Tuesday, February 8, 2011

February 8 2011: An unstable tower of breaking promises

Lewis Wickes Hine What difference 100 years make January 1911
"Tom Vitol (also called Dominick Dekatis), 76 Parsonage Street, Hughestown Borough; Works in [coal] Breaker #9; Probably under 14: Pittston, Pennsylvania. "

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Stoneleigh: Despite the continuing atmosphere of optimism and denial (that's par for the course during long-lived counter-trend rallies), we are witnessing a slow-motion crash of the juggernaut that is the real US economy. The unemployment situation is already the worst since the Great Depression  and showing no signs of recovery.

David Rosenberg provides his take on the data from the latest Bureau of Labor Statistics report:
Just How Ugly Is The Truth Of America's Unemployment
The data from the Household survey are truly insane. The labour force has plunged an epic 764k in the past two months. The level of unemployment has collapsed 1.2 million, which has never happened before. People not counted in the labour force soared 753k in the past two months.

These numbers are simply off the charts and likely reflect the throngs of unemployed people starting to lose their extended benefits and no longer continuing their job search (for the two-thirds of them not finding a new job). These folks either go on welfare or they rely on their spouse or other family members or friends for support.

Stoneleigh: The middle class is forced to run on a treadmill that is increasing in speed, so that they have to run faster and faster just to keep up. More and more people are failing to do so and being flung off the back all the time, but so far their plight goes largely unnoticed. For now there are sufficient bread and circuses to distract the rest of the masses, and enough opportunities for short-term profit for those at the top of the pyramid to focus their attention away from reality as well. In the meantime the pressure builds quietly closer to criticality, and as we've seen recently in Egypt, a social pressure cooker can suddenly erupt. Prevailing social mood can turn on a dime.

As bad as unemployment is now, it is destined to get vastly worse, likely at an accelerating pace. The real economy is facing a squeeze from both ends that stands to get dramatically worse, as we move into the next phase of the credit crunch and the effective money supply begins to shrink in earnest (deflation). Many employers are already having difficulty maintaining salaries and benefits, and many employees are struggling with a rising cost of living that leaves them increasingly stretched. This is before credit contraction moves into high gear, as it will once the rally is over. 

The relative optimism of a rally keeps both sides hanging on, hoping that the hard times are temporary and that greener pastures lie around the corner. When that optimism evaporates, and those hopes prove to be unfounded, the reaction could be rapid, especially on the part of employers. Those who have been trying to kick the can of current difficulties down the road far enough for recovery to get underway are very likely to hit a wall, especially if postponing the inevitable has been achieved by digging themselves into an even deeper hole in the meantime. The likelihood of a spike in unemployment in the not too distant future is very high.

The public sector is particularly vulnerable, as the crunch is already becoming acute in many places. Public sector employees have been offered relatively generous terms, especially for benefits such as pensions, but the ability of public authority employers to keep those promises hinges on maintaining tax revenues, and that is already proving to be impossible at both the municipal and state levels. Mechanisms are being sought to walk away from these promises-that-cannot-be-kept, which compete with essential social functions for increasingly scarce revenues, as Mary Williams Walsh noticed in the New York Times last month:
A Path Is Sought for States to Escape Their Debt Burdens
Policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers [..]

Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care [..]

Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.

Stoneleigh: The parallels between muni bonds and the housing bubble are significant, notably the shift in perception from low risk to high risk in a short period of time. Says Veronique de Rugy for Reason Magazine:
The Next Housing-Style Crisis Will Be The Municipal Debt Bubble
Like homeowners, states and cities splurged on debt and found inventive ways to get around borrowing limits to finance projects they couldn’t pay for otherwise. And recently the federal government encouraged investors to pour their money into the coffers of these less-than-creditworthy borrowers.

Now some of those investors, like the few lonely mortgage-industry short sellers in 2005–06, have started betting against the borrowers. Time reports that some of them "are jumping into the credit default swap market to bet against cities, towns and states".

Stoneleigh: Municipalities, which have been borrowing for years to fund spending of all kinds, are shortly going to find it very much more difficult to access the money they would require to maintain their current spending. We are already seeing large scale layoffs in many places, and this is the thin end of the wedge. Tami Luhby at CNN:
Camden, N.J., to lose nearly half its cops
There will be fewer cops patrolling the streets of Camden, N.J., come Tuesday. Struggling to close a $26.5 million budget gap, the city with the second highest crime rate in the nation is laying off 163 police officers. That's nearly 44% of the force. And Camden will also lose 60 of its 215 firefighters. Some people with desk jobs will be demoted and reassigned to the streets. The mayor's office says that the cuts will not affect public safety.

Stoneleigh: This assurance is highly optimistic considering recent experience elsewhere. Jerry White at WSWS wrote back in September:
Detroit firefighters denounce city budget cuts
A virtual firestorm erupted Tuesday night, destroying or severely damaging 85 homes, garages and other structures and leaving dozens of families homeless. Burning debris and embers were blown by winds spreading flames house-to-house and across streets and alleys. Shorthanded and underequipped firefighters, grappling with malfunctioning hydrants and exhaustion, fought to protect lives and property. They were aided by residents desperately fighting back the flames with garden hoses [..]

In a press conference Wednesday, Detroit Mayor David Bing sought to deflect attention from the crippling budget cuts imposed on the fire department and other city services....In reality, cutbacks carried out by Bing and previous Democratic administrations had a direct impact on the severity of the fires and the damage they wrought. Between 8 and 12 of the city’s 66 fire companies are "browned out" each day, meaning they are temporarily decommissioned and unavailable to fight fires due to budget cuts. One of the decommissioned stations was reportedly the closest to a neighborhood that erupted in flames. Residents complained of long delays while waiting for fire engines, even running to nearby firehouses that were empty.

Stoneleigh: Our societies face many hard choices as to priorities in our developing era of broken promises to ourselves and each other. We cannot have it all. Both employers and employees are caught between a rock and a hard place (as are those they serve with their activities). So far the hard choices are being avoided, but that does nothing but compound the inevitable pain. Desperation measures such as encouraging gambling in order to gain revenue from social addictions is clearly not a solution. Neither is selling future revenue streams to pay current bills. Consistently failing to pay those bills is reminiscent of the collapse of the Soviet Union, where employees were paid months late if at all.

Illinois is in particularly bad shape. Cue Steve Kroft at CBS' 60 Minutes:
State Budgets: The Day of Reckoning
Hynes is the [Illinois] paymaster. He currently has about $5 billion in outstanding bills in his office and not enough money in the state's coffers to pay them. He says they're six months behind.

"How many people do you have clamoring for money?" Kroft asked. "It's fair to say that there are tens of thousands if not hundreds of thousands of people waiting to be paid by the state," Hynes said.

Asked how these people are getting by considering they're not getting paid by the state, Hynes said, "Well, that's the tragedy. People borrow money. They borrow in order to get by until the state pays them." "They're subsidizing the state. They're giving the state a float," Kroft remarked. "Exactly," Hynes agreed.

"And who do you owe that money to?" Kroft asked. "Pretty much anybody who has any interaction with state government, we owe money to," Hynes said. "The state's a deadbeat," Kroft remarked.

Stoneleigh: And Tim Jones for Bloomberg:
Illinois Has Days to Plug $13 Billion Deficit That Took Years to Produce
"Illinois is probably in the worst shape," Gross said in a Dec. 28 interview on CNBC. The widening gap between Illinois’s expenses and revenue drew criticism from Moody’s. The disparity underscored the state’s "chronic unwillingness to confront a long-term, structural budget deficit," it said in a Dec. 29 study.

The worst financial crisis since the Great Depression and politicians’ unwillingness to cut budgets explain the descent since 2008, said Tom Johnson, president of the nonpartisan Taxpayers’ Federation of Illinois. Annual sales and income-tax revenue fell for the first time in modern history, he said. "The state was hoping for a quick recovery or inflation, and they didn’t get it," Johnson said in a telephone interview. "And there was no appetite to reduce the escalating costs of spending."

The falloff in revenue aggravated the state’s historic practice of delaying payments to vendors and carrying those costs on from one year to the next. "Revenues went south, spending went north," Johnson said. "It’s unsustainable." The current-year budget deficit of $13 billion is roughly half the size of the state’s general-fund budget. Borrowing to pay bills continues. In November the state sold $1.5 billion of bonds backed by tobacco settlement payments to help pay vendors.

"We have seen a lot of the budgetary tools that really don’t qualify as real solutions used, whether it’s short-term borrowing, pension borrowing, delays in payments, the sale of future revenues," Hynes said. Illinois business leaders have warned that the state’s failure to properly fund pensions means the plans will run out of money to pay promised benefits before the decade ends.

Stoneleigh: The common ground where bargains acceptable to both sides of a dispute can be found is rapidly disappearing or already gone. All parties are looking for more in order to dig themselves out of a hole, when there is much less overall to go around. This creates a clear potential for an entrenched and confrontational mentality that can easily make matters worse.

Unfortunately deflation (the collapse of money plus credit relative to available goods and services) aggravates natural human impulses arising out of increasing scarcity. Under deflationary conditions, where credit can evaporate at lightning speed, the purchasing power of very scarce remaining physical cash increases. In other words, over time, a salary would go further than it used to, or alternatively the purchasing power of a salary could be maintained if the salary was cut. Employees would be very unlikely to see a salary cut in those terms however, and would likely become very defensive. People typically think in nominal terms, not in real terms, even though it is affordability that matters rather than merely price.

Squeezed employers are not going to be able to maintain the purchasing power of the salaries they pay. They will be looking to pay fewer people and to hand over less purchasing power to each remaining employee than before. Employees will have little or no bargaining power, either individually or collectively, under circumstances where unemployment is high and rising (for a very evocative illustration of this in relation to the Great Depression see John Steinbeck's The Grapes of Wrath).

The odds of very substantial pay and benefit cuts in the not too distant future are very high, and the odds of this being extremely badly received by the workforce are even higher. We could see many more public sector employers trying to pay their bills in IOUs, as California resorted to during phase one of the credit crunch.

At the moment employees are watching prices rise (as a lagging indicator of previous expansion coupled with commodity market speculation), and in many places they are facing tax increases and/or the introduction of service user fees at one or more levels of government. While prices are likely to fall in a deflation, this will not mean greater affordability where people's purchasing power is falling faster than price due to rapidly falling wages and benefits, so the rise in the effective cost of living will continue, and so will the pain. 

So far interest rates are still moderate, which matters a great deal to heavily indebted individuals, but this is not likely to remain the case for too long as lenders face higher risk of non-payment. The typical reaction, apart from drastically curtailing lending, would be a higher risk premium placed on credit. Debt will become much less serviceable as a result. The burden on ordinary people, as almost everything gets less affordable, will be a heavy one indeed. 

As we have written here before, there is considerable potential for war in the labour market. It is entirely likely that we will see general strikes, and a considerable amount of unrest, which can in turn trigger a repressive response. There are many commenters who take one side or the other in calling for a solution to the employment predicament, but that is too simplistic. Blame games serve no one (except nascent demagogues). 

We have built our civilization on an unstable tower of promises. We have all been part of the problem, and now we must all look for ways forward that cause the least harm to the fabric of society. There are no 'solutions' in that there is nothing that will get us business as usual, but there are better and worse ways to address the intractable situation we are facing.

Unions are a favourite target for criticism. They are only one side of the story, but they are major players. Steve Maich for Macleans:
Are labour unions a blessing or a curse?
Despite arguments to the contrary, this economic muddle wasn’t triggered because ordinary Americans don’t make enough money or because they lack adequate job protection. It wasn’t sparked by big businesses being saddled with high labour costs or debilitating strikes either. Our problems are rooted in the fact that ordinary Americans spent wildly beyond their means for more than a decade, and big business rode that debt-fuelled spending boom until it crashed.

Stoneleigh: The union movement has done a lot over the last hundred years to redress a balance of power that had enabled the Dickensian exploitation of the masses, but now has the potential to be a significant obstacle to what must happen going forward, namely financial haircuts for all parties. It will not be possible, nor is it desirable, to defend the rights of one group at the expense of all others, and all competing priorities for public expenditure. 

Pressing the case for one segment of society only would be extremely divisive, particularly between working people. Where unions exist to maintain large disparities between workers through closed shops with substantial barriers to entry, they act to benefit a few relatively privileged workers at the expense of the many, not to redress the balance of power between the top and the bottom of the pyramid. As such they become self-serving, as most human institutions typically do over time.

They can also be used by the powerful as a tool to divide and rule. As Ilargi said at The Automatic Earth some time go, We're going to play you all against each other, until you make as much as a Chinese peasant. This clearly does nothing to advance the cause of working towards a more just society, as unions claim to do.

As high unemployment will undercut bargaining power, unions are not likely to survive in their present form. If they cling to rigid demands based on promises made in manic times, they will be broken. This is a recipe for a return to outright exploitation under conditions where desperate people have no choice. It would be far better to leave behind that which cannot survive and work to find any kind of common ground that could be built on. Such 'solutions' are not likely to please anyone, as having to accept less never does, but it would be better than fighting the inevitable.

Looking for ways to move forward during a period of contraction will be of major importance in almost every sphere of society. Those with mediation skills, who can help to identify the least worst approach for all concerned, could be worth their weight in gold. I would expect it to be a thankless task, given how patently unrealistic most people's expectations are, but if it can help to avoid our societies making a bad situation worse as expensively as possible, then it will be well worth the effort.

The Next Housing-Style Crisis Will Be The Municipal Debt Bubble
by Veronique de Rugy - Reason Magazine

When state and local governments want to spend more than they collect in revenues, they issue bonds. Such bonds are a longstanding feature of the American landscape, going back at least as far as 1812, but during the last decade they have spun out of control, as states and cities have increased their borrowing to indulge in more and more spending on new stadiums, schools, bridges, and museums. They have even started borrowing to cover their basic operational expenses. 

Since 2000 the total outstanding state and municipal bond debt, adjusted for inflation, has soared from $1.5 trillion to $2.8 trillion (see chart). The recession didn’t slow the spending.

One reason for the increase in demand for these bonds is that in times of crisis, investors tend to abandon high-risk, high-return assets for safer investments. The presumed reliability of municipal bonds—only U.S. Treasury bonds are considered safer—have made them very attractive. From 1970 to 2006, the default rate for municipal bonds has averaged 0.01 percent annually. And the average recovery rate for those few municipal bonds that have defaulted is also notably high, about 60 percent. In comparison, corporate bonds’ recovery rate is about 40 percent.

Municipal bonds are perceived as safe investments because, like U.S. Treasury bonds, they are backed by the full faith, credit, and taxing powers of the issuing governments. Investors know that states and localities can always raid taxpayer wallets to pay off their debts. 

But in the last two years tax and fee hikes have faced greater public opposition. Last year, for example, Jefferson County, Alabama, was unable to raise sewer fees to meet its sewer bond obligation. Since governments are generally unwilling to cut spending either, the result of resistance to new revenue raising has been substantial increases in states’ and cities’ debt levels. Detroit and Los Angeles have announced that they may have to declare bankruptcy, as have a number of smaller cities.

Usually, as a borrower becomes a riskier prospect, lenders start pulling away. At the very least, worried about the prospect of losing their investment to default, they don’t increase the amount they lend. 

But municipal bonds have not yet lost their low-risk reputation. According to the Investment Company Institute, $84 billion went into long-term municipal bond mutual funds in 2010, up from $69 billion in 2009. And the 2009 level represents a 785 percent increase from the 2008 level of $7.8 billion. Artificial incentives have lured investors into thinking that lending cash to bankrupted cities will be profitable.

It helps that interest on municipal bonds is often exempt from federal taxes. Most are exempt from state and local taxes as well. Because they gain from the exemption, investors, especially in the higher tax brackets, are willing to accept the bonds’ lower yields.

More important, investors believe cities and states—especially states, which can’t legally declare bankruptcy to escape debts—will resort to anything to avoid reneging on their obligations. And if they default anyway, investors assume the feds will bail them out. Washington already has bailed out the banks, the automobile industry, homeowners, and local school budgets; it isn’t unreasonable to assume that it will decide the states and cities are also too big to fail.

Consider what happened in 2008. Government revenues started to fall, signaling to investors that bonds might be riskier than they thought. At the same time, several insurers that typically backed municipal bonds went bankrupt or exited the market, meaning that buyers were left unprotected against the risk of default. Instead of seeing this downturn as an incentive for states and cities to change their behavior, Washington stepped in with a new municipal offering.

The Build America Bonds program, part of the American Recovery and Reinvestment Act of 2009, was aimed at subsidizing bonds for infrastructure projects. Under this program, the Treasury Department pays 35 percent of bond interest to the issuing government. If a state or local government issued a bond at a high rate to make it appealing to investors—10 percent, say—the Treasury would make a 3.5 percent direct payment to the issuer. In exchange, the federal government gets to tax the returns on the bonds. It’s no surprise that, starting in 2008, states and cities increased their debt dramatically, while investors enabled this overspending.


Image: Reason Magazine

Two years later, things have already taken a bad turn. In May the financial advisory firm Alex Partners LLP reported that 90 percent of the restructuring experts it polled believed a major U.S. municipality would default on its debt in 2010. By the time this column is published, that prediction will be either fulfilled or falsified. But even in the best-case scenario, a municipal debt crisis looms in the near future.

The parallels with the housing bubble are worrisome. Prior to the meltdown, mortgages were perceived as very low-risk investments. Banks were encouraged through government policies to lend large amounts to people, whether they could afford it or not, and borrowers were encouraged to spend more than they should. Both lenders and borrowers had faith that nothing would go wrong—and that if anything did go wrong, Washington would save the day. 

Like homeowners, states and cities splurged on debt and found inventive ways to get around borrowing limits to finance projects they couldn’t pay for otherwise. And recently the federal government encouraged investors to pour their money into the coffers of these less-than-creditworthy borrowers.

Now some of those investors, like the few lonely mortgage-industry short sellers in 2005–06, have started betting against the borrowers. Time reports that some of them “are jumping into the credit default swap market to bet against cities, towns and states.” A CDS is an insurance contract that protects a bond holder against default. But there’s a difference: You don’t necessarily have to be exposed to the underlying bond to buy a CDS. They can be bought or sold, and are priced depending on the  market’s perception of bond default probability. If the risk increases, it is likely that the demand for CDSs will too, leading to an increase in their price. Brian Fraser, a partner at the law firm Richards Kibbe & Orbe LLP, told Time, “The spreads on CDSs have been growing, and the dollar amount of CDSs on municipals has grown in the last year. That’s a clear warning sign that people are effectively starting to short the muni market.”

The state and municipal debt crisis could culminate in a request for the third near-trillion-dollar bailout of the last two years. That much federal borrowing on top of the current debt could very quickly have an impact on interest rates and on the dollar. And at that point, we can just forget about the recovery.

US State Governors Determined to Cut as Deficits Loom
by Conor Dougherty and Amy Merrick - Wall Street Journal

Politicians in Both Parties Aim to Balance State Budgets Through Cuts, Not Taxes

Governors around the U.S. are proposing to balance their states' budgets with a long list of cuts and almost no new taxes, reflecting a goal by politicians from both parties to erase deficits chiefly by shrinking government.

On Monday, Florida Gov. Rick Scott, a newly elected Republican, is expected to issue a budget that cuts state spending by $5 billion and overhauls public-employee pensions. A Democratic governor, John Kitzhaber of Oregon, has proposed a two-year budget that would make cuts to mental-health institutions and reduce state Medicaid reimbursements to doctors and hospitals. Cuts to Medicaid, a joint state-federal program, are some of governors' largest proposed reductions.

Among other proposed cuts: Fewer state agencies; fewer employees; and generally a smaller safety net for social services. State-funded universities would cost more. And local governments would play a bigger role in delivering services as well as paying for them.

Iowa Gov. Terry Branstad wants to cut the state's highest corporate income-tax rate in half, to 6%. "We see the growth opportunity primarily in small businesses and entrepreneurs. This makes Iowa a more competitive and more profitable place for them to locate," the Republican says. Still, he is among the few governors proposing some tax increases, as well: He would raise the tax rate casinos pay to 36% from the current range of 22% to 24%, to offset the corporate-tax cut.

Reining in spending and taxes was a central theme in the November election, helping 18 Republicans win governorships, but many Democratic governors have also pledged to avoid new taxes. A theme of cuts and consolidation has emerged in budgets released so far by governors of both parties, such as those in California and New York (Democrats) as well as Arizona and South Dakota (Republicans).

Budget proposals in most states are expected by the end of this month, to be followed by months of tussling in state legislatures. Most state fiscal years begin July 1. While states early in the economic downturn saved money through employee furloughs or by freezing funding levels, budgets for the coming fiscal years are aiming to combine programs or, in some cases, eliminate entire state agencies. Some state officials and lawmakers say they have a chance to reshape government in ways that might not have been politically palatable in years past.

"The way we responded to recessions in the past was to do less of the same, with the hope of having more money later so we could do more of the same," Gov. Kitzhaber in Oregon said. "There's a once-in-a-generation opportunity to do some things we should have done a long time ago but couldn't make the politics work." State tax receipts, which shrank during the recession, are growing again, yet states will mostly be without federal aid they had for the past two fiscal years. The 2009 federal stimulus bill provided $150 billion in assistance to the states over two years.

"State revenues are growing, but not enough to replace the stimulus dollars, let alone keep up with baseline spending growth," said Robert Ward, deputy director of the Nelson A. Rockefeller Institute of Government in Albany, N.Y. Education spending is emerging as a target. For example, in New York, Democratic Gov. Andrew Cuomo's budget has prompted Anne Kress, president of Monroe Community College in Rochester, N.Y., to assess what her school does and how.

The school's state funding has been cut by about 25% over the past two years, leading to a $100 increase in annual tuition and the elimination of programs such as massage therapy and court reporting. Ms. Kress says this year's cuts may result in another tuition increase. She also expects to eliminate several counseling programs. Examples could be those for African-American men and single mothers.

In Texas, state leaders must erase a deficit estimated at $15 billion to $27 billion over two years. They say they will do it without raising taxes or raiding reserves called rainy-day funds.
Under one proposal, state aid to public schools would drop by about 15%, or $7 billion, from current levels; it would be down by $10 billion from current financing formulas that take into account such factors as increasing enrollment. The state House plan calls for shuttering four of the 50 Texas community colleges.

Iowa Gov. Branstad has proposed reducing what the state spends on preschool education to $43 million from $71 million and having parents pay on a sliding scale, depending on their income. Iowa established free preschool for all 4-year-olds in 2007, under a Democratic governor, Chet Culver. "I do recognize some low-income Iowans can't afford to pay for preschool, but even they can pay something, maybe just $10 a month," says Mr. Branstad, who took office last month and who had previously served four terms as Iowa governor.

Illinois stands out among states with a big tax increase just adopted to attack a deficit estimated at $13 billion. Last month, the state passed a 67% increase in its individual income tax rate and a 45% jump in its corporate rate. In California, which faces a $25.4 billion deficit, newly elected Democratic Gov. Jerry Brown has called for big cuts in Medicaid and higher education. He also wants to shift more responsibility for corrections and foster care to local governments.

To pay for that shift, and to avoid even deeper cuts, Mr. Brown has called for a June election to ask voters to extend temporary increases in the state income and sales taxes, as well as vehicle-license fees. In Arizona, Republican Gov. Jan Brewer is seeking a federal waiver to allow the state to eliminate Medicaid coverage for 280,000 residents, mostly childless adults. The waiver would save an estimated $1 billion over a year.

New Jersey Actuary: Pension Crisis Will Get Worse
by Jason Method - My Central Jersey

New Jersey's pension crisis will get worse in the next several years, even if state officials add $500 million to the pension systems as planned, a state actuary testified last week. Actuary Janet H. Cranna also said the state will be forced to continue selling such assets as stocks and bonds to pay pensioners, thereby further weakening the system. But the pension crisis would not have been nearly as bad had the state government contributed to the system all along, Cranna said, instead of largely skipping payments for 10 years.

The testimony, which came as the state released its annual valuation reports for the pension funds, further clarified not only how badly underfunded the state's pension system is, but that billions of dollars in state contributions are needed to turn around the fortunes for the funds for 800,000 current or retired government workers. Yet contributing billions of dollars to pensions would put further pressure on the state budget in a year when the state already faces a $10.5 billion deficit and officials could be ordered by the state Supreme Court to provide more money to educate children from low-income families.

Eileen Norcross, a senior researcher at George Mason University in Virginia who has written about New Jersey's pensions, said state officials are only beginning to grapple with the vastness of the system's deficit. "They can't get around the fact that they have to increase the amount they pay into the system," Norcross said in an interview. "These are budget choices. But they are benefits for vested workers that they have to honor." Norcross said some experts have estimated that New Jersey will have to contribute $10 billion a year toward its pensions by 2020.

Who's to blame?
The valuation reports, and the comments by the actuary, prompted an exchange between officials that rose to a near shouting match as they blamed various interest groups for the system's woes. Some of the overall numbers — such as the fact that the state system faces a $53.8 billion unfunded bill for pensions to paid over the next 30 years — had been released in late December. That does not even factor in some $56 billion in long-term retiree health care costs, for which virtually no money has been set aside.

Cranna's pointed comments came while she presented reports on the systems that oversee pensions for local police and firefighters, as well as most rank-and-file local and state government workers in the state. Cranna's firm, Buck Associates, was not hired to review the teachers' system. But because that system faces the largest unfunded liability, at $24.5 billion, her comments would apply just the same. "The state is in a negative cash-flow position," Cranna said. "It would be prudent to start making (the full) contributions. At these ratios, the system is not funded well at all."

Gov. Chris Christie has proposed broad changes for the pension system. He wants employees to work longer before they retire, roll back a 9 percent boost given in 2001 and require that some contribute more money toward their pensions. nLast year, the state passed a series of reforms for new employees. Those reforms would not have any effect on the pension system's current condition, Cranna said.

Another law would require the state to catch up to its needed pension contribution in seven years. In the budget to be adopted by July, that would amount to a little more than $500 million, or one-seventh of the $3.5 billion necessary if the system were to be considered fully funded for the year. Christie, a Republican, has said he may not even want to make that one-seventh payment in the upcoming budget. State Senate President Stephen M. Sweeney, a Democrat, has insisted on that payment in order for pension reforms to be passed. But Cranna said that approach — taking seven years to catch up to full needed contributions — will only put the system further behind.

The pension system still is factoring in losses in the stock market from the financial crisis in 2008 and 2009, Cranna added. Meanwhile, more state workers are retiring, causing further stress on the system. If the state had never stopped making its pension contributions, the pension covering local police officers would have another $3 billion and 83 percent of the money it needs, Cranna said. That is a level of funding that experts say is considered safe for pensions.

The pension fund that pays for most rank-and-file state workers would have 60 percent of the money it needs if the state had continued to make contributions, well up from the 42 percent it has now, Cranna said. Similarly, the pension funds for most rank-and-file local government workers would have $2.2 billion and also be better funded, Cranna added. State worker Anthony F. Miskowski stood up and told the trustees for the police and fire fund that they need to tell the state's leaders that they must do everything possible to shore up pensions. "It's your responsibility," Miskowski said. "Sell the Statehouse and put the money in the pension fund."

Board Chairman John G. Sierchio responded by telling Miskowski that such a message is hard to sell to political leaders. "Actuary reports don't get people elected," Miskowski said. "I think everyone agrees with you. It's been said before." Then, L. Mason Neely, chief financial officer for East Brunswick, told Sierchio, a representative of the New Jersey Policeman's Benevolent Association, that the unions were partly to blame for the problem. The unions, including the PBA, Neely said, had in previous years endorsed the idea of skipping pension payments so that there would be more money for state aid and other programs.

Sierchio shot back quickly. "I didn't hear your mayor going to the Senate and Assembly saying, "Don't do this, we want to pay,' " Sierchio said, his voice rising. "You're wrong," interjected Neely, a longtime pension watchdog. "I stood there and said it."

Are Michigan municipal bankruptcies coming?
by Kurt Brouwers - Market Watch

Municipal bankruptcies are exceedingly rare, but now we get word from Michigan that preparations are underway to deal with a potential series of municipal crises.  The state has taken the unusual step of training dozens of financial crisis managers to help guide cities and school districts that may be in financial trouble.

This piece spells out what is happening [emphasis added]:

State Treasurer Andy Dillon said Monday that his office will train 45 financial emergency managers next month to deal with an expected surge of communities or school districts facing insolvency.

Dillon said he hopes many of the experts will be used to counsel local officials to avoid bankruptcy, rather than assume control of their finances.

Dillon said “three or four” communities — he would not name them — are on the brink of financial collapse and may not be able to pay their employees in March…

I believe this is a prudent measure, but it certainly suggests that trouble in coming.  If municipal bankruptcies occur in Michigan, that by itself is not the end of the world.  In California, the city of Vallejo declared bankruptcy and it has been making moves to deal with its problems under the guidance of the court.

Bankrupt California City
By way of background, Vallejo California is in the San Francisco Bay Area.  Back in 2008, it declared municipal bankruptcy due to very high payments required under its police and fire contracts.  The city recently filed a plan under which it would pay unsecured creditors anywhere from 5 to 20 cents on the dollar of what the city actually owes.

More information on this bombshell decision can be found in a piece from The Bond Buyer, a publication devoted to municipal finance [emphasis added]:

Unsecured creditors will receive 5 cents to 20 cents on the dollar for their claims under a reorganization plan Vallejo, Calif., filed Tuesday in federal court.

The plan to exit bankruptcy outlines the reorganization of debt the city owes its largest creditors, Union Bank and National Public Finance Guarantee. It also sets aside a pool of $6 million to pay unsecured creditors about 5% to 20% of their claims over two years, according to court documents filed in U.S. Bankruptcy Court for the Eastern District in Sacramento.

“The city regrets that it cannot pay a higher percentage,” Vallejo officials said in the court filings. “The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city’s streets.”

…The formal legal plan is based on a five-year road map City Council members approved at the end of November, tackling $195 million in unfunded city pension obligations, cutting payments for retiree health care, reducing pension benefits for new employees, raising pension contributions for current workers, and creating a rainy-day fund…

I imagine the powers that be are looking closely at the Vallejo experience to see what Michigan cities would face if any declare bankruptcy.

Michigan Treasurer's Office to train 45 emergency financial managers ahead of surge in community, school crises
by Chris Christoff - Detroit Free Press

State Treasurer Andy Dillon said Monday that his office will train 45 financial emergency managers next month to deal with an expected surge of communities or school districts facing insolvency. Dillon said he hopes many of the experts will be used to counsel local officials to avoid bankruptcy, rather than assume control of their finances.

Dillon said "three or four" communities -- he would not name them -- are on the brink of financial collapse and may not be able to pay their employees in March. A state treasury report in 2009 said about 100 communities were in some financial distress. Dillon hinted that one of the communities on the brink is not what most would expect -- an urban and low-income city. He said the state needs more teeth in laws to force communities to straighten out their finances, and for those that don't, "Bad things will happen."

He called on the Legislature to quickly enact a change in the law to give financial emergency managers, such as Detroit Public Schools' Robert Bobb, more power to act sooner to head off financial problems. "It's going to properly align people's motivations to do it themselves," Dillon said, after speaking to the Business Leaders for Michigan summit on the state's financial condition.

Several cities have expressed concerns about their finances, said Summer Minnick, of the Michigan Municipal League. She said the decline of the U.S. auto industry and reductions in state revenue sharing have taken a toll. Minnick said more municipal bankruptcies are looming, adding, "It could be five, it could be 15. But we know there are some."

Speculation rises over what Michigan governor will do about scheduled drop in income tax rate
by Kathy Barks Hoffman - AP

When Michigan lawmakers reluctantly agreed to raise the state income tax in 2007, they put in a requirement that the tax would start dropping again in 2011, when they hoped times would be better.

Michigan's budget woes haven't abated in the past four years, and now Gov. Rick Snyder is faced with a dilemma: Does he stick with the status quo, letting the income tax drop a tenth of a percent in the budget year that starts Oct. 1 and continuing to let it drop until 2015? Or does he ignore the GOP mantra that lower taxes always are better and freeze or even increase the tax as part of an overhaul of Michigan's outdated tax structure?

Snyder spokeswoman Sara Wurfel said no decision has been made yet as the new Republican governor puts together a budget proposal to be presented Feb. 17. "Everything is being looked at as part of the comprehensive solution," she said.

House Republicans already have said they support decreasing the tax from 4.35 percent to 4.25 percent, which will lower revenue by around $150 million in the next fiscal year. If the tax continues to decrease as scheduled, it will drop revenue by $329 million in fiscal 2013, $523 million in fiscal 2014 and more than $700 million in fiscal 2015, when the rate would be down to 3.9 percent, where it was in mid-2007.

Snyder has not publicly called for the decrease, nor has he unilaterally ruled out a tax increase. And state Treasurer Andy Dillon this week pointed out in a speech to the Business Leaders for Michigan leadership summit that Michigan taxes have declined as a percent of personal income, from a high of just over 8 percent in 1999 to just over 6 percent this year, a drop of about 25 percent. Dillon added that Michigan residents are paying $8 billion less in state taxes than the ceiling set under a constitutional limit.

That could give a bit of hope to groups that support a mix of revenue increases and spending cuts to eliminate the ongoing structural deficit, which amounts to a potential $1.8 billion shortfall in the year ahead. Snyder has said he opposes changing Michigan's income tax from a flat to a graduated rate. But he wants to shift the state from the Michigan Business Tax to a new 6 percent corporate income tax to lower business taxes by about $1.5 billion, and some experts familiar with the business tax say he may look at changing the income tax rate as part of that restructuring.

"I think we are going to have a discussion about the individual income tax in Michigan since most business owners already are paying taxes on their business income through the individual income tax," said East Lansing economist Patrick Anderson of Anderson Economic Group. Snyder also has called for shared sacrifice, and many Michigan residents seem to be responding to the call.

Newark Mayor Cory Booker: 'We Couldn't Cut Enough'
by William Alden - Huffington Post

Since he became mayor of Newark in 2006, Cory Booker has had to make cuts that previously seemed unthinkable. Under his watch, the city closed libraries, imposed furloughs on employees and, late last year, laid off about 13 percent of its police force. While the police department says there are no fewer officers on patrol -- thanks to reassignments within the force -- a spike in crime in the two months since the layoffs has left some residents worried about safety.

Newark isn't alone. After the worst financial crisis since the Depression, cities across the nation have seen revenue wither. As they struggle to get their books in order, cities are increasingly finding that they don't have the money to fund even the most basic of services. But while Booker faces a common problem, his strategies for dealing with it are unusual. He spoke with HuffPost about how he navigates the budgeting process, and why he has hope for the city of Newark.

HuffPost: A trailer for the new season of Brick City starts with a quote from you, on the screen, where you say, "Squeeze everything else but police and fire." But late last year, the city laid off 164 officers, about 13 percent of the force. How did it come to that?

Booker: Look, budgets across the country -- 60 percent of American cities have had reductions in their forces of public safety. And, so, this is not something that's unique to Newark. In fact, right now it's plaguing major cities in New Jersey. Camden has had major layoffs. Paterson is facing layoffs. Atlantic City. Jersey City. We're facing, literally, the worst economy of our lifetimes.

So, we have dramatic losses in revenue. And public safety, frankly -- police and fire -- make up the significant majority of our budget. We were squeezing and starving every other area of our city. Furloughing employees, cutting staff. But it came to a point where we couldn't cut enough to make up for the tremendous budgetary shortfall. Challenges demand creativity. I'm grateful that the police director and my team really came forward with a substantive plan to make sure that the loss of those police officers didn't affect the progress we were making in the street.

And, look, it's been a difficult adjustment. We had really some challenges in the month of December. But now, as we're going through January, things are really getting back on track. And I'm really encouraged. Remember, the first three years in office, we led the nation in percentage reduction of shootings and murders. And I'm really confident that now we're beginning to get back to that nation-leading pace.

HP: I've heard that there are the same number of officers patrolling the street. But I also have heard from some of the union officials that in order to accomplish that, older officers have had to be re-deployed: People who were looking at retirement are now on street patrol. Are you concerned about officer safety?

CB: I'm always concerned about officer safety. I think when you are the leader of men and women who put their lives on the line -- whether it's firefighters and police, or national guard members in the military -- that's the most horrific thing, I think, for an executive, when guys who put their lives on the line get hurt or injured.

That's a concern that hasn't changed as a result of the layoffs. But in many ways, we have more experienced officers on the streets. Guys with more years under their belts, not people that are six months out of the academy. It's a give-and-take in many ways. Look, I'm very happy: We have our chief, who used to be doing other jobs, now in precincts, running our precincts. In many ways, we have the best talent of the agency closer to the street and closer to the ground on a daily basis.

HP: The city has also laid off other workers. How deep can the city cut before it just stops to function?

CB: Money is a necessary but not sufficient resource with which to get the job done. And I found out when I first came in -- we were dialing down our budgets every year that I've been in office. What I've been finding is, if you are more creative, if you bring more resources to the table from outside your taxpayer base -- you know, we've raised well over $200 million in private philanthropy for our strategic needs here in the city of Newark -- it's if you bring people together to volunteer, and do things that they weren't doing before, you can still make tremendous progress.

A lot of our best innovations since I've been mayor have been public-private partnerships. Whether it's our ex-offender reentry programs, or even the camera system that we put up all around the city -- all paid for by philanthropy -- Newark is creating a real good model for government effectiveness and advancement, based on its partnership with non-profits and the private sector.

HP: Does that include your own involvement in citizens' lives? Especially via your Twitter feed?

CB: Today's a great day. We got out early this morning. I've been myself inspecting streets, but I've got now thousands of more eyes on my streets, and people tweeting me about what's wrong. In the last month alone, my Twitter feed has helped me get water main breaks addressed before I even knew they existed -- to even traffic lights, to even bigger things, like people that are in need of emergency services but can't get through.

Government in the 21st century in America is going to change dramatically. We've seen government obligations mushrooming, like pension costs and health care costs. It's gonna squeeze out a lot of the other things that we expect from government, unless we get more creative and change the way government does business. This is what Newark is trying to do. Under tough circumstances, in the worst economy of a lifetime, we're actually making strides in areas, from affordable housing, to re-entry services, to grassroots financial empowerment and literacy, to public safety efforts.

We're able to make some strides, even though this is such a tough time, because we're thinking creatively. We're bringing in new partnerships, we're introducing technology. It's not easy -- we're stumbling and falling, and we're occasionally being set back. But all in all, if you look at Newark compared to five years ago, our shootings are dramatically down, murders are dramatically down, our population is dramatically up.

There's a lot of hope in Newark. The arena, and the arts culture in Newark, is booming. There's more basketball games -- college and professional -- played in Newark right now than any place in America, except for the Staples Center and Madison Square Garden. So much is happening in Newark right now that's making me downright proud. But every day, every inch of ground you've got to earn. It's tough, it's hard, but I've got great partners helping me in and outside of government.

HP: How do you make these budget decisions? How do you determine whether to close libraries, or lay off workers? Or cut toilet paper from the city offices?

CB: Well, the toilet paper never got cut. [Laughs.] It is tough decisions. I often joke that the decisions we had to make last year were between awful and godawful. But at the same time, that's what you're elected for. I would rather be in a game where you're 20 points behind than 20 points ahead, because we can rally people together to do what other people don't think we can do. If we're willing to make the tough decisions, but at the same time be humble enough to reach out for help and engage others, we can make strides where other people can't.

If you walk around the city of Newark today, you will see at least two dozen new parks all over the city that were built during this worst economic downturn. That's because we're bringing people together to do things other people can't do. Literally, the largest parks expansion our city has had in over a century has happened in the worst economy, because of all the partnerships that we've been bringing together.

That's how you have to get things done now. You have to find creative coalitions. We had a horrible spike in car-jackings in December. What we did was we brought together a state, Federal, local coalition, and we beat it back within weeks. It was amazing. The law enforcement community in New Jersey rallied together in a way that left me humbled and inspired.

Lawmakers In Poorest States Fail Poverty Scorecard
by Laura Bassett - Huffington Post

The U.S. poverty rate jumped to 14.3 percent in 2009 -- its highest level since 1994 -- while lawmakers in some of the poorest states consistently voted against key antipoverty measures, an advocacy group said on Monday.

In its annual "Poverty Scorecard", which grades members of Congress on their voting records on poverty-related legislation, the Sargent Shriver National Center on Poverty Law found "there is often a negative correlation between a state's poverty rate and the voting record of its members, meaning the states with the highest poverty rates had delegations with the lowest average scores in voting to fight poverty."

Both senators in Mississippi, where one in five people are living in poverty, received an "F" for their antipoverty voting records in 2009. Sens. Thad Cochran (R-Miss.) and Roger Wicker (R-Miss.) voted against extending unemployment benefits, the Paycheck Fairness Act, an amendment to extend the Temporary Assistance for Needy Families (TANF) jobs program, and ten other poverty-fighting bills that could have provided financial relief to their low-income constituents.

In South Carolina, which had a 17.1 percent poverty rate in 2009, six out of eight lawmakers received grades of "D" or lower on their antipoverty efforts, with Sen. Jim Demint (R-S.C.) earning the lowest possible grade of "F-" for voting down all of the 14 measures on the Center's list. The "Scorecard" found that a significant percentage of lawmakers with poor voting records on antipoverty measures are from Southern states, including Louisiana, Alabama, Mississippi, South Carolina and Oklahoma, and that several states with higher-than-average poverty rates have Congressional delegates with good records in voting to fight poverty. Every delegate in New Mexico, for instance, earned an "A" for their efforts, despite the state's 18.1 percent poverty rate.

"We publish the Scorecard for the sake of transparency; so that people are able to see what their elected officials are doing to fight poverty," said the Center's Director of Economic Security Dan Lesser in a statement. "Our senators and representatives need to be held accountable for their efforts, or lack thereof, in this fight." The Census Bureau defined poverty in 2009 as an annual income of less than $21,954 for a family of four and $10,956 for an individual. About 43.6 million Americans lived below the poverty line last year -- the highest number in 51 years -- and the poverty rate for children under 18 jumped to a whopping 20.7 percent.

"With a mind-boggling 44 million Americans living in poverty in 2009, it was imperative that our elected representatives enact measures in 2010 to try to reverse the trend," said Lesser. "Some of them chose to act, while some didn't, and we as voters need to know that."

Four in 10 Americans Struggle to Pay the Bills
by Market Digest

Despite signs of recovery from the “Great Recession,” 4 in 10 Americans find themselves living lives of economic struggle, and worry about whether they’ll keep a middle-class life in the long term, according to a new Public Agenda survey. Even with their short-term worries about paying the bills, the public’s biggest concerns are about affording college and a secure retirement, and they put their faith in long-term solutions like making higher education affordable, job training, and preserving Social Security and Medicare, the report found.

The survey shows how widespread the struggle remains to make ends meet in America. Four in ten Americans (40 percent) say they’re struggling “a lot” in the current economy, while fewer than 2 in 10 say they’re not struggling at all – and those two groups live in different worlds, according to the telephone survey exploring the views of 1,004 adults, funded by the Annie E. Casey Foundation.

Half of those who say they’re struggling “a lot” (52 percent) say they’ve had trouble paying the rent or mortgage since 2008, compared to only 4 percent of the non-struggling. More than one-third, 34 percent, have lost their job in the past two years, compared with 9 percent of the non-struggling. Fully 77 percent of the struggling who also have children say they’re “very worried” about paying for their child’s college education. In addition, nearly one-third of those who are employed (32 percent) say they’re “very worried” about losing their job. Of the group overall, 61 percent are very worried about being able to retire, while 45 percent say they’re very worried about paying back debt.

By contrast, 8 percent of those who aren’t struggling are worried about retirement, and only 2 percent are worried about paying back debt or losing their job. When asked what would be “very effective” in helping those who are struggling economically, the public favors higher education and job training, along with preserving programs like Social Security and Medicare. These are the top three solutions among both those who are struggling and those who aren’t.

“Making higher education more affordable” led the list both overall (63 percent) and among those who say they’re struggling (65 percent). Preserving Social Security and Medicare was next at 58 percent (62 percent among the struggling) and expanding job-training programs came in third at 54 percent (56 percent for the struggling).

One reason for the faith in education may be the public’s perception of who’s struggling the most in the current economy. Three-quarters of Americans say that people without college degrees are struggling “a lot” these days, compared to just half who say college graduates are struggling.

“At Public Agenda we’ve tracked the growing importance the public has placed on higher education over the last dozen or so years, a finding that is particularly striking in this report. People have come to recognize that affordable higher education is crucial to the economic prospects of individuals and, by extension, their communities,” said Will Friedman, president of Public Agenda. “This should hearten those who are working to make high-quality, post-secondary degrees and credentials more affordable to individuals and tax-payers alike.”

Many of the economic proposals discussed by political leaders don’t resonate as strongly with the public. Neither cutting taxes for the middle class (48 percent) nor reducing the federal deficit (40 percent) get majority support. Despite the fact that many of the struggling people we surveyed said they had problems meeting their rent or mortgage, even fewer supported providing financial help to those “underwater,” who owe more on their mortgage than their house is worth. Only 22 percent of the total and 31 percent of the struggling said that idea would be “very effective.”

House Dems To Reintroduce Longshot Bill For Long-Term Unemployed
by Arthur Delaney - Huffington Post

Democratic Reps. Barbara Lee (Calif.) and Bobby Scott (Va.) are reintroducing legislation this week to provide additional weeks of unemployment insurance benefits for "99ers," the long-term jobless who have exhausted their benefits and still haven't found work.

"The bill that I am introducing with Congressman Scott, The Emergency Unemployment Compensation Expansion Act, would ensure that these long-term unemployed workers get the long overdue assistance that they need to support their families, make ends meet and contribute to our economy," Lee said in a statement. "Our bill would add 14 weeks of emergency unemployment benefits and would make sure these benefits are retroactively available to people who have exhausted all their benefits and are still unemployed."

Given Republican hostility to additional deficit spending -- Lee's office said the cost of the extra benefits would not be offset -- the effort will likely amount to little more than a reminder that long-term unemployment persists even though much of the nation's political discourse is focused on signs of economic recovery. The Congressional Budget Office has estimated that 1.4 million Americans have been unemployed for as long as 99 weeks. Of the 13.9 million unemployed, 43.8 percent -- or 6.2 million -- have been out of work for six months or longer.

Lee and Scott are holding a press conference on Wednesday to discuss the bill further. They will be joined by 99ers from an ad hoc online group that calls itself the American 99ers Union. "The American 99ers Union supports government spending that results in a positive return on investment," a statement from the group said. "The Emergency Unemployment Compensation Act will effectively serve this purpose."

Lee and Scott expressed frustration last year, when they first introduced an extension bill, that President Barack Obama omitted help for the 99ers from the deal he struck with congressional Republicans that preserved tax breaks for the rich and reauthorized extended federal unemployment benefits through 2011. Federal unemployment benefits enacted in response to the recession provide the unemployed up to 73 weeks of benefits beyond the standard 26 weeks provided by states. (The full complement of federal benefits is only available in 25 states, so some exhaustees are not officially 99ers.)

The Lee-Scott bill faces even tougher odds in the new Republican-controlled House of Representatives than it did last year in the previous Congress, when helping the 99ers was barely an afterthought. "If you're serious about helping Americans on unemployment, you need to show how you'll pay for the cost with cuts elsewhere," a House GOP aide said. "If you don't do that, you're looking to issue a press release, not to actually help people."

Heidi Shierholz, an economist with the progressive Economic Policy Institute who supports the legislation and will attend Wednesday's press conference, said there's no economic reason for benefits to stop at 99 weeks. "There is no magic number of how long extensions should last," she said. "There's just nothing in the economic literature that says 99 weeks is the limit. It's not like if we break the 100 barrier things are going to fall apart."

The Youth Unemployment Bomb
by Peter Coy - Business Weeek

In Tunisia, the young people who helped bring down a dictator are called hittistes—French-Arabic slang for those who lean against the wall. Their counterparts in Egypt, who on Feb. 1 forced President Hosni Mubarak to say he won't seek reelection, are the shabab atileen, unemployed youths. The hittistes and shabab have brothers and sisters across the globe. In Britain, they are NEETs—"not in education, employment, or training."

In Japan, they are freeters: an amalgam of the English word freelance and the German word Arbeiter, or worker. Spaniards call them mileuristas, meaning they earn no more than 1,000 euros a month. In the U.S., they're "boomerang" kids who move back home after college because they can't find work. Even fast-growing China, where labor shortages are more common than surpluses, has its "ant tribe"—recent college graduates who crowd together in cheap flats on the fringes of big cities because they can't find well-paying work.

In each of these nations, an economy that can't generate enough jobs to absorb its young people has created a lost generation of the disaffected, unemployed, or underemployed—including growing numbers of recent college graduates for whom the post-crash economy has little to offer. Tunisia's Jasmine Revolution was not the first time these alienated men and women have made themselves heard.

Last year, British students outraged by proposed tuition increases—at a moment when a college education is no guarantee of prosperity—attacked the Conservative Party's headquarters in London and pummeled a limousine carrying Prince Charles and his wife, Camilla Bowles. Scuffles with police have repeatedly broken out at student demonstrations across Continental Europe. And last March in Oakland, Calif., students protesting tuition hikes walked onto Interstate 880, shutting it down for an hour in both directions.

More common is the quiet desperation of a generation in "waithood," suspended short of fully employed adulthood. At 26, Sandy Brown of Brooklyn, N.Y., is a college graduate and a mother of two who hasn't worked in seven months. "I used to be a manager at a Duane Reade [drugstore] in Manhattan, but they laid me off. I've looked for work everywhere and I can't find nothing," she says. "It's like I got my diploma for nothing."

While the details differ from one nation to the next, the common element is failure—not just of young people to find a place in society, but of society itself to harness the energy, intelligence, and enthusiasm of the next generation. Here's what makes it extra-worrisome: The world is aging. In many countries the young are being crushed by a gerontocracy of older workers who appear determined to cling to the better jobs as long as possible and then, when they do retire, demand impossibly rich private and public pensions that the younger generation will be forced to shoulder.

In short, the fissure between young and old is deepening. "The older generations have eaten the future of the younger ones," former Italian Prime Minister Giuliano Amato told Corriere della Sera. In Britain, Employment Minister Chris Grayling has called chronic unemployment a "ticking time bomb." Jeffrey A. Joerres, chief executive officer of Manpower (MAN), a temporary-services firm with offices in 82 countries and territories, adds, "Youth unemployment will clearly be the epidemic of this next decade unless we get on it right away. You can't throw in the towel on this."

The highest rates of youth unemployment are found in the Middle East and North Africa, at roughly 24 percent each, according to the International Labor Organization. Most of the rest of the world is in the high teens—except for South and East Asia, the only regions with single-?digit youth unemployment. Young people are nearly three times as likely as adults to be unemployed.

Last year the ILO caught a glimmer of hope. Poring over the data from 56 countries, researchers estimated that the number of unemployed 15- to 24-year-olds in those nations fell in 2010 by about 2 million, to just under 78 million. "At first we thought this was a good thing," says Steven Kapsos, an ILO economist. "It looked like youth were faring better in the labor market. But then what we started to realize was that labor force participation rates were plunging. Young people were just dropping out."

Youth unemployment is tempting to dismiss. The young tend to have fewer obligations, after all, and plenty of time to save for retirement. They have the health and strength to enjoy their leisure. "I spend many hours a day playing soccer with my friends," says Musa Salhi, an 18-year-old Madrid resident who studied to be an electrician but hasn't worked in over a year. Even as fighters on horses and camels galloped through Cairo's Liberation Square on Feb. 2 and the U.N. estimated that 300 people had died in a week of clashes, the world's investors continued to perceive the consequences as largely local. The Standard & Poor's 500-stock index rose 1 percent in the week following the first mass protests on Jan. 25. Crude oil prices rose less than 4 percent over the period.

But the failure to launch has serious consequences for society—as Egypt's Mubarak and Tunisia's overthrown President, Zine al-Abidine Ben Ali, discovered. So did Iranian President Mahmoud Ahmadinejad, who in 2009 dispatched baton-wielding police against youths protesting his disputed reelection. "Educated youth have been in the vanguard of rebellions against authority certainly since the French Revolution and in some cases even earlier," says Jack A. Goldstone, a sociologist at George Mason University School of Public Policy. In December the French government released a report on the nation's Sensitive Urban Zones, also known as banlieues, which said that the young men in the neighborhoods find it "extremely difficult" to integrate into the economic mainstream. The heavily Muslim banlieues exploded into rioting in 2005; last year a series of violent attacks there brought police face to face with youths brandishing AK-47s.

A demographic bulge is contributing to the tensions in North Africa and the Middle East, where people aged 15-29 make up the largest share of the population ever, according to multiple demographic sources. The Egyptian pyramid that matters now is the one representing the population's age structure—wide at the young bottom, narrow at the old top. Fifteen- to 29-year-olds account for 34 percent of the population in Iran, 30 percent in Jordan, and 29 percent in Egypt and Morocco. (The U.S. figure is 21 percent.) That share will shrink because the baby boom of two decades ago was followed by a baby bust. For now, though, it's corrosive.

In a nation with a healthy economy, a burst of new talent on the scene spurs growth. But the sclerotic and autocratic states of the Middle East are ill-equipped to take advantage of this demographic dividend. Sitting at the fringes of a protest in Cairo's Liberation Square on Jan. 29 and wearing a bright yellow head scarf, Soad Mohammed Ali says she hasn't found work since graduating from Cairo University with a law degree—nearly 10 years ago. She says the only offer of government work she has received is cleaning jobs at $40 a month. At age 30, Ali says, "I am old now."

For the young jobless, enforced leisure can be agony. Musa Salhi, the Spanish soccer player, says, "I feel bored all the time, especially in the mornings. My parents really need and want me to start working." In Belfast, Northern Ireland, 19-year-old Declan Maguire says he applied for 15 jobs in the past three weeks and heard nothing back. "I would consider emigrating, but I don't even have the money to do that. It is so demoralizing."

For decades, Mubarak coped with Egypt's youth unemployment problem by expanding college enrollments. That strategy couldn't last forever. This past March, scholars Ragui Assaad and Samantha Constant of the Middle East Youth Initiative, a venture of Brookings Institution and the Dubai School of Government, put it bluntly: "In Egypt, educated young people who spend years searching for formal employment, mostly in the public sector, are now forgoing this prospect as the supply of government jobs dries up. Formal private sector employment—quite limited in the first place—is not growing fast enough. … Hence, young people are left with either precarious informal wage employment or expected to simply create a job for themselves in Egypt's vast informal economy."

Mubarak gave no sign of knowing how explosive the situation was, but his ministers did state repeatedly that Egypt needed rapid growth to soak up new job-seekers. The country started getting some things right in 2004, when Mubarak appointed a business-?minded government under Prime Minister Ahmed Nazif. The nation lowered corporate taxes and import tariffs, privatized telecom, and expanded exports. The economy grew 7 percent annually from 2006 through 2008, dipped below 5 percent in 2009, and was on track for over 5 percent growth this past year, according to the International Monetary Fund.

That was good and bad. While growth is essential for easing social tensions in the long term, it can exacerbate them in the short term in a country such as Egypt. That's because, former Finance Minister Youssef Boutros-Ghali told BusinessWeek several years ago, the first fruits of growth go to those who are already wealthy.

The lack of democracy in Egypt and elsewhere in the Middle East—Israel being the exception—makes matters worse. Goldstone, of George Mason, says Mubarak is running afoul of the "paradox of autocracy," a phrase coined by the late University of California at San Diego sociologist Timothy L. McDaniel. "Any authoritarian ruler who wants to modernize his country has to educate the workforce," Goldstone says. "But when you educate the workforce you also create people who are not so willing to follow authority. Thus you create this threat of rebellion and disorder." Democracies are "much better at managing large numbers of highly educated people," Goldstone notes. Spain's youth unemployment is even higher than Egypt's, but young Spaniards aren't trying to overthrow the government.

Even so, rich democracies ignore youth unemployment at their peril. In the 34 industrialized nations in the Organization for Economic Cooperation and Development, at least 16.7 million young people are not employed, in school, or in training, and about 10 million of those aren't even looking, the OECD said in December 2010. In the most-developed nations, the job market has split between high-paying jobs that many workers aren't qualified for and low-paying jobs that they can't live on, says Harry J. Holzer, a public policy professor at Georgetown University and co-author of a new book, "Where Are All the Good Jobs Going?" Many of the jobs that once paid good wages to high school graduates have been automated or outsourced.

The spike in youth unemployment should ease in the West as the after-effects of the 2008 financial crisis diminish. Eventually, growth will resume in the U.S., Europe, Japan, and other nations. The retirement of the baby boomers will increase demand for younger workers. "I believe the tables will turn. Employers will be lining up" for younger workers, says Philip J. Jennings, general secretary of UNI Global Union, an international federation of labor unions with 20 million members.

That's cold comfort to the young people who are out of work now. The short term has become distressingly long. Although the recession ended in the summer of 2009, youth unemployment remains near its cyclical peak. In the U.S., 18 percent of 16- to 24-year-olds were unemployed in December 2010, according to the Labor Dept., a year and a half after the recession technically ended. For blacks of the same age it was 27 percent. What keeps the numbers from being even higher is that many teens have simply given up. Some are sitting on couches. Others are in school, which can be a dead end itself. The percentage of American 16- to 19-year-olds who are employed has fallen to below 26 percent, a record low.

What's more, when jobs do come back, employers might choose to reach past today's unemployed, who may appear to be damaged goods, and pick from the next crop of fresh-faced grads. Starting one's career during a recession can have long-term negative consequences. Lisa B. Kahn, an economist at the Yale School of Management, estimates that for white, male college students in the U.S., a 1 percentage point increase in the unemployment rate at the time of graduation causes an initial wage loss of 6 percent to 7 percent—and even after 15 years the recession graduates earn about 2.5 percent less than they would have if they had not come out of school during a downturn.

There's a psychological impact as well. "Individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions," conclude Paola Giuliano of UCLA's Anderson School of Management and Antonio Spilimbergo of the International Monetary Fund in a 2009 study. Downturns, the study suggests, breed self-doubting liberals.

The coincidence of protests in Egypt and record youth unemployment elsewhere has caught the attention of the world's most powerful capitalists and diplomats. At this year's World Economic Forum in Davos, Switzerland, held while Cairo was in chaos, the hallways buzzed with can-do talk about improving employment opportunities for the young. Even before the latest whiff of grapeshot, the U.N. declared the year beginning last August as the International Year of Youth. In December the Blackstone Group and CNBC held a conference in London with top experts to discuss solutions to youth unemployment. Companies from AT&T to Accenture to Siemens are working on ways to prepare high school and college students for the working world.

The only surefire cure for youth unemployment, however, is strong, sustained economic growth that generates so much demand for labor that employers have no choice but to hire the young. Economists have been breaking their teeth on that goal for decades. "If we knew how to get growth right we'd win the Nobel Prize," says Wendy Cunningham, a specialist in youth development at the World Bank in Washington.

In the absence of a growth panacea, economists have been working on microscale solutions, such as training programs to smooth the transition from school to work. No magic bullets there yet, either. "We seem to lack a creativity about how to address the issue. I can't point any fingers because I certainly don't have the answers," says Sara Elder, an economist at the ILO in Geneva.

One reason answers are so scarce is that rigorous measurement of antipoverty programs became widespread only in the past decade, thanks in part to the influence of economists such as Esther Duflo and Abhijit Banerjee of the Abdul Latif Jameel Poverty Action Lab, based at Massachusetts Institute of Technology. Serious analysis requires tools such as randomized trials and control groups that most bureaucrats and do-gooders don't know. And measuring long-term impact takes a decade or more.

One finding that has emerged is that more education is not always better. What matters is matching the skills of the workforce to the skills that employers demand. In Iran, where the percentage of people aged 15 and over with postsecondary degrees has soared from 2.5 percent to 10.5 percent over the past 20 years, the education system has become "a giant diploma mill," says Djavad Salehi-Isfahani, an economist at Virginia Tech. Egypt and Tunisia are headed in that direction; in 1990, only about 2 percent of their people aged 15 and over had post-secondary degrees, but by 2010 the ratios were up to 6.7 percent for Tunisia and 6 percent for Egypt, according to Harvard University's Center for International Development.

The extra schooling didn't help. Much of the anger that boiled over in the two nations, in fact, came from college graduates who couldn't put their degrees to work. Typical is Saad Mohammed, 25, a 2010 graduate of Cairo's venerable Al-Azhar University, interviewed in Liberation Square between protests. He feels betrayed that he has been unable to find work in his chosen field, "origins of religion." Mohammed hopes that "a new government will give me a job in a religious charity." The mismatch is worst for young women in the Middle East, who are getting as much advanced education as men but have far fewer job opportunities.

China, too, has produced more college diplomas than it can make use of. The number of graduates has quintupled in the past decade, and "the Chinese economy has just not been able to create that many jobs for high-skilled labor," says Anke Schrader, a researcher in Beijing at The Conference Board's China Center for Economics and Business. Manpower says that according to its analysis of the Chinese labor market, newly minted technical-school graduates are earning as much or more than new university graduates, with monthly pay of 2,000 to 4,000 renminbi a month, and in some cases 6,000 renminbi, vs. 2,000 to 2,500 for the university grads. (Monthly pay of 2,000 renminbi equals $3,600 a year at market exchange rates.)

In the U.S. and much of Europe, the problem is just the opposite of the Arab world's: not too much college education but too little. According to a study by the Organization for Economic Cooperation and Development, less-educated youth are 4.6 times as likely to be unemployed as more-educated youth in the U.S.—a measure of the potency of knowledge in a knowledge economy. That means that the U.S. has fallen off the top of the world league table for college graduation rates at the worst possible moment. As of 2008, only 60 percent of students in American four-year schools had managed to graduate within six years, according to the National Center for Education Statistics.

Even in technologically sophisticated nations such as the U.S., college isn't for everyone. But traditional vocational programs, though popular, are not the best solution for youth unemployment, according to effectiveness research conducted by the World Bank. Cunningham, who has a PhD in labor economics and has worked in youth development at the bank since 2000, says vocational programs "often are set up without a good understanding of the demands in the labor market and become obsolete very quickly. They have staff that stay on and on. They don't have the money to update their technology."

More successful are programs that are tightly linked with employers. The Jóvenes (Spanish for youths) programs in several Latin American nations require that an employer sign a document promising to take their graduates as interns, and they teach life skills alongside technical ones. Employers range from bakeries to clothing manufacturers to computer repair shops. The question, says Cunningham, is whether the Jóvenes programs can be scaled up from hundreds of participants to hundreds of thousands.

These days there's a newfound appreciation for an ancient work arrangement, the apprenticeship, because it greases the transition from learning to doing. Germany and Austria experienced milder youth unemployment in the global downturn partly because of blue-collar apprenticeship programs, says Stefano Scarpetta, deputy director of the directorate of employment, labor, and social affairs at the OECD in Paris. Last year, the International Labor Organization says, Germany's youth unemployment rate was 13.9 percent, compared with a Europe-wide average of 21.2 percent and 21 percent in the U.S.

In an update on the apprentice idea, countries such as the Netherlands encourage university students to gain work experience while enrolled. Scarpetta says 70 percent of Dutch youth ages 20-24 are getting some work experience. By contrast in Italy and Portugal only about 10 percent work while in school. The Netherlands' youth unemployment rate is just 11.2 percent.

Something similar is catching on in the U.S. AT&T, with almost 270,000 employees and an annual training budget of nearly $250 million, is trying to smooth high school students' transition to work with a program called Job Shadow that exposes students to the realities of employment. Insight into the minds of American teenagers has made AT&T executives realize the magnitude of the challenge. "I had three students shadowing me a while ago—juniors in high school," says Charlene F. Lake, AT&T's chief sustainability officer. "When I asked them what they wanted to do after high school, two of them hadn't thought about it. One girl said she'd like to teach and expressed surprise that she needed more education to do that. She didn't even realize she had to go to college."

For many young people who lack work experience, structure is the key. "You need to have rules and regulations," says Executive Director Mary B. Mulvihill of the Grace Institute in New York, which offers tuition-free training in personal and office skills to help "underserved" women become self-sufficient. "You need to say, 'If you do this, look how your life is going to change.' If it's more loosey-goosey, I don't think it works."

If the purpose is to create jobs, as opposed to just filling them, loosey-goosey may be exactly what's needed. Entrepreneurship—with all its guesswork and improvisation—could be the most underexploited means of reducing youth unemployment. In 2008 the University of Miami started an entrepreneurship program called Launch Pad inside its career center to send the message that starting your own company is a valid career option, not just a class to take.

Since then, University of Miami students and recent grads have launched 45 companies. Coral Morphologic collects and raises corals for sale to aquarium owners. Sinha Astronautics has conceived of a space plane for launching satellites into low-earth orbit. Audimated, a music website, allows fans to make money by promoting their favorite indie artists. The man who launched Launch Pad is William S. Green, senior vice-provost and dean of undergraduate education. "Young people are interested in managing their own lives and are a little bit cautious about big corporations," he says. "This has become the largest single student activity on campus."

After Miami's entrepreneurship initiative caught the eye of Stephen A. Schwarzman, the billionaire head of private equity firm Blackstone Group, the Blackstone Charitable Foundation last year launched a similar program in southeastern Michigan with Wayne State University and Walsh College. On Jan. 31, as President Barack Obama announced his Startup America initiative at the White House, Blackstone said it would expand what it also calls LaunchPad to five more cities, as yet unnamed, devoting $50 million over five years. Schwarzman, buttonholed at the World Economic Forum in Davos, said Blackstone "started getting focused on this area when it became clear that [government efforts] were not in our judgment going to lead to significant declines in unemployment."

To free-market economists, one solution to youth unemployment is simple: Clear away the government-imposed obstacles to hiring young people. They blame high minimum wages, for instance, for discouraging companies from hiring promising young people who haven't had a chance to accumulate the knowledge or experience to justify being paid even the minimum wage. Following that counsel, most European countries, where minimum wages are high relative to average pay, have lower minimums for young workers. (The evidence is that high minimum wages do exclude some young people, while benefiting others by raising their pay.) Likewise, too-strong protections for the permanent workforce can hurt young people because they aren't similarly protected and bear the brunt of downsizing in hard times, the ILO warned in a 2009 report.

Right or wrong, the free-market argument hasn't carried the day: Britain and New Zealand actually raised their minimum wages during the global downturn. And the argument for the negative effect of worker protections hasn't convinced Austria and Germany, which have strong employment regulation and yet have had healthier job markets in the past two years than countries such as the U.S. with fewer worker protections. Thea Lee, deputy chief of staff at the AFL-CIO, argues that unions can't be blamed for high youth unemployment: "Business likes to have workers with no power, no rights, no protections."

That's a bit harsh. After all, company executives are squeezed too, and hiring neophytes is costly. Joerres, the Manpower chief, blames the faster pace. "Businesses did more training when the life cycle of their products and employees was longer," he says. "Now if the life cycle of your product is 18 months and it takes 12 months to bring your employee up to speed, you lose."

Chronic youth unemployment may not be fixable. But there's evidence it can be reduced through the concerted efforts of government, labor, business, education, and young people themselves. Luckily the soil is fertile: All over the world, the hittistes and shabab atileen, NEETs and freeters and boomerang kids are hungry for a chance to thrive. Says John Studzinski, senior managing director at Blackstone Group: "To a certain extent, all you can do with youth employment is plant seeds."

Obama makes corporate America his business
by Dana Milbank - Washington Post

The U.S. Chamber of Commerce's main hall, where President Obama gave his I-love-business speech on Monday, displays the flags of Columbus, Cortes and Ponce de Leon. Inscribed on the beams overhead are messages such as:
  • Alexander the Great found India.
  • Xenophon crossed Asia Minor.
  • Peary reached the North Pole.

Now, 102 years after Cmdr. Peary's expedition, the Chamber can carve the name of another explorer:
  • Obama discovered corporate America.

"I strolled over from across the street," the president said of his trek from the White House across Lafayette Square to the Chamber's H Street palace. "And look, maybe if we had brought over a fruitcake when I first moved in, we would have gotten off to a better start." When the laughter ended, Obama departed from his prepared text to add: "But I'm going to make up for it."

He sure is - and if the list of goodies he read out Monday is any indication, he would have found it easier to deliver the fruitcake. Obama told the business lobby about the executives who have important roles in his administration: J.P. Morgan Chase's Bill Daley, GE's Jeff Immelt and AOL's Steve Case. "We need to make America the best place on Earth to do business," the president promised. Let's get rid of those "outdated and unnecessary regulations," the onetime corporate scold said, and remove that "burdensome corporate tax code with one of the highest rates in the world."

The president boasted that his administration had slowed down environmental rulemaking and accelerated drug approvals. Rather than browbeat corporate America, as he did in his early days in office, he pleaded for more hiring with sports phrases such as "get off the sidelines" and "get in the game." Even health-care reform, the bete noire of the business lobby, became, in Obama's telling, another assist to his corporate friends - funneling "$40 billion directly to small businesses" and saving "large employers anywhere from $2,000 to $3,000 per family."

Chamber President Tom Donohue, whose organization once accused Obama of a "general attack on our free-enterprise system," was thrilled by the president's new friendliness. In his introduction of Obama, Donohue boasted that the speech was "one of the hottest tickets in town." Liberals were rather less pleased that Obama was making nice to the group that spent tens of millions of unregulated dollars to defeat lawmakers who supported his agenda. "What America needs is not olive branches to giant corporations but controls over the companies that sank the economy," said Public Citizen.

It was already a bad day for liberals concerned about corporate power: The Huffington Post, a powerful voice on the left, had just agreed to be taken over by AOL. And here was Obama, as the liberal group Agenda Project put it, "fawning" over corporate evildoers. "I will tell you: I will go anywhere, anytime to be a booster for American businesses, American workers and American products," Obama offered.

One person in the part of the room where Donohue was seated began to clap, and the rest of the crowd quickly joined in the applause. "And I don't charge a commission," Obama ad-libbed. Obama did try to remind the executives of their corporate responsibilities by suggesting to them that good behavior is in their own interests. "In the financial crisis," he said, "the absence of sound rules of the road - that wasn't good for business."

The president also made a gentle appeal for companies to spend some of the "nearly $2 trillion sitting on their balance sheets" to hire people. These weren't commands but requests, appealing to the corporate leaders' sense of patriotism. "Ask yourselves what you can do to hire more American workers," he said.

Although his overtures were friendly, the audience was skeptical. Obama at times paused after what should have been applause lines, but the room was so quiet that the air could be heard coming out of the vents, as when he vowed to take "domestic discretionary spending down to the lowest share of our economy since Eisenhower was president." No applause. "That's a long time ago," he added. Again, nothing.

Still, there was much for the audience to like in his words: "reforming our patent system . . . bigger, permanent tax credit . . . knock down barriers that make it harder for you to compete . . . run the government a little bit more like you run your businesses . . . consolidate and reorganize the federal government . . . dramatically cutting down on the paperwork."

At the end, Obama put his own fight with corporate America into historical perspective. He recalled the "fractured" relationship Franklin Roosevelt had with business because of the New Deal, but said that they ultimately had "one of the most productive collaborations between the public and private sectors in American history." True, but that took a world war. Now there is no such war - only a surrender.

'Toxic' Assets Still Lurking at Banks
by Michael Rapoport - Wall Street Journal

During the financial crisis, investors fretted over "toxic," hard-to-value assets that banks were carrying. Those fears have faded as bank profits have rebounded, loan delinquencies have declined, and bank stocks have soared 25% in the past five months. But banks still hold plenty of the bad assets that once spooked investors: mortgage-backed securities, collateralized debt obligations and other risky instruments. Their potential impact concerns some accounting and banking observers.

In part due to those bad assets, the top 10 U.S.-owned banks had $13.8 billion in "unrealized losses" that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks' book value, but don't get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks' pretax income for the first nine months of 2010 by 21%, according to the Journal analysis.

Unrealized losses are just one way in which the troubled assets obscure banks' true financial condition, accounting experts say. With the banking recovery well under way, they think the banks should no longer delay a reckoning and should count those losses against earnings.

Another problem: Even when banks do take real charges because of their securities losses, accounting rules allow them to keep some of those charges from hurting their bottom line. Making the picture even murkier, the value of many risky assets are based solely on the banks' own estimates—leaving valuations uncertain and, some critics say, overstated. "They're still inflated because I don't think the bullet ever really got bitten," said Jack Ciesielski, publisher of the Analyst's Accounting Observer.

The banks say they mostly don't need to take charges for losses on their risky assets. They say they will ultimately realize the assets' full value by holding onto the securities and collecting the principal and interest payments associated with them. One problem centers largely on "Level 3" securities, illiquid investments that can't be easily valued using market prices. According to the Journal analysis, as of Sept. 30, the top 10 banks had $360.7 billion in "Level 3" securities. That amounts to 42.6% of the banks' shareholder equity, a pile of assets whose value is hard to verify.

To be sure, banks aren't quite as exposed to bad assets as they used to be. At the top 10 banks, Level 3 securities have declined 24% in the past two years, while Level 1 and Level 2 securities, which are much easier to value, rose. The amount fell as banks sold some Level 3 assets, switched them to Levels 1 or 2, or wrote some down. Unrealized losses also have declined.

Bank of New York Mellon Corp., for example, took a $4.8 billion charge against earnings in 2009, much of it related to mortgage-backed securities, to reduce its balance-sheet risk. The bank subsequently sold some of its lowest-quality securities. Chief Executive Bob Kelly said on a conference call at the time that "we're putting our investment securities issues behind us" and "we want to sell the securities where we think there is just no value there."

Many banks haven't been that conservative. "In a lot of cases banks are probably deluding themselves" about the future value of those securities, and whether they will ultimately recover as much from those securities as they contend they will, said Bert Ely, an independent banking consultant.

Often, the impact of these assets isn't easily visible. Much of the information about risky assets is only in the banks' regulatory filings, not in their earnings releases. Though major banks have announced their fourth-quarter earnings, investors won't be able to see how much in risky assets the banks are currently holding until they file their annual reports with the Securities and Exchange Commission in about a month.

Citigroup Inc., for instance, didn't mention its high level of Level 3 securities when it announced fourth-quarter earnings. As of Sept. 30, the bank held $79.1 billion of Level 3 assets—equal to 48% of its book value. That includes billions in credit derivatives, asset-backed securities and some subprime-mortgage-backed securities. Jon Diat, a Citi spokesman, said the bank is "comfortable with its treatment of Level 3 assets," provides extensive disclosure and "adheres to all applicable accounting policies and standards."

Zions Bancorp had $905.1 million in one-year-or-more unrealized losses as of Sept. 30, which would have made its nine-month 2010 loss of $306.7 million worse if counted against earnings. "We have detailed disclosures regarding how we value and determine credit impairment on these securities, and we believe that our valuations are reasonable," said Doyle Arnold, Zions's chief financial officer. PNC Financial Services Group Inc. had $1.6 billion in year-plus unrealized losses as of Sept. 30, or 55% of pretax income for the first nine months of 2010. Spokesman Fred Solomon said PNC is "very comfortable with our ability to recover these amounts."

Another avoidance method: As long as banks say they don't expect to sell a security, they are allowed to put some of the security's losses into a balance-sheet line known as "other comprehensive income," where they don't affect net income or regulatory capital. Banks were given this leeway in 2009, when the Financial Accounting Standards Board, which sets accounting rules, gave in to pressure from Congress and softened the rules on writing down assets. A FASB spokesman declined to comment.

State Street Corp., for instance, had $420 million in non-credit impairment losses in 2010, which would have cut its pretax income by 20% if they were counted against earnings. Carolyn Cichon, a State Street spokeswoman, said the bank's asset-impairment charges have declined, and the bank's accounting "continues to reflect our position that we have the ability and intent to hold the securities to maturity."

Why politics and investing don't mix
by Barry Ritholtz - Washington Post

Washington, I'm here to tell you, politics and investing don't mix. Yep, I thought I'd begin our conversation about investing by rocking your most cherished beliefs. Many of you are active in party politics, work for government or are involved in related fields. Well, I have some bad news: Your politics are killing you in the markets.

In my work, I use behavioral psychology, statistics, cognitive biases, history, data analysis, mathematics, brain physiology, even evolution to make better investing decisions. Indeed, these are all key to learning precisely what not to do. While making good decisions can help your portfolio, avoiding bad ones is even more important.

We humans make all the same mistakes, over and over again. It's how we are wired, the net result of evolution. That flight-or-fight response might have helped your ancestors deal with hungry saber-toothed tigers and territorial Cro Magnons, but it drives investors to make costly emotional decisions. And it's no surprise. It's akin to brain damage.

To neurophysiologists, who research cognitive functions, the emotionally driven appear to suffer from cognitive deficits that mimic certain types of brain injuries. Not just partisan political junkies, but ardent sports fans, the devout, even hobbyists. Anyone with an intense emotional interest in a subject loses the ability to observe it objectively: You selectively perceive events. You ignore data and facts that disagree with your main philosophy. Even your memory works to fool you, as you selectively retain what you believe in, and subtly mask any memories that might conflict.

Studies have shown that we are actually biased in our visual perception - literally, how we see the world - because of our belief systems. This cognitive bias is not an occasional problem - it is a systematic source of errors. It's not you, it's just how you are built. And it is the reason most people are terrible investors.

How does this play out in the world of investing? Let me share two examples. I don't pick favorites: Both Democrats and Republicans are implicated. Back in 2003, the dot-com crash had about run its course. From the peak of the market in March 2000 to the March 2003 trough, the Nasdaq had gotten crushed, losing 78 percent of its value. As Federal Reserve chief Alan Greenspan took rates down to 1 percent, the Bush administration passed $1 trillion in tax cuts. As someone else once said about the stock market, "Give me a trillion dollars, and I'll throw you one hell of a party."

Yet many of my Democrat friends on Wall Street - fund managers, traders and analysts - were highly critical of the tax cuts. At the time, I heard all the reasons why they were so bad: They were deficit-busters, unlikely to create jobs, giveaways to the wealthy. While those critiques may have been true, they were also irrelevant to equities.

As armchair policy wonks obsessed over these issues, they missed the bigger picture: Liquidity is a major factor in how the economy and stock markets perform. Trillions of dollars in fresh cash was very likely to goose equities higher. (Sound familiar?) Indeed, the impact of the tax cuts did just that. Combined with Greenspan's ultra-low rates, you had the makings of a cyclical bull market rally. From 2003 to 2007, the Standard & Poor's 500-stock index - the usual benchmark for equities - gained 100 percent. And my politically active friends on the left missed most of it.

Fast-forward six years to the recent credit crisis. The S&P 500 had fallen 57.69 percent. By March 2009, op-eds in the Wall Street Journal blamed the crash on President Obama. But conditions were forming that would hasten the end of the sell-off. Markets were deeply oversold. Once again, the Fed chair was cutting rates - this time, it was Ben Bernanke, and he took rates down to zero. In a panic, Congress forced the accounting rule-making body to be more accommodative to the banking sector. FASB 157, as it is known, ended mark-to-market accounting - essentially allowing banks to hide their bad loans.

All these factors suggested that a substantial rally from the market lows was coming. Historically, average gains in post-crash bouncebacks were 70 percent. The easy money to the downside had been made, and it was time to stop betting that the markets were heading south. If history held true, we were looking at the mother of all bear market rallies. By that March, I was explaining this to clients, the news media and co-workers. But the greatest pushback this time around came from across the political spectrum. My GOP pals were lamenting the occupant of the White House. I heard things like "Obama is a Kenyan, a Muslim, a Socialist. He is going to kill business."

What followed was the single most intense two-year rally in Wall Street history. As of Friday, the S&P 500 has gained 93.8 percent. And my politically active friends on the right missed most of it.

Remember, the cycle of booms and busts are surprisingly regular occurrences. What some people all a "100-year flood" actually happens far more frequently - since 1929, there have been 18 crashes. It's just as important that an investor participate in the cyclical bull markets, capturing the rally as well. All things considered, missing the downside and catching the upside makes for a pretty decent investment strategy.

You need not be a mathematical wizard to learn this lesson. When you are in the polling booth, vote however you like; But when you are reviewing your investing options, it is best to do so with a cold, dispassionate eye. Understanding how your own biases impact your investing process is a key step. If you want to avoid making certain errors, you must at least be aware of them. And now you are.

Value of global pension funds hits record high at $26.5 trillion
by Julia Kollewe and Phillip Inman - Guardian

Pension funds battered by the financial crisis performed strongly last year after stock markets recovered in the wake of the Greek debt crisis. Pension fund deficits, which have plagued final salary occupational schemes around the world, narrowed as assets in the 13 largest pension markets hit a record high of $26.5 trillion (£16.4tn). The figure for pension fund assets dwarfs the $3.5tn amassed by sovereign wealth funds and the $2.5tn of foreign debt owned by the Chinese government.

The steep rise in assets should give pension savers some comfort that commitments to a guaranteed retirement income will be honoured, but experts pointed out that the global asset/liability ratio is still well down from its 1998 level. Roger Urwin, global head of investment content at Towers Watson, said it is now quite common for a pension fund to be 25% underfunded whereas in the 1990s they were 100% funded. "By and large pension funds still have a long way to go to make sure assets match their liabilities," he said.

He noted that there were EU efforts under way to press pension funds to have more solvency protection similar to insurance companies. The Netherlands, where pension assets make up 134% of GDP, is usually held up as an example. UK and US companies have switched employees out of final salary schemes into cheaper arrangements based on stock market returns. The Netherlands has begun to make the switch in the belief that deficits are unlikely to be eradicated while life expectancy continues to increase.

The Towers Watson survey found that pension fund assets increased by 12% in 2010 as stock markets recovered. This compares with 17% growth in 2009 and a 21% drop in 2008 at the height of the financial crisis, which took assets back to 2006 levels. Global pension fund assets have grown 66% since 2000 when they were valued at $16tn. The UK, the third-largest pension market after the US and Japan, has grown to $2.3tn from $1.3tn in 2000. Pension assets now amount to 76% of GDP, an improvement on the 2008 figure of 61%, but still below the pre-crisis level of 78% in 2007.

The UK now has as much invested in pension funds as the value of its GDP. It also has the highest allocation to equities in the world, of 55%, although this is down from 74% in 2000. Just over a third is invested in bonds, 3% in cash and 7% in other assets such as property. Urwin said this was down to culture: "UK pension funds have had a historical orientation to equities for some time. It was almost the first pension fund industry to invest to a large degree in equities."

UK funds have been slow to invest in alternative assets such as property, partly because they are often run by boards of trustees who lack the resources. "Equities are easier to manage than the alternatives." The US, Australia and Canada also invest more in equities than the rest of the markets. Japan, the Netherlands and Switzerland are more risk averse, with higher than average exposure to bonds.

At the end of 2010, the average global asset allocation of the seven largest markets was 47% equities, 33% bonds, 1% cash and 19% other assets. In the UK, 90% of pension assets are held by private sector companies. The picture is similar in Australia where 86% of assets are in the private sector. By contrast, 70% of assets in Japan and 62% of Canadian assets are held by the public sector. The report also shows that Brazil had the highest growth in pension fund assets, of 15%, over the last decade, followed by South Africa at 13%, Hong Kong at 11% and Australia at 10%. The countries with the lowest growth were Japan with 0.2%, Canada and France, both at 1%, and Switzerland at 2%.

Last year, pension assets rose in almost all 13 markets in dollar terms with the exception of crisis-struck Ireland and France, partly driven by a weaker euro. Australia, Japan, South Africa, Switzerland, Canada and Brazil benefited from their currencies' appreciation against the dollar in 2010. Only the pound and the euro weakened against the dollar, by 2.9% and 7.5% respectively.

Whitney Whips Up Wall Street as Bear in Heels: Alice Schroeder
by Alice Schroeder - Bloomberg

Meredith Whitney has done it again, turning Wall Street against her with a contrarian call, this time on municipal bonds. The analyst’s prediction for “50 to 100 sizable defaults” of U.S. municipal bonds totaling “hundreds of billions of dollars” could become her Big Wrong Call. If so, it will knock Whitney from a pedestal, to the satisfaction of her many critics.

She has staked her credibility on this forecast, broadcast Dec. 20 in an interview on CBS’s “60 Minutes.” Her summary of a 600-page report to clients prompted a National League of Cities analyst to say she possessed a “stunning lack of understanding.” Other critics called her prediction “ludicrous,” “irresponsible,” “damaging,” and “overreaching.”

There’s a huge gap between these descriptions and Whitney’s track record as an analyst. The chasm is so big that it is worth exploring. Something interesting is going unexamined or unexplained. Many of Whitney’s critics have a vested interest in tearing her down. They include competing municipal bond analysts, fund managers who run muni portfolios, financial advisers who sell the tax-exempt securities, and above all, the borrowers who depend on munis to finance their whopping deficits. To all of them she is a big-mouthed, larger-than-life nightmare. Is California Treasurer Bill Lockyer objective when he calls Whitney’s forecast “apocalyptic arm-waving”?

Contrarian Views
It doesn’t help that her big calls have been bearish, which automatically pits her against the established interests of Wall Street. Critics also question whether Whitney’s a perma-bear who is paid to go to extremes -- in effect, the flipside of the rating companies that were perma-bulls on mortgage-backed securities before the financial crisis. There has been a fair debate over whether Whitney’s correct and negative call on Citigroup, which gave her credibility, also made her overconfident and created a monster desperate for attention. By extending her franchise beyond banks, Whitney has fed the monster argument.

If she were demure and understated instead of a brassy hustler who markets herself on television with stunning success, fewer people might be hoping for Whitney’s fall. But she’s willing to break a sweat to boost her business and sell herself as a brand. That doesn’t make her a phony. My eyes roll every time an article mentions her professional wrestler husband and his colorful aliases, usually with the innuendo that she’s putting on a similar (that is, inauthentic) show.

Heels and ‘Squeals’
New York magazine, in a March 2009 story, pointed out that for its interview, Whitney “dressed in a tightly fitted plum velvet jacket and towering red patent-leather heels.” The article goes on to report her “squeals” about receiving a gift-box of cookies. Fortunately, the magazine didn’t speculate about her bra size. It’s easier to understand Whitney when you study her provenance. I knew her in the mid-1990s at Oppenheimer & Co. when she was a wide-eyed research assistant to analyst Steve Eisman, now of FrontPoint Partners and one of the main figures in Michael Lewis’s bestseller, “The Big Short.”

Back in those days he was a firebrand who terrorized consumer finance companies. Eisman was the first, if not the only analyst to call them out for trying to outrace a tide of loan-losses through massive growth in lending. His style was to assume the role of town crier, revel in the controversy he created, and take the flak as he waited for the targets of his crusade to crash and burn, as he knew they would do.

Foreseeing Failure
It’s a template that has worked multiple times in the past two decades to predict the fate of business models built on the false notion that high growth can overcome bad economics. (See: Enron, Countrywide, Washington Mutual and AIG.) Those who were early to grasp the single most important business dynamic of our era -- the Ponzification of America -- turned what is an unfurling disaster for our country into a money-maker for investors. Eisman taught Whitney, and they were both early.

Whitney’s latest call on municipal defaults is the logical extension of this theme. Her point is that, until now, investors were getting paid too little for the risk they were taking by investing in local municipal bonds. She isn’t the first to note troubles in the muni market, just the most aggressive and unequivocal in her point of view. That willingness to be gutsy, along with the work that went into the 600-page report, “Tragedy of the Commons,” is what finally put this issue in the news.

Debating Details
Whitney has been tripped up over unfortunate arguments about whether defaults will number fewer than 50 or more than 100, what is meant by the term default, and whether hundreds of billions of dollars in defaulted debt is a lot or a little. Her critics have argued that the federal government will wave its wand and do another bailout, or some legal abracadabra may let municipalities avoid technical bankruptcy. These are beside the point of what Whitney’s trying to say: that the risk premium for local municipal bonds was seriously out of whack.

The question isn’t how much municipal bond investors will get back in interest payments and principal, but how much the securities were overpriced compared with safer assets. All Whitney has to do is endure the flak until we find out. She is one tough lady, and I suspect can handle that.

Two banks, a conman and a homeless bloke
by Lucy Kellaway - Financial Times

Last week, there were two stories in the papers about bankers being taken for a ride by conmen and nutters. Both tales were profoundly enjoyable: seeing investment bankers with egg on their faces is always cheering. They were also enjoyably profound, making one question what bankers get up to all day and which talents are needed to perform those tasks well.

The first story concerns a 49-year-old Brit who applied for a job as deputy chief executive of a City of London bank. His background appeared pukka: Oxford, Harvard and then 20 years at JPMorgan. During two interviews with headhunters and Ahli United Bank, Peter Gwinnell made all the right noises and was duly appointed.

After doing the job for a month, during which time he did what senior bankers do and took a lot of flights and attended a lot of meetings – someone ran some checks on him. They found he had never worked at JPMorgan. He had never studied at Oxford or Harvard. Instead, he was a conman who had been in prison and, after last week’s conviction for fraud, is now under the supervision of a probation officer and being treated for depression.

The interesting thing about this story – apart from making you wonder what headhunters do for their huge fees if they can’t even be bothered to do a basic Google search – is how easy it is to con people into thinking you are a senior banker. You simply need to invest in the right wardrobe and learn the right language. Mr Gwinnell was pictured in the papers looking entirely plausible in the perfect shade of deep banker blue shirt and the perfect sort of grey pinstripe suit. And though history doesn’t relate exactly how he spoke in those meetings, all that was required was for him to talk in a such way that no one else could understand what he was saying, so that it wouldn’t matter if he didn’t understand it himself.

Last week provided the perfect example of the sort of talk required at the highest level in investment banking. James Gorman, CEO of Morgan Stanley, gave an interview to the Wall Street Journal in which he said that “we’ve focused less on building pure flow, client-driven businesses ... What we’re doing strategically is going back to the future. It’s a sweet spot where we’re very comfortable.” Any decent conman should be able to mug up a pure flow of sweet spots, and Bob’s your uncle – or Peter’s your banker.

The second story is less dramatic, as there was no court case but merely a paragraph buried in an SEC filing filing spotted by a keen journalist on the Houston Business Journal. However, it thrills me even more, as it shows the great Goldman Sachs being made a fool of by a homeless bloke. The bank, along with Greenhill & Co, has been acting for Dynegy, the US energy producer that Carl Icahn is trying to buy. During the “go-shop” process – in which the bankers try to tease out higher bids – Dynegy received an unsolicited letter from an outfit called Buisson Baudoin Rondeleux, expressing an interest in buying it.

According to the filing, the person who signed the letter “did not respond to repeated telephonic and written attempts by Goldman Sachs, Greenhill & Co to contact him”. Finally, a Goldman banker tracked him down and found he was using “a phone number associated with a Columbia, South Carolina, telephone exchange and a return address associated with a homeless shelter”. The filing then reveals that Buisson Baudoin Rondeleux “did not appear in searches of public records and the internet”. When the Goldman banker finally managed to speak to the homeless person, he “indicated that he did not have financing for the purported proposal and had no prior experience in acquiring public companies”.

This offers a fairly scary glimpse into what goes on in an M&A department. Bankers, like headhunters, ignore what common sense tells them. But, unlike headhunters who do no checking at all, they check to a fault. And then, once they have all been led thoroughly up the garden path, some poor lackey solemnly documents the journey for the SEC’s elucidation. Surely any imposter, or anyone homeless, would have done better than this. They would have taken one look at the ludicrous company name, spent two seconds Googling it, and thrown the letter in the bin. Unless, of course, the bankers were pretty sure they were wasting their time but, as they were being paid so very handsomely, were more than happy to do so.

A Crisis of Faith in Britain’s Central Banker
by Landon Thomas Jr. and Julia Werdigier - New York Times

A central banker need not be loved, but at the least he should command respect — and in Britain these days Mervyn King cannot count on either.

Mr. King, the donnish governor of the Bank of England, has been accused of presiding over the worst stagflation — a dreaded combination of stagnant economic activity and rising inflation — happening in any major developed economy. He has been condemned for flouting the bank’s independence by publicly supporting the British government’s deficit-cutting strategy.

As for the issue on which he may have most closely staked his reputation — that Britain’s large banks must increase capital levels well beyond international standards — he so far has been ignored. Doubts over Mr. King’s inflation strategy come as European leaders are working to devise a unified strategy for dealing with sovereign debt woes in the region. Germany and France are pressing for concrete steps to harmonize fiscal spending by focusing on tax and pension issues, while weaker nations are struggling to bring down their deficits.

But with inflationary pressure picking up everywhere, the main topic of debate is expected to be how much longer the European Central Bank, like its counterpart in Britain, can resist the pressure to raise interest rates. Not long ago, central bankers in the United States, the European Union and fast-growing emerging countries like Turkey and Brazil were being hailed. They were seen as having salvaged their economies by flooding their banking systems with enough money to help prevent a depression.

But now many of them are confronting the prospect that their powers are on the wane, as inflation begins to creep up and as growth in advanced industrial countries is hampered by high levels of government debt. For a group accustomed to being influential — the Federal Reserve’s Ben S. Bernanke and Jean-Claude Trichet of the European Central Bank are facing challenges similar to Mr. King’s, if less acute — such diminution can come as a rude awakening. In a speech last month, Mr. King acknowledged his limited ability to combat the high levels of unemployment and increased inflation bedeviling Britain.

With food and energy prices increasing and the weakness of the British pound making imports more expensive, he said, monetary policy could not “alter the fact that, one way or another, the squeeze in living standards is the inevitable price to pay for the financial crisis and the subsequent rebalancing of the world and U.K. economies.” It sounded a bit like the last cry of the “incredible shrinking central banker.”

“It was a defensive speech, and there is a degree of frustration in the forces that are beyond his control,” said DeAnne S. Julius, the chairman of Chatham House, a research and analysis organization in London, and a former member of the Bank of England’s monetary policy committee. Ms. Julius is a critic and argues not only that Mr. King is underestimating the inflationary winds but also that he is too extreme in urging that British banks take on more capital. “The pressure is on — both in terms of banking reform and inflation,” she said. “I do not think he has an easy life.”

And then there is the issue of fiscal policy. The British public could be in for an even rougher ride this year when the government’s £80 billion austerity program really starts to bite. That prospect looms even larger after recent indications that the economy, instead of continuing to grow, shrank by 0.5 percent in the last quarter. Consumer prices rose at a 3.7 percent annual rate in December, reaching the highest level in two years and, for a 13th consecutive month, missing the Bank of England’s target of 2 percent.

Mr. King declined to be interviewed. But people who have worked with him paint a picture of an innovative thinker who has an agreeable charm but can also be pugnacious and confrontational when challenged intellectually. “Mervyn is not blessed with any doubts about his abilities,” said Michael Foot, chairman of the Promontory Financial Group consulting company in London and a former Bank of England executive.

But the accumulation of pressures seems to be having its effect. His January speech, while carrying all the quirky earmarks of a King address — he began and ended with quotes from “Anna Karenina” — came across to many analysts as unusually prickly rather than as a measured analysis of the British economy. “There is a misapprehension in some quarters that the monetary policy committee could have prevented the squeeze in living standards by raising interest rates over the past year to bring inflation below its present level,” Mr. King said in the speech. “That view is a misunderstanding of how monetary policy works.”

Two members of the bank’s policy making committee recently expressed public disagreement with Mr. King’s insistence that Britain’s current inflation rate had been driven by outside shock factors and that interest rates should not be increased. He has also been accused by another board member, Adam Posen, of jeopardizing the bank’s independence by talking up the Conservative-led government’s deficit-cutting strategy.

Since the Bank of England was made independent from the Treasury in 1997, its governors have been appointed by the government but have been viewed as apolitical, with a focus on ensuring price stability — and with no business sharing their views on fiscal policy. Mr. King, whose second and final term will end in 2013, appeared to have moved beyond that understanding when he endorsed the coalition government’s plan to cut the deficit faster than the opposition Labour Party had suggested when it was still in power.

The fear, some economists said, is that his endorsement creates expectations that he would be willing to neglect inflation for a while in order to let the government’s spending cuts work. To Mr. King’s defenders, however, those who raise such fears do not know the heavy burden of running the Bank of England from its palace-like base on Threadneedle Street at the heart of the City, as London’s financial district is known. Indeed, Mr. King has plenty of fans who praise him for the power of his convictions — unpopular as they may be.

On the subject of being too close to the Tories on cutting the deficit, his defenders point to leaked cables in which Mr. King raised doubts about the experience of the Conservative leader, David Cameron, and his chief economic adviser, George Osborne. “He is a king, a monarch in the classic sense, and he is fulfilling his duty to advise, consider and warn,” said Michael Fallon, a Conservative member of Parliament who has questioned Mr. King numerous times as a member of the Treasury select committee. “Our public finances were in a deeper mess than others, and he has helped shape that debate.”

Mr. King has also attracted a strong following — largely outside British banking circles — for his aggressive campaign to reduce the leverage of Britain’s banks. He laid out his case in a hard-hitting address late last year in New York. As Mr. King pointed out in that speech, Britain’s banks pose unusual risks because they have assets 4.5 times the size of the British economy. How to scale that back is the subject of a much anticipated independent inquiry here, led by John Vickers, a former Bank of England chief economist and head of the Office of Fair Trading.

Mr. King has been careful to not prejudge the result. He has made clear, though, that his view is that radical changes must come, saying in his speech that of the systems one might use to organize banks, “the worst is the one we have today.”

George Osborne bank levy attacked by banks, Balls and unions
by Harry Wilson - Telegraph

George Osborne, the Chancellor, was accused of 'moving the tax goalposts' by banks and of introducing a 'damp squib' by Labour after he increased a levy on bank profits to raise £2.5bn this year and made it permanent.

The British Banker's Association, the voice of the industry, said "constant chopping and changing" of the tax regime "risks making the UK a less attractive place for businesses to operate". Ed Balls, the shadow chancellor who will meet the Chancellor for the first time over the dispatch box later today, dismissed the announcement as "hurried and panicky" and a "damp squib" because the coalition had decided not to re-impose Labour's 2010 bonus tax.

Mr Osborne said he had increased the levy to raise an extra £800m this year to make sure "banks make a fair contribution to closing the deficit". The levy was announced last June. It was meant to be phased in slowly, but the Chancellor said bank finances were now healthy enough for the levy to be imposed in full this year. The Institute of Directors, which warned when the levy was first introduced that there was a real risk that it would ramp up over time, said: "Let’s hope it’s the last increase.”

Mr Osborne, speaking on the BBC Radio 4 Today programme, he said today's move would show lenders that he was acting in "good faith" in slow-moving negotiations aimed at forcing banks to curb bonuses and increase loans to small businesses. "We want more lending, [banks] to pay more tax, make a bigger contribution to our society and pay less bonuses next year," the Chancellor said.

The levy changes were to have been announced in next month's Budget, but it was brought forward so it could be imposed within weeks. The initial reduced rate was 0.05pc of profts - this was forecast to raise £1.7bn. From March 1 the rate will be 0.1pc for 2 months, to offset the lower rate charged in January and February, before moving to 0.075pc, the Treasury said. It expects the levy to raise £2.5bn this year and next, with the amount rising to £2.6bn in 2013 and 2014.

The permanent bank tax applies to the global balance sheets of UK banks and the British operations of foreign firms. Lenders with a balance sheet of less than £20bn are exempt.
Mr Balls said: "Without this bank bonus tax - and with the banks set to benefit from a corporation tax cut - George Osborne has actually delivered a tax cut for the banks compared to last year, even after today's announcement," he said on Sky News. "This panicky announcement seems to be a fig leaf to hide George Osborne's failure to get a deal on the Project Merlin talks with the banks."

Unions attacked the move as "political gesturing". Len McCluskey, Unite general secretary, said: "The effort to present this bank levy as a punishment for the banks is pathetic, the money returned to the Treasury is a pittance, while bonuses are chucked around like confetti. "This levy does nothing to fundamentally reform banking in this country and effectively Osborne has been paid to go away. This is a shameful reflection of how lacking in muscle this government is prepared to bewhen it comes to holding the financial services sector to account."

Bob Crow, general secretary of the Rail Maritime and Transport union, said: "This new levy is a drop in the ocean. While £6 billion is being creamed off in bonuses as nurses are being sacked, this gutless government stands idly by and barely lifts a finger."

The government's talks with banks over lending and bonuses - the so-called Project Merlin - have yet to be finalised, but British biggest banks could be forced to reveal more details of how much they pay their top staff than either their New York or Hong Kong-based rivals. The banks are expected to be forced to disclose the compensation packages of as many as 10 of their highest paid employees below board level under a new disclosure regime agreed on the back of the Project Merlin negotiations.

Standard Chartered dropped out of the talks last year, arguing that they had little relevance to it given the bank, though it is headquartered in the UK, has little business here. Santander UK, the British arm business of Spain’s largest bank, has also adopted a more standoffish approach as the lender has argued that it is already aggressively expanding the lending it is making available to British businesses as it attempts to grow its market share. Bank shares were little changed on Tuesday.

Japan, the US, Bubbles and Deflation
by Doug Short - Dshort.com

Here is a series of real (inflation-adjusted) monthly close charts of the Nikkei 225 and the S&P 500 since 1970 with their respective annualized rates of inflation shown below. This series also includes an overlay chart with the two index peaks aligned. The overlay retains Japan's inflation to illustrate a point discussed later in this post.

The left sides of the two bubbles are remarkably similar. More conspicuous, however, are the dissimilar contours of the post-bubble declines. A key difference is the fact that Japan experienced nearly simultaneous bubbles in equities and real estate; the former peaked in December 1989, the latter in early 1991. The equity and real estate peaks in the US were separated by approximately five years, and the 2005 peak wasn't generally recognized for another year or two because of the highly regional nature of the real estate market.

Inflation or Deflation?
Many economists and market experts predict high US inflation as a result of the massive government intervention in the recent financial crisis. However, in the wake of the Financial Crisis, the US economy slipped into an eight-month period of deflation unparalleled in nearly 60 years.

The decade following the Japanese twin bubbles was accompanied by mild inflation averaging around 1.4% with occasional brief periods of deflation. Thereafter, the Japanese economy has tended more toward deflation (see the circled area).

The daily peak for the S&P 500 came in March 2000. However, in both real and nominal terms, the S&P 500 monthly close peaked in August 2000, which is the reference point of overly for the two charts. Following the 2000 high, the annualized rate of inflation averaged 2.8% until March 2009, when the economy moved into an eight-month period of deflation.

To some extent the widespread predictions of high inflation in the US have a political bias. Opponents of government intervention often point to excessive inflation as the inevitable outcome of bailouts, incentives and monetary easing. The Japanese government also played a strong interventionist role following that county's twin bubbles. As the chart shows, accelerating inflation has not been the result.

Of course the two countries differ in many respects. Both experienced stagflation during the 1970s, but the inflation charts during that period do not mirror one another. Likewise Japan's long-term post-bubble struggle with deflation does not preordain a similar fate for the US. The charts and commentary here merely constitute an observation that severe inflation is not the inevitable outcome of government efforts to manage the US economy. Deflation may be a greater threat than is commonly thought. It's worth noting that deflation didn't become a significant issue for Japan until near the end of the decade following the 1989 peak. Our 2009 bout with headline deflation occurred nine years after the top of the Tech Bubble.

The complexity of economic issues and political biases will no doubt fuel the inflation/deflation debate for some time.

A Closer Look at Japan's Deflationary Struggles
In closing, here's a close-up look at Japan's annualized monthly headline CPI since 1990. I've included an overlay of the Discount Rate to help us see one aspect of Government's efforts to manage the economy.

The latest Japanese Consumer Price Index, data through December 2010, shows an annualized monthly inflation rate of zero following two months of mild inflation, which was preceded by 20 consecutive months of deflation. If we make a linear extrapolation of the CPI monthly trend, as I've done in the chart above, we get a return to deflation. Japan's CPI will be especially interesting to watch in the coming months. With inflation on the rise around the world, a return to deflation in Japan would certainly run counter to the growing expectations of inflation hawks.

Bad News: New Book Probes Role of Press in Financial Crisis
by Peter Goodman - Huffington Post

Given that some economists still debate the root causes of the Great Depression, little wonder that a multitude of competing stories still vies for affirmation as explanation for the financial crisis of 2008. Recrimination sometimes seems like the real American pastime, and the near-slide into the financial abyss presents a teeming buffet of potential culprits.

Depending upon your ideological predisposition, the crisis owes to the greedy bankers who turned home loans into casino chips, or to the federal regulators who abdicated authority, allowing Wall Street to turn itself into a gambling parlor. It was homeowners who treated their mortgages like winning lottery tickets, cashing in through repeated rounds of refinancing. It was politicians who championed expanded home ownership with reckless tax incentives and mandates forcing banks to lend even to borrowers with sketchy credit. It was the Federal Reserve which kept interest rates too low for too long.

But one segment of American society has largely evaded scrutiny in the search for the source of the disaster: the financial press. This is a dangerous oversight, argues journalist Anya Schiffrin in an intriguing and thoughtful new book, "Bad News: How America's Business Press Missed the Story of the Century."

As the crisis begins to fade from memory, and as acute fear is predictably replaced by complacency, a rigorous accounting of what actually transpired is imperative. Schiffrin aims to impose that accounting on those of us who make our living writing about finance. Her findings are not comforting, suggesting that coziness with sources and a lack of financial acumen made many reporters vulnerable to bogus assurances that nothing was wrong.

Schiffrin is herself a member of the tribe, having worked as a correspondent for Dow Jones news service in Vietnam during the Asian financial crisis (an experience that gave her an taste of the risks inherent in an economy shy of reliable information). She brings her experience and contacts to bear on this project, probing how shrinking budgets in a time of traditional media decline deprived many newsrooms of the resources needed to unravel a complex story, just as financial journalism confronted its ultimate test: a historic real estate bubble enhanced by the steroids known as derivatives.

A necessary disclosure: I wrote a chapter of this book, examining my experience covering the crisis as the national economic correspondent for the New York Times. And I don't fully buy into its overarching thesis that the reporting in the run-up to the crisis amounts to a systemic failure. As several chapters in Bad News make clear, a good deal of excellent work in the years before the crisis could have limited the pain had warnings been heeded--not least, work by my former Times colleagues Gretchen Morgenson and David Leonhardt, who sounded the alarm early on that home prices were getting well of whack with American incomes, setting up a fall.

The trouble was that a louder chorus repeatedly drowned out this probing reporting about the magnitude of the real estate bubble--a steady celebration of permanently rising home price, the fantasy that propelled a construction binge, a mortgage bonanza and no end of wealth that got created along the way. That chorus abetted and enabled the capture of the regulators who are supposed to be able to tune out such noise while dispassionately scrutinizing the numbers.

This is not to exonerate the press or chastise the lazy reader, the reflexive posture for many a scribe whose words have failed to produce happy results. Though the press rarely has the power to dominate events and does not make policy, we are collectively responsible for the understanding that our audience takes away from our words. And it is a fair hit to assert that we are prone to being manipulated and getting swept up in the excitement of the times, rather then stopping to ask the critical, typically difficult-to-answer questions that public service journalism demands.

This is not so much because we consciously decide to become cheerleaders, urging on bubbles that take shape on our watch, but rather because cheerleading is the product of the easiest options that present themselves on any given day. Rising prices, soaring stock markets and the wealth accruing to executives overseeing the festivities are verifiable facts, whereas warnings and worrying entail the indulgence of conjecture and speculation, and they might turn out to be wrong.

It takes a special breed of reporter to do the digging and put faith in their convictions as they take on the dominant narrative of the moment--particularly when that narrative is championed by prize-winning economists celebrated as wise men, such as the former Federal Reserve Chairman Alan Greenspan and his successor, Ben Bernanke, who played leading roles in convincing the public that everything was fine.

I first saw this dynamic up close during the technology bubble of the late-1990s. I never heard one of my colleagues profess a desire to help the Nasdaq continue to multiply. I never was privy to a directive to tout the impregnability of every new dot-com that came along. But many writers effectively opted to play these roles by default in selecting the stories that were most readily available--profiles of start-ups arranged by ubiquitous public relations consultants; astounding tales of technological discovery; stories of the wealth being harvested from the market like the proverbial gold at the end of the rainbow.

You could sit at your desk in any newsroom in America in 1999 and simply wait for a press release to arrive in your inbox or a wire story to be flagged by your assignment editor and soon find yourself writing about something that no one had ever written before--the largest merger in history! The fastest this! The slickest that! The path of least resistance turned journalists into boosters, while critical stories entailed a path into the wilderness, with no eager sources and only piles of inscrutable documents.

Fundamentally, there is much to Schiffrin's point that most reporters took the easy route in the years leading up to the financial crisis, which meant buying into the fantasy that justified ridiculously inflated housing prices. The real estate bubble so dominated the era that it caused even serious reporters to miss the underlying story: Tens of millions of Americans needed to use their houses as ATMs because their pay checks no longer delivered enough money to finance even middle class aspirations--health care when someone got sick, college for children, a functioning car to get to work. That is the broadest context in which to critique the financial press. We mostly missed the breakdown in the American middle class bargain, and so we did not appreciate how predatory lending effectively went mainstream.

The more immediate coverage of the crisis and its aftermath has occasioned conspiratorial talk that the press oversold the fears of a systemic meltdown to help enable the Bush and Obama administrations to deliver the taxpayer-financed bailouts for Wall Street. Some have suggested that the financial press played a role much like the Washington press corps in the lead-up to the Iraq War, frightening the public with apocalyptic visions that required intervention. (Schiffrin cites the pre-Iraq War coverage as a potent example of coziness with sources yielding tainted journalism, though her critique is more systemic than conspiratorial.)

As someone who sat inside one of the biggest newsrooms during the crisis, however, I reject the notion that has taken root in some quarters that we were essentially active participant in a government-directed con. Yes, there were good reasons to doubt the veracity of Bush's Treasury Secretary, Hank Paulson, who had previously headed Goldman, as he warned in the fall of 2008 that the public either had to hand over $700 billion to Wall Street or invite a meltdown. Those doubts (which were duly reported at the time) have only intensified as the terms of the bailout have emerged, with Goldman managing to secure a "backdoor bailout," through funds dispensed to the insurance firm American International Group.

Continued investigation into the terms of the bailouts and how they came about is required. But the idea that the press was effectively complicit in an Iraq-style ruse, trumping up the mushroom clouds to justify the intervention, is misleading and unfair. The Bush administration doctored the intelligence to create a false perception of threat in Iraq. But economists and business people were genuinely and legitimately terrified of a potential repeat of the 1930s banking runs as major financial institutions teetered toward collapse in the fall of 2008. Money was freezing up, laying waste to companies, sending the unemployment rate soaring.

There turned out to be no weapons of mass destruction in Iraq, despite the bad journalism that insisted otherwise--journalism that contributed to the stampede into the war. But you simply cannot say the same about the financial consequences at risk as the Bush administration crafted the bailouts. Did the trillions of dollars of interrelated and suddenly un-payable credit obligations constitute weapons of mass destruction pointed at the global economy? Maybe, maybe not. There was simply no way to be sure, and whatever the government did--wade in with a rescue, or stand back and watch--was bound to affect the outcome.

Once the markets became ruled by fear, an expensive bailout was the price of preventing the worst. That bad news simply had to be reported, whatever the consequences, even as we knew that the stories themselves were adding to the fear.

Bad News provides little reason to imagine that the press will heroically prevent the next crisis, figuring out where danger lies before everyone else does. Financial crises build over many years through the fabric of the culture itself, warping expectations, altering the risks people and institutions are willing to bear in pursuit of return on their money, while tilting the balance away from the intrusions of government regulation. Journalists operate within our culture, and we absorb collective understandings.

Still, the basic critique of the book is instructive and worth contemplating. It boils down to most of us not cultivating a wide enough circle of sources. For anyone who writes about finance, it is worth pausing to consider where we regularly draw our information and then actively expanding that zone. It is worth looking at how many of our sources are people whose job descriptions include having to talk to reporters for a living. Because in this crisis, as in all such events, the warnings were never going to be obtained from people paid to talk to the press, a group dominated by the special interests that benefit from the status quo.

The real insights were waiting in harder to reach places, among people who typically have good reason to avoid journalists--the ranks of mid-level managers inside predatory lending operations; those doing due diligence inside banks that were buying a selling radioactive securities; the growing ranks of regular families that could no longer pay the bills.

In my own view, and from my own experience, blaming the press for the financial crisis is like blaming January for giving you a cold: You may have a point, but you better be prepared to dress warm again next winter. In both the technology bubble and the run-up to the Iraq War, a much stronger case can be made that shoddy reporting helped nurture disaster. Even by the everyday standards of journalism, bad information was presented as fact. But in the case of the financial crisis, the system did not fail so much as function according to the ordinary rules of engagement.

This is Schiffrin's fundamental point, and it amounts to bad news indeed. It would be so much more convenient if we could blame it on a Judy Miller, pin it on one guy who got it wrong, then lance that boil and feel better. But the problem goes right to heart of a press that simply reflects too few voices, often missing out on the ones that have something important to tell us.

Yes, world food prices are higher because of speculation
by Alice Cook - Clouded Outlook

World food prices have become highly politicised. Two views are battling it out. First up; the supply-siders, such as Paul Krugman and Ben Bernanke, who claim that prices are up because of global warming, declining harvests and world population growth.

Then, there is everyone else, who claim that it is the fault of speculators.

Here is how Mr. Krugman put it:

"What’s behind the surge in food prices? The usual suspects have made the usual claims — it’s all about the Fed, or it’s all about speculators. But I’ve been looking at the USDA World supply and demand estimates, and what stands out from the data is mainly that we’ve had a huge global harvest failure."
He also said:
"..it sure looks like climate change is a major culprit. And it’s not just the (Former Soviet Union): extreme weather elsewhere, which again is the sort of thing you should expect from climate change, has played a role in bad harvest around the world."

Lets dispense with the climate change issue first. World wheat supply fell by 0.1 percent in 2010, and it is projected to fall by 5 percent in 2011. As the chart below suggests, there is nothing unusual about recent supply developments. In fact, projected 2011 wheat production is the fourth highest since 1995.

The World supply of wheat jumps around every year. This is due to fluctuating weather conditions. Anyone with a passing knowledge of farming knows that. Is the recent fall due to climate change - absolutely not. Linking recent food inflation to climate change is just absurd.

However, the climate change point was merely an addendum to Krugman's argument. What about the more substantive point linking food inflation to a supply shock?

All speculative bubbles start with some kind of supply or demand shock. It is part of the pathology of speculation. The more substantive issue is whether originating shock can fully explain the subsequent price movement. In other words, can a 5 percent reduction in supply generate the following price movements?

Wheat prices are up about 50 percent in six months. The supply decline during that period was 0.1 percent. However, the anticipated decline in supply for this year is over 5 percent. That sounds a lot like speculation. Buy now on the expectation of higher prices in the future.

Low interest rates facilitates speculation in wheat. Suppose a speculator can take out a loan at 1 percent, buy a few tonnes of wheat at $200, stash them away in a warehouse and sell them six months later at $325. Does that not sound like a familiar wheeze? Here is a clue: think houses, dot.com companies, and currency futures.

Meanwhile, the rest of the world pays more for their food. Moreover, there is a kicker. The greater the amount of inflation, the greater the incentive for commodity dealers to speculate. More speculation means more hoarding, which in turn, creates more inflation. There is only one thing that can stop this cycle - higher interest rates.

For a liberal like Mr. Krugman, this is a very uncomfortable chain of events. He argued vociferously for lower rates. He believed that looser monetary policy would reduce the interest burden on US borrowers and prevent a further deterioration in US economic activity.

However, those low rates are now facilitating a speculative binge that is seriously hurting the world's most economically vulnerable people. At the risk of being excessively emotive, low interest rates may have protected debtors in the developed world, but at the cost of high food prices in the developed world. It is just one more miracle of Globalization.

Einstein was right - honey bee collapse threatens global food security
by Ambrose Evans-Pritchard - Telegraph

The bee crisis has been treated as a niche concern until now, but as the UN's index of food prices hits an all time-high, it is becoming urgent to know whether the plight of the honey bee risks further exhausting our food security.

Almost a third of global farm output depends on animal pollination, largely by honey bees. These foods provide 35pc of our calories, most of our minerals, vitamins, and anti-oxidants, and the foundations of gastronomy.

Yet the bees are dying – or being killed – at a disturbing pace. The story of "colony collapse disorder" (CCD) is already well-known to readers of The Daily Telegraph. Some keep hives at home and have experienced this mystery plague, and doubtless have strong views on whether it is caused by parasites, or a virus, or use of pesticides that play havoc with the nervous system of young bees, or a synergy of destructive forces coming together.

The bee crisis has been treated as a niche concern until now, but as the UN's index of food prices hits an all time-high in real terms (not just nominal) and grain shortages trigger revolutions in the Middle East, it is becoming urgent to know whether the plight of the honey bee risks further exhausting our already thin margin of food global security. The agri-business lender Rabobank said the numbers of US bee colonies failing to survive each winter has risen to 30pc to 35pc from an historical norm of 10pc. The rate is 20pc or higher in much of Europe, and the same pattern is emerging in Latin America and Asia.

Albert Einstein, who liked to make bold claims (often wrong), famously said that "if the bee disappeared off the surface of the globe, man would have only four years to live".
Such "apocalyptic scenarios" are overblown, said Rabobank. The staples of corn, wheat, and rice are all pollinated by wind. However, animal pollination is essential for nuts, melons and berries, and plays varying roles in citrus fruits, apples, onions, broccoli, cabbage, sprouts, courgettes, peppers, aubergines, avocados, cucumbers, coconuts, tomatoes and broad beans, as well as coffee and cocoa.

This is the fastest growing and most valuable part of the global farm economy. Between 80pc and 90pc of pollination comes from domesticated honey bees. Moths and butterflies lack the range to penetrate large fields. The reservoir of bees is dwindling to the point where ratios are dangerously out of kilter, with the US reaching the "most extreme" imbalance. Pollinated crop output has quadrupled since 1961, yet bee colonies have halved. The bee-per-hectare count has fallen nearly 90pc.

"Farmers have managed to produce with relatively fewer bee colonies up to this point, and there is no evidence of agricultural yields being affected. The question is how much further this situation can be stretched," said the report. Rabobank said US bee colonies were shrinking even before CCD struck because cheap imports of Asian honey had undercut US hives. Note the parallel with the demise of the US rare earth metals industry, put out of business when China flooded the world with cheaper supplies in the 1990s. This is what happens when free trade is managed carelessly.

China has its own problems. Pesticides used in pear orchards wiped out bees in parts of Sichuan in the 1980s. Crops are now pollinated by hand using feather brushes, a laborious process as one bee colony can pollinate up to 300m flowers a day. Germany, France and Italy have banned some pesticides, especially neonicotinoids (as in tobacco) that harm the memories of bees.

The British Beekeepers' Association has called for an "urgent review" of these chemicals, fearing we may lose all our bees within a decade if we are not careful. US beekeepers have made similar pleas. The US agriculture department's Bee Research Laboratory has found evidence that even low levels of these pesticides reduce the resistance of bees to fungal pathogens. Leaked documents from the Environmental Protection Agency confirm that clothianidin used on corn seed is "highly toxic", may pose a "long-term risk" to bees, and that previous tests were flawed.

Critics alleged a cover-up: Rabobank said we should be careful not to vilify agro-industry. The world needs food and fertilizer companies to keep finding ways to raise crop yields, if we are to feed over 70m extra mouths each year, and meet the demands of Asia's diet revolution, offset water scarcity in China and India, and divert a great chunk of the US, Argentine, and EU grain harvest into bio-fuels for cars.

With pincers closing in on world food output from so many sides, we have little margin for error. Scientists are coming to the rescue. Research is honing in on the fungus Nosema, and the Varroa mite, but not fast enough. Rabobank calls for a step-change in the global response, and in the meantime for tougher rules, so that beekeepers do not have to fight alone, starting with curbs on pesticide use during in daylight hours when bees are foraging.

Apian atrophy is a more immediate threat than global warming, and can be solved, yet has barely risen onto the policy radar screen. This is surely a misjudgment. Einstein was not always wrong.


VK said...

Damned if we do. Damned if we don't. Recently came across the work of Dr Tim Garrett, an Atmospheric Scientist at the University of Utah. He's published a paper entitled "Are there basic physical constraints on future anthropogenic emissions of carbon dioxide?"

Basically the paper says there is a tight link between real growth in wealth & energy consumption. Every inflation adjusted dollar increase in wealth (1990 adjusted) requires a 9.7mW increase in energy consumption. And given that 86pc of our energy use is derived from fossil fuels, wealth generation is tightly linked to fossil fuels & carbon emissions.

The paper goes onto say that runaway climate change is inevitable if civilisation doesn't collapse in the next decade so as to keep emissions below 450ppm, they are close to 390ppm today. But if the economy is merely depressed than collapse from climate disasters is inevitable. Either way it's virtually impossible to escape collapse as we'd have to decarbonize our energy usage by building one nuclear reactor per day for the conceivable future. So electric cars, solar, wind, hydro and nuclear are all flights of fancy as they are simply not large enough.

So if collapse is mathematically inevitable. Might as well party on no? Too late to do anything about it, it seems.

VK said...

N(t)=[Y0/R + (N^(1-b)0 - Y0/R)exp[-R/E•(1-b)t]]^1/1-b

Y = resources
Yo= initial resources
N(t) = population at time t
R = resources required to maintain individual
b = the growth rate (If beta is less than 1 we get a sigmoidal growth curve, if beta is one we get exponential growth, if beta > 1 we get super exponential growth, for civilisation beta > 1 at present)
E = quantity of resources to add one more person

The above equation is a very basic equation used to model growth in systems. Most pure maths students have come across it. It's been used by Dr Geoffrey West to show that the collapse of civilisation is inevitable.

Basically, we can move collapse further along by innovating BUT the more we innovate, the shorter the time period for the next innovation required to grow. So, whereas before innovations required a thousand years, than 500, than 250. Today we require a major game changing innovation every 15-20 years and it just gets shorter with every growth inducing innovation.

So if we don't innovate we collapse and even if we do we get to a ridiculous point where every innovation has to occur in weeks, days, hours and eventually milliseconds. Otherwise? You guessed it - Collapse.

Anonymous said...

To say "we collapse" is a confused framing. We are not the system.

VK said...

Breakdown of BLS Data Not Seasonally Adjusted i.e. raw data YoY, Jan 2010 vs Jan 2011

Civilian non institutional population rose by 1.872 Million
That's 156,000 people per month.

Civilian labor force fell by 421,000. That's 35,083 people per month leaving the labor force.

Number of people employed rose by 790,000 or 65,833 people per month. Hardly enough to keep up with population growth.

While somehow the number of unemployed fell by 1.21 Million. That's 100,833 people per month dropped from being counted as unemployed.

The Not In Labor Force Category Rose by 2.921 Million People!! A 191,000 people are giving up every single month.

The number of people in the Not In Labor Force Category who would take a full time job if given the chance Rose by 535,000 to 6.643 Million. A rise of 44,583 people per month.

The employed to population ratio is worse now than a year ago dropping from 57.8 to 57.6pc

There are a 110.373 Million full time employees in America.
The ratio of full time employed to the total labor force is 46.2%. Full time employees generate over 90pc of income in America.

Total US population is about 310,787,383. So the ratio of full time employees to total US population is 35.5pc. Every full time employee is basically supporting 2.82 people including themselves.

Jim R said...

That London bank should keep Mr. Gwinnell on as a fraud spotter and remove the nimrod who hired him.

And the homeless bloke probably has a higher net worth than the bank (a large negative being less than zero).

Greenpa said...

VK - a little further evidence of the inevitable-


Our decision making bodies have become eternal circular circus.

"In 2008 the Minnesota Climate Change Advisory Group, appointed by former Gov. Tim Pawlenty, estimated that a whopping 38 percent of greenhouse gas reductions would come by converting land back to natural "carbon sinks'' such as forests, bogs and grasslands. Minnesota wasn't alone -- many other states had similar notions.

"But it didn't take long for researchers to figure out how unrealistic that was. One study of the Upper Midwest ... found that a 29 percent reduction in carbon emissions over 50 years would require that two-thirds of the cropland be converted to grassland or forest. That would eliminate nearly half of all grain, oil seed and dry beans produced in the United States..."

Which, to any sapient adult with a functional high school education, was really, truly, utterly obvious in the first place. But that didn't prevent it turning into a multi-professor, multi-university, 2 year "study".

Unknown said...

Regarding unions and especially public unions, I don't understand why people are focusing on the need to end them in order to re-prioritize (redistribute?) funds when there has been no effort to rein in the much larger abuses of the elites and re-allocate their funds. It seems like the wrong focus at this time to pursue breaking up public unions when many government workers are already on fractional pay due to furloughs and when many of the more generous pensions have already been phased out.

Dan said...

@ Teresa

RE: Unions


Stoneleigh said...


I'm not calling for breaking up unions. I think they could have a role to play, provided they're prepared to be realistic. If they're inflexible though, they'll act as an obstacle to what needs to happen, which is a very large ratcheting down of expectations across the board. Of course that is much easier said than done.

If unions insist on the status quo or better, they'll be effectively insisting that their employers hit a wall. Then the unions will be broken and their members will be much worse off. (IMO this is what will happen, not what should happen.)

Unions need to avoid acting as a tool for elites to divide and rule, which is what will occur if workers are divided into haves and have nots.

The abuses at the elite level have been completely egregious of course - far worse than anything unions may have done. My concern at that end of the spectrum is that the elites are likely to insist on maintaining an unrealistic level of profitability at the expense of the people at the bottom of the heap, as they did in the Great Depression when workers had no bargaining power at all.

I fully expect both sides to try to cling what they have now. Neither side is going to get it, and the typical human reaction is to fight over a shrinking pie so that quite a bit of what's left gets destroyed in the process. I don't think the odds of avoiding that are very high, human nature being what it is, but I still think it's worth trying to avoid the worst of it in as many places as possible.

Unknown said...

Thanks for the link Dan! Good video!

Ruben said...

I think unions need to stop striking for their own advancement, and instead strike for others. Strike to raise the minimum wage. Strike for welfare benefits.

Striking for personal gain will be very poorly received and will badly set back cooperative action.

Unknown said...

Thank you for the clarification, Stoneleigh. It does seem like there are leadership problems with some unions and I agree it is likely that both sides will try to cling to what they have now. I am intrigued by what you write about the need to ratchet down expectations. As we get deeper into the crisis, it seems like there is a real need for this to happen, and to the degree that it doesn't happen, we will encounter greater social turmoil. My question is this: who ideally should communicate this "ratcheting down" message in our society? It's a matter of being honest, really, which no one seems very good at these days. Some will seek out answers and understanding for themselves, but that is not the majority.

Stoneleigh said...


Ratcheting down expectations, which absolutely has to happen all round, is the hardest thing for human beings to do. People typically think they deserve whatever happens to be the best deal they ever had (or more). Anything less seems like accepting defeat.

Unfortunately, the balance of power will shift even more in favour of the elites in the early stages of a depression, as they will be able to press the advantage at a time when an excess of workers relative to available employment will hit a peak. Also, ordinary people are acutely vulnerable because of the debt burdens they carry, as this confers power over them. My personal preference would be for much greater equality, but sadly I can't see it happening any time soon.

All human hierarchies are essentially predator-prey interactions, as the centre accumulates wealth at the expense of the periphery. That essential nature has become more and more overt in recent years, and will become even more so in the next few, manifesting as a naked power grab. A healthy middle class is the hallmark of a civilized society IMO, and that is sadly on the verge of disappearing.

As a society we have been eating our seed corn for at least a generation. This means we will all take a giant step backwards, and that most people's expectations will be crushed. We need to accept that business as usual is no longer an option, and make the best of a bad situation. The more local control we can achieve, the better off we should be, but there are no guarantees in the world of the future.

Lynford1933 said...

I wonder how many black swans are not covered in VK's (Dr Garrett's) formula. One Carrington Event (1859 CME) changes the whole scheme of all things.

It is not totally bad when you have no real effect on the outcome of this world to shrug. Go here first (Thanks Stoneleigh):


When you got all that done, it's "big garden time" for you and your family.

BTW: That Carrington Event will not effect your garden but a Nuclear Winter Event might.

Dan said...

@ Stoneleigh

RE: "...A healthy middle class is the hallmark of a civilized society IMO, and that is sadly on the verge of disappearing..."

One "interesting" feature of this crisis is that, in the near term, the middle class can continue to exist [somewhat] in part due to massive government subsidy and spending. But of course, for every dollar of "QE" that is made available, an increasingly smaller percentage is accessible by the middle class.

In other words, the FED and the .gov would need to create literally tens of trillions of more dollars in liquidity, just to stave off the collapse of the middle class. But the irony is that such monetary policies, by their very nature, lead to massive PRICE inflation (both nominal and real) for the most critical goods and services...and thus the middle class desperately needs to access MORE and MORE of these digital dollars...but the "elites" end up capturing an increasing % of these monies.

Hombre said...

@Teresa - I spent years in the UAW at GM working as an electrician and in electronic troubleshooting. During that time I tried consistently to get my UAW brothers and sisters to take a wider view of things and rather than strive for more benefits for ourselves, to work for fair wages and benefits for those around us, union and non-union. You can imagine what kind of "feedback" that brought me.
Of course our plant is now bulldozed to the ground, in no small part due to the combined extravagance of both management and union.
What we are now facing requires everyone to climb out of the boxes we have been in for many privileged decades and lay everything out on the table!
Stoneleigh is quite right on this in my opinion.

Ruben said...

I am just reading Dan Ariely's new book the Upside of Irrationality. He is a behavioural economist, and has studied adaptation. Basically we adapt to anything. So, to increase joy and minimize pain, spread your good things over a longer time, and take your bad things all at once.

Which means, we should ratchet our expectations down in a big jump, instead of fighting tooth and nail to maintain. Granted, I do not expect this happen on a societal basis, but for personal prep we will reduce our discomfort if we do a lot of change at once.

p01 said...

So, this is going to be easy, at least with the more educated understanding the (completely unsustainable) situation.
Or maybe not.


Unknown said...

It is interesting to read James Hamilton's econbrowser and TAE back to back. For instance, seemingly, Hamilton paints a benign picture at http://www.econbrowser.com/archives/2011/02/an_improving_ec.html. So we've got real PCE rising, real disposable income rising, survey of plant managers way up, shoot, even light truck sales are way up. So what's the problem? Why doesn't current economic data reflect all these dire TAE predictions? Lags?

Anonymous said...

@VK said "There is a tight link between real growth in wealth & energy consumption."

Future generations will look back on the period between 1400-2000 as one gigantic anomaly.

First the Black Death essentially freed those serfs which had managed to survive, then the 'discovery' of the new world freed the remainder by providing a ready outlet for emigration.

Vast forests, then coal, then fossil fuels provided plentiful & cost effective energy that helped release humanity from traditional hierarchies which harnessed and exploited the pyramid's leverage potential.

During this entire process, the institutional memory of what life was really like before the 'good times' eliminated the master-slave relationship had been lost to the ages.

In fact, the memory is so distant that we, the current descendants, look upon the coming correction with despair as something new & ominous, rather than simply a bill finally coming due.

Our expectations became so unrealistically high that we actually take umbrage that our entitlements may not be forthcoming.

Collapse isn't the end, it is merely the (re)start as we snap back to mean regression. Don't look forward with dread, rather, look back with fond memories.

Like the eternal question, was it better to have lived high (loved) and lost, or never to have lived high (loved) at all?

VK said...


Fact: Total employment in the US is below that seen in the year 2000. But,

Fact: In that same period GDP has grown by 50 odd percent.

Fact: And the population has grown by 31 Million or so.

Hamilton is an economist, in other words, he is clueless. Long term trends are clear - No job growth over the last decade, stocks haven't gone anywhere in real terms & nominal terms, wages have barely kept up with inflation & car sales in China are now higher than in America.

Meanwhile the rich elite have gotten richer, a lot richer. 99pc of Americans have been screwed over. That GDP growth was caused by excess credit & money printing.

Nassim said...

Democracies are "much better at managing large numbers of highly educated people," Goldstone notes. Spain's youth unemployment is even higher than Egypt's, but young Spaniards aren't trying to overthrow the government.

This is pure nonsense. You simply cannot compare their poverty with that of Egyptian youth. Anyway, just you wait and see what happens when the Spanish government and banks can't borrow enough abroad. These mileuristas can have a good time in places like Barcelona. In any case, Spain has a massive underground economy that economists seem to know little about.

Nassim said...

Ratcheting down expectations, which absolutely has to happen all round, is the hardest thing for human beings to do.


Agreed. A few days ago, we went to a photographer to have my girl-of-ten's picture taken. You cannot imagine the ballyhoo they made - 3 people involved and two visits. Eventually, crunch time came and the cost of the 20 photos/files we wanted was astronomic. I walked out as I didn't want to argue with my better half in front of strangers. Later, I learnt that my daughter only wanted one photo. I was really proud of her. Clearly, my efforts at lowering expectations were not wasted. :)

Nassim said...


Frankly, I cannot think of any profession that has its expectations more out of line than the US legal profession. They thrive on complexity and it is quite unaffordable.

In the USA there are 756 prisoners per 100,000 people whereas it is only 33 in India - World Prison Population List. Even in Iran, it is only one-third that of the US. The situation is not dissimular for other branches - family law, commercial law, property law and so on.

Fog Bound said...

Stoneleigh I've been reading your posts for a couple of years now and you have sold me on the idea of deflation. Given deflation, I'm concerned as to what to do with my pension money which is in a 403b that I cannot access and have limited options for investment.

Currently I have it sitting in money market funds and the only real option I see is a precious metals fund. What is your take? Money Market or precious metals?

I ask this in the context of what in general do you think is the best to hold? Cash or precious metals (gold and silver). I've seen you state that both would be good in deflation but which do you think is superior?

Nassim said...


French PM Fillon says Mubarak lent him plane on holiday

This is nothing. Blair, while Prime Minister, was doing the same repeatedly. Blair accused over his family's free Egyptian holiday. He did the same with Berlusconi. This guy is so cheap that it really is unbelievable. Cherie: 'Our best night ever was during freebie holiday in Berlusconi's Sardinian villa'

Please don't think that African dictators are any different from Western leaders. Given half the chance, Blair would also have salted billions away.

Anonymous said...

Long ago I decided species come and species go. Whether humans survive or not is really meaningless. Of course, it matters to us but in the scope of things, not at all. One thing about it, we'll die talking.

Supergravity said...

The factor of waste output is missing from the sample equation, its required for a dynamic equilibrium of feedbacks to enumerate the contemporary co2 dillemma, if applicable, and to express the workings of more general chemical contamination resulting in non-viable habitats as ultimate extinctive function for all industrial growth in confined space.
The most useful innovation cycles would be those which also lessen waste output per unit production, or even turn waste into resources, but this has eventual limits.

Generally, no industrial macro-organism can live in a medium of its own waste, as a thermodynamic condition of metabolism, but specifically, I do grow weary of overspecified co2-alarmism, the exact threshold of runaway climate-change, if decoupled from any external influences which may have greater effect than doubling atmospheric co2 by industrial intercourse, could well be beyond 500ppm, or back at 380ppm. Its just not that much of an exact science at this point. 450ppm is likely not the ultimate threshold we should be concerned about.

The possible effects of atmospheric co2 saturation by human influences, as caused especially by the rampant deforestation which has proceeded linearly with the growth of cities, is still a serious concern, and the proposed mechanisms to place the general growth of cities as the primary cause of co2 buildup are not yet disproven, but there remain additional factors apart from human affairs, related to geophysical, astrophysical or solar phenomenon, which present other concurrently viable mechanisms for the patterns of observed climate fluctuations and could conceivably still give an exclusively non-antropogenic cause or hybrid cause of much of the co2 buildup in the past few centuries.
Any such realisations wouldn't absolve the growth of cities from other biosphere denaturations and contaminations, many of which could autonomously cause mass extinctions without changing atmospheric constituents or global temperature at all, but any revelations sufficiently casting into doubt the link between antropogenic co2 expulsion and climate disruption would then avoid the haphazard advocation of preemptive industrial collapse in a malformed utility conjecture.

Hombre said...

@Dan - Another good video, this time concerning unions.
I am thinking they are about moot, or will soon will be if the contraction escalates.

@P01 - I had to laugh at the demand for a 40% raise! Absurd, of course. I have an idea they will look back a few years from now and ask themselves... "...what was I thinking?"

p01 said...

Wise words.
It would have been nice to see that consciousness trumps genes or whatever little devil pushes the exponential funtions on this planet, though.
Instead it seems to have just increased the entropy more efficiently; an omnivorous yeast, so to speak.


p01 said...

Nothing we did not know (or assumed), but this might start a long overdue public discussion on energy. Or it might just lead to hoarding and panic.


sumacarol said...

On the point of a need for unions to become more willing to negotiate, it seems in some cases I am aware of that union leadership has so lost any understanding of its role that these folks readily give in to the demands of management already, because they identify with management and look down on their workers, accepting the commonly-expressed notion that workers are lazy and overpaid. I don't know how prevalent this viewpoint is among union leadership, but to the extent that they have "lost their way", I don't know how this would impact their ability to negotiate fairly on behalf of workers, even in the context of a shrinking pie.

VK said...


One wonders if Blair & Bush do have vast secret accounts with hidden loot stashed somewhere. Mubarak is now apparently the richest man on the planet??? Yeah right!!

I'm seriously reconsidering my views on the Rothschilds & Rockefellers. They are painted as mere billionaires these days but old money is hidden money. If a small time puppets like Ben Ali & Mubarak have accrued so much money. How much does the Saudi King have? Or how much do the real power elite hold in offshore accounts??

Questions to ponder. For them power is the ultimate aphrodisiac, money is meaningless at such a vast sum. Only power counts.

Nassim said...

Questions to ponder. For them power is the ultimate aphrodisiac, money is meaningless at such a vast sum. Only power counts.


Quite meaningless once past, say, $20 million. It all comes down, as usual, to sex :)

I am a bit queasy about mentioning the Rothschilds because I don't like to be called a Jewphobe of whatever. Some of you may have heard their role, as well as that of other bankers, in helping bankrupt Egypt and lending the British money to buy shares in the Suez Canal Company. Later, the inability of Egypt to repay its loans resulted in the British occupying the country for an awfully long time. You would have had to be a genius to bankrupt Egypt at that time - with revenues from the canal plus a booming cotton market.

However, there is one more recent case with which I am quite familiar. You may have heard of President Mitterrand nationalising private banks in France in 1982. It is no secret that the French socialist party (Mitterrand was a socialist) has always had a preponderance of Jewish politicians and that it has been historically heavily supported by the Jewish community of France. This is no secret and, for example, in 2005 two Jewish candidates were vying to lead the party - Laurent Fabius and Dominique Strauss-kahn. Fabius was earlier prime minister under Mitterrand.

To cut a long story short, the private banks - especially Rothschild - made a huge fuss about the amount of compensation they were offered. Take a look at this Wikipedia entry:
... the 1981 nationalization by the newly elected socialist government of François Mitterrand was an equally significant disaster

In fact, all the good assets (i.e. loans) had been shifted abroad and all the bad ones left behind. When the auditors moved in, they found the value of the assets far less than the amount paid in compensation. Accountants call that goodwill. Goodwill should be very low when you lose all your best clients. The whole thing was hushed up as the bank changed name and fresh capital was injected by the French State. Frankly, the whole thing stank but Mitterrand made it all sound like a great victory for French socialism. A few years later, they moved back into France and opened a new bank with a slightly different name - Rothschild & Cie Banque.

Nassim said...

part 2
I was Directeur Informatique (IT manager) at INSEAD - supposedly the best US-style business school in Europe - at that time and some professors did some analysis so as to find out whether the French State had underpaid and it was quite clear that was a total nonsense. I helped them with the numbers. I am sure it is published in some obscure academic magazine.

Mitterrand was a bit of a scoundrel and only presented his love-child, Mazarine, at a very late date - he died shortly afterwards. In fact he kept his cancer a secret as long as conceivably possible - can't let go of power can we? His wife (they lived across the river in Paris from one another), Danielle, is a very wealthy women whose family owned clothing factories and a famous make of tights. Of course, they only tell you that she is a Marxist-Leninist in the Wkipedia entry - she is the original "champagne socialist" of them all. :)

His son, Jean-Christophe Mitterrand was heavily into the arms trade in Africa with a Russian/Israeli "businessman". Jean-Christophe was only fined for not paying taxes but his partner was sent to prison - I guess it helped having had your Dad as president.

His nephew, Frédéric Mitterrand, was almost daily on TV when Mitterrand was president - The French State owned TF1. Now he is Minister of Culture and Communications. Most recently, he has been busy telling everyone who will listen that Mubarak should stay and that Tunisia is not a dictatorship To say that Tunisia is a one-man dictatorship seems to me quite exaggerated

If you check out the Wikipedia of many French people who were active in the period 1940-45, you will find that they were part of the French Resistance. What a farce. I am sure there are PR firms making a mint out of "fixing" Wiki entries. Firstly, the Gaullist version of "French Resistance" was most ineffectual and was largely a work of fiction. Secondly, the real "French Resistance" was largely communist. However, if you check out the communists, you will find that the real trouble-makers were often "foreigners" (ie. Armenians and Jews) and that the French frequently sold them out to the Germans for internal political reasons.

For example, perhaps the most successful Résistant of them all was Armenian - and he was betrayed to the Germans by the French - Manouchian Group

In sum, the Mitterrands are a family of scoundrels and nepotists. They will do absolutely anything for power and wealth.

MonkeyMuffins said...

"It will not be possible, nor is it desirable, to defend the rights of one group at the expense of all others, and all competing priorities for public expenditure."


TAE's expedient newspeak reminds of the banality of evil.

for those not so easily ensorcelled, i proffer:


as a Jew, through adoption, and an Italian, by blood, i find myself increasingly resonating with The White Rose and The Italian Resistance.

i like to think i would have been among them at that time.

and i'm struggling--mightily--to find the courage to move in similar directions today.

for i am convinced our times and crimes are analogous.

1) economics is political (as is this blog, regardless of its absurd, offensive, disingenuous and counterproductive assertions to the contrary)

2) there is no such thing as a free market (never was, never will be)

3) corporations are sociopathic entities

4) money isn't real; and the idea that money can make more money is comparable to the idea that dragons can make more dragons

5) the most important truths of the Peak Movement, such as it is, can be summed up in one sentence:

we are not going to grow, consume, indebt and complicate our way out of the problems of growth, consumption, debt and complexity

6) once a person understands and inhabits this reality, all that's left:

is how to respond

7) does a person distort the past and the present while promoting and working toward running away and hiding (like TAE and not-remotely-nominal man)?

8) or does a person take a stand for what s/he knows is real, right and just?

does s/he actively work to break free from the chains of the status quo, to at least potentially give birth to something new?

something better

personally, i would rather stand with those in Tahrir Square (scared and vulnerable but vocal and proactive), than cower in a trailer in the woods (comfortable and relatively secure but silent and passive)

Nassim said...


You may have read some stuff by Primo Levi. I find his description of starving people in camps giving food to others especially incomprehensible.

If This Is a Man

team10tim said...

Hey hey VK,

Here are some other energetic/economic/environmental papers you may be interested in. Energetic Limits to Economic Growth (PDF warning) Panel data on the energy to growth relationship. Note that the slope or exponent, 0.76 (95% confidence interval 5
0.69–0.82), is close to three-quarters, which is the canonical value of the exponent for
the scaling of metabolic rate with body mass in animals.
ie economies have metabolic growth dynamics. This is analogous to Garrett's heat engine with a growing interface.

Kummel et al. Technical progress and energy dependent production functions and Ayres and Warr Accounting for Growth (PDF warning) have mapped the process with R^2 of 0.99+ for several countries using a linear-exponential function very similar to Garrett's (they use different terms, Garrett redefines his equation in economic terms in the appendix)

I believe that if you add in WebHubbelTelescope's dispersive discovery/shock model and a technological progress function along the lines of Doyne Farmer's Dynamics of technological development in the energy sector (PDF warning) you can make a decent model the material throughput of our future and the resulting carbon emissions.

team10tim said...


You may also be interested in the residual from the Ayres and Warr paper, Accounting for Growth (PDF warning, also previous link appears to be down) Figure 9 shows a divergence between the predicted and actual GDP starting in the mid 70's. This is coincident with the exponential increase in debt and inequality in the US.

I suspect, but have yet to model, that the divergence is explained by the Keen/Minsky financial instability models. Tying the monetary/credit models to the econophysics models may offer some deep insight, but I haven't had time to do it yet.

jules said...

I always respect your comments
but I am just not convinced of the deflationary outcome
Marc Faber is saying hyperinflation is more likely as is Graham summers now. With the rate the fed is printing surely a collapse in the currency will come first?
i hope you are right but I fail to see how the FED will alllow it with Fiat currencies
Only a gold standard could deflation occur IMHO as they can now print to infinity which the bernank will certainly do

VK said...

@ Nassim,

Thanks for the detailed information on Mitterand & French history. I reckon it would be a lot of fun having a dinner party conversation with you :) Or reading your book, whichever comes first!

@ Tim

Thanks for the links. Have you seen the most recent WWF Living Planet Report? It states that we're using 1.5 planets per year by extracting faster than we can replenish. We're in deep deep doo doo. So either economic activity goes in to the tank or the population begins it's descent. Probably will be a combination of both I suspect. Fugly situation.

Ilargi said...

"Gravity said...
Prominent dutch economists have now opined that the state guaranteeing financial liabilities at this scale may not be such a good idea, since this will burden the taxpayers more than generally acknowledged. Strangely, no mention of additionally incurred moral hazard.

Of course, there are few scenario's in which these guarantees will remain financeable for much longer without bankrupting the public purse."

Hey Gravity,

I understand they keep at least $270 billion of this (debt guarantees) off balance sheet. That's very interesting, but I can't seem to find a source for it. Do you have one?


Phlogiston Água de Beber said...

Who would have guessed that broaching instability and breaking promises would bring out so much optimism? Even snerfling paints some lipstick on the flying pig warming up on the runway. I never thought I'd see that day. MonkeyMuffins thinks maybe something better this way comes and wishes he were in Tahrir Square. Chances are, if you wait where you are, Tahrir Square will come to you.

By my reckoning, there are two especially troubling sources of instability that promise to make most promises of a political-economic sort highly discountable. Those sources would be our beloved goddess of nature, Gaia, with her irritated responses to our carbonaceous supplications. See Guy McPherson's post on happenings in the Fram Strait and how it is changing the future.

Another seriously disruptive source, also sort of a goddess, Blythe Masters continues to work her terror upon the world. Discussed on Max Keiser's report on fiat food.

This time Max Keiser and co-host, Stacy Herbert, talk about fake rice and real inequality and about a 'new model' that looks a whole lot like an old model called capitalism. In the second half of the show, Max talks to Pierre Jovanovic, author "Blythe Masters," about credit default swaps, the Queen of commodities and Marie Antoinette.

My take from just those two inputs is that there will soon be two kinds of places. Places where you will have to go looking for trouble. And places where trouble will come looking for you.

Ilargi said...

It strikes me as peculiar that neither yesterday's biggest crowd in three weeks in Egypt, nor today's de facto occupation of the Egyptian parliament get even one tenth of the media attention the subject got just last week.


lautturi said...

Dmitri Orlov gives here a sobering and clear half an hour monoloque about Russian experience and The Going Down -procedure we are witnessing. Highly recommended.

Ilargi said...

New post up.

A Glimpse Into the Stubborn Psychology of Fish