers appeared to have hit sentiment hard, researchers said, even before the full impact of the public spending cuts is felt. "In the 35 years since the index began, confidence has only slumped this much on six occasions, the last being in the midst of the 1992 recession," said Nick Moon, managing director at GfK NOP Social Research. "Today's figures, when combined with the bleak economic forecast, will make talk of a double-dip recession unavoidable."
The eight-point plunge in optimism took the barometer's headline reading to -29, the lowest since March 2009, when the UK was mired deep in the last recession. Their findings will prompt more questions as to whether the Coalition risks tipping the economy back into recession through its programme of tax rises and spending cuts to reduce the budget deficit.
People are becoming increasingly negative about their own finances and the wider economy, both in retrospect and looking forwards, the survey showed. If consumers have no confidence that their jobs are safe and that Britain will keep growing, the risk is that they will rein in their spending, denting domestic demand. Rising inflation is also putting spending under pressure, as wages are not keeping pace with the increases.
The survey of 2,000 people, conducted on behalf of the European Commission, took place earlier this month, before official figures revealed the economy shrank in the final quarter of 2010 – which is likely to increase consumer nerves. People were keener to save, likely to reflect increased expectations that the Bank of England will be forced to raise the interest rate because of high inflation, as well as the wish to create a safety net if harder times arrive.
The biggest fall in confidence was seen in enthusiasm for making major purchases, which was taken to reflect the rise in the VAT to 20pc at the start of this month. Separately, a survey from the Confederation of British Industry reported that sales growth on the high street slowed this month, as expected, after spiking ahead of the VAT increase.
Why All The Simple Theories Of The Financial Crisis Are Wrong
by Joe Weisenthal - Business Insider
Today the Financial Crisis Inquiry Commission releases its full report on the crisis.
Already the minority GOPers on the panel have come out with their own rebuttal, and the centerpiece is this chart, which shows that the housing bubble in the US was mirrored all around the world.
Thus, any attempt to pin this to The Fed, or Wall Street's control of Washington, or Fannie and Freddie, fails on the ground of the global nature of the crisis.
S.&P. Downgrades Japan as Global Debt Concerns Spread
by Bettina Wassener - New York Times
Japan, the third-largest economy in the world after the United States and China, was downgraded by a leading credit ratings agency on Thursday, in a sharp reminder of the seemingly intractable debt levels that are plaguing many of the world’s developed, and often slow-growing, economies.
Standard and Poor’s lowered its sovereign credit rating for Japan to AA- from AA, warning that the Japanese government’s already high debt burden was likely to continue to rise further than it had anticipated before the financial crisis shook the global economy, and would peak only during the middle of next decade. Kaoru Yosano, the Japanese economy minister, called the move "regrettable," and said he believed market confidence in Japan’s public finances had not been shaken, Reuters reported. The yen fell against the dollar but then quickly recovered somewhat.
Still, Standard and Poor’s move, which came just weeks after both it and its rival ratings agency Moody’s cautioned that they might take a more negative stance on the United States, again highlighted just how deeply indebted many of the world’s developed economies remain — despite concerted efforts on the parts of governments there to repair their balance sheets.
Worries over several of Europe’s smaller economies — notably Greece, Portugal, Ireland and Spain — have over the past year raised concerns about possible defaults and more pain for the banking system, and weighed heavily on global financial market sentiment since the start of 2010. Unlike Greece’s debt, most of Japan’s is held domestically, putting that economy on a better financial footing.
Still, many analysts have long warned that Japan must start paring down its debt or face rising market worries. Standard and Poor’s on Thursday summarized those concerns, saying in a statement that "in the medium term, we do not forecast the government achieving a primary balance before 2020 unless a significant fiscal consolidation program is implemented beforehand."
The Japanese economy was tipped into a painful recession by the global financial crisis, and has only managed a very feeble recovery — and one plagued by deflation — since then. A rapidly aging population is compounding the country’s woes, raising the likelihood of ever-increasing social security and pension obligations going forward. "The nation’s total social security related expenses now make up 31 percent of the government’s fiscal 2011 budget, and this ratio will rise absent reforms beyond those enacted in 2004," Standard and Poor’s commented Thursday, adding that it expected the country’s economy to eke out growth of only 1 percent in the medium term.
The country’s government is well aware of the challenges — prime minister Naoto Kan has warned that the nation faces a financial crisis of Greek proportions if it does not tackle a debt that is expected to rise to 210 percent of the country’s gross domestic product next year — but has so far failed the decisive action that many analysts are necessary.
The "government lacks a coherent strategy to address these negative aspects of the country’s debt dynamics," Standard and Poor’s commented on Thursday. "We think there is a low chance that the government’s announced 2011 reviews of the nation’s social security and consumption tax systems will lead to material improvements to the intertemporal solvency of the state."
Warning shot for America and Europe as S&P downgrades Japan
by Ambrose Evans-Pritchard - Telegraph
Standard & Poor's has downgraded Japan for the first time in nine years, citing lack of a "coherent strategy" to control its monster deficits or grasp the nettle to reform.
The move is a chilly reminder that sovereign debt woes continue to fester across much of the industrial world, and still pose a threat to the fragile global recovery.
The US rating agency cut Japan's $10.6 trillion (£6.6 trillion) debt one notch to AA-, warning that the mix of government paralysis, a shrinking workforce and a fast-rising interest burden have left the country's debt dynamics on an unsustainable footing. Julian Jessop, from Capital Economics, said the unfolding drama in Tokyo has global implications since Japan is the world's top external creditor with $3 trillion of net assets abroad. "This is potentially a much bigger story than any default in Greece," he said.
The concern is that Japanese banks, pension funds and life insurers may forced to repatriate large sums to cover losses at home if the fiscal crisis triggers a jump in bond yields. This could set off a worldwide fall in asset prices. Takahora Ogawa, S&P's Asian analyst, said Japan's economy is the same size today in nominal terms as it was in 1992 yet public debt has tripled. The combined central and regional government debt will reach 233pc of GDP this year, or 259pc including bonds under the Fiscal Investment and Loan Programme.
In contrast to Europe, Japan has barely started to tighten its belt, drifting on with a budget deficit that will be 8pc of GDP as far out as 2013. "This is not affordable. Japan is running out of the domestic financial assets to absorb the debt," said Mr Ogawa.
Japan's population has been contracting since 2005, pioneering a fate that awaits much of Europe and Asia. Its median age is a world record at 44.4 years, and rising fast. The population will fall from 127.5m to 89.9m by 2055, according to Japan's Social Security Resarch Institute. "Despite this bleak demographic outlook, Japan has no specific measures or plans to deal with its diminishing and aging population," said S&P.
Japan was downgraded repeatedly between 1998 and 2002 without suffering much harm but that was in a different world, before the global credit crisis shattered illusions about the sanctity of sovereign debt. The Bank for International Settlements has warned that simmering fiscal problems in the rich countries are nearing "boiling point", with a risk of an "abrupt rise" in bond yields as investors choke on excess debt.
Kaoru Yosano, Japan's economy minister, called S&P's decision "regrettable" given that the government is working on a plan to overhaul the tax and social security system. "I hope the world will understand our sincere efforts to carry out fiscal consolidation. I believe confidence in Japan will not be shaken." Mr Yosano himself said last week that Japan has reached a "critical point" where investor patience might suddenly snap. "We face a dreadful dream that one day the long-term interest rate might rise."
Mr Jessop said the S&P downgrade is no shock since the country was already on negative watch. However, the Democratic Party of Japan – hampered since June by a hung parliament – has not yet shown that it is "up to the job" of restoring discipline. "If the government gets this wrong, Japan could be the first Asian casualty of the global financial crisis. Markets have tolerated Japan's awful fiscal position because it was the fastest growing economy in the G7 last year, thanks to a rebound in exports and fiscal stimulus. But it all started to go horribly wrong in the fourth quarter when the economy almost certainly contracted again," he said.
Adarsh Sinha from Bank of America said Tokyo is on borrowed time but does not expect a bond crisis this year. "Inexorable structural forces mean that each year brings us closer to when the domestic pool of saving will be insufficient to finance Japan's public debt. However, 2011 is unlikely to be the tipping point for this disorderly adjustment."
Tax revenues covered just 52pc of spending in 2010. Almost half the budget was borrowed. Even in the boom year of fiscal 2007 revenues covered only 70pc of outlays, so the problem is clearly chronic and not caused by the recent recession.
The IMF's latest Article IV report on Japan warns that without a shift in policy the "public debt-to-revenue ratio" will rise from 263pc three years ago to 482pc by 2015. No country in peacetime has ever pushed the fiscal boundaries so far and emerged unscathed.
Peter Tasker from Arcus Research, a venerated Tokyo expert, said horror stories about Japan's debt have been the stuff of folklore for years, yet borrowing costs have fallen ever lower anyway because the country is "entirely self-financing". If need be, the Japanese can squeeze a lot more tax from their under-taxed economy. "Rather than a 'dreadful dream', Japan's leaders face an enticing reality. They have the opportunity to issue more and more bonds at the lowest interest rates seen since the Babylonians invented accounting. Japan needs to forget about the views of credit agencies, which have not had a terribly good track record recently," he wrote recently.
Japan has certainly been shielded from global vigilantes so far because 95pc of its debt is held by local investors, allowing Tokyo to issue 10-year bonds at just 1.21pc. It is far from clear that this can continue. The Government Pension Investment Fund (GPIF) – the biggest holder of Japanese debt – has switched from net buyer to net seller as it meets payout costs for retiring baby-boomers.
Dylan Grice, a noted Japan bear at Societe Generale, said the country's ageing crisis would bite in earnest in two to three years, causing pensioners to run down their assets. The savings rate has already dropped from 15pc of GDP in 1990 to under 3pc. It may soon turn negative, depleting reserves needed to soak up state debt.
"They will have to turn to foreign investors, who will demand higher yields of 4pc to 5pc. The government will not be able pay this because interest payments are already 28pc of tax revenues," he said. "If they try to correct it by a fiscal contraction [raising taxes] they will cause a depression that dwarfs anything in Greece. The Japanese are facing a problem that no country has ever faced before. I think Japan is already is beyond the pale," he said.
Mr Grice predicts the get-out-of-jail-free card will prove to be some sort of stealth default through inflation, perhaps spiralling into hyperinflation very fast once the genie is out of the bottle. James Bullard, the head of the St Louis Federal Reserve, said recently that the US is "closer to a Japanese-style outcome today than at any time in recent history". That bears thinking about.
Moody's Says Time Running Out for U.S. as S&P Cuts Japan
by Christine Richard - Bloomberg
Moody’s Investors Service said it may need to place a "negative" outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens. The extension of tax cuts enacted under President George W. Bush, the chance that Congress won’t reduce spending and the outcome of the November elections have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said yesterday.
"Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising," wrote Steven Hess, a senior credit officer in New York and the author of the report. The rating remains "stable," according to the report.
The warning from Moody’s came on the same day that Standard & Poor’s lowered Japan to AA- from AA, signaling that the ratings firms are stepping up pressure on the governments of the world’s biggest economies to curb their spending. The threat of a lower rating may cause international investors to avoid U.S. assets. About 50 percent of the almost $9 trillion of U.S. marketable debt is owned by investors outside the nation, according to the Treasury Department in Washington.
U.S. debt has increased from about $4.34 trillion in mid-2007 as the government increased spending to bail out the financial system and bring the economy out of recession. The budget deficit has increased to 8.8 percent of the economy from 1 percent in 2007. "Because of the financial crisis and events following the financial crisis, the trajectory is worse than it was before," Hess said in a telephone interview.
Moody’s said it expects there will be "constructive efforts" to reduce the deficit and control entitlement spending. It predicted 10-year Treasury yields will rise toward 5 percent without surpassing that level. Yields on the benchmark securities were little changed at 3.39 percent today as of 6:26 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 traded at 93 22/32. Demand for U.S. debt has pushed the rate down from 5.27 percent a decade ago.
The U.S. Dollar Index, which tracks the currency against six counterparts, climbed to 77.791 today from a low during the global financial crisis of 70.698 on March 17, 2008, as the U.S. economy recovered. The odds of a U.S. ratings cut are remote, said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which has the equivalent of $42.2 billion in assets and is part of Japan’s second-largest publicly traded bank. "I don’t think the U.S. will be downgraded," Nakamura said. "The U.S. may try to cut spending. Those kinds of policies will support the rating." Mizuho Asset bought Treasuries in December, he said.
President Barack Obama’s deal with congressional Republications, announced Dec. 6, calls for a two-year extension of tax rates in return for extending long-term jobless benefits for 13 months and cutting the payroll tax for $120 billion for a year. The U.S. has the highest government debt-to-government revenue of any Aaa rated country, Moody’s said yesterday. The ratio, at 426 percent, is more than double that of Germany, France and the U.K. and more than four times higher than Australia, Sweden and Denmark, according to Moody’s.
‘Trend May Continue’
"Other large Aaa countries have plans to reduce deficits substantially over the coming few years, indicating that this trend may continue," Hess said. S&P cut Japan’s credit rating for the first time in nine years, saying the government lacks a "coherent strategy" to address the nation’s 943 trillion yen ($11 trillion) debt burden. The ratings firms also have downgraded Europe’s so-called peripheral countries on rising deficits and slumping growth.
Fitch Ratings cut Greece to BB+ on Jan. 14, following S&P and Moody’s in lowering the country to below investment grade. Moody’s began reviewing Portugal and Spain in December. Credit-default swaps on U.S. Treasuries climbed for a fourth day yesterday, rising 1.5 basis points to 51.57 basis points, according to data provider CMA. That means it would cost the equivalent of $51,570 a year to protect $10 million of debt against default for five years. Prices of the swaps compare with 59.8 basis points for debt issued by Germany, 83.1 for Japan, and 897.3 for Greek bonds.
Reduce Fed Borrowing
The U.S. Treasury Department said yesterday it will reduce its borrowing on behalf of the Federal Reserve to $5 billion from $200 billion because of concerns about the federal debt limit. The Obama administration and Congress are debating whether to raise the limit as the government approaches the current ceiling of $14.29 trillion, which the Treasury estimates will be reached between March 31 and May 16.
Focus on the debt ceiling, which was increased a year ago, has risen since Republicans won control of the House of Representatives in November with pledges to challenge the Obama administration on spending. Republican lawmakers have told the president and Democratic legislators that they will insist on specific cuts as a condition of raising the U.S. debt limit.
Treasuries are poised to fall as the debate on increasing the U.S. debt limit intensifies, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. was quoted by the Associated Press as saying. U.S. debt "will sell off as this get more press and with more invective," Gross said, according to AP. "Investors like us, we sell now." Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.
Moody’s to Factor Unfunded Pensions Into States' Credit Ratings
by Mary Williams Walsh - New York Times
Moody’s Investors Service has begun to recalculate the states’ debt burdens in a way that includes unfunded pensions, something states and others have ardently resisted until now. States do not now show their pension obligations — funded or not — on their audited financial statements. The board that issues accounting rules does not require them to. And while it has been working on possible changes to the pension accounting rules, investors have grown increasingly nervous about municipal bonds.
Moody’s new approach may now turn the tide in favor of more disclosure. The ratings agency said that in the future, it will add states’ unfunded pension obligations together with the value of their bonds, and consider the totals when rating their credit. The new approach will be more comparable to how the agency rates corporate debt and sovereign debt. Moody’s did not indicate whether states’ credit ratings may rise or fall.
Under its new method, Moody’s found that the states with the biggest total indebtedness included Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island. Puerto Rico also ranked high on the scale because its pension fund for public workers is so depleted that it has virtually become a pay-as-you-go plan, meaning each year’s payments to retirees are essentially coming out of the budget each year.
Other big states that have had trouble balancing their budgets lately, like New York and California, tended to fare better in the new rankings. That is because Moody’s counted only the unfunded portion of states’ pension obligations. New York and California have tended to put more money into their state pension funds over the years, so they have somewhat smaller shortfalls.
In the past, Moody’s looked at a state’s level of bonded debt alone when assessing its creditworthiness. Pensions were considered "soft debt" and were considered separately from the bonds, using a different method. "A more standard analysis would view both of these as liabilities that need to be paid and put stress on your operating budgets," said Robert Kurtter, managing director for public finance at Moody’s.
In making the change, Moody’s sidestepped a bitter, continuing debate about whether states and cities were accurately measuring their total pension obligations in the first place. In adding together the value of the states’ bonds and their unfunded pensions, Moody’s is using the pension values reported by the states. The shortfalls reported by the states greatly understate the scale of the problem, according to a number of independent researchers. "Analysts and investors have to work with the information we have and draw their own conclusions about what the information shows," Mr. Kurtter said.
In a report that is being made available to clients on Thursday, Moody’s acknowledges the controversy, pointing out that governments and corporations use very different methods to measure their total pension obligations. The government method allows public pension funds to credit themselves for the investment income, and the contributions, that they expect to receive in the future. It has come under intense criticism since 2008 because the expected investment returns have not materialized. Some states have not made the required contributions either.
Moody’s noted in its report that it was going to keep using the states’ own numbers, but said that if they were calculated differently, it "would likely lead to higher underfunded liabilities than are currently disclosed." After adding up the values of each state’s bonds and its unfunded pensions, Moody’s compared the totals to each state’s available resources, something it did in the past only for each state’s bonds. It found that some relatively low-tax states, like Colorado and Illinois, had very high total debts compared with their revenue, suggesting that their finances could be improved by collecting more taxes.
But some states that are heavily indebted, like New Jersey, also have among the highest tax rates, suggesting other types of action may be needed to reduce their debt burdens. Moody’s also ranked total indebtedness on the basis of each state’s total economic output and its population. It did not factor state promises for retiree health care into its analysis, on the thinking that pensions are a fixed debt like bonds, but retiree health plans can usually be renegotiated.
Mr. Kurtter said Moody’s was not suggesting that any state was in such serious trouble that it was about to default on its bonds, something considered extremely unlikely by many analysts. Some state officials have complained about a recent tendency to focus on total pension obligations, calling it a scare tactic by union opponents who want to abolish traditional pensions and make all state workers save for their own retirements.
Mr. Kurtter said Moody’s had decided it was important to consider total unfunded pension obligations because they could contribute to current budget woes. "These are really reflections of the budget stress that states and local governments are now feeling," he said. A company with too much debt could close its doors, he said, but governments do not have that option. "They have a tax base. They have contractually obligated themselves to make these payments. These are part of the ongoing budget stress," he said. "It ultimately all comes back to being an operating cost. Addressing those problems is really what’s happening today."
State pension + debt = big numbers
by Tami Luhby - CNN
States' debt loads are high enough, but when you combine them with their pension obligations, the numbers are really eye-popping. Hawaii's debt, for instance, is $5.2 billion. But so is its pension obligation. Combined, the dual obligations make up 16.2% of the state's economy, according to a report released Thursday by Moody's Investors Service. That's the nation's highest total liability as a share of the state's gross domestic product.
With state economies continuing to reel from the Great Recession, their pension and debt loads are garnering greater attention. States are having a hard enough time just paying for schools and social services, leaving many struggling to make big pension payments as well. "These are expensive obligations," said Robert Kurtter, Moody's managing director for public finance. "Not crushing burdens, but they add to states' financial stress at a very difficult time."
Just how deep states are in the hole for their pension payments is a matter of debate. A Pew Center on the States report last year pegged the figure at $452 billion. Overall, state pension systems are 84% funded. Other experts, however, have said the unfunded liability is much greater. Even Kurtter acknowledges that the pension hole is likely understated because of the rules governing states' accounting for retirement benefits.
While Moody's has always taken pension obligations into account when rating a state, this is the first time it has released a report showing the combined debt and pension liability levels in each one. The rating agency said it was important to show investors a state's total obligations, especially since pension liabilities have been growing more swiftly in recent years.
For instance, New York and California have high debt levels. But since they have well-funded pensions, they are not among the top states in terms of total liabilities as a share of the economy. That honor goes to Mississippi, Connecticut, West Virginia and Massachusetts, in addition to Hawaii. See the chart above for the full picture. The new reporting method will not prompt any credit rating changes, Kurtter said
Banks Get Tough With Municipalities
by Carrick Mollenkamp and Michael Corkery - Wall Street Journal
As municipal borrowers look to renegotiate bond deals, banks are drawing a tough line in the refinancing talks. Some banks that helped borrowers get cash are less willing to or able to do so now. Stronger banks that still can provide backstops, called letters of credit, will do them only with strings attached. Costs for the letters have risen. "The terrain has changed quite dramatically," says Lee White, executive vice president at investment-banking firm George K. Baum & Co. in Denver.
The change in banks' stance and its effect on municipal borrowers' finances shows interrelationships in the credit market that are often out of view. Before the 2008 financial crisis, banks provided letters of credit as backstops that effectively guaranteed payment on floating-rate debt sold by municipal-debt issuers. They were an easy source of fee income for at least a dozen U.S. and European banks that relied on their high credit ratings to land the business. Meanwhile, variable-rate debt allowed a municipality or other entity to raise money for long periods, but at lower rates typically associated with short-term bonds.
But since the credit crisis, some banks have been downgraded by credit-ratings firms, making their guarantee less appealing to the investors that buy municipal bonds. Also, banks globally have tightened lending standards and are under new requirements to set aside more capital as a buffer against losses. The result: As letters of credit that banks provided expire this year, fewer banks are willing to provide them, and those that are doing so are demanding more for them. This comes as many issuers are in weaker financial shape than they were three years ago, and investor appetite for municipal bonds lately has been declining.
"The cost for procuring letters of credit is substantially higher than it was before the prices exploded in 2008, and the number of banks that are offering the product has shrunk," said Tom Dresslar, a spokesman for the California Treasurer's Office. Before 2008, issuers paid 0.65 percentage point to one percentage point of the debt being sold for letters of credit. Today, the cost is 1.50 percentage points to 2.25 percentage points if a letter of credit is available at all, said Jerimi Ullom, head of the health-care finance project group at law firm Hall, Render, Killian, Heath & Lyman in Indianapolis.
Banks are offering substitute letters of credit or other financing options, at a cost. One avenue is to allow borrowers to replace floating-rate debt with debt that a bank buys and keeps for itself in what is called a bank-qualified placement transaction. Jeff Previdi, a senior director in the State and Local Government group in Standard & Poor's Ratings Services' U.S. Public Finance division says the ratings firm is scrutinizing deals in which banks purchase debt directly rather than providing a letter of credit. "This is a bit of a new product," Mr. Previdi said, adding that one concern is whether it could leave a borrower in a bind under certain circumstances.
In one case, a bank required a small school district in Pennsylvania to pay back $30 million in debt in as little as seven days if the school violated certain terms of the debt deal. The terms were later amended to allow the district 180 days to repay the bank, according to S&P. Banks that provide letters of credit, meanwhile, are insisting that the borrower move fee-generating businesses such as deposits, trust management and affinity cards to the new bank, industry participants say. J.P. Morgan Chase & Co., for example, may ask for cash-management business such as handling deposits, says a person familiar with the matter. Banks are "using this as leverage to extend their franchise," said George K. Baum's Mr. White.
In Ohio, Lancaster Pollard & Co. represented a hospital that needed to replace a letter of credit in November, said Tanya Hahn, senior vice president at the investment-banking firm, which specializes in the hospital and senior-living sectors. The hospital opted to pay off $15 million of a $45 million bond and then sell $30 million of debt to a bank in a bank-qualified deal. Ms. Hahn declined to make public the parties in the transaction. But to seal the deal, the hospital had to move its primary banking-transaction business to the bank buying the bonds, she said.
Municipalities are finding other ways to deal with bank partners that have been downgraded. But the solution can end up as a short-term bandage. In 2009, Lakeland, Fla., began paying higher interest costs on $200 million of floating-rate debt. The reason: Half the debt was supported by a letter of credit from regional lender SunTrust Banks Inc. in Atlanta, which had been downgraded because of concerns about credit losses. As investors bailed on the bonds, the debt began to trade at a higher interest cost, according to a report from the city's finance committee.
Lakeland, a city of 94,000 located between Tampa and Orlando, asked SunTrust to find another bank to effectively join with the lender on providing the backstop, said Greg Finch, the city's finance director. SunTrust didn't for reasons that weren't provided, he said. The city then replaced the debt with debt maturing in three and five years. The move paid off: The interest cost on the bonds fell to the level it was before the SunTrust downgrade. But Lakeland now is considering how to deal with the $100 million coming due Oct. 1, 2012. In a statement, SunTrust said, "We have worked with our clients to find the most attractive financing options through the financial downturn and therefore the recent ratings actions have not had a material impact on our clients or us."
New York State Seizes Finances of Nassau County
by David M. Halbfinger - New York Times
A state oversight board on Wednesday seized control of Nassau County’s finances, saying the county, one of the nation’s wealthiest and most heavily taxed, had nonetheless failed to balance its $2.7 billion budget.
Many hard-hit local governments have flirted with insolvency because of revenue shortfalls caused by the recession, but the financial problems of Nassau, on Long Island, owed more to a failure by county officials to face up to tough economic reality responsibly and quickly enough, according to the state board. "The county’s 2011 budget is built on a foundation of sand," a board member, George J. Marlin, said.
The move, which came after months of steadily more ominous threats and a downgrade of Nassau’s debt by a credit-rating agency in November, turns the oversight board into a control board, with vast power to rewrite the county’s budget and veto labor contracts, borrowings and other important financial commitments. As a first step, the control board ordered the county government to rewrite its budget by Feb. 15 omitting cost-savings items that the board has called specious or too risky.
Nassau’s tax receipts are the envy of many worse-off municipalities: its malls and busy retail districts, a short drive from New York City, help generate about $1 billion in sales taxes a year, and its aging bedroom communities add about $800 million in county property taxes. But the county has resisted cuts in services, and its current leaders have been just as adamant about not raising taxes.
Nassau now finds itself joining much less affluent places in New York State, like the cities of Newburgh, Troy and Yonkers, that have had control periods imposed on them in recent years. The only other county in New York that has been taken over in modern times is Erie, the state’s 24th-wealthiest county, where the median household income is about half that in Nassau, which is the richest county in the state.
"Some places manage their way into fiscal problems, and other places are beset by social forces, many of them outside of their own control," said Steven J. Hancox, a deputy state comptroller who oversees local government. "Nassau has had a history where the populace has enjoyed a variety of services, and those cost money. "It doesn’t really matter where you are; when the money dries up you have tough choices to make."
While voting 6 to 0 to take over the county’s finances, the control board, the Nassau Interim Finance Authority, stopped short, for now, of declaring a financial emergency, which would also allow it to impose a wage freeze on county workers. But it said that remained a likelihood if Nassau’s leaders did not comply with its demands to cooperate in bringing the county’s spending into line with revenues by Feb. 15. "The taxpayers elected a team," the authority’s chairman, Ronald A. Stack, said. "Hopefully the team will be able to perform."
Yet the takeover was a stinging rebuke to Nassau’s county executive, Edward P. Mangano, a Republican who took office a year ago after upsetting a popular incumbent in 2009. Mr. Mangano had repeatedly said the budget was balanced, and then insisted there were ample contingencies to cover any shortfalls. But the authority said that many of his assertions were unfounded or unsupportable.
Should the county choose to work closely with the authority, it could seek to reopen talks with labor unions, emboldened and newly empowered by that alliance. But the response from the county on Wednesday was adversarial in tone. "Who elected them?" asked the county attorney, John Ciampoli, referring to the authority.
Mr. Mangano, speaking to reporters after the board’s decision, said he was considering a lawsuit to block the takeover, accused the authority of wanting to raise property taxes and urged taxpayers to question its "motivation." He has accused the board members of having partisan Democratic sympathies. Mr. Stack, a veteran municipal banker who as a state official was involved in addressing the 1975 New York City fiscal crisis, said the county’s deficit, under the strict accounting standards required by state law, was $176 million, or more than six times the threshold of 1 percent of the budget — above which the law required the authority to take control.
Using the county’s own more forgiving accounting rules, he added, the county’s deficit was $49 million, but still nearly twice the statutory trigger point for a takeover. In a lengthy text explaining its decision, the authority said that Mr. Mangano’s signature tax cut — the repeal of a tax on home-heating fuel — was one of several factors that stretched the county’s ability to balance its budget to the "breaking point."
Moreover, the authority said Nassau’s reserves had dropped to dangerously low levels. A takeover would last only until the county’s budget was declared back in balance, but how long that will take depends largely on county officials, Mr. Stack said. Mr. Marlin, a Conservative Party member, noted that he was an enthusiastic supporter of Mr. Mangano’s election, and even credited him with "some forward progress."
And Mr. Stack said the board included a Republican and an Independent, along with three Democrats. "We have a 6-0 vote here," he said. "It is not partisan. It is not political."
Mr. Mangano, in his news conference, also questioned why the authority had refrained from imposing a wage freeze. And he insisted that a takeover was unwarranted, pointing to an 11th-hour tentative labor agreement with a county worker’s union, announced on Monday, that he said would mean tens of millions in annual county savings. But Mr. Stack said the labor deal, which the authority now can approve or reject, would have saved only $2 million this year.
Nassau’s government, once a model for other suburban communities, has long been plagued by a tangled property tax-assessment system that forces it to refund tens of millions of dollars a year to residents and business owners who win appeals of their local, school and county tax bills. In effect, the county subsidizes some of the nation’s richest school districts.
The county first got into deep trouble a decade ago by borrowing to pay those refunds, though they are an operating expense, and by relying on one-shot revenues, rather than raising taxes. It averted disaster only with a $100 million state bailout in June 2000. As a condition of that aid, the state created the oversight board to ensure that Nassau corrected its poor fiscal practices.
Chief among those was borrowing to pay tax refunds, and some progress was made in switching to a pay-as-you-go policy. But Mr. Mangano’s financial plan called for borrowing $364 million over the next two years to pay tax refunds — "the very practice that precipitated the 2000 crisis NIFA was created to address," the board said.
Goldman Sachs Got Billions From AIG For Its Own Account, Crisis Panel Finds
by Shahien Nasiripour - Huffington Post
Goldman Sachs collected $2.9 billion from the American International Group as payout on a speculative trade it placed for the benefit of its own account, receiving the bulk of those funds after AIG received an enormous taxpayer rescue, according to the final report of an investigative panel appointed by Congress.
The fact that a significant slice of the proceeds secured by Goldman through the AIG bailout landed in its own account--as opposed to those of its clients or business partners-- has not been previously disclosed. These details about the workings of the controversial AIG bailout, which eventually swelled to $182 billion, are among the more eye-catching revelations in the report to be released Thursday by the bipartisan Financial Crisis Inquiry Commission.
The details underscore the degree to which Goldman--the most profitable securities firm in Wall Street history--benefited directly from the massive emergency bailout of the nation's financial system, a deal crafted on the watch of then-Treasury Secretary Henry Paulson, who had previously headed the bank. "If these allegations are correct, it appears to have been a direct transfer of wealth from the Treasury to Goldman's shareholders," said Joshua Rosner, a bond analyst and managing director at independent research consultancy Graham Fisher & Co., after he was read the relevant section of the report. "The AIG counterparty bailout, which was spun as necessary to protect the public, seems to have protected the institution at the expense of the public."
When news first broke in 2009 that Goldman had been an indirect beneficiary of the AIG bailout, collecting the full value of some $14 billion in outstanding insurance polices it held with the firm, the officials who brokered the deal justified these terms as a necessary stabilizer for the broader financial system. As the world's largest insurance company, AIG's inability to cover its outstanding obligations could have threatened the solvency of the institutions holding its policies, asserted the Federal Reserve Bank of New York, which oversaw the deal.
Goldman fended off claims that the arrangement amounted to a backdoor bailout by asserting that none of the money from the AIG rescue landed in its own coffers. Rather, those funds went to compensate clients or institutions on the other side of its trades, Goldman said. But the report from the financial crisis commission, obtained by The Huffington Post in advance of its release, appears to challenge that assertion: The report reveals another pot of money conveyed to Goldman--the $2.9 billion to cover trades the Wall Street investment house made for itself. That money went straight to the bank's bottom line, according to the report.
Over the last two years, Goldman has reported nearly $22 billion in profits, according to its official earnings statements. During those years, it has paid out $31.6 billion in compensation to its employees. According to the report, the financial crisis commission first learned that the $2.9 billion in AIG funds landed in Goldman's account through an e-mail the bank sent to the panel on July 15, 2010 in response to questions.
Previously, Goldman executives had testified that the AIG bailout funds the bank collected went to compensate its clients and institutions that held the other side of its trades. At a hearing on July 1, 2010--two weeks before Goldman sent the e-mail acknowledging how $2.9 billion in AIG funds wound up in its own account--the crisis panel questioned Goldman's chief financial officer, David A. Viniar and managing director David Lehman. Both said they knew nothing about AIG funds landing in the bank's private coffers, according to a transcript of the hearing.
The report concludes that Goldman collected the $2.9 billion as payment for so-called proprietary trades made for its own account--essentially successful bets on large pools of financial instruments. "The total was for proprietary trades," the report asserts. "Unlike the $14 billion received from AIG on trades in which Goldman owed the money to its own counterparties, this $2.9 billion was retained by Goldman." A spokesman for for the crisis commission said it would be premature to discuss the panel's findings. "I have no comment on the commission's report until it is released on Thursday," said crisis commission spokesman Tucker Warren.
Goldman collected at least half the money at issue after AIG received the first round of a public bailout whose tab eventually swelled to $182 billion, according to the commission's report. The winning bets that Goldman collected on through the AIG bailout are known as credit default swaps--essentially, a type of insurance, albeit one that operates in the shadows, beyond purview of regulators. The insurance giant wrote trillions of dollars worth of these policies during the real estate boom without setting aside sufficient cash to cover losing bets, positioning itself for potential catastrophic losses.
According to the crisis commission report, Goldman bought credit default swaps from AIG as a form of insurance on investments known as Abacus, which were pools of mortgage-linked securities. One such pool put Goldman cross-wise with federal regulators: Last year, Goldman agreed to pay $550 million in fines to settle securities fraud charges filed by the Securities and Exchange Commission. According to the lawsuit, Goldman allegedly concealed the fact that it designed the basket of mortgage-linked securities to fail at the behest of another client who netted about $1 billion by betting against them. Goldman sold the same investments to other clients--mostly European banks--without disclosing their provenance, according to the SEC's lawsuit.
The crisis panel did not disclose whether this Abacus deal was among those on which Goldman collected a portion of the AIG bailout funds. The AIG bailout, which paid holders of its insurance policies 100 cents on the dollar, was aggressively defended by federal regulators as a critical immunization against a potential financial pandemic as the insurance company teetered on the verge of collapse in the fall of 2008.
Treasury Secretary Timothy F. Geithner, who led the New York Fed at the time the AIG rescue was crafted, later told Congress that a collapse risked "large and unpredictable global losses with systemic consequences--destabilizing already weakened financial markets, further undermining confidence in the economy, and constricting the flow of credit." Both the New York Fed and Treasury declined to comment.
Analysts say such fears caused the officials who crafted the bailout to lean heavily toward speed and size, while failing to factor in fairness. "At the time, the idea was the sucker could go down because there wasn't enough liquidity in the system, money wasn't moving, and you could see a domino effect," said Ann Rutledge, a principal at R&R Consulting in New York, which specializes in structured finance.
In reality, she contends, those fears were overblown: There was ample money in the financial system. Rather, individual institutions did not have enough cash on hand to survive their losses, she asserts. But the fear of a broader liquidity crisis was used as justification for what now appears to have been a backdoor means of bailing out Goldman, said Rutledge. The details in the commission's report leave Goldman "naked," she added. "It doesn't have the fig leaf of a systemic risk argument. Normally what happens when you have a sophisticated institution that's doing stupid credit stuff is you let them eat it, but that didn't happen in the bailout."
Moody’s Assumed 4% Annual Home Price Rises in 2003 Bond Rating Model
by Matthew Leising and Katrina Nicholas - Bloomberg
Moody’s Corp. assumed U.S. home prices would rise 4 percent a year when it developed a model in 2003 to rate mortgage-backed securities, according to the Financial Crisis Inquiry Commission. Prices instead plunged 28.5 percent from July 2006 through the low reached in February last year, according to the Chicago- based National Association of Realtors. Moody’s failed to foresee the decline, the commission concludes in a 545-page book seen by Bloomberg News and due to go on sale today.
"The failures of credit rating agencies were essential cogs in the wheel of financial destruction," the congressionally-appointed panel wrote in the book. Moody’s "put little weight on the possibility that prices would fall sharply nationwide." Moody’s, Standard & Poor’s and Fitch Ratings assigned top credit grades to U.S. subprime-mortgage bonds just before that market collapsed in 2007, triggering the global financial crisis. Moody’s downgraded 73 percent of the mortgage-backed securities it had rated triple-A in 2006 to junk, according to the commission report.
Michael Adler, a Moody’s spokesman, had no immediate comment on the report when reached by telephone yesterday. The book cites "Moody’s Mortgage Metrics: A Model Analysis of Residential Mortgage Pools" as the source of its information. Issuers sold 3,244 residential mortgage-backed securities and collateralized debt obligations between January 2006 and September 2008, when the collapse of Lehman Brothers Holdings Inc. spurred investors to avoid all but the safest debt, data compiled by Bloomberg show. A total of 576 securities were sold since October 2008, meaning average monthly sales dropped to 21 from 98, according to the data.
Former Moody’s employee Eric Kolchinsky testified to the Financial Crisis Inquiry Commission in June, saying $488 million of collateral in a 2006 deal, rated by Moody’s while he worked there, was downgraded to junk. No payments were being made as the debt was in default, and that wasn’t even the worst performer among securitized products the company graded, he said.
Moody’s Chief Executive Officer Raymond McDaniel called his company’s ratings of residential mortgage securities and other collateralized debt obligations "deeply disappointing" when he spoke to the commission that same month. He said the housing market collapse and subsequent economic slump were of a magnitude "many of us would have once thought unimaginable," adding that "Moody’s is certainly not satisfied with the performance of these ratings."
U.S. home prices dropped 4.3 percent in November from a year earlier as the housing market struggled to emerge from the worst crash in seven decades, the Federal Housing Finance Agency said on Jan. 25. Mounting foreclosures are depressing home values as unemployment above 9 percent saps real estate demand.
by David Rosenberg - GluskinSheff
A long-standing colleague and reader sent this off to me yesterday and it blew me away. Read on:
Obama’s State of the Union:
"Two years after the worst recession most of us have ever known, the stock market has come roaring back. Corporate profits are up. The economy is growing again."
Herbert Hoover, May 1st 1930, US Chamber of Commerce Meeting:
"While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover."
Obama’s State of the Union:
"Thanks to the tax cuts we passed, Americans’ paychecks are a little bigger today. Every business can write off the full cost of the new investments they make this year. These steps, taken by Democrats and Republicans, will grow the economy and add to the more than one million private sector jobs created last year."
Herbert Hoover, October 22, 1932, campaign speech in Detroit:
"It can be demonstrated that the tide has turned and that the gigantic forces of depression are today in retreat. Our measures and policies have demonstrated their effectiveness. They have preserved the American people from certain chaos. They have preserved a final fortress of stability in the world."
Obama’s State of the Union:
"But now that the worst of the recession is over..."
Herbert Hoover, June 1930, to a delegation requesting a public works project:
"Gentlemen, you have come sixty days too late. The depression is over."
Obama’s State of the Union:
"The steps we’ve taken over the last two years may have broken the back of this recession..."
Herbert Hoover, State of the Union, December 6, 1932:
"The unprecedented emergency measures enacted and policies adopted undoubtedly saved the country from economic disaster..."
Property: Overarching problems
by John Plender - Financial Times
Back in the 1970s, the British property boom and bust exposed over-borrowing, over-building and dubious dealing on a scale that threatened to bring down the UK banking system. In the American savings and loan crisis of the 1980s, the dealings were even more dubious and the property borrowings far greater; the cost to the US taxpayer ran to more than $100bn.
The latest crisis, for all the complexity of the instruments involved, is more of the same – simply the biggest in a long line of property-related banking crises. It shows once again that land, bricks and mortar are the Achilles heel of the financial system.
Today, what started as a seizure in the subprime mortgage market in 2007 is increasingly focused on commercial property. According to the Institute of International Finance, a leading industry body, $1,400bn of loans to the sector worldwide mature between now and 2014, of which nearly half exceed the value of the underlying assets. "Given that lending standards have tightened considerably, it is clear that many borrowers may not be able to refinance," says IIF deputy managing director Hung Tran.
Nor has the problem in US residential property diminished. An estimated 30 per cent of mortgages exceed the value of the underlying homes, giving rise to a $700bn shortfall.
The likelihood of a rash of defaults is of growing concern to policy?makers, bankers and investors, as well as to heavily indebted property companies. Central to the future of both the finance industry and the global economy, therefore, is the question of why property repeatedly torpedoes the banking system, prompting deep recessions, and what can be done to prevent this.
Bubbles – mostly associated with excessive expansions of money and credit – and the ensuing busts are a constant of economic history. Yet taxonomies of financial crises since the early 17th century compiled by Charles Kindleberger, and since 1800 by Carmen Reinhart and Kenneth Rogoff, suggest it is only recently that property has rivalled industrial innovation as a focus of investor euphoria.
That said, the same studies show a clear hiatus between the 1930s Great Depression and the collapse of Bretton Woods, the semi-fixed international exchange rate regime, in the early 1970s, reflecting the slew of regulation that followed the 1929 Wall Street Crash and the reduction in international capital flows.
The catalyst for a resumption of periodic crises came with deregulation in banking and capital markets in the 1970s, together with the emergence of wholesale money markets. With ready access to funds, banks embarked on a dash for growth across the developed world. Property-based financial crises ensued in the mid-1970s in the US and UK; in the mid-1980s in America; in the early 1990s in Japan, the Nordic countries and the UK again; then once again in the English-speaking countries along with Spain from 2007.
What lies beneath this increasing tendency for property-induced trouble? "The most likely explanation," says Lord Desai, emeritus professor at the London School of Economics, "is that innovation dried up." Property, that is, has acted as a sink for excess liquidity when industry’s demand for funds has been weak.
This hypothesis chimes with a recent McKinsey Global Institute report, which concludes: "The investment rate (investment as a share of gross domestic product) of mature economies has declined significantly since the 1970s, with investment from 1980 through 2008 totalling $20 trillion less than if the investment rate had remained stable. This substantial decline in the demand for capital is an often overlooked contributor to the three-decade-long fall in real interest rates that helped feed the global credit bubble."
Note, too, that the lending capacity of banks has greatly increased since the 1970s. In effect, the safety net governments have placed under financial systems after successive crises has permitted banks to borrow and lend more on a shrinking capital base in pursuit of a high-risk, high-return strategy. In each boom, therefore, more credit is looking for an outlet than in those preceding it. One result of all this, says Andrew Haldane, the Bank of England’s executive director for financial stability, is that "past liquidity crises are foothills by comparison with recent Himalayan heights".
Why, then, was there a dotcom bubble in the late 1990s instead of a property bubble? It may simply be that this was the one period in the past 40 years when optimism about technological innovation was so euphoric that there was no need for property to absorb an oversupply of credit. Although dotcom companies themselves were financed primarily by equity, more capital intensive, high-technology sectors such as telecommunications brought forward investment plans that used much of the available credit.
Yet the optimism was unjustified. "Markets were soaring in the face of declining corporate performance," says Charles Dumas of Lombard Street Research. "Corporate profits fell from the third quarter of 1997 to the peak of the bubble in 2000."
From the banks’ perspective, the problem was that from the 1980s the biggest companies sidestepped them and went directly to the markets for funds. For many banks this was because, as their credit ratings declined after the Latin American debt crisis that began in 1982, their borrowing costs rose above those of large corporations.
For others, borrowing costs rose as a consequence of financial liberalisation. Writing on the Japanese banking crisis, Kazuo Ueda, a former Bank of Japan policy committee member, says liberalisation measures introduced in the late 1970s and mid 1980s increased banks’ cost of funds, forcing them to seek new lending opportunities. In such circumstances, bankers from a highly regulated environment saw property lending as the answer to their prayers. Credit analysis, says Mr Ueda, "was just a matter of estimating the future path of real estate prices". The perceived risk was low because, excepting a brief period circa 1975, Japanese land prices had risen continually in the postwar period.
For growth-hungry bankers worldwide, commercial property offered big-ticket assets able to absorb millions in one go. And in the latest bubble, credit rating agencies played an important role, providing additional reassurance that, when sliced and diced in complex instruments such as collateralised debt obligations, risks in property were low.
The reality, however, is that the risks in commercial property are not and have never been low. The business is highly cyclical. It is also very opaque. Price information about transactions may not be publicised; and, when it is, it can be misleading. Market indices are compiled from valuations, and valuers are obliged to track the optimism that drives speculative booms. Above all, the business is highly leveraged because property entrepreneurs seek to maximise the return on equity while shifting as much risk as possible to lenders. This leaves property values highly vulnerable to changing credit conditions.
There are systemic consequences to all this. One reason is that property constitutes the biggest chunk of assets on bank balance sheets. Before 2007 the US appeared to be an exception, but only because property exposure had been moved off balance sheet. Come the crisis, it quickly returned.
Second, property is the epicentre of pro-cyclicality in banking. When prices go up, the value of a bank’s capital increases because of the rise in the value of its own properties and of the collateral that supports its lending. Risk in property is then perceived to be declining so the supply of credit to the sector increases, which further pushes up prices in a self-reinforcing process that ultimately turns into a self-reinforcing decline. The decline is exacerbated as foreign lenders repatriate funds and regulators tighten lending standards.
In a prescient paper written five years before the start of the crisis, Richard Herring and Susan Wachter of the Wharton School at the University of Pennsylvania identified a number of features that help to explain this pro-cyclical behaviour in the property sector.
Among them is an in-built market bias towards optimism. Because long lead times in construction mean supply is fixed for long periods when demand is rising, optimists tend to be in the ascendant. Historically, it has also been difficult to sell land short. So optimists are able to drive prices above fundamental values and use their capital gains as further collateral.
A second factor is "disaster myopia", the economist’s argot for the tendency to underestimate the problem of low-frequency shocks. Cognitive psychologists have found that even statistically expert decision-makers’ estimates of probabilities rest on the ease with which they can imagine an event will occur. They are good at estimating high-frequency events but discount low-probability shocks of the kind thrown up by long property cycles.
A third factor is the interaction of competition and myopia. When lending by myopic banks pushes property prices above fundamental value, more canny banks are either priced out of the market or forced to drop lending standards. Other myopic banks, seeing the high returns, enter the market. As returns are eroded, banks take on more leverage and risk to protect their return on equity. Disaster myopia then leads to disaster magnification in the downturn.
Such behaviour is encouraged by conventional accounting, which provides against incurred losses but not against the probability of loss. A pro-cyclical twist has been added in the latest economic cycle by mark-to-market accounting. Mr Haldane of the Bank of England points out that marking to market – entering assets and liabilities on balance sheets at prevailing market prices – could in part explain why the fall in UK commercial property values in 2007-08 was deeper and faster than in previous cycles.
A final twist comes when bank bonuses are based on conventional accounting because, as Prof Wachter and fellow economist Andrey Pavlov have shown, those best placed to assess low-probability shocks are rewarded for disregarding them.
The fashionable remedy for these problems is macroprudential regulation – using tools such as counter-cyclical capital buffers and loan-to-value limits to prevent excessive credit creation. However, the methodologies are experimental and entail difficult judgments about the nature and duration of the economic cycle.
Furthermore, it could be that the greatest systemic threat from property now lies not in the developed world but in emerging markets that are importing loose US monetary policy through exchange rate pegs to the dollar. If history is any guide, there is always another chapter in the cycle of over-borrowing, over-building and dubious dealing that takes financial systems to the brink of disaster.
COMMERCIAL MARKET OUTLOOK
A vast pile of debt hangs over a still-troubled business
Renewed strength in commercial property could, perversely, presage further problems, writes Daniel Thomas. Banks are likely to take a harder line with an indebted sector still dealing with the troubled legacy left by past generations of investors and their lenders.
Outstanding debt to global commercial real estate is estimated to stand at $6,800bn, according to DTZ, the property consultancy, with the majority located in Europe and the US.
Of this debt, more than one-third – $2,400bn – is due to mature in the next two years. This represents a huge refinancing burden for a sector from which most lending institutions are retreating, following a significant fall in values and a tightening in policies ahead of future banking regulations.
Analysing the new debt available to replace the expiring facilities, DTZ estimates a funding gap of $245bn.
Many of these loans were originated or refinanced at the peak of the market in 2006-07 then extended again under some duress during the crash, which means they are often higher than the underlying assets. Banks face big losses if such property is sold.
In Britain, for example, more than £50bn of the £215bn in debt is either in breach of covenants or in default. Lloyds, the UK’s largest property lender, reckons that as much as half of its £60bn commercial property loan book is in trouble. Some £30bn in loans have been written down by one-third to reflect losses in the sector so far.
But the move to strengthen bank balance sheets could mean more difficulties for property borrowers, as lenders can now take more of the pain from being tough. "As governments focus on reducing their sovereign debt, a potential unwinding of accommodating fiscal and monetary policies will put more pressure on banks to deal with their most problematic loan positions," says Hans Vrensen, DTZ’s head of research. "New regulatory changes will also increase pressure for equity investors." He sees a "prolonged messy work-out process".
Any rise in interest rates would heap further pain on borrowers that lenders had already given a grace period.
The past 18 months have seen a recovery in values in many established markets, most notably in London, where prices are back to pre-crash levels. That has allowed banks to sell some loans and assets, and force borrowers to do likewise when a sale would repay debt.
Better quality asset-backed loans have been stripped from the books, leaving problems in so-called secondary property assets where values have remained near their recessionary lows. There is thought to be little prospect for early growth in rents or values of such property – and as much as 90 per cent is classed as secondary in mature markets such as the UK.
New equity could be part of the solution. But alternative sources of finance will demand lower prices to take on the risk in distressed assets.
Asian investors lead massive demand for first Euro bail-out bond
by Ambrose Evans-Pritchard - Telegraph
Asian and Middle-East investors have thronged to buy the first issue of AAA-rated bonds by the eurozone's new bail-out fund, marking a key moment in the evolution of Europe's monetary union.
The auction of €5bn (£4.3bn) of five-year bonds to fund the first stage of the Irish loan package was nine times subscribed, reflecting appetite for bonds ranked with core German or French debt but offering higher returns. The yield was 2.89pc, compared with 2.31pc for Bunds. The outcome was not in doubt after Japan said it would buy 20pc of this month's total issue by the European Financial Stability Facility (EFSF), and China emerged as a white knight for EMU debt. Asian investors bought 38pc of the issue.
"It is the biggest order book ever. We will check before notifying the Guinness Book of Records but nobody can remember anything like that in the world", said Klaus Regling, head of the EFSF. Ralf Umlauf from Helaba said the auction was "a step in the direction of a eurobond".
Spreads on peripheral EMU debt rose regardless, chiefly over concerns that Spain's package to recapitalise its savings banks does not go far enough. Olli Rehn, the EU's economics commissioner, flew to Berlin on Tuesday to plead with the Free Democrat (FDP) party in Germany's coalition to back a boost for the EFSF's firepower and scope, with little success. "It is not convincing," said Guido Westerwelle, the FDP's eurosceptic leader.
North African Unrest May Spread as Davos Delegates Warn on Food Inflation
by Serena Saitto and Caroline Connan - Bloomberg
Record food prices may fan social unrest and fuel inflation beyond North Africa as thousands of people take to the streets of Cairo to denounce President Hosni Mubarak, delegates at the World Economic Forum said. "This protest won’t end in North Africa; it will spread in many countries because of high unemployment and increasing food prices," Hamza Alkholi, chairman and chief executive of Saudi Alkholi Group, a holding company investing in industrials and real estate, said in an interview in Davos, Switzerland.
Risks of global instability are rising as governments facing budget crunches cut subsidies that help the poor cope with surging food and fuel costs, the head of the United Nations’ World Food Program said two days ago. World food costs rose to a record in December on higher costs for sugar, grain and oilseeds, the UN reported Jan. 4, contributing to the uprising that ousted Tunisia’s Zine El Abidine Ben Ali on Jan. 14. Protests have spread to Egypt, Algeria, Morocco and Yemen.
An index of 55 food commodities tracked by the UN’s Food and Agriculture Organization gained for a sixth month to 214.7 points, above the previous high of 213.5 in June 2008. Higher commodity prices are "leading to riots, demonstrations and political instability," Nouriel Roubini, the New York University economics professor who predicted the financial crisis, said on a Davos panel. "It’s really something that can topple regimes, as we have seen in the Middle East."
In Egypt, the world’s biggest wheat importer, three people set themselves on fire and thousands protested against President Hosni Mubarak’s government. Egyptian authorities banned protests and tightened security to prevent demonstrators from repeating the rally of Jan. 25. In Algeria, three were killed and 420 injured at rallies against high food prices and a lack of public housing. Jordanian opposition groups have held peaceful protests against the government, and in Yemen today thousands gathered outside the main university in the capital, Sana’a, demanding that President Ali Abdullah Saleh step down.
"People have the right to express discomfort about the Egyptian constitution and high inflation," Hamed El Chiaty, chairman and chief executive officer of Travco Group International Holding SAE, an Egyptian travel and hospitality company, said in an interview in Davos. Egypt’s inflation rate rose to 10.3 percent in December, compared with 2.2 percent in the euro region and 1.5 percent in the U.S.
Rising food and energy prices are fueling inflation across emerging markets and pose one of the biggest threats to the global economic recovery, Roubini said. India and China, two of the world’s fastest-growing economies, will be forced to respond by raising interest raise, threatening to choke the growth that is driving the global expansion, International Monetary Fund Special Adviser Min Zhu said in Davos.
Daokui Li, an adviser to the Chinese central bank, said policy makers should "gradually" increase rates in the first and second quarter. "Rate increases are necessary, but it can’t solve the immediate inflation problem," he said in an interview. Surging food costs are a bigger threat to the economies of emerging markets because they have a bigger weight in consumer price indexes and have a larger impact on inflation, Zhu said. Food prices account for 47 percent of India’s price index and 34 percent in China, he said.
"We need to get inflation under control," especially food prices, Sunil Bharti Mittal, chairman of Bharti Airtel Ltd., India’s largest mobile-phone company, said in an interview. Wei Jiafu, chairman of China Cosco Holdings Co., the nation’s largest shipping line, said the government would act to tame inflation. "Our government is taking measures to deal with it. We have a more flexible monetary policy."
The protests in Egypt sent the benchmark EGX30 stocks index tumbling 8.1 percent, the most since May, as of 11:40 a.m. in Cairo, extending yesterday’s 6.1 percent decline. Trading on the exchange was suspended for 50 minutes as shares slid, resuming at 11:30 a.m. Wheat prices in Chicago, were set for the longest winning streak since November 2009, as North African importers boosted purchases. The cost of insuring Egyptian sovereign debt rose 14.86 basis points yesterday to 344.47, the highest since June 2009, according to CMA prices for credit-default swaps.
"If you don’t improve people’s lives, you will have social unrest," Sheikh Mohammed bin Essa Al Khalifa, chief executive officer of the Economic Development Board in Bahrain, said in an interview. "Each country is different, each country is unique. It could spurt up in Latin America. It’s not an Arab thing."
"Could Plunge Rural Areas into a Freefall of Land Prices..."
by Kalpa - Big Picture Agriculture
source: Iowa State [pdf]2010 Farmland Value Survey (Iowa State University)
For the farmland price junkies who frequent this site, Dr. Michael Duffy's updated 2010 report on Iowa farmland prices out of Iowa State contains graphs, charts, and numbers to drooool over. [pdf] According to the report, though land coming up for sale is scarce, investors represented 25 percent of the sales in Iowa last year.
Speaking about one of my favorite subjects, the cost of production, which appears to be ever more volatile, here's Duffy:The estimated costs for producing an acre of corn and soybeans have risen over 40 percent since 2006. The estimated costs are up 16 percent since 2008 but they are down 7 percent since 2009. The volatility in prices and costs leads to tremendous uncertainty and volatility in the land market.
Reasons he gives for rising values of farmland include:
Factors to watch for price determination of farmland include:
- scarcity of land coming up for sale
- farm sizes trending larger
- low interest rates
All in all, the report shows us that farmland prices are literally going up through the roof, especially farmland capable of high yield corn and soybean crops which is largely policy-induced farmland pricing.
- amount of debt incurred
- government policies, especially energy policies
- input costs
- government monetary policies as they relate to inflation and interest rates
- commodity prices
- weather related problems
The above graphic shows Land Values by Iowa crop reporting districts as reported by ISU for 2010. Estimates of average dollar value per acre for high, medium, and low grade farmland on Nov. 1, 2010 by Iowa Crop Reporting District; and the Crop Reporting District average and the average percentage change from Nov 1, 2009. The estimates are based on a survey conducted by Iowa State University Extension.
source: Iowa State [pdf]
In their article, "New York Times attacks farm programs for all the wrong reasons"[pdf], University of Tennessee Ag economist researchers, Daryll Ray and Harwood Schaffer, included the strongest language that I've seen to date concerning the bubbling of farmland prices as related to government policy:But AMTA/direct payments have affected the cost of production. As a guaranteed flow of cash, they have been incorporated into land rental rates and ultimately in the price of land. As a result, farmers have seen an increase in the cost of production directly attributable to the payments. At this point the payments are so integrated into the asset base/production system, that their abrupt removal coupled with a sudden future decline in crop prices could plunge rural areas into a freefall of land prices not seen since the 1980s. As a result there is strong resistance in the farm sector to any talk of reducing/redirecting/eliminating direct payments.
More and more, some notable voices seem to be saying "this can only end badly". One glance at the graph at the top of this article sets off alarm bells. A "bad ending" is easy to imagine for not only farmland prices, but also for the controversial Ag policies we've adopted this past decade which were put in place to raise low commodity prices resulting from grain commodity overproduction. Those policies have since caused some remarkably undesirable and unintended consequences.
How factory farms affect all of us
by Factory Farm Map
- There are 4 factory-farmed chickens for every single American.
- U.S. hog factory farms added 4,600 hogs every day between 1997 and 2007.
- U.S. factory-farm dairies added nearly 650 cows every day between 1997 and 2007.
- Between 1997 and 2007, U.S. factory farms added 5,800 broiler chickens every hour.
- There are 23 times more chickens than people in Alabama.
- The 107.6 million broiler chickens, 165,000 hogs, 1.6 million egg-laying hens, and other livestock on factory farms in Alabama produce as much untreated manure as 40 million people -- nearly 9 times the population of Alabama.
- There are 48 times more chickens than people in Arkansas.
- The average Arizona factory-farm dairy has nearly 2,700 cows.
- The more than 93,000 dairy cows on factory-farm dairies in Maricopa County, Arizona produce as much untreated manure as the sewage from the New York City metro area.
- The 180,500 dairy cows, 366,600 beef cattle, 614,000 egg-laying hens, and 5,100 hogs on factory farms in Arizona produce as much untreated manure as 77 million people -- 11 times the population of Arizona.
- The Government Accountability Office reported that Benton and Washington counties in Arkansas produced 942 million pounds of manure in 2002.
- The more than 16 million broiler chickens on factory farms in Benton County, Arkansas produce as much untreated manure as the sewage from the Atlanta metro area.
- The more than 14 million broiler chickens on factory farms in Washington County, Arkansas produce as much untreated manure as the sewage from the Boston metro area.
- The 133.8 million broiler chickens, 3.6 million egg-laying hens, 244,700 hogs, 3,800 beef cattle, and nearly 1,500 dairy cows on factory farms in Arkansas produce as much untreated manure as 51 million people -- nearly 18 times the population of Arkansas.
- The average industrial feedlot in California had more than 18,700 beef cattle.
- The nearly 240,000 dairy cows on factory-farm dairies in Merced County, California produce ten times more waste than the sewage from the Atlanta metro area.
- The 155,000 dairy cows on factory-farmed dairies in Kings County, California produce twice as much untreated manure as the sewage from the New York City metro area.
- The 399,000 beef cattle on industrial feedlots in Imperial County, California produce twice as much untreated manure as the sewage from the New York City metro area.
- There is one factory farmed hog for every 5 people in Colorado.
- There is one beef cattle on an industrial feedlot for every 5 people in Colorado.
- The average Colorado hog factory farm has more than 30,800 hogs -- about six times larger than the national average.
- The more than 181,000 beef cattle on industrial feedlots in Yuma County, Colorado produce as much untreated manure as the sewage from the Los Angeles and Atlanta metro areas combined.
- There are 19 times more chickens on factory farms than people in Delaware.
- The more than 14 million broiler chickens on factory farms in Sussex County, Delaware produce as much untreated manure as the sewage from the Boston metro area.
- The size of average Florida egg factory farms nearly tripled to 1.6 million hens between 1997 and 2007.
- In 2009, the EPA issued an administrative order against a Sarasota County dairy for improperly disposing of dead cows above ground. The dairy had been sued in 2003 for disposing of manure without a permit.
- There are 22 times more chickens on factory farms than people in Georgia.
- The more than 10.7 million broiler chickens on factory farms in Gilmer County, Georgia produce as much untreated manure as the sewage from the Seattle metro area.
- The more than 17.5 million broiler chickens on factory farms in Franklin County, Georgia produce as much untreated manure as the sewage from the Philadelphia metro area.
- The nearly 205 million broiler chickens, 9 million egg-laying hens, 235,000 hogs, and 35,000 dairy cows on factory farms in Georgia produce as much untreated manure as 85 million people -- nearly 9 times the population of Georgia.
- The average Idaho factory-farm dairy has more than 2,100 cows.
- There is one factory farmed dairy cow for every three people in Idaho.
- There is one beef cattle on an industrial feedlot for every 6 people in Idaho.
- The more than 135,000 dairy cows on factory-farm dairies in Gooding County, Idaho produce as much untreated manure as the sewage output from the New York City and Chicago metro areas combined.
- There is one factory farmed hog for every three people in Illinois.
- The number of factory farmed hogs in Illinois grew by 22 percent to 3.9 million between 1997 and 2007.
- The size of average Illinois egg factory farms nearly doubled to nearly 821,000 million hens between 1997 and 2007.
- In 2009, an Iroquois County hog operation manure spill tainted 19-miles of a local stream, killing fish for several days, including the native northern pike.
- There are 6 times as many hogs on factory farms as people in Iowa.
- There are only twice as many people as factory farmed hogs in Indiana.
- The number of factory farmed hogs in Indiana grew by 18 percent to 3.3 million between 1997 and 2007.
- The more than 6 million egg-laying hens on factory farms in Adams County, Indiana produce as much untreated manure as the sewage from the San Diego metro area.
- There are 18 times more chickens on factory farms than people in Iowa.
- The number of factory farmed hogs in Iowa grew 75 percent to 17.9 million between 1997 and 2007.
- The size of average Iowa egg factory farms nearly tripled to nearly 1.3 million hens between 1997 and 2007.
- In 2008, a leaky hose on a Blairstown, Iowa dairy allowed 5,000 gallons of manure to discharge to a local waterway.
- The average Kansas hog factory farm has 10,000 pigs.
- The average Kansas factory-farm dairy has nearly 3,600 cows.
- There are only twice as many people as factory farmed hogs in Kansas.
- Kansas nearly has more beef cattle on industrial feedlots (2.6 million) than people (2.8 million).
- There are 11 times more chickens on factory farms than people in Kentucky.
- In 2003, a federal judge in Kentucky found that because Tyson Foods exercises so much control over its contract poultry growers, it too was responsible for the air pollution caused by these operations.
- There are six times more chickens on factory farms than people in Louisiana.
- In 2008, a 4-mile cow manure spill was left on a Maine state highway.
- There are six times more chickens on factory farms than people in Maryland.
- Perdue’s poultry operations in the Chesapeake Bay produce so much more waste than the region can handle that the manure has to be trucked out of the state.
- Livestock manure from the watersheds that feed the Chesapeake Bay are the source of about one-fourth of the pollution that causes oxygen-depleted dead zones in the Chesapeake.
- In 2009, a 1,000-cow Frederick County, Maryland dairy operation reimbursed the county and a local city $254,900 for emergency water supplies, testing and other costs after a 576,000 gallon manure spill in 2008 polluted the town’s water supply, which had to be shut off for two months.
- The size of average Michigan egg factory farms nearly tripled to more than 875,000 hens between 1997 and 2007.
- In 2009, as many as 200,000 fish were killed in a 12-mile length of the Black River in Sanilac County, Michigan after dairy manure was improperly spread on fields.
- The more than 3.5 million egg-laying hens on factory farms in Allegan County, Michigan produce as much untreated manure as the sewage from the Austin, Texas metro area.
- In 2007, the Michigan Department of Environmental Quality sued the 6,600-head Ingham County Vreba-Hoff Dairy for failing to comply with state water quality laws and violating a 2005 consent judgment.
- There are 40% more factory farmed hogs (7.1 million) than people (5.3 million) in Minnesota.
- The number of factory farmed hogs in Minnesota grew 70 percent to 7.1 million between 1997 and 2002.
- The more than 679,000 hogs on factory farms in McLeod County, Minnesota produce twice as much untreated manure as the sewage from the Houston metro area.
- The 7 million hogs, nearly 290,000 beef cattle, 91,000 dairy cows, 9 million egg-laying hens, and 3 million broiler chickens on factory farms in Minnesota produce as much untreated manure as 179 million people -- more than half the U.S. population.
- There are 38 times more chickens on factory farms than people in Mississippi.
- The 110 million broiler chickens, 1.8 million egg-laying hens, 326,600 hogs and 3,500 dairy cows on factory farms in Mississippi produce as much untreated manure as 44 million people -- 15 times the population of Mississippi.
- There are only twice as many people as factory farmed hogs in Missouri.
- There are 8 times more chickens on factory farms than people in Missouri.
- The size of average Missouri egg factory farms doubled to nearly 1.4 million hens between 1997 and 2007.
- Premium Standard Farms industrial hog facilities were three of the top five sources of odor complaints in Missouri between 2002 and 2006.
- There are 40% more cattle on feedlots (2.5 million) than people (1.8 million) in Nebraska.
- There are 60% more factory farmed hogs (2.9 million) than people (1.8 million) in Nebraska.
- The nearly 254,000 beef cattle on industrial feedlots in Cuming County, Nebraska produce as much untreated manure as the sewage from the New York City and Miami metro areas combined.
- The more than 2.5 million beef cattle, 2.8 million hogs, 10 million egg-laying hens, nearly 26,700 dairy cows, and 168,000 broiler chickens on factory farms in Nebraska produce as much untreated manure as 313 million people -- more than the entire U.S. population.
- The average New Mexico factory-farm dairy has nearly 2,400 cows.
- There is one factory farmed dairy cow for every six people in New Mexico.
- Along Interstate 10 southeast of Las Cruces, New Mexico, there are 30,000 dairy cows on 11 back-to-back dairies.
- The 85,000 dairy cows on factory-farm dairies in Chaves County, New Mexico produce as much untreated manure as the sewage output from the Los Angeles and Philadelphia metro areas combined.
- The nearly 213,000 dairy cows on factory-farm dairies in New York produce as much untreated manure as 47 million people -- two and a half times the population of New York.
- In 2009, a dairy manure spill in upstate New York spilled into a tributary of the St. Lawrence River. Workers at a 6,000-head dairy spread manure to frozen fields, which pooled and leaked into the river.
- There are nine times more chickens on factory farms than people in North Carolina.
- There are more factory farmed hogs (10.1 million) than people (9.4 million) in North Carolina.
- The more than 2.2 million hogs on factory farms in Duplin County, North Carolina produce twice as much untreated manure as the sewage from the New York City metro area.
- The nearly 812,000 hogs on factory farms in Bladen County, North Carolina produce as much untreated manure as the sewage from the Chicago and Atlanta metro areas combined.
- There is one factory farmed hog for every four people in North Dakota.
- In 2009, a Fulton County dairy manure sprayer became stuck, dispersing manure that entered the Little Bear Creek.
- In 2009, a line break on a Miami County hog farm spilled manure and affected 4.5 miles of the Canyon Run Creek and Stillwater River, killing 3,000 fish.
- In 2008, the Ohio Department of Natural Resources investigated a manure spill that contaminated 2 miles of a tributary of the Middle Creek and caused a fish kill.
- The nearly 4.5 million egg-laying hens on factory farms in Darke County, Ohio produce as much untreated manure as the sewage from the entire Cincinnati metro area.
- The average Oklahoma hog factory farm has 24,800 pigs.
- The average Oklahoma factory-farm dairy has more than 2,400 cows.
- The average industrial feedlot in Oklahoma has nearly 13,300 beef cattle.
- There are seven times more chickens on factory farms than people in Oklahoma.
- In 2009, an Oregon feedlot agreed to pay an $8,000 penalty to settle discharge violations for allowing manure to flow into a Snake River tributary.
- Threemile Canyon Farms in Boardman, Oregon, is the largest dairy operation in the state with tens of thousands cows, which release more than 15,000 pounds of ammonia into the air every single day.
- The more than 3.7 million egg-laying hens on factory farms in Lancaster County, Pennsylvania produce as much untreated manure as the sewage from the Columbus, Ohio metro area.
- The nearly 1 million hogs, 54,600 dairy cows, 25 million chickens and 35,000 beef cattle produce as much untreated manure as 43 million people -- three and a half times the population of Pennsylvania.
- In 2010, Fulton County dairy operators agreed to pay a $12,920 fine and shut down their farm after tens of thousands of gallons of manure spilled into a tributary of the Licking Creek and Potomac River and killed 650 fish.
- There are 8 times more chickens on factory farms than people in South Carolina.
- There are nearly two factory farmed hogs for every person in South Dakota.
- There is one beef cattle on an industrial feedlot for every 2 people in South Dakota.
- The 342,000 beef cattle, 1.4 million hogs, 45,000 dairy cows, and 2.8 million egg-laying hens on factory farms in South Dakota produce as much untreated manure as 69 million people -- 85 times the population of South Dakota.
- The average Texas hog factory farm has 100,000 hogs.
- The average industrial feedlot in Texas has more than 20,500 beef cattle.
- The nearly 14 million broiler chickens on factory farms in Nacogdoches County, Texas produce as much untreated manure as the sewage from the Detroit metro area.
- The more than 20 million broiler chickens on factory farms in Shelby County, Texas produce as much untreated manure as the sewage from the Dallas-Fort Worth metro area.
- The average Utah hog factory farm has nearly 40,000 pigs.
- There is one factory farmed hog for every four people in Utah.
- In 2008, the Vermont Agency of Natural Resources fined two northwestern Vermont farmers for excessive manure spreading on local field that ran off into Lake Champlain.
- In 2010, the EPA ordered a dairy and turkey farm from discharging nitrogen and phosphorus laden manure into a tributary of the Shenandoah River.
- In 2010, the EPA ordered a 100,000 broiler chicken operation to stop discharging pollutants from large piles of uncovered chicken manure that were leaching nitrogen and phosphorus into a tributary of the Shenandoah River.
- In 2010, the EPA ordered a 100,000 broiler chicken operation in Virginia to stop discharging pollutants from large piles of uncovered chicken manure that were leaching nitrogen and phosphorus into a tributary of the Shenandoah River.
- The average industrial feedlot in Washington has more than 12,100 beef cattle.
- In 2010, a manure lagoon on a 750-cow dairy collapsed, spilling 12 million gallons of manure onto fields that leaked into the Snohimish River.
- The 86,000 dairy cows on factory-farm dairies in Yakima County, Washington produce as much untreated manure as the sewage output from the New York City metro area.
- In 2008, a Mt. Vernon, Washington dairy agreed to pay an $8,000 penalty to settle alleged Clean Water Act violations for manure discharges that leaked from a barn into a tributary that leads to the Puget Sound.
- There are six times more chickens on factory farms than people in West Virginia.
- In 2008, a 600-heifer Rockland, Wisconsin farm was ordered to pay $28,000 for a manure discharge that killed 225 trout in a nearby creek and many more fish as far as 9 miles downstream.
- Some Wisconsin mega-dairies have operated without necessary permits and many never receive an onsite inspection -- the state's goal is to visit once every 5 years but admits it does not meet that goal.
- Between 2003 and the end of 2010, Wisconsin will have permitted 200 mega-dairies to open or expand but has never turned down a permit application or revoked a permit, even after repeated environmental violations.
- The 257,000 dairy cows, nearly 270,000 hogs, 40,000 beef cattle, 4.9 million broiler chickens, and 3.6 million egg-laying hens on factory farms in Wisconsin produce as much untreated manure as 69 million people -- 12 times the population of Wisconsin.
- The average Wyoming hog factory farm has nearly 34,000 pigs.