“The Wait for Financial Reform”

Alan Blinder is worried that the will to reform the financial sector is fading:

The Wait for Financial Reform, by Alan S. Blinder, Commentary, NY Times: ...We are barely emerging from the greatest financial crisis since the 1930s. From last September to March, it was downright frightening. Yet by the time Congress left town for its summer recess, financial reform appeared to be losing steam. ... Why is the pulse of reform so faint? I see five main reasons:
IT’S YESTERDAY’S PROBLEM People have an amazing capacity to forget. Our financial system is now functioning much better than it was in March or last fall. ... You can see public attention shifting elsewhere... I want to scream, “Stop!” The financial regulatory system needs fixing, and to accomplish it, Congress will have to hold a lot of feet to a lot of fires. It’s not clear that many members have the stomach for that.
LOST IN THE CROWD The problem of short attention spans has a first cousin: the overcrowded legislative agenda... There is a budget to pass, health insurance to reform, energy to cap and trade, schools to overhaul, two wars to watch over and others to avoid — and more. Amid all of this, the Treasury has sent Congress 16 pieces of financial reform legislation... What are the chances that these 16 bills will surface to the top of the legislative agenda?
THE MOTHER OF ALL LOBBIES Almost everything becomes lobbied to death in Washington. In the case of financial reform, the money at stake is mind-boggling, and one financial industry after another will go to the mat to fight any provision that might hurt it. ...
BUREAUCRATIC INFIGHTING Industry lobbyists are not the only problem. Regulatory deck chairs need to be rearranged, and various government agencies are scrambling to maintain or expand their turfs. ..The bureaucratic turf wars have grown intense...
A LACK OF FOCUS Perhaps worst of all, it’s hard to keep the public engaged in something as complex, arcane and — frankly — as boring as financial regulation. ... Today, the electorate has a vague sense that it has been ripped off and that change is needed. But the sentiment is unfocused and inchoate — with these two exceptions: People clearly want greater consumer protection and restrictions on executive pay.
By no coincidence, those are the two pieces of financial reform that seem most likely to survive the Congressional sausage grinder. Don’t get me wrong; we need both. But the two don’t constitute the entirety of reform, or even its most important parts.
I’d attach greater importance to at least three major Treasury proposals that may wind up on the cutting-room floor:
First, we need a systemic risk monitor or regulator. ... In my last column, I explained ... why the Fed should get the job.
Second, we need a new mechanism to euthanize or rehabilitate giant financial institutions whose failure could threaten the whole system. ...
Third, something serious must be done to tame — though not to destroy — the derivatives markets. ...
And there is a great deal more... So let’s get on with the job...

Here's my view on the tension between imposing regulation before the will to do so fades, and delaying to avoid upsetting already unsettled financial markets and to carefully consider the changes before putting them into place:

While it's possible that regulation will go overboard in response to the crisis, there are powerful interests that will resist regulatory changes that limit their opportunities to make money (and Nobel prize winning economists willing to back them up), so my worry is that regulation will not go far enough, particularly with people ... arguing that we should wait for recovery before making any big regulatory changes to the financial sector. They may be right that now is not the time to change regulations because it could create additional destabilizing uncertainty in financial markets, and that waiting will give us time to see how the crisis plays out and to consider the regulatory moves carefully. But as we wait, passions will fade, defenses will mount, the media will respond to the those opposed to regulation by making it a he said, she said issue that fogs things up and confuses the public as well as politicians, and by the time it is all over there's every chance that legislation will pass that is nothing but a facade with no real teeth that can change the behaviors that go us into this mess.

Economic Theory During College Football

Long time reader TomK asked for my take on this article by Jeffrey Rogers Hummel titled Why Default On US Treasuries Is Likely.

I'm going to keep this short, I had planned to take the weekend off from all writing.

Hummel's argument appears to be a combo of ideology that is very reasonably backed up with plenty of numbers. To be clear the argument is compelling.

It is a long post. Earlier in the week I read something similar elsewhere (sorry don't recall where) that explained it very succinctly; when your minimum credit card payment no longer covers the monthly interest you are in big trouble. Hummel's post says this in a more articulate manner by focusing in on government spending as a percentage of GDP and taxation a percentage of GDP and how the numbers, where they appear to be headed based on what we know today, simply cannot work.

Possible (or probable?) outcomes include inflating our way out, "repudiating" the debt (which he feels is more likely) and as an olive branch of sorts he talked about shuttering the medicare program. Obviously all three are unpalatable across many fronts.

I am not the guy to outdebate the author or figure out the solution but I felt there was one glaring omission from the article. Inflating or repudiating has dire consequences for the many countries who hold and continue to buy large amounts of US debt. Quite a few countries own too much to just sell because who would buy? Additionally the extent to which the greenback is the currency used in many transactions globally and the number of countries that peg to the greenback creates an urgency (either now or in the future) to seek out a globally coordinated solution.

That is not to say a globally coordinated solution could be found and successfully implemented but for me to agree with the conclusion drawn in the article I need to see this point addressed even if it is subsequently shot down.

“Economists and the Crisis”

This is from Philip Lane at the Irish Economy Blog:

Economists and the Crisis, by Philip Lane: As has been tracked by several previous posts on this blog, there is by now a considerable debate on what the crisis teaches us about the role of economists.
One dimension of this debate has focused on the failure by the economics profession to predict the onset of the crisis. A second quasi-related dimension relates to the failure to sufficiently appreciate the instability of the pre-crisis financial system. To some, these failures suggest that those economists who did not accurately predict the crisis should have no role in resolving the crisis and constructing the new post-crisis economic system. This debate is playing out at the global level and also in relation to the domestic situation.
These are all big issues and I do not attempt to provide a comprehensive set of answers here. Nevertheless, it may be useful to make a few points. I also mainly focus on the role of academic/research economists and the field of macroeconomics.
First, there is no doubt that the crisis has underlined a mis-allocation of research resources. Over the last 15-20 years, monetary economics in relation to the advanced economies has focused on the analysis of ‘low-amplitude’ business cycles. While business cycles were certainly shallow during this period, the social costs of rare-but-large crashes are so large that it is clear in retrospect that too few researchers were focused on the economics of large crises. (An exception relates to those who focused on emerging market economies, where a lot of analysis has been conducted of the recurrent crises that have affected these economies.)
One role for the economics profession is to attempt to forecast the future behaviour of the economy. This is mainly done by economists in policy roles (since policymaking requires projections of future economic performance) and economists in financial firms (since the return on financial investments also turn on future economic performance).
In fact, very few academic economists get involved in this task: to do it well really requires a lot of data resources and and the tracking of many variables, such that is a full-time task that is best conducted by large teams of economists. However, even if not involved in day-to-day forecasting, academic economists can play an important role by providing an independent voice and focusing on ‘big picture’ issues such as whether the forecasting models are well designed and taking a longer-term horizon for forecasting (most forecasting is concerned with quarter-by-quarter developments or, at most, a 1-3 year horizon).
In fact, the main contribution may not be in forecasting per se but in detailing possible contrarian scenarios in order to challenge the conventional wisdom. This can be very valuable but the limitation is that such ‘Cassandra’ warnings typically cannot be tied to a specific date and it is tempting for the mainstream to dismiss such warnings if they do not quickly come to pass. Moreover, if a forecaster’s reputation depends on short-term performance, a bearish economist may quickly lose credibility if boom conditions persist and the day of reckoning is postponed.
However, the main goal in outlining low-probability but high-cost risk scenarios is not so much to alter ‘central’ forecasts but to encourage decisionmakers to adopt prudent strategies that are robust to the occurrence of the ‘disaster’ scenario. In fact, the ideal is that decisionmakers are sufficiently prudent that the risk of the disaster scenario recedes and those offering the Cassandra warnings never see their worst fears realised.
Certainly, we can point to several academic and non-academic economists who were assiduous in making warnings about the consequences of the lending boom and these deserve great credit.
For many others in academia, their research activities were directed towards other questions. In relation to policy-relevant macroeconomics, a major focus has been on conducting research on ‘institutional design.’ That is, rather that focusing on macroeconomic forecasting, many have opted to contribute to the design of policy frameworks that can deliver enhanced stability and lower the cost of crises should they occur. This includes work on: the zero-bound problem in interest rate policy; macro-prudential financial regulation; counter-cyclical fiscal policies; tax policies vis-a-vis the property sector; the establishment of insurance devices such as reserve funds and rainy-day funds and other mechanisms to mitigate macroeconomic risks. Work on such issues has intensified since the onset of the crisis, together with much innovative work in areas such as the design of ‘non-orthodox’ monetary interventions.
Accordingly, the state of macroeconomics is in flux. While there is much to regret concerning the course of pre-crisis research, it is also true that many of the technical innovations over the last 20 years are now being applied in exciting ways to design crisis-resolution policies. Indeed, it is somewhat ironic that the crisis has led to a tremendous resurgence in interest in macroeconomics: economics is much more interesting in ‘bad times’ than in ‘good times’.
Another very promising development has been the enhanced integration of macroeconomics and finance. Many leading finance economists have responded very quickly to the crisis and have written superb analyses of various dimensions of the crisis and developed innovative new policies to restore financial stability and reduce the risk of future crises.
Many of these points apply equally to both the global and local economic situations. Regarding academic research on the Irish economy, I will point out a ’scale’ problem - the small size of the Ireland means that it is difficult to build a successful academic career by focusing on the local economy, in view of the limited publication opportunities and the small size of the domestic profession. This is a problem.
Finally, some have argued that the crisis has shown the limitations of economics. At one level, this is certainly true and an important lesson for all types of decisionmakers is to recognise that the future is uncertain and relying on Panglossian forecasts (where no downside risk is ever realised) is not an appropriate risk management strategy. It is also the case that economics needs to learn more from adjacent disciplines (psychology, history and the other social sciences). However, the likely evolution is an ‘adapted/enriched’ economics rather than a fully-symmetric multi-disciplinary approach, since the technical basis for most economic policy analyses is predominantly driven by economic factors.

Do Corporations Have a Right to Free Speech?

The Supreme Court is going to decide if corporations have First Amendment rights that allow "direct, unlimited corporate participation in campaigns." Let's hope the decision is that they don't:

Corporate free speech? Since when?, by Jim Sleeper, Commentary, Boston Globe: ...Theodore B. Olson, George W. Bush’s solicitor general until 2004 ... is now the lead advocate for Citizens United, a nonprofit corporation that produced “Hillary: The Movie’’ to swift-boat Senator Clinton’s presidential campaign.
“Hillary’’ didn’t get much distribution because campaign-finance laws ... and court rulings ... bar corporate-funded ads from elections. But now the Supreme Court will review Citizens United v. Federal Election Commission on Sept. 9. Free-speech absolutists, from the National Rifle Association to the American Civil Liberties Union, support Citizens United ’s claim that FEC restraints were unjustified.
But if they win, free speech will be drowned out... Corporations are creations of the republic, not its equals or superiors. We citizens charter them, protect them legally, subsidize them, and even bail them out - and punish them when, as with Pfizer Chemical, their profit-maximizing violates drug-safety rules. We couldn’t do that if a level playing field of “robust speech’’ were overwhelmed by corporate speech...
That’s what’s at stake in the Supreme Court’s worrisome readiness to consider overturning restrictions the republic was wise enough to enact. If Olson’s business clients want to smear Clinton, let them do it openly, not from behind the façade of a corporation claiming First Amendment rights. ...

And:

Will Deep Pockets Always Win? It's In Roberts's Court., by Robert G. Kaiser, Commentary, Washington Post: ...This year or next the court could ... remake the American system by permitting a flood of corporate money into our electoral campaigns..., such a decision would create vast new opportunities for a particular class of Americans..., corporate elites. ...

Until this summer, the barriers preventing the use of corporate and union funds in political campaigns -- the oldest dating to 1907 -- were "firmly embedded in our law"... Could the court really allow corporations and their agents -- the Chamber of Commerce, say, or coalitions of companies created for the purpose -- to campaign openly for or against individual candidates for federal office? Yes, it could. Campaign finance reformers are afraid that the two newest conservative members of the court, Chief Justice John Roberts and Justice Samuel Alito, may be eager to overturn a long line of precedents. ...

How would the political world be changed by legalized corporate campaigning? There would be a vast increase in the influence of corporations. ... Not surprisingly, corporate interests have always done well in Congress. More than a quarter-century ago, then-Sen. Bob Dole ... told the Wall Street Journal: "When these political action committees give money, they expect something in return other than good government."

"We may reach a point," Dole predicted, "where if everybody is buying something with PAC money, we can't get anything done." Dole was prophetic. Congress has failed to legislate on urgent issues for years -- think of health care, climate change, immigration, Social Security and Medicare. The organized interest groups that surround those issues rely on money to defend their positions and frustrate new initiatives. This is the wall our new president ran into this summer.
What is now called "corporate" money in our politics is raised from the shareholders and executives of the companies that maintain PACs. Unions similarly collect PAC contributions from their members. Executives and their families can make personal donations. These are the only legal ways for corporate executives and companies to contribute to campaigns. The law sets limits on how much both PACs and individuals can raise and give...
A decision to allow direct, unlimited corporate participation in campaigns would nullify the impact of those rules. American corporations ... would obviously have enough money to blow the roof off campaign spending standards.
But the most dramatic effect of eliminating legal restrictions on corporations' spending could come not in campaigns but in the realm of lobbying. Fred Wertheimer of Democracy 21 ... explained: "Just imagine the impact on a member of Congress in the midst of deciding what to do on health care or climate control or banking legislation if the member knew that dozens of companies in affected industries each could spend millions of dollars . . . on full-scale campaigns to defeat or elect the member." ...

Statement by G-20 Finance Ministers, Central Bankers on Global Economy

Finance officials from the Group of 20 largest economies Saturday agreed to a global framework for bank capital rules, under which banks will face higher capital requirements, and agreed to guidelines on banker pay. Below is the verbatim text of their statement issued Saturday on the global economy.

Getty Images
U.S. Treasury Secretary Tim Geithner, British finance minister Alistair Darling, French finance minister Christine Lagarde (all in front), China finance minister Xie Xuren and Canada’s finance Jim Flaherty (in back) pose for a group picture Sept. 5 in London.

Communiqué
Meeting of Finance Ministers and Central Bank Governors, London, 4-5 September 2009

1. We, the G20 Finance Ministers and Central Bank Governors, met ahead of the Pittsburgh Summit to assess our progress in delivering the Global Plan for Recovery and Reform and agree further actions to ensure sustainable growth and build a stronger international financial system. We reiterated the need for swift and full implementation of all the commitments made at the Washington and London Summits and have agreed the further necessary steps to strengthen the financial system, as set out in the accompanying declaration.

2. Our unprecedented, decisive and concerted policy action has helped to arrest the decline and boost global demand. Financial markets are stabilizing and the global economy is improving, but we remain cautious about the outlook for growth and jobs, and are particularly concerned about the impact on many low income countries. We will continue to implement decisively our necessary financial
support measures and expansionary monetary and fiscal policies, consistent with price stability and long-term fiscal sustainability, until recovery is secured.

3. We must build on what we have already achieved and tackle the significant challenges that lie ahead. It is vital for growth that we act to support lending, including dealing with impaired assets and conducting robust stress tests where necessary. We must promote employment through structural policies, active labor market policies, and training and education. We will work to address excessive commodity price volatility by improving the functioning and transparency of physical and financial markets and promoting a closer dialogue between producer and consumer countries. We welcome the swift implementation of the $250 billion trade finance initiative and reaffirm our commitment to fight
all forms of protectionism and to reach an ambitious and balanced conclusion to the Doha Development Round.

4. We agreed the need for a transparent and credible process for withdrawing our extraordinary fiscal, monetary and financial sector support as recovery becomes firmly secured. Working with the IMF and the FSB we will develop cooperative and coordinated exit strategies, recognizing that the scale, timing and sequencing of actions will vary across countries and across the types of policy measures.

5. We will work to achieve high, stable and sustainable growth, which will require orderly rebalancing in global demand, removal of domestic barriers and promotion of the efficient functioning of global markets. The need to combat climate change is urgent, and we will work towards a successful outcome in Copenhagen.

6. We have made significant progress in strengthening the IFIs, but more needs to be done. We are close to completing the delivery of $850 billion of additional resources agreed in April, including an expanded, more flexible New Arrangement to Borrow; and $50 billion to support social protection and safety nets, boost trade and safeguard development in low income countries. We welcome the overhaul of the IMF’s lending facilities. We encourage the Multilateral Development Banks to make full use of their balance sheets and reaffirm our commitment to ensure they have appropriate capital, recognizing that they are fully on track to deliver $100 billion of additional lending. In the period ahead we need to focus on providing resources to low income countries to support structural
reforms and infrastructure development.

7. We look forward to prompt implementation of the 2008 IFI governance reforms, and will complete World Bank reforms by Spring 2010 and the next IMF quota review by January 2011. We recognize that the IMF should remain a quota-based organization; and as part of the reforms, the voice and representation of emerging and developing economies, including the poorest, must be significantly increased to reflect changes in the world economy. To achieve this we look forward to substantial progress in Pittsburgh. We also reaffirm our commitment to increase accountability, strengthen the involvement of Fund Governors in strategic oversight, and agree to move to an open, transparent and merit-based selection of IFI management. To improve the role and effectiveness of the Fund in supporting stronger cooperation and ensuring a more sustainable global economy and international financial system, candid, evenhanded, and independent surveillance will be vital. We call on the IMF, working with other international institutions, to continue assessing our actions to secure a sustainable
recovery.

  • See also: G-20 statement on steps to strengthen financial system

  • Coming Up Short…er

    It's not fun being a doomsayer. It really isn't.

    In spite of what some say, I'd much rather live in a world where the day-to-day struggles are easily manageable, the future looks exceptionally bright, and one can readily enjoy life's simple pleasures -- like the beautiful weather we are having in New York today -- without having to worry about the system falling apart and crashing down on top of us.

    But anyone who takes the time to carefully look around and analyze the situation can see that many of the excesses and imbalances that brought us to this point -- and which inspired me to write my March 2007 book, Financial Armageddon -- are still there.

    While the government may have bought some time with its decision to abandon prudence and rationality and, instead, mortgage our children's future to the hilt (mainly to help its powerful friends in the financial world), the problems have not gone away.

    If anything, many of them have gotten a lot worse, suggesting the eventual fallout will be massive and far-reaching. Take, for example, the meltdown in municipal finances. According to a new report, "New Fiscal Year Brings No Relief From Unprecedented State Budget Problems," from the Center on Budget and Policy Priorities, a non-profit think tank, it seems that the worst is yet to come.

    The unprecedented state fiscal problems brought on by the worst decline in tax receipts in decades show no signs of letting up. On July 1 — the start of the fiscal year in most states — an unusually high number of states were still struggling to adopt budgets for fiscal year 2010. Most states have adopted budgets that closed the shortfalls they faced with a combination of federal stimulus dollars, service reductions, revenue increases, and funds from reserves. But these budgets are already falling out of balance as the economy has caused state revenues to decline even more than projected. States will continue to struggle to find the revenue needed to support critical public services for a number of years.

    The Center’s most recent survey of state fiscal conditions found many signs of the depth of the state budget crisis.

    • At least 48 states have addressed or still face shortfalls in their budgets for fiscal year 2010 totaling $168 billion or 24 percent of state budgets.
    • An unusual number of these states are still struggling to balance their 2010 budgets two months after the start of the fiscal year. Three states — Arizona, Michigan, and Pennsylvania — have not yet adopted budgets for 2010. In addition, new shortfalls have opened up in at least 15 of the states that have adopted budgets — California, Colorado, Georgia, Hawaii, Kansas, Kentucky, Maryland, New Mexico, New York, Rhode Island, Utah, Vermont, Virginia, Washington, and Wyoming — plus the District of Columbia . These additional gaps — some of which have already been addressed[1] — totaled $28 billion.
    • The states’ fiscal problems will continue into the next fiscal year and likely beyond. At least 36 states have looked ahead and anticipate deficits for fiscal year 2011. These shortfalls total $74 billion — 15 percent of budgets — for the 30 states that have estimated the size of these gaps by comparing expected spending with estimated revenues, and are likely to grow as more states prepare projections and revenues continue to deteriorate.
    • Combined budget gaps for the next two fiscal years — those already mostly closed for 2010 and those projected for 2011 — are estimated to total at least $350 billion.

    Figure 2’s budget shortfall figures for fiscal years 2009 and 2010 show the national recession’s impact on state budgets. These figures are the total size of the shortfall identified by each state listed. In many cases all or part of this shortfall has already been closed through a combination of spending cuts, withdrawals from reserves, revenue increases, and use of federal stimulus dollars.

    Figure 2 also compares the size and duration of the shortfalls that occurred in the recession of the first part of this decade to shortfalls this time. The current recession is more severe — deeper and longer — than the last one, and state fiscal problems have proven to be worse and are likely to remain so. Unemployment, which peaked after the last recession at 6.3 percent, has already hit 9.4 percent, and many economists expect it to rise higher. This would further reduce state income tax receipts and increase demand for Medicaid and other essential services that states provide. With consumers’ reduced access to home equity loans and other sources of credit, sales tax receipts have fallen more steeply than in the last recession. These factors suggest that state budget gaps will continue to be significantly larger than in the last recession. All but a handful of states have had to face or are still dealing with shortfalls in fiscal year 2010 that total some $168 billion. If, as is widely expected, the economy does not begin to significantly recover until the some time in calendar year 2010 and unemployment remains high through 2010, state shortfalls are likely to be even larger in fiscal year 2011 (which begins in July 2010 in most states). The deficits over the next two fiscal years — 2010 and 2011 — are likely to be more than $350 billion. [2]

    Several factors could make it particularly difficult for states to recover from the current fiscal situation. Housing markets might be slow to fully recover; their decline already has depressed consumption and sales tax revenue as people refrain from buying furniture, appliances, construction materials, and the like. This also would depress property tax revenues, increasing the likelihood that local governments will look to states to help address the squeeze on local and education budgets. And as the employment situation continues to deteriorate, income tax revenues will weaken further and there will be further downward pressure on sales tax revenues as consumers are reluctant or unable to spend.

    Unlike the federal government, the vast majority of states are governed under rules that prohibit them from running a deficit or borrowing to cover their operating expenses. As a result, states have three primary actions they can take during a fiscal crisis: draw down available reserves, cut spending, and raise taxes. States already have begun drawing down reserves; the remaining reserves are not sufficient to allow states to weather the remainder of the recession. The other alternatives — spending cuts and tax increases — can further slow a state’s economy during a downturn, which produces a cumulative negative impact on national recovery as well.

    Some states have not been affected by the economic downturn, but the number is dwindling. Mineral-rich states — such as New Mexico, Alaska, and Montana — saw revenue growth as a result of high oil prices. However, the recent decline in oil prices has begun to affect revenues in some of these states. The economies of a handful of other states have so far been less affected by the national economic problems.

    In states facing budget gaps, the consequences are severe in many cases — for residents as well as the economy. As the 2009 fiscal year ended and states planned for 2010, budget difficulties have led some 41 states to reduce services to their residents, including some of their most vulnerable families and individuals.[3]

    For example, at least 27 states have implemented cuts that will restrict low-income children’s or families’ eligibility for health insurance or reduce their access to health care services. Programs for the elderly and disabled are also being cut. At least 24 states and the District of Columbia are cutting medical, rehabilitative, home care, or other services needed by low-income people who are elderly or have disabilities, or significantly increasing the cost of these services.

    At least 25 states are cutting or proposing to cut K-12 and early education; several of them are also reducing access to child care and early education, and at least 34 states have implemented cuts to public colleges and universities.

    In addition, at least 42 states and the District of Columbia have made cuts reducing the size or work time of state government employees. Such cuts not only often result in reduced access to services residents need, but also add to states’ woes because of the impact on the economy from less consumer activity.

    If revenue declines persist as expected in many states, additional spending and service cuts are likely. Budget cuts often are more severe later in a state fiscal crisis, after largely depleted reserves are no longer an option for closing deficits.

    Expenditure cuts and tax increases are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy. Tax increases also remove demand from the economy by reducing the amount of money people have to spend — though to the extent these increases are on upper-income residents that effect is minimized because much of the money comes from savings and so does not diminish economic activity.

    The federal government — which can run deficits — can provide assistance to states and localities to avert these “pro-cyclical” actions.

    TABLE 1:
    STATES WITH FY2010 BUDGET GAPS

     

    FY2010
    before budget adoption

    FY2010
    mid year gap

    FY2010 Total

    FY2010 Total –
    % of General Fund Budget

    Alabama

    $1.2 billion

    0

    $1.2 billion

    16.7%

    Alaska

    $1.3 billion

    0

    $1.3 billion

    30.0%

    Arizona

    $4.0 billion

    0

    $4.0 billion

    41.1%

    Arkansas

    $146 million

    0

    $146 million

    3.2%

    California*

    $26.0 billion

    $19.5 billion

    $45.5 billion

    49.3%

    Colorado

    $1.0 billion

    $384 million

    $1.4 billion

    18.6%

    Connecticut

    $4.2 billion

    0

    $4.2 billion

    23.9%

    Delaware

    $557 million

    0

    $557 million

    17.6%

    District of Columbia

    $650 million

    $150 million

    $800 million

    12.7%

    Florida

    $5.9 billion

    0

    $5.9 billion

    22.8%

    Georgia

    $3.1 billion

    $1.0 billion

    $4.1 billion

    23.8%

    Hawaii

    $682 million

    $297 million

    $978 million

    19.1%

    Idaho

    $411 million

    0

    $411 million

    16.4%

    Illinois*

    $13.2 billion

    0

    $13.2 billion

    37.7%

    Indiana

    $1.1 billion

    0

    $1.1 billion

    7.5%

    Iowa

    $779 million

    0

    $779 million

    13.2%

    Kansas

    $1.4 billion

    $183.2 billion

    $1.6 billion

    25.6%

    Kentucky

    0

    $1.1 billion

    $1.1 billion

    11.3%

    Louisiana

    $1.8 billion

    0

    $1.8 billion

    21.6%

    Maine

    $640 million

    0

    $640 million

    21.4%

    Maryland

    $1.9 billion

    $700 million

    $2.6 billion

    18.7%

    Massachusetts

    $5.0 billion

    0

    $5.0 billion

    17.9%

    Michigan

    $2.8 billion

    0

    $2.8 billion

    12.4%

    Minnesota

    $3.2 billion

    0

    $3.2 billion

    21.0%

    Mississippi

    $480 million

    0

    $480 million

    9.6%

    Missouri

    $923 million

    0

    $923 million

    10.3%

    Nebraska

    $150 million

    0

    $150 million

    4.3%

    Nevada

    $1.2 billion

    0

    $1.2 billion

    37.8%

    New Hampshire

    $250 million

    0

    $250 million

    16.2%

    New Jersey

    $8.8 billion

    0

    $8.8 billion

    29.9%

    New Mexico

    $345 million

    $432.6 million

    $777.6 million

    14.1%

    New York

    $17.9 billion

    $2.1 billion

    $20.0 billion

    36.1%

    North Carolina

    $4.6 billion

    0

    $4.6 billion

    21.9%

    Ohio

    $3.3 billion

    0

    $3.3 billion

    12.3%

    Oklahoma

    $777 million

    0

    $777 million

    13.6%

    Oregon*

    0

    0

    0

    0.0%

    Pennsylvania

    $4.8 billion

    0

    $4.8 billion

    18.0%

    Rhode Island*

    $590 million

    $65 million

    $655 million

    21.3%

    South Carolina

    $725 million

    0

    $725 million

    12.5%

    South Dakota

    $32 million

    0

    $32 million

    2.9%

    Tennessee

    $1.0 billion

    0

    $1.0 billion

    9.7%

    Texas

    $3.5 billion

    0

    $3.5 billion

    9.5%

    Utah

    $721 million

    $279 million

    $1.0 billion

    19.8%

    Vermont

    $278 million

    $28 million

    $306 million

    27.3%

    Virginia

    $1.8 billion

    $1.5 billion

    $3.3 billion

    20.1%

    Washington

    $3.4 billion

    $195 million

    $3.6 billion

    23.3%

    West Virginia

    $184 million

    0

    $184 million

    4.9%

    Wisconsin

    $3.2 billion

    0

    $3.2 billion

    23.2%

    Wyoming

    0

    $32 million

    $32 million

    1.7%

    Total

    $139.4 billion

    $27.9billion

    $167.6 billion

    24.3%

    Notes: States in italics had not adopted FY2010 budgets as of the date of this report.

    Some or all of the pre-budget shortfalls have already been addressed.

    *The mid-year shortfall shown for California ($19.5 billion) differs from the often-cited $26.3 billion figure because it does not include the $5.8 billion of potential revenues affected by the May ballot measures to avoid double counting and does not include $1 billion to be deposited in reserve. At least $3.2 billion of the $13.2 billion gap in Illinois has not been closed.

    Oregon has a two-year budget. The size of the projected shortfall is shown in Table 2. Rhode Island’s mid-year shortfall of $65 million is a deficit carried over from FY2009.

    TABLE 2:
    STATES WITH PROJECTED FY2011 BUDGET GAPS

     

    Size of Gap

    Percent of FY2010 General Fund Budget

    Alabama

    DK

    na

    Alaska

    $677 million

    15.3%

    Arizona

    $2.6 billion

    26.7%

    California

    $15 billion

    16.3%

    Colorado

    $1.3 billion

    16.9%

    Connecticut

    $4.4 billion

    25.0%

    Florida

    $5.0 billion

    19.3%

    Georgia

    $1.3 billion

    7.2%

    Hawaii

    $320 million

    6.2%

    Illinois

    $10.4 billion

    28.2%

    Indiana

    $316 million

    2.2%

    Iowa

    DK

    na

    Kansas

    $412 million

    6.7%

    Kentucky

    $598 million

    6.2%

    Maryland

    $1.2 billion

    8.7%

    Massachusetts

    DK

    na

    Michigan

    $2.7 billion

    11.9%

    Mississippi

    $544 million

    10.9%

    Nebraska

    $150 million

    4.3%

    New Hampshire

    $250 million

    16.2%

    New Jersey

    $6.0 billion

    20.4%

    New Mexico

    $318 million

    5.8%

    New York

    $4.6 billion

    8.4%

    North Carolina

    $4.4 billion

    21.0%

    Ohio

    $1.1 billion

    4.1%

    Oklahoma

    $725 million

    12.7%

    Oregon

    $4.2 billion

    29.0%

    Pennsylvania

    $4.1 billion

    15.4%

    Rhode Island

    $197 million

    6.4%

    Utah

    $700 million

    13.9%

    Vermont

    $82 million

    7.3%

    Virginia

    DK

    na

    Washington

    DK

    na

    West Virginia

    $243 million

    6.4%

    Wisconsin

    DK

    na

    Wyoming

    $147 million

    8.0%

    Total

    $73.9 billion

    15.0%

    Notes: An entry of "DK" in Size of Gap means that an estimate of the size of the projected gap in that state is not yet available.

    For some states, these estimates reflect projected deficits after taking use of federal stimulus funds into account.

    States Have Restrained Spending and Accumulated Rainy Day Funds

    The current situation has been made more difficult because many states never fully recovered from the fiscal crisis of the early part of the decade. This heightens the potential impact on public services of the shortfalls states now are projecting.

    State spending fell sharply relative to the economy during the 2001 recession, and for all states combined it still remains below the fiscal year 2001 level. In 18 states, general fund spending for fiscal year 2008 — six years into the economic recovery — remained below pre-recession levels as a share of the gross domestic product.

    In a number of states the reductions made during the downturn in education, higher education, health coverage, and child care remain in effect. These important public services were suffering even as states turned to budget cuts to close the new budget gaps. Spending as a share of the economy declined in fiscal year 2008 and is projected to decline further in 2009 and again in 2010.

    One way states can avoid making deep reductions in services during a recession is to build up rainy day funds and other reserves when the economy is growing. At the end of fiscal year 2006, state reserves — general fund balances and rainy day funds — totaled 11.5 percent of annual state spending. Reserves can be particularly important to help states adjust in the early months of a fiscal crisis, but generally are not sufficient to avert the need for substantial budget cuts or tax increases. In this recession, states have already drawn down much of their available reserves; the available reserves in states with deficits are likely to be depleted in the near future.

    For those who are looking for an overview that is a bit less dry or wonkish, The Automatic Earth just happened to include a round-up of horror stories from the world of state and local government finances in its latest post, entitled "September 4 2009: States of Shock":

    California $80 Million in Unemployment Insurance Being Paid out Per Day in California

    • [..] earlier this week 143,000 unemployed Californians exhausted their unemployment benefits.  Now, you might think that this is simply a function of a normal recession. It is not. In fact, many of these people have exhausted their 26 weeks of benefits plus three additional extensions. 
    • Another bill has been introduced to extend benefits for a fourth extension bringing the amount of unemployment insurance available for up to 92 weeks!  This is no minor recession but a major economic shift in our economy.  Without the extension being passed there will be 264,000 Californians with no unemployment insurance by the end of the year. 
    • So far this year California has dished out some $11 billion in unemployment insurance. This is the biggest amount on record, dwarfing the previous record set last year at $8.1 billion. 
    • Weekly benefits range from $65 on the lower end all the way up to $475.  The insurance people receive depends on their previous income.  The average weekly amount is $319.


    States Shut Down to Save Cash

    Furloughs may provide a political benefit to politicians who must placate powerful unions while dealing with taxpayers who fume that government employees haven't shared the pain of a recession that has cost more than six million private-sector jobs. Government jobs have traditionally been an island of stability during recessions, and states kept adding workers well after the recession began at the end of 2007. But since August 2008, states have shed about 33,000 jobs, according to data from the federal Bureau of Labor Statistics. Experts say more layoffs are inevitable. Furloughs have already affected hundreds of thousands of workers -- more than 200,000 in California alone.

    More than 20 states have considered forcing employees to take unpaid furlough days, according to anecdotal reports as well as data compiled by the National Conference of State Legislatures, which says it is too early to calculate exactly how much these moves save the states. About five million Americans work for state governments, according to federal statistics, from colleges and prisons to public hospitals, parks and all kinds of administrative offices. In some states, labor unions have turned to the courts to try to stop shutdowns.


    Rhode Island Judge Refuses to Block Rhode Island Government Shutdown

    Rhode Island residents looking to renew their drivers licenses, get help claiming unemployment benefits or even go golfing could face closed doors Friday after a judge cleared the way for Gov. Don Carcieri to shut down most of the state government. Unions representing nearly 13,000 state workers are seeking to stop the shutdown day, the first of a dozen planned by Mr. Carcieri. Superior Court Judge Michael Silverstein on Thursday refused their request to do so, instead ordering both sides into arbitration, a process that could take two months or more. A state Supreme Court justice planned to hear an appeal from the unions Thursday afternoon.

    Mr. Carcieri, who didn't immediately comment on Judge Silverstein's ruling, ordered the shutdowns to help close a $68 million shortfall in a state budget hammered by surging unemployment and dwindling state tax revenue. The shutdowns will require all but essential workers to stay home without pay, or about 80% of the state's work force. "We want to stop the shutdowns and go to arbitration," said Brendan Fogarty, president of Local 400, whose union represents employees from the departments of transportation, environmental management and administration. "We don't want our members to not get paid while we wait for the decision."


    California The human toll of state budget cuts

    Big ol’ honkin’ crocodile tears: Those are what our state legislators have been shedding with regard to passing their smoke-and-mirrors budget. "We’ve had to make the hard decisions," they bemoan with grimly set mouths.

    I don’t buy that for a second; it’s simply not true. As education, health and human services are slashed this year because of poor stewardship in Sacramento, the Legislature gives a pass on levying a California oil extraction tax, the only oil-producing state in the nation not to have one.

    Streamlining government by consolidating — or eliminating — well-paid regulatory boards and commissions? Nope. Sewing shut corporate loopholes that allow offshore tax breaks? Uh-uh. Steps toward meaningful pension reform in the public sector? Not a chance.

    In fact, the Fair Political Practices Commission said in early August that state officials had fattened their lobby-stuffed coffers by more than $60 million through fundraisers in the first half of 2009 — and it’s not even an election year. No, our solons in Sacramento are taking the money and making the tough decisions to balance the budget on the backs of their least powerful constituents, those without lobbies: the young, old and infirm.


    Connecticut Connecticut governor to reluctantly allow budget to become law

    Connecticut's state budget is to take effect Sunday because Gov. M. Jodi Rell is reluctantly letting it become law without her signature. Rell criticized the budget as calling for more borrowing and vague plans for future spending. But the governor said she would allow it to become law because Connecticut residents were feeling the effects of the budget stalemate.


    Connecticut Rep. Stripp votes against state budget"

    "This economy has forced residents to trim their budgets, to change the way they live their lives. Their government should face the same reality."

    [Stripp] claimed the Democratic-approved budget "is built on unprecedented levels of debt, gimmicks and holes that will require even more taxes in the near future." According to Stripp, the budget passed by the legislature includes $1.5 billion in tax increases, borrowing $2 billion to plug holes in the next two years, emptying the $1.4 billion rainy day account, and counting on $1.5 billion in federal stimulus money. The state’s current budget deficit is estimated to be about $8 billion.


    Maryland State budget cuts mean rough road for county

    Baltimore County will lose 90 percent of the state aid that pays for highway construction and road maintenance as part of an effort to close an estimated $740 million deficit in this year's Maryland budget. The rest of the county cuts will come from aid to police, the health department and the Community College of Baltimore County. The state Board of Public Works unanimously approved Gov. Martin O'Malley's proposed $450 million in cuts to the state budget Aug. 26. Included are the elimination of 364 state jobs and the imposition of up to 10 furlough days for state employees.


    New York Counties Don't Want Budget Burden

    The state budget gap is big -- $2.1 billion -- but county executives from across the state are warning legislators not to pass that burden down to the counties. "Should they propose cutting spending, we will stand with them," said Stephen Acquario, executive director of the New York State Association of Counties. "If they propose cost shifting to county property tax payers, we will not and we will fight these proposals."


    Conn, Pa Connecticut and Pennsylvania state budgets still in limbo

    A program that helps thousands of Connecticut welfare recipients find work has been in limbo for two months. Family resource centers, which provide child care, adult education, and other services, have shut their doors. In Pennsylvania, day-care centers have laid off workers. Some preschool programs are scrapping plans to reopen in September. And tens of thousands of state employees had to wait to be paid for several weeks.

    While most states have already passed their budgets, Connecticut and Pennsylvania remain the only two in the nation still at odds over how to balance the books this fiscal year amid plummeting state revenues. Connecticut's revenue flow has dropped by $2 billion from last year while Pennsylvania's came in $3.3 billion less than expected.


    Florida Florida economist: $1 billion budget hole next year, $2.3 billion by 2011-12

    Florida chief economist Amy Baker is friendly and quick with a smile, but her messages tend to be real downers. So it went Thursday, when Baker told the Legislative Budget Commission that the coming year's budget faces a potential gap of $923 million, and by 2011-12 when federal stimulus dollars dry up, the hole could be as big as $2.3 billion.

    Credit a still-weak economy and real estate market, combined with increasing needs in areas like health care and other state-funded services. Baker used terms like "massive wealth destruction" to describe the affect of the recession and plummeting home values on Floridians and the state economy. She gave scary stats like the median price of a home going from $250,000 to $147,000. Oh, and she said to brace for more high unemployment numbers.


    Ohio Ohio Roundtable sues state over slots

    Gov. Ted Strickland’s bid to install video slot machines at Ohio’s horse-racing tracks has been hit by another legal challenge, with U.S. Sen. George Voinovich, R-Ohio, joining those against the plan. The Ohio Roundtable, a conservative public policy organization based in suburban Cleveland, filed a lawsuit Thursday against the slots plan, asking the Ohio Supreme Court to declare it unconstitutional. The suit challenges Strickland’s plan to install 17,500 slot machines at seven racetracks through an expansion of the Ohio lottery. The plan, estimated to raise $933 million for state coffers through June 2011, was included in a two-year state budget bill passed by the Ohio General Assembly in July.


    Michigan No Budget Deal Yet in Lansing

    State budget talks continued for another day in Lansing. But there's still no resolution to the $3 billion deficit. Governor Granholm huddled with the Legislature's Republican and Democratic leaders for most of the day. They were joined by some business leaders to help facilitate the negotiations. They shared some ideas on long-term cost savings.


    Michigan Status of State Budget

    Republican and democratic leaders are meeting at the State Capitol, now in the tenth hour of a marathon negotiating session. They're trying to dig the state out of its 3 billion dollar deficit. It's a story 6 News has been keeping a close eye on. The speaker of the house, the majority leader in the senate and the governor are still talking behind closed doors. They've been negotiating since 9am and they're scheduled to go until 9pm. A lot hinges on these negotiations. As you know, the clock is ticking. We've got just days now to get a budget passed or state government will shut down.


    Michigan Michigan groups call for higher taxes to save budget

    A coalition of social service, education and labor groups called on state officials Wednesday to raise $2.1 billion more in taxes and end $600 million in tax exemptions to avoid deep cuts in the budget that starts Oct. 1. Michigan faces at least a $2.7 billion budget deficit in the upcoming budget year. It will be able to fill some of its budget shortfall with federal recovery money, but those calling for increases say the state needs to make long-term changes to its tax structure to avoid future deficits.


    South Carolina Budget and Control Board cuts 4% from South Carolina state budget

    A 4 percent across-the-board cut to South Carolina’s budget could mean more cuts for area school districts. But decisions on what cuts will be made might not trickle down to districts for the next two to three weeks, officials said. Schools, colleges, prisons and other state agencies lost 4 percent of their budgets Thursday as South Carolina’s financial oversight board dealt with lagging tax collections. The five-member Budget and Control Board, meeting in Columbia, agreed to trim $200.5 million from a $5.7 billion budget. That included $85 million from the Department of Education.


    Mississippi Mississippi governor orders 2.9% cut in $6 billion budget

    Mississippi Gov. Haley Barbour on Thursday ordered budget cuts for some state programs, including all levels of education, because state tax collections were sluggish during the first two months of the fiscal year. Barbour ordered cuts of $171.9 million in a $6 billion budget. That's about 2.9 percent of the overall spending plan. Some programs will remain untouched, while others are being asked to save up to 5 percent.

    The governor tells agencies how much money they're losing, but it's up to the agencies' executives to decide which services to shrink or eliminate. Barbour said it's easier for them to do that early in the fiscal year rather than late. "We've got a budget storm on the horizon," Barbour said during a news conference Thursday. "We can't avoid the storm. We know the best thing is to prepare early, act early."


    Utah Governor Convenes Budget Cutting Commission

    Governor Gary Herbert has organized a commission to take a fresh look at state budget cuts to bridge what could be an $800 million shortfall next year. And unlike his predecessor, Governor Jon Huntsman, he’s not promising to avoid cuts to public education and critical human services. "Nothing should be off the table, we ought to look for ways to be efficient as we possibly can with the taxpayers’ dollar," Herbert says. "That’s why it’s called optimization here of government services."


    Idaho Choices loom amid bad budget news for Idaho

    Idaho is facing a $151.4 million tax revenue shortfall in the current budget year, according to a new state forecast, and state leaders will have to decide whether to further slash the state budget or dip into rainy-day funds that now total $274.3 million.

    Lawmakers and Gov. Butch Otter have been reluctant to spend much of the state’s reserves, which stood at $391 million before the Legislature convened this year. But they spent nearly a third this year, while also imposing deep cuts in the state budget, including the first-ever cut in state funding for public schools and a 5 percent cut in personnel costs statewide, for all agencies. That’s led to furloughs, layoffs and more; for example, this Friday, the legislative services offices is closed due to staff-wide furloughs.

    "We have been here before," Otter said today, in response to the gloomy revenue news. "We have the experience, the tools and the commitment needed to address this situation while maintaining necessary public services. We are fortunate to be far better off than most other states [..]"


    California Social service agencies hurt by massive state budget cuts

    The moment Gov. Arnold Schwarzenegger signed the new California budget, billions of dollars across the state evaporated from social programs designed to protect society’s most vulnerable — the elderly, the homeless, the disabled. "The whole safety net is thinner," said Avi Rose, director of Jewish Family and Children’s Services of the East Bay. Much of the $16.1 billion California budget reductions were drawn from social programs, such as in-home health care for the elderly or disabled, mental health services, employment services, community clinics and child welfare and foster care programs. The $16.1 billion cuts — combined with $14.9 billion cuts enacted in February, local government funds, tax revenues and federal stimulus dollars — will help close a $60 billion gap in a $198 billion budget.


    Arizona Arizona report cites continued state revenue drop

    Arizona's tax revenues continue to drop and the state's economy apparently has not has reached bottom yet, according to a new state report released Monday. The Joint Legislative Budget Committee staff's report showed state tax collections of $573 million in July. That's 10 percent below July 2008 revenue and $33 million below this year's forecast for the month. Of the two biggest revenue sources, sales tax collections for the month were down 18 percent from a year earlier and individual income tax collections were down 11 percent.[..]

    Despite a constitutional requirement for a balanced budget, the state on June 30 finished the last fiscal year with a shortfall approaching $500 million. The treasurer has had to borrow hundreds of millions of dollars on a daily basis from a variety of state accounts to cover state operating expenses


    New Hampshire Republicans call for state special session

    Republican legislative leaders called upon Gov. John Lynch to convene a special session to cut spending in a state budget embroiled in a $110 million court dispute and faced with lagging revenues over the past two months. Senate Republican Leader Peter Bragdon, of Milford, and House Republican Leader Sherman Packard, of Londonderry, asked Lynch to release state agency head work papers from last fall that assumed a 3 percent cut in state spending over the next two years.

    "We need to come back; we need to make the cuts which we are asking for,'' Packard told reporters. "We are asking for the governor to step up, call us back into special session so we can make the cuts necessary to make.'' The Supreme Court will hear oral arguments Oct. 15 on a lower court ruling that judged as illegal the state budget making use of $110 million in surplus with the Joint Underwriting Association. Bragdon said Lynch's optimism that the state will win the lawsuit doesn't settle the budget dilemma especially with state taxes and fees off forecast by 15 percent or $17.6 million last month.


    Beauty and the Macroeconomic Beast

    Discover Magazine's blog Cosmic Variance responds to Paul Krugman's essay How Did Economists Get it So Wrong?:

    ...One part of the essay worth commenting on, or at least musing about, is the punchline. Krugman thinks that a major factor leading to the failures of economics to understand the mess we’re currently in was the temptation to think that beautiful models must be right. ...
    Without knowing much of anything about the relevant issues, I nevertheless suspect that this moral might be a bit too pat. Sure, people can fall in love with beautiful theories, to the extent that they overestimate their relationship to reality. But it seems likely to me that the correct way of understanding all this, once it’s properly understood, will look pretty beautiful as well. General relativity is widely held up as an example of a beautiful theory — and it is, when understood in its own language. But if you put the prediction of GR in the Solar System into the language of pre-existing Newtonian physics (which you could certainly do), it would look ugly and ad hoc. Likewise, Newton’s theory itself is quite elegant, when phrased in the language of potentials on a fixed spacetime background; but if you express the theory in terms of differential geometry (which you could certainly do), it looks like a mess. Sometimes the beauty/ugly distinction between theoretical conceptions is more a matter of how well we understand them, and less about their intrinsic qualities.
    So my counter-hypothesis would be that it wasn’t beauty that was the problem, it was complacency. If you have a model that is beautiful and works well enough, you’re tempted to take pride in it rather than pushing it to extremes and looking for problems. I suspect that there is a very beautiful theory of economics out there waiting to be developed, one that understands perfectly well that individuals aren’t rational and markets aren’t perfect. One that has even more impressive-looking equations than the current favored models! Beauty isn’t always a cop-out.

    I'm not sure if complacency is the right word, there is great credit in the profession for finding anomalies within the existing framework. The problem is that it's almost always possible to tweak the existing model in some way that rationalizes any new regularity discovered in the data that is at odds with existing theory. And without the ability to take the models to the lab and subject them to experiments, there's no way to immediately test the new structures (and as I've noted before, of course the models will pass the test with existing data, they were built to rationalize all the important known regularities in the data). It's only when a lot of time has passed and we have enough data to sort things out, or when we have large shocks of the type we've recently had, that we get the kind of information that we need to subject models to rigorous tests.

    We didn't have "a model," we had competing models all of which claimed to be able to explain the known regularities in the data, and while I think the evidence does point in one direction, the evidence was not conclusive enough to seal the case for one model over another. As I said once before, "I think what has happened will have a much bigger impact on the profession and the models it uses to describe the world than most economists currently realize," and hopefully this shakeup in the profession brought about by the current crisis will move macroeconomic theory in a positive direction. With any luck, "the correct way of understanding all this, once it’s properly understood, will look pretty beautiful."

    The (Sluggish) Employment Report

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    I've been trying to figure out what to say about the employment news today that the economy lost "only" 216,000 jobs last month and that the unemployment rate ticked upward to 9.7%. While I don't have anything to add that hasn't been said already by someone, somewhere - see below - the main thing I want to do is to reinforce the message that employment is likely to lag output once the economy begins recovering, so we must continue programs that support the unemployed even after it's clear that output has turned the corner. If anything, we need to reinforce those programs, not reduce them. (Note: Contrary to the impression one might get from reading about recent economic developments, according to the data we have in hand the recovery has not started yet, i.e. we have not yet passed the trough of the output cycle let alone the employment cycle. What is happening is that the fall appears to be slowing substantially and we are poised to turn the corner, but that has not happened yet. And while expectations are high, there's no guarantee it will happen anytime soon, particularly if you strip out the effects of the stimulus package.)

    Here's more: Brad DeLong, Paul Krugman, Spencer, Calculated Risk, Real Time Economics, Andrew Leonard, Credit Writedowns, The Curious Capitalist, The Big Picture, Calculated Risk II.

    How Banks Bust

    A new report by the inspector general for the Federal Deposit Insurance Corp. offers an interesting snapshot of the collapse of Alliance Bank in Culver City, Calif., which failed in February. The $1.1 billion bank was eventually toppled by some of the same types of commercial real estate lending that is haunting dozens of other banks. But the inspector general’s report offers a rare glimpse into the supervisory ratings of Alliance. In other words, it shows the report card regulators had been giving the bank since 2000.

    The report card is based on the CAMELS rating system, with “1” being the best score a bank can get and a “5” being the worst.

    There are seven numbers in each score.

    The first number stands for “Capital adequacy,” so if a bank has superb capital, they will get a 1. If a bank’s capital is mediocre, they might get a 3.

    Next is “Asset quality,” followed by “Management,” followed by “Earnings,” followed by “Liquidity” and “Sensitivity to Market Risk.”

    The final number is a composite score. So, the overall score, or grade. A bank that gets a “4” or a “5” is typically put on the FDIC’s problem list, which means they are at a higher risk of failure.

    Here’s Alliance’s breakdown. They went from a composite rating of “2” in May 2007 to a “5” in June 2008, which is nearly as steep of a drop as possible.

    06/30/2008 455554/5
    05/07/2007 222222/2
    03/27/2006 222232/2
    04/11/2005 222132/2
    03/29/2004 222223/2
    04/07/2003 222222/2
    04/29/2002 223332/2
    01/08/2001 222232/2
    02/07/2000 333222/3


    Study Hard and Stay in School = Socialism?

    Apparently, people who are upset that prayer has been removed from schools are worried the president's "study hard and stay in school" message is an attempt to indoctrinate students.

    They are worried the speech will "spread President Obama’s socialist ideology."

    Of course, this is fine:

    While Republicans are busy gnashing their teeth over President Obama's imminent indoctrination of the nation's schoolchildren, there's an education story bubbling up in Texas that could have considerably more far-reaching consequences.

    The GOP-controlled State Board of Education is working on a new set of statewide textbook standards for, among other subjects, U.S. History Studies Since Reconstruction. ...

    Approved textbooks, the standards say, must teach the Texan student to "identify significant conservative advocacy organizations and individuals, such as Newt Gingrich, Phyllis Schlafly, and the Moral Majority." No analogous liberal figures or groups are required...

    Paul Krugman has it right, these are not people that will be persuaded by logical arguments:

    The point is that whatever is driving all this doesn’t have anything to do with the realities of what I, or, much more important of course, Obama say or do. Obama could have come in proposing to pursue an agenda identical to Bush, and he would still be a socialist/Commie/fascist, with those of us who don’t see it that way lying Nazis ourselves.

    Something is going very wrong in the heads of a substantial number of Americans.

    There is no middle ground, no ideological center, no place to meet these people halfway. Any attempt to appease these is a waste of valuable time, gives the media a controversy to cover, and encourages more of the same.

    But how do you defend against this nonsense when the media's coverage gives it the status of a legitimate claim? If the administration stays silent, the media will build the controversy up in an attempt to force a response - they do very well ratings-wise when there are controversies - and that amplifies the false, negative message. If the administration engages the false charges and responds, that too simply stokes the fires and encourages more. So what's the answer?

    Somehow, the focus needs to be on the messengers rather than the message, and Barney Frank's "On what planet do you spend most of your time" is a start in this direction.

    Update: Joe Klein:

    It Gets Worse, by Joe Klein: I was at a Blanche Lincoln town hall meeting in Russellville, Arkansas, yesterday--and the number of people who believe that the President has larded the government with communists (!) was astonishing. One woman said there were four known communists in the government and that she'd researched it on the internet. When I asked her afterwards, she said environmental adviser Van Jones, legal advisor Cass Sunstein (who was last spotted being excoriated by the left for supporting the FISA revisions), someone named Lloyd and she didn't remember the fourth. And wasn't it suspicious that Obama had all these czars working for him--that was a Russkie commie term, wasn't it? When I asked, the woman admitted that, among other things, she occasionally listened to William Bennett's conservative radio show. I pointed out that Bennett had once been the Drug Czar, appointed by Ronald Reagan. Life sure can be complicated sometimes. ...

    The amazing thing remains not only the unwillingness of responsible Republicans--a term that is in danger of becoming an oxymoron--to call bull-- on this, but also the willingness of many prominent Republicans to join in the slinging of garbage. Michelle Cottle reports that there are Republican-sanctioned efforts afoot to have parents not send their children to school on September 8 because the President is scheduled to address the nation's school-children that day and they are afraid that he will fill their little heads with socialist propaganda. That is somewhere well beyond disgraceful. 

    Could I just say that the intensity of this getting pretty scary...and dangerous? We are heading toward a cliff and the usual brakes of civil discourse are not working. Indeed, the Republicans have the pedal to the metal--rushing us toward a tragedy far greater than the California health care forum finger-biting Karen describes below. I'm usually not one to panic or be overly worried about the state of our country--even when we do awful things like invade Iraq and torture people, we usually right our course before long--but I have a sinking feeling about where we're headed now. I hope I'm wrong.

    We'll see about the "usually right our course before long" claim for torture and Iraq (and Afghanistan?), and so far our progress doesn't bode well if that's the model for repairing civil discourse and public debate.

    Economists React: Improving Trend ‘Can’t Be Denied’

    Economists and others weigh in on the increase in the unemployment rate and moderating job losses.

    • Arguably the most disheartening feature of this employment report was the 0.3% jump in the unemployment rate to a 26-year high of 9.7%. That essentially confirmed suspicions that surprising decline in July was largely a statistical aberration. On a slightly more encouraging note, the average and median duration of unemployment improved, largely the result of back-to-back declines totaling some 624k in the number of people unemployed for 15 to 26 weeks. This indicates that most of the sharp drop in the number of people continuing to collect weekly jobless pay was the result of workers returning to work rather than running out of benefits. If that develops into a trend, overall employment gains should soon follow. –Nomura Global Economics
    • The rising unemployment rate (a lagging indicator) was expected with a sharp rise in teenage unemployment expected after the minimum wage was increased in July. The unemployment rate for college-educated workers remained at 4.7% while the unemployment rate for less than high school diploma workers rose to 15.6%. In a labor market driven by the demand for skilled workers, especially in the service sector, this month’s employment report should not be a surprise to anyone. Cyclical recovery in the economy is faced with structural challenges in the labor market. –John Silvia, Wells Fargo
    • The moderation in the pace of job loss during August largely reflected a sharp jump in the health care category and a moderation in the pace of job loss in the retail sector. These positive developments were partially offset by a shaper decline in manufacturing employment… Employment in the motor vehicle assembly plants fell 15,000 in August on the heels of a 28,000 rose in July. Many of the auto factories that are typically shuttered for retooling during the July survey period were actually up and running this year. The seasonal adjustment factors anticipate that the auto employees who are usually out of work in the July survey will return in August. But since many of these people remained on the job in July, there wasn’t nearly as much of an incremental rise in the raw number of workers in August of this year. We believe there was an artificial boost of 30,000 or so to July payrolls from seasonal factors trying to account for temporarily laid off workers who weren’t in fact laid off this year, and this effect was fully unwound in August. –David Greenlaw, Morgan Stanley
    • The continued moderation in the pace of job losses does offer some encouragement on the state of the U.S. labor market. Nevertheless, with the soft economic backdrop, we are likely to see further job losses in the coming months as U.S. businesses continue to adjust their payrolls in the face of weak demand, which will likely limit the extent to which consumer spending can be depended upon to power the eventual recovery. It is important to note, however, that the labor market is generally a lagging indicator of economic activity –Millan L. B. Mulraine, TD Securities
    • Job losses continued in August but the good news is that the cut backs are on a clearly declining trajectory. After peaking at over 740,000 in January, the rush to restructure workforces has slowed just about every month. Also, the percentage of industries posting job increases was the highest in a year. One note of caution, though: Previous declines were revised upward by nearly 50,000, which raises the question what this drop will look like once the next round of data are released. –Naroff Economic Advisors
    • The report shows the divergence between the ‘haves’ and the ‘have nots’ in this economy—with average hourly earnings rising 0.3% in each of the last two months, labor income is rising at a solid pace for those with jobs while the near 25-week average duration of unemployment underscores how long it takes to find a new job for those who are unemployed. –RDQ Economics
    • One slight fly-in-the-ointment for this jobs report was the household survey, which is an alternative, and some would argue, more reliable measure of employment than the non-farm payrolls numbers. This showed a 392 thousand decrease in employment, worsening from a 155 decline in July. But even here, the trend in job losses seems to be abating. We do not expect to see positive jobs growth before next year, and it will probably be another 2 quarters before the unemployment rate peaks. An unemployment rate of 11 or more is likely to be seen before it finally heads slowly down starting the second half of 2010. –Rob Carnell, ING Bank
    • Whether or not today’s and other recent reports overstate the case, the improving trend of the labor market after the autumn/winter carnage cannot be denied. What is still very much open to question is how fast the move will be to stabilization of payrolls and eventually to job growth. We continue to believe that the process will be a slow one, and that households will be contending with weak income growth and balance sheet issues for some time. –Joshua Shapiro, MFR Inc.
    • An interesting side note to the August data is the loss in government jobs. While the Federal government is trying to its part it is being more than offset by job losses in the Post Office and in state & local governments. By most measures, the pace of layoffs in the private sector is declining. –Steven Blitz, Pangea Market Advisory

    Compiled by Phil Izzo


    Jobless Rate for Men Far Worse Than Women’s

    Looking underneath the headlines, two points ring out from today’s jobs report.

    1) Men are getting hammered by this recession. The jobless rate for men hit 10.1% in August. This now matches the post World War II high hit in 1982. It’s even higher if you include teenagers; 10.9% unemployment for men and teen boys. That compares to a 7.6% jobless rate for women and an 8.2% rate for women and teen girls, which are well below their 1982 peaks. The attached chart shows it all. Men always do more poorly in downturns, in part because they tend to work in more cyclical industries. In this downturn, they’ve been in industries that got hit especially hard: construction, manufacturing and financial services. It would be worth looking at how this is playing out for President Barack Obama. Are his approval ratings getting hit harder among men? Probably.

    2) The economy is experiencing another huge increase in productivity in the third quarter. Nonfarm labor productivity grew at an annual rate of 6.6% in the second quarter. Look for something in that eye-popping range for the current quarter. Here’s a rough sketch of the numbers: Today’s jobs numbers showed that the Labor Department’s index of aggregate hours worked by Americans was at 98.9 in August, down steeply from a second quarter average of 99.7. That’s from a combination of job cuts, reductions in overtime and other cuts to work shifts. Let’s assume there’s no change in hours worked in September. That would mean the total amount of hours that Americans worked in the third quarter would be down at about a 2.8% annual rate. The economy seems to be on track to grow at an annual rate of 3% or more. More output and fewer hours worked means more productivity in the neighborhood of 6%. You’ll be hearing a lot of talk about a jobless recovery in the months ahead. The upside is that this is good for corporate profits. The downside is that workers will suffer even after the economy comes back.


    Broader Unemployment Rate Hits 16.8% in August

    Job losses moderated in August, but the unemployment rate ticked up 0.3 percentage point to 9.7%, the highest level since June 1983.

    But another more comprehensive gauge of unemployment ticked up even more. The government’s broader measure, known as the “U-6″ for its data classification, hit 16.8% in August, 0.5 percentage points higher than July.

    The comprehensive measure of labor underutilization accounts for people who have stopped looking for work or who can’t find full-time jobs. The index had declined last month, along with the headline unemployment rate. That decline was sparked by more people dropping out of the labor force. This month the labor force increased by 73,000 people and the plunge in employment was larger in the household survey, which is used to calculate the jobless rate, than in the payroll survey used to calculate the change in nonfarm payrolls.

    The U-6 figure is the highest since the Labor Department started this particular data series in 1994. But, similar to the headline unemployment rate, it likely isn’t as bad as it was in the 1980s. U-6 only goes back to 1994, but a discontinued measure has a longer history. That old U-6 measure peaked at 14.3% in 1982. Through some calculation, a comparable measure can be determined in the current report. Under the old U-6 methodology, the August rate would be 13.3%, the highest rate since 1983, but still below the peak.

    Still, the elevated U-6 rate gives a clearer picture of the broader employment situation. The 9.7% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things.

    The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

    Many forecasters expect the official unemployment rate to top 10% by the end of this year, and the broader rate could easily top 18%. For people in this group, comparisons to the Great Depression (when 25% of Americans were out of work) may not look so wild even if overall economic activity is holding up better.


    IMF Chief Strauss-Kahn Warns Against ‘Premature Exists’ From Fiscal, Monetary Stimulus

    Dominique Strauss-Kahn, managing director of the International Monetary Fund, warned world governments against “premature exits from monetary and fiscal policies” despite signs that “the global economy appears to be emerging at last from the worst economic downturn in our lifetimes.”

    Predicting that the recovery will be “relatively sluggish” and unemployment is likely to continue to rise through next year, Mr. Strauss-Kahn said, “[P]olicy makers should err on the side of caution when they decide when to exit from their crisis response policies.” After all, he said, global growth has “turned the corner” mainly because of what he called “massive policy support.”

    Mr. Strauss-Kahn made the comments in remarks prepared for delivery in Berlin Friday in the Sixth Annual Bundesbank Lecture. A prepared text was released in Washington. The former French finance minister, also said that “the time is right” for policymaker to devise exit strategies. “Failure to clarify and formulate these plans will risk undermining confidence and the recovery process itself,” he said.

    The IMF is more optimistic about the global economy than it was just a few months ago. It now expect global growth of slightly less than 3% in 2010, Jörg Decressin, an IMF forecaster, said in Washington earlier this week. That’s up from the IMF’s July estimate of 2.5%.

    The IMF chief also said that, despite a consensus that financial regulation and supervision must do better at mitigating systemic risks, “the reform effort is not proceeding as quickly as is necessary to address the problems raised by the crisis.” Among other things, he endorsed proposals for tougher capital requirements for the world’s banks and said they should be crafted to prevent excessive risk taking.

    In addition, Mr. Strauss-Kahn predicted that the world will eventually see alternatives to the dollar rise “in stature and international usage,” but predicted change would come “over the coming decade, rather than the coming months.”


    Droplets of Seawater: A Global Warming Solution?

    Economists have long been dubious about the Obama administration’s proposal to create a new cap-and-trade system to limit the economy’s production of greenhouse gases.

    So how would they fix the global climate threat? How about keeping global temperatures in check by spraying clouds with drops of seawater to help make them bigger and whiter and more reflective of the sun’s rays. That’s the conclusion of a small panel of very acclaimed economists assembled by the Copenhagen Consensus, the Nobel-heavy brain trust assembled every year by Bjorn Lomborg, the iconoclastic author, to tackle the world’s problems.

    The five-member panel, which includes three Nobel laureates in economics, ranked fifteen climate-change remedies, from reengineering clouds to a carbon tax, in order of how much bang they’d offer for the buck. “Marine cloud whitening” came out on top.

    The idea of spraying ocean clouds with water would cost only $9 billion. Mr. Lomborg says it could take just 1850 ships to do the tricks. But he says it could offer trillions of dollars in benefits by acting like a giant coat of 100+ sunblock. “It’s unbelievably cheap if it works,” says Finn Kydland, Copenhagen Consensus panel member and a 2004 Nobel winner, whose work on “time consistency” problems explained how short-sighted thinking can prompt government policy makers to make long-run mistakes.

    Other Nobel winners on the panel included Thomas Schelling, a game theorist who won in 2005, and Vernon Smith, an experimental economist who won in 2002. “We’re not saying, let’s go do this tomorrow. We’re saying, let’s spend 10 years and find out if this works,” Mr. Lomborg told us.”It would be immoral not to.”

    Geoengineering has its critics—both within the Copenhagen Consensus and without. The British Institute of Mechanical Engineers tsk-tsked this week at the viability of climate engineering. Mr. Lomborg says he got a pleasant reception Thursday when he explained the findings to White House advisers.

    Joseph Aldy, a White House adviser on environmental policy, said, “Administration officials meet with individuals and organizations who hold a wide variety of views about energy and environmental policy to listen to their ideas.”

    So what was the second-best idea? A climate policy focused on intensive research and development of low-carbon energy sources—not tinkering with today’s solar panels, but a top-down effort meant to address the “Herculean” magnitude of replacing fossil fuels worldwide in coming decades.

    And the three worst choices? The group ranked as “very poor” solutions three versions of a carbon tax, which would do little to drive clean energy and even less to curb emissions, but which would succeed nicely in derailing the global economy, the experts found.

    A cap-and-trade proposal, such as that operating in Europe and under consideration in Congress, didn’t even make the list, meaning it ranks below “very poor” in their skeptical minds. Mr. Lomborg, who has long advocated a technology-heavy solution to fighting climate change, figures the findings could goose the global climate talks slated for Copenhagen in December. “If we don’t get a global agreement, we won’t fix climate change,” he says, reluctantly cheerleading for the confab. “But if it’s just another Kyoto, then it’s a wasted ten years,” he says.

    Far-out ideas such as climate engineering and more R&D could help break the impasse between the West and the Rest at the climate talks. “They offer a much better chance” of convincing the developing world to play ball, he says: Easier to convince China to spend a few hundred billion to create a whole new industry than to spend hundreds of billions to shackle the economic growth that has transformed the country.


    Geithner Pushes for Tough Global Capital Rules

    Treasury Secretary Timothy Geithner sent a detailed letter to the finance ministers from the Group of 20 industrial and developing nations calling for tough new capital rules for the world’s largest banks. The standards, which Mr. Geithner said should be agreed on by the end of 2010 and implemented by the end of 2012, would call for much higher capital requirements at banks and require a much higher quality capital, with a heavy emphasis on equity.

    [Tim Geithner]
    Geithner

    U.S. officials have called for tougher capital requirements for months, but Mr. Geithner’s detailed proposal comes as many European leaders have shifted their focus on bank regulation to things such as limiting the size of banks and caps on bonuses. So the U.S. proposal could be controversial and set up a clash of top regulators as fault lines form over the best way to supervise banks.

    In his “Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms,” Mr. Geithner calls for:

    1) capital requirements that are designed to protect the stability of the financial system and individual banks. In other words, reduce the ability of banks to “accumulate” risk during boom times by requiring them to hold more capital during boom times.

    2) all banks to hold more capital and the biggest banks to hold even more capital than that. No large financial companies should be able to evade these limits.

    3) a greater emphasis on the quality of capital. Higher quality capital means it is better able to absorb losses. Voting common equity should represent a large majority of a bank’s tier 1 capital.

    4) risk-based capital requirements that reflect the risk of a bank’s exposures. Reduce the reliance on a bank’s internal models to dictate what their capital requirements should be. Regulatory capital ratios should reflect more accurate information about the health of a bank.

    5) a way of addressing the huge problem caused by procyclicality, which essentially means that banks have little capital to spare when times are bad because they were able to hold less capital when times are good. This has been a huge issue that policy makers have struggled with for years, and Mr. Geithner has several pages worth of ideas on this front.

    6) a “simple, non-risk-based leverage constraint.” G-20 leaders have agreed to this in principle, but it has not yet been implemented. It would make it harder for banks to game risk-based capital standards because there would be a capital floor they couldn’t fall below.

    7) a conservative and explicit liquidity standard. This is something regulators have been emphasizing in the last year and many consider as important as capital standards.

    8) ensuring that tougher capital requirements don’t allow firms to migrate to places where such capital requirements don’t exist. In other words, keep the playing field balanced and don’t allow huge risks to buildup in the system outside of regulation.


    “What is the Future of Coal?”

    Robert Stavins says there are considerable uncertainties regarding the future of coal:

    What is the Future of U.S. Coal?, by Robert Stavins: ...At the center of much political attention in the United States is “the future of coal”... CO2 emissions from coal consumption accounted for 30 percent of U.S. greenhouse gas emissions in 2005, and nearly all resulted from coal’s use in generating electricity. According to EIA forecasts, the vast majority of coal demand over the coming decades will be from existing power plants, with currently existing plants still accounting for two-thirds of total demand in 2030. Therefore, while much attention has been given to how climate policy and technological advances may affect new power plants, over the next two decades a policy that affects both existing and new coal-fired power plants would have far greater impacts than a policy that affects only new plants.
    Potential climate policies can be grouped into four major categories: standards, subsidies or credit-based programs, carbon taxes, and cap-and-trade (like Waxman-Markey). The cost of retrofitting existing plants to meet CO2 emission standards would likely be so high that standards could be imposed only on new plants..., standards would be unlikely to affect operations of existing plants. In fact, by increasing the cost of new plants, such standards can encourage generators to extend the life of existing plants. Hence, new source standards hold little promise in this domain.
    Likewise, while subsidies or credit-based programs ... may displace some new coal-fired generation with other types of generation, they will have little, if any, effect on the operation of existing coal-fired power plants. And carbon taxes are opposed by the regulated community because of the additional costs they would place on private industry, and are opposed by environmentalists because of the political challenges.
    This leaves cap-and-trade. Such a system would cover both new and existing emission sources, and could have a more pervasive effect on coal use than standards, subsidies, or credit-based programs. For this and other reasons, most policy attention in the United States has been focused on potential cap-and-trade systems.
    Coal combustion generates the most CO2 emissions per unit of energy. As a result, a cap-and-trade system’s effect on the cost of coal use would be significantly greater than its effect on the cost of gasoline or natural gas consumption. For example, a $100 per ton of CO2 allowance price would increase the average cost of electricity generation from coal-fired power plants by about 400%, the average cost of electricity generation from natural gas plants by about 100%, and gasoline prices by about $1.00 per gallon.
    The competitiveness of conventional coal-fired electricity generation relative to other technologies diminishes as the stringency of an emissions cap increases. Therefore, much attention is being given to opportunities to employ carbon-capture-and-storage (or CCS) technologies, which would separate carbon dioxide from other stack gases, liquify it, and store it underground for long periods of time.
    Three important caveats about CCS should be considered. First, it is likely that CCS will be economically practical only for new plants, and only when CO2 allowance prices exceed $100 per ton of CO2 for early adopters (cost estimates have increased over the past few years, as technological and institutional challenges have become clearer). Second, there is significant uncertainty about the cost of CCS, because it has not yet been commercially demonstrated. And third, CCS significantly reduces, but does not eliminate, CO2 emissions from coal-fired generation.
    In light of the growing momentum toward a mandatory U.S. climate policy, the anticipated impacts of such policies on coal use are an important issue. But the remaining uncertainties are great. Impacts of a climate policy on coal use will depend upon the type of climate policy employed, the stringency of the policy, the future price of natural gas, the future cost and penetration of nuclear and renewable technologies, and the cost of coal-fired generation with carbon capture and storage technologies. ...

    A Look Inside Fed’s Balance Sheet — 9/3/09 Update


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    The Fed’s balance sheet expanded again in the latest week, rising to $2.069 trillion from $2.052 trillion. The majority of the increase came from purchases of mortgage backed securities, Treasurys and agency debt as the makeup of the balance sheet continued to shift out of emergency facilities and into debt holdings. The Fed started a program in March to ramp up such acquisitions in order to push down long-term interest rates low. Direct-bank lending fell back below $250 billion in the latest week, the lowest level since the collapse of Lehman Brothers. Central-bank liquidity swaps rose for the first time in six weeks, as overseas demand for dollars rose slightly possibly with banks stocking up some U.S. currency ahead of the Labor Day bank holiday. The commercial paper and money market facilities also dropped again and are at their lowest levels since inception, as companies decide to take their funds out and tap investors directly as sentiment in the market improves.

    In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. Every Thursday afternoon, the chart will be updated with the latest data released by the Fed.

    In an effort to simplify the composition of the balance sheet, some elements have been consolidated. Portfolios holding assets from the Bear Stearns and AIG rescues have been put into one category, as have facilities aimed at supporting commercial paper and money markets. The direct bank lending group includes term auction credit, as well as loans extended through the discount window and similar programs.

    Central bank liquidity swaps refer to Fed programs with foreign central banks that allow the institutions to lend out foreign currency to their local banks. Repurchase agreements are short-term temporary purchases of securities from banks, which are looking for liquidity and agree to repurchase them on a specified date at a specified price.

    Click and drag your mouse to zoom in on the chart. Clicking the check mark on categories can add or remove elements from the balance sheet.


    Jobs Report Preview: Fewer Cuts, But Higher Unemployment

    All eyes are on the Labor Department’s employment data for August, set to be released on Friday — one that might look good by comparison but probably won’t show any substantial improvement in labor-market conditions last month.

    It’s a familiar theme of late. Last month, the government’s employment report showed the economy shed 247,000 jobs in July and the unemployment rate stood at 9.4% — news that compared to prior months was positively cheery. For one, the jobless rate declined for the first time since February 2008, although as we noted last month, it resulted from people dropping out the labor force. Meanwhile, the 247,000 job losses in the month marked the smallest decline since August 2008.

    So what can we expect from the coming report? The consensus forecast from a Dow Jones Newswires survey sees the unemployment rate rising back to 9.5% amid 233,000 job losses. Essentially, economists expect the labor market didn’t get significantly better — or worse — last month.

    The middling forecast partly results from conflicting signals in other employment reports this week:

    • The Institute for Supply Management released reports showing expansion returned to the manufacturing sector last month while the rate of contraction slowing in services industries, two glimmers of good news — but the employment components of both reports suggested job cuts continued in August.
    • On Tuesday, payroll giant Automatic Data Processing estimated that 298,000 private-sector jobs were lost in August, though it could be overstating the weakness partly because it doesn’t include government jobs that are included in the Labor Department statistics, and also because the index has overshot the official number for six of the last eight months.
    • Finally, today the Labor Department issued the latest data on weekly jobless claims. The number improved slightly, but the level of initial claims for unemployment benefits has remained stubbornly high. As we noted last month, the peak in jobless claims often presages the end of recession and improvement in the jobs market, but the drop from the peak is moving especially slow in the current downturn.

    All of this indicates that Friday’s number is likely to be slightly better, but pain in the labor market isn’t past yet. “Employment conditions are improving at such an agonizingly slow pace that most Americans will not be able to detect any genuine improvement,” said Bernard Baumohl of the Economic Outlook Group. “We expect to see only microscopic improvements. That may well typify what the 2009-2010 economic recovery will be about.”