Wednesday, March 30, 2011

Today's links

1--Suicide squads' paid huge sums amid fresh fears for nuclear site, Telegraph

Excerpt: The radioactive core in one reactor at Fukushima's beleaguered nuclear power plant appeared to have melted through the bottom of its containment vessel, an expert warned yesterday, sparking fears that workers would not be able to save the reactor and that radioactive gases could soon be released into the atmosphere.

Richard Lahey, who was a head of reactor safety research at General Electric when the company installed the units at Fukushima, said the workers, who have been pumping water into the three reactors in an attempt to keep the fuel rods from melting, had effectively lost their battle. "The core has melted through the bottom of the pressure vessel in unit two, and at least some of it is down on the floor of the drywell," he said.

The damning analysis came as it emerged that workers at Japan's stricken nuclear plant are reportedly being offered huge sums to brave high radiation in an attempt to bring its overheated reactors under control. The plant's operator, the Tokyo Electric Power Company, is hoping to stop a spreading contamination crisis which could see another 130,000 people forced to leave their homes....

State broadcaster NHK said underground tunnels linked to reactors 1, 2 and 3 are flooded with water containing radiation measured in some spots at a highly dangerous 1,000 millisieverts an hour. Workers in protective gear are shoring up the tunnel shafts with sandbags to stop the water – which reportedly contains concentrations of long-lived caesium-137 – from seeping into the sea about 55 to 70 metres away.

Japan's Nuclear Safety Agency said that the plutonium was "not at levels harmful to human health", but the government's top spokesman Yukio Edano called the situation "very grave", and confirmed fears that at least one reactor had suffered a partial meltdown.

2--BP Managers Said to Face U.S. Manslaughter Charges Review, Bloomberg

Excerpt: Federal prosecutors are considering whether to pursue manslaughter charges against BP Plc (BP/) managers for decisions made before the Gulf of Mexico oil well explosion last year that killed 11 workers and caused the biggest offshore spill in U.S. history, according to three people familiar with the matter.

U.S. investigators also are examining statements made by leaders of the companies involved in the spill -- including former BP Chief Executive Officer Tony Hayward -- during congressional hearings last year to determine whether their testimony was at odds with what they knew, one of the people said. All three spoke on condition they not be named because they weren’t authorized to discuss the case publicly.

Charging individuals would be significant to environmental- safety cases because it might change behavior, said Jane Barrett, a law professor at the University of Maryland.

“They typically don’t prosecute employees of large corporations,” said Barrett, who spent 20 years prosecuting environmental crimes at the federal and state levels. “You’ve got to prosecute the individuals in order to maximize, and not lose, the deterrent effect.” ....The manslaughter investigation is focusing on decisions by BP managers leading up to the explosion that may have sacrificed safety in favor of speed and cost savings, one of the people said....

The decisions included moving ahead with operations without the recommended equipment, failing to run a test to ensure the well’s stability, and misreading the results of other tests.

3--Fed Presidents Support Completion of Bond-Buying Program, Bloomberg

Excerpt: Two Federal Reserve regional bank presidents voiced support for the completion of the central bank’s $600 billion Treasury securities-purchase program through June, saying it’s too soon to remove stimulus from the economy.

Boston Fed President Eric Rosengren said yesterday that high unemployment and low core inflation mean record monetary support is still necessary. Chicago Fed President Charles Evans said he believes data suggesting a more sustainable recovery won’t prompt an alteration in the bond-purchase program.

“It could be that $600 billion is just about the right number,” Evans told reporters before a speech in Columbia, South Carolina. “I won’t be surprised if that in fact is the decision. I still think it is a high hurdle to stop short of $600 billion. So far I haven’t seen it.”

Their remarks highlight the difference of views that has emerged since the Fed’s March 15 meeting, when policy makers kept in place the plan to buy bonds while concluding the recovery is on “a firmer footing” and the labor market is “improving gradually.”...

4--13% of all U.S. homes are vacant, CNN Money

Excerpt: High residential vacancies are killing many housing markets, as foreclosed homes sit on the market and depress sale prices and property values.

And it's only getting worse: The national vacancy rate crept up to just over 13% according to last week's decennial census report. That's up from 12.1% in 2007.

"More vacant homes equal more downward pressure on home prices," said Brad Hunter, chief economist for Metrostudy, a real estate information provider.

Maine had the highest proportion of empty housing stock, at 22.8%. Other states with gluts of empty houses included Vermont (20.5%), Florida (17.5%), Arizona (16.3%) and Alaska (15.9%).

5--Republicans for Environmental Progress: An Endangered Species, by J.S. via Economist's View

Excerpt: The modern Republican Party has absolutely no affirmative environmental agenda whatsoever, and goes so far as to contest the entire rationale for continued environmental progress. Ironically, this extremely reactionary environmental agenda is coming at a time when the ideas that Republicans once championed are now widely accepted as the best ways to structure environmental policy. ...

I have been involved in environmental policy for almost 20 years and have never seen anything like the current Republican assault on the environment. It is truly astounding. To be clear, the Republicans leading this charge against environmental progress are in no way following conservative principles―they are doing the exact opposite. ...

There is absolutely nothing “free market” about letting polluters trash the environment for free. In fact, this fits the definition of a market failure, not a well-functioning capitalist system. What the Republicans are currently practicing is crony capitalism of the worst kind: rewarding industry at the expense of the public interest and future generations.

It is the Republican rank and file who should be the most offended by these policies. Public opinion polls consistently show that both Democrats and Republicans care deeply about the environment, and support clean energy policies and strong environmental safeguards. Unfortunately, the once proud environmental ethic of the Republican Party has been snuffed out by a small group of radical Tea Party extremists who are deeply confused both about true conservative principles and the proper role of government in society. And once moderate Republicans who supported sensible environmental policies are nowhere to be seen. Until true conservatives retake the Republican Party we will be left doing little more than damage control, and the chances of a new comprehensive affirmative environmental agenda are slim to none.

6--Quick PCE Notes, Tim Duy, Fed Watch via Economist's View

Excerpt: The February Personal Income and Outlays report revealed the drag of higher food and energy costs as a 0.3 percent gain in nominal disposable personal income was knocked back to a 0.1 percent loss in real terms. Similarly, the 0.7 percent gain in nominal spending turned into a just 0.3 percent real gain. While better than the flat reading in January, the relatively weak performance of PCE this quarter will lead analysts to knock down Q1 growth forecasts. I try not to read too much into any one quarter, and tend to view the consumer slowdown in light of the acceleration at the end of last year. Overall, the trend in PCE growth since the middle of last year is consistent with annual gains of around 3% a year. The footing is firming, and it is sustainable, but it is still far short of what is needed to rapidly return consumption to its pre-recession trend....

The new normal, it seems. On one hand, I have a preference for steady growth over recession and stagnation. On the other, the gap between the new trend and old shown by the green and red lines at least partially reflects the lack of job opportunities for the nation’s unemployed – and few are expecting that situation to change dramatically this year....

Given that spending accelerated faster than income, the saving rate by definition fell, although it continues to hover around the 6% mark. The higher saving rate provides some cushion for higher food and energy prices, allowing households to absorb and adapt to these price gains without an abrupt change in behavior. ...

From the most recent FOMC statement:

The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations.

Again, see the commodity chart above. Core inflation has remained remarkably stable during the past decade despite the instability of commodity prices. This suggests that overall monetary policy has not been far off the mark.....

Bottom Line: Try to look through the data to spot underlying trends; this is what the Fed is doing, and it will lead them to complete the current round of asset purchases. Watch energy prices closely, keep an eye on the other risks (Europe, Japan, etc) while awaiting the next big test - the exit of the Fed from large scale asset purchases. The economy stumbled last year when the Fed shifted to neutral. Coincidence, or should have been expected given that housing would not rebound and fiscal stimulus would fade? We will have another test of the importance of the Fed lifeline in the second half of this year.

7--More Profits, Fewer Jobs, Annie Lowrey, Slate

Excerpt: On Friday the federal government released the latest chapter of a year-old economic mystery: If you're a corporation, the economy is great. If you're a worker, the economy is still pretty horrible. According to the Bureau of Economic Analysis, real corporate profits neared an all-time high in the last three months of 2010, with companies raking in an annualized $1.68 trillion in pre-tax operating profits. (After tax, that comes to $1.25 trillion, about equal to the GDP of India.) The Federal Reserve estimates that companies are sitting on about $1.9 trillion. At the same time, unemployment remains at 8.9 percent, and job growth is still anemic....

How can the corporate economy be so profitable while the jobs economy remains so weak? Part of the answer lies in improved productivity. When the recession hit, businesses fired millions of workers then asked the rest to make up the difference—and, in many cases, they did. Productivity increased 3.9 percent in 2010, while labor costs fell. To simplify: Businesses paid fewer workers to do more. In addition, big corporations found customers overseas. Americans might not be ready to spend just yet, but consumers in Asia and elsewhere are—exports climbed 21 percent to $1.28 trillion in 2010....

But in the last quarter of 2010, the story was all about Wall Street. Profits actually decreased a bit at nonfinancial firms. But companies like investment banks and insurers saw profits climb to an annualized $426.5 billion. The financial sector now accounts for about 30 percent of the economy's overall operating profits....

Still, record-high profits do not necessarily translate into improvements in the economy—as the country's 14 million jobless workers would be (not so) happy to tell you. For the past year, companies have hesitated to spend all of that cash, worried about a lack of good investment opportunities and fearful about demand. The upside is that it seems they are beginning to spend down their $1.9 trillion pile. The downside is that it does not seem that it will be to the immediate benefit of American workers.

There are a few ways big businesses are starting to tap their cash reserves. For one, a number of companies have increased buy-backs of their own shares. Bloomberg reports that companies listed in the Standard & Poors 500 have approved $149.8 billion in buy-backs in the past three months—about 50 percent more than they did in the first three months of 2010. Second, the big corporate piles of cash have set off a flurry of mergers and acquisitions....Finally, a number of companies have used or are planning on using their excess cash to bump up their dividend payments, giving investors a portion of the profits.

Buy-backs and dividend payments might make investors wealthier, and that has a positive impact on the economy. But it does not translate into jobs, at least not quickly. Plus, mergers often bring layoffs. In other words, corporate America isn't using its historic horde of cash in ways that will immediately benefit working America—meaning the long slog is not looking like it will get any shorter.

8--There is no US federal debt crisis, Francis Bator, Financial Times

Excerpt: Fiscal prudence matters. But the helter skelter rush to cut this year’s and next year’s budget deficits is high-priced folly. For want of enough spending overall by households, businesses and government taken together, i.e., for want of enough buying, a huge amount of production capacity is standing idle, producing nothing. 13.7m unemployed workers — four for every job that is vacant — are searching for jobs instead of working and earning income. At the same time, states and local governments, forced by shrunken revenues and shrinking federal subsidies to curtail their spending, are shutting health centres, allowing roads and bridges to crumble, and laying off nurses, firemen and teachers.

With all that spare capacity, why are businesses not hiring more workers and increasing production? Because their sales people are telling them that there would be no buyers. Debt-burdened households, deficit plagued governments and businesses with a lot of their plant and machines standing idle, are simply not spending enough overall to buy all the goods and services that businesses are easily capable of producing. A trillion dollar per annum shortfall in buying is keeping production by most industries below 2007 levels and the unemployment rate near 9 per cent. And with Treasury bill rates near zero — and core wage-price inflation below target — the Federal Reserve is almost if not quite out of ammunition.

If anyone tells you that cutbacks in this year’s and next year’s federal spending will encourage enough additional private spending to make up the difference — never mind narrow the inherited trillion dollar output and jobs gap — look him hard in the eye and ask him if he’d really bet his children’s tuition money on that proposition. It’s nonsense. Reduced sales to government and lower transfer payments from government, therefore less spendable private income, and more jobless workers and idle factories, will be more likely to cause both households and businesses to reduce their spending.....

As to the Chinese, frightened by what rapid yuan appreciation would do to their export-addicted economy, they have been, as Paul Krugman put it, pumping out yuan, buying up dollars. How likely is it that they’ll risk harming their own economy by reversing course abruptly? A gradual reversal calibrated to facilitate an orderly, collaboratively managed dollar depreciation is of course precisely what’s needed.

That said, we must of course be ready to cope with a disorderly, speculation-driven depreciation, however unlikely. The Federal Reserve and the Treasury are no doubt keeping their contingency plans current. But as Ben Bernanke, Federal Reserve chairman, and Tim Geithner, Treasury secretary, know better than almost anyone (and as I remember from ancient but close, direct involvement) sensible policy aimed at safeguarding the real economy can prevent really serious harm. Fear of bond market hysterics need not and should not rule America’s fiscal choices.....

While there is no federal debt crisis (as distinct from a governance crisis and a tax-phobia crisis,) we do need a credible multi-year budget plan soon that would over time hold the debt/GDP ratio in check. For the near term, the plan should allow for a one-time fiscal boost in case the recovery remains anemic. (must read)

9--Massive Setback for Merkel, Der Spiegel

Excerpt: It is being hailed as the start of a new political era in Germany. The Green Party looks set to appoint its first state governor after Sunday's election in the state of Baden-W├╝rttemberg. The result is a huge setback for Chancellor Angela Merkel.

The Fukushima disaster has had, and will have, many consequences around the world. One of the more unlikely, however, appears to be the results of Sunday's election in the southwestern German state of Baden-W├╝rttemberg, where skepticism about nuclear power helped propel the Green Party to a historic victory over Angela Merkel's conservative Christian Democratic Union (CDU).

The Greens doubled their share of the vote to 24.2 percent, according to preliminary results released by the state electoral commission. They are now likely to govern the state in a coalition with the center-left Social Democratic Party (SPD), which secured 23.1 percent of the vote, down 2 percent from the last election in 2006. In what would be a first for Germany, the Greens, as the senior partner in the coalition, will likely appoint the state governor.

The Green's leading candidate, Winfried Kretschmann, talked of a "historic electoral victory," while national Green Party co-leader Claudia Roth described the result as "the start of a new political era."...

Setback for Merkel

The conservatives had already been suffering in the polls, but the Fukushima disaster effectively turned the state election into a referendum on nuclear power, dealing a blow to the CDU and boosting the fortunes of the anti-nuclear Greens. The debate damaged incumbent CDU Governor Stefan Mappus, who had in the past been a vocal supporter of nuclear power. Merkel's political U-turn on atomic energy in the wake of the catastrophe in Japan also appears to have backfired. Voters apparently saw her sudden decision to temporarily take a number of older reactors off the grid as blatant electioneering....

Sunday's result is a huge setback for Angela Merkel, whose CDU ruled the state for almost six decades. The result further reduces the number of seats the CDU and FDP have in the Bundesrat -- Germany's upper legislative chamber, which represents the interests of the states -- and will make it even harder for the national government to pass certain legislation.

10--Bank of America set to write down principal on California mortgages, Housingwire

Excerpt: Bank of America will begin a new pilot program in the next few weeks, allowing some California homeowners to receive a principal writedown on their mortgage.

The program will be funded from the $699.6 million the California Housing Finance Agency received from Treasury Department's Hardest Hit Fund last year. A spokesperson for the CalHFA said there is no set amount of loans BofA is targeting, but the bank will be soliciting eligible homeowners soon. CalHFA has not given BofA a limit to the funding "unless they blow us out of the water," the spokesperson said.

CalHFA is in talks with other lenders and servicers, but they did confirm that Guild Mortgage Company will also participate in the program.

"We're really excited to get the program going," the CalHFA spokesperson said.

Rebecca Mairone, the new national mortgage outreach executive at BofA, said in an interview with HousingWire Monday that it would soon begin the California initiative as well as several other states that received Hardest Hit Funds.

Earlier in March, BofA announced it was sending letters to Arizona homeowners regarding possible principal writedowns under Hardest Hit Fund programs. Through that program, BofA said it was targeting 8,000 households.

Ally Financial agreed last week to participate in another principal-writedown program in Michigan, again using the Hardest Hit Fund.

11--Is inflation causing Americans to stop spending, Time

Excerpt: The BEA releases its own measure of inflation called the Personal Consumption Expenditures Index. It is less well known than the popular Consumer Price Index, but some members of the Federal Reserve think it is a more accurate measure of inflation than the CPI. Well the PCE index rose 0.4% in February, that was the largest monthly increase for that figure in two and a half years.

The result is that when you adjust for inflation, personal income appears to be falling, down 1%. And that strong spending rebound we were seeing a few months ago? Well, again adjust for inflation, and that seems to be disappearing as well. Here's what the popular economics blog Calculated Risk had to say (note when economists say "real" that means they are adjusting for inflation):

Even though PCE growth was at expectations, real PCE was low - and this suggests analysts will downgrade their forecasts for Q1 GDP. Using the two month estimate for PCE growth (averaging the growth of January and February over the first two months of the previous quarter) suggests PCE growth of around 1.4% in Q1 (down sharply from 4.0% in Q4).

So is inflation the thing that will get consumers to finally close their wallets? The thing is inflation is actually a two-edged sword when it comes to consumption. When inflation rises quickly, that can hurt confidence in the economy and as long as prices are rising faster than incomes (which usually happens when inflation really takes off) that can cause people to conserve their dollars. But if inflation is too low, that can hurt spending as well.

Here's the thing: Inflation is part of recoveries. As the economy starts to grow faster, that boosts demand and with it prices tend to rise as well. This happens in every recovery. And it is a hump that every recovery has to get over. If prices start to rise faster than the economy, then recoveries fail. But that doesn't usually happen. This time around the usually weak job growth has people concerned that rising prices will overtake the recovery. For now that doesn't look likely. Even with February's 0.4% jump in inflation as measured by the PCE, prices are still only up 1.6% in the past 12 months. (And that is actually less than the CPI's jump in the past month of 2.1%.) Real GDP, by comparison, rose nearly 3% in 2010. So, for now, inflation seems unlikely to derail the recovery. But if prices continue to rise like they did in February we might have a problem. Stay tuned.

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