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[Dec 30, 2015] IMF chief Lagarde warns of disappointing global growth in 2016

Notable quotes:
"... Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the Fed begins what is expected to be a series of interest rate increases. ..."
www.theguardian.com

The IMF managing director, Christine Lagarde, said the prospect of rising interest rates in the US and an economic slowdown in China were feeding uncertainty and a higher risk of economic vulnerability worldwide.

Added to that, growth in global trade has slowed considerably and a decline in raw material prices was posing problems for economies reliant on commodities, while many countries still had weak financial sectors as the financial risks increase in emerging markets, she said.

"All of that means global growth will be disappointing and uneven in 2016," Lagarde said, noting that mid-term prospects had also weakened as low productivity, ageing populations and the effects of the global financial crisis dampened growth. In October, the IMF forecast that the world economy would grow by 3.6% in 2016.

... ... ....

Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the Fed begins what is expected to be a series of interest rate increases.

Lagarde warned that rising US interest rates and a stronger dollar could lead to companies defaulting on their payments and that this could "infect" banks and states.

[Dec 27, 2015] Summer Rerun Why America Will Need Some Elements of a Welfare State

Notable quotes:
"... Wolf concludes that America cannot do without some form of a welfare state, specifically improved training, education, and universal health care. ..."
"... Our problem is that we are asking for concessions that are beyond the acceptable limit for elites in any historical epoch. We're asking the powerful and the rich to give up their money and power for the greater good of all mankind. This is not likely to happen unless a powerful enough segment of the elite comes to the inescapable conclusion that they're literally dead meat if they don't and therefore opts for survival over position. ..."
"... Welfare etc are social services that can only be funded through the world-wide looting operation of the American empire ..."
Dec 27, 2015 | naked capitalism

An excellent column by Martin Wolf in the Financial Times, where he is the lead economics editor. Starting with principles put forward by Ben Bernanke in his recent speech on income inequality, Wolf concludes that America cannot do without some form of a welfare state, specifically improved training, education, and universal health care.

James Levy, December 26, 2015 at 4:32 pm

I have no idea if Marx was right, in the long run, or wrong–the verdict is still out on the long-term viability of industrial capitalism, which is less than 250 years old and creaking mightily as I write this. It may be that when Rosa Luxemburg said that the choice was between Socialism and Barbarism, she underestimated how likely barbarism was. What I do know is that capitalism today isn't just too ugly to tolerate, it is downright murderous. Its imperatives are driving the despoliation of the planet. It's love of profit over all else is cutting corners and creating externalities that are lethal. But it has made a few percent of the global population comfortable and powerful, and they are holding onto that comfort and that power come hell or high water (and, ironically, if things continue apace both are on the menu).

Our problem is that we are asking for concessions that are beyond the acceptable limit for elites in any historical epoch. We're asking the powerful and the rich to give up their money and power for the greater good of all mankind. This is not likely to happen unless a powerful enough segment of the elite comes to the inescapable conclusion that they're literally dead meat if they don't and therefore opts for survival over position. I am not enthusiastic that this will happen before it is way too late to save more than a fraction of the current world population, and send those people back to the lifestyles and thought patterns of 30 Year's War Europe.

    1. digi_owl

      Its a generational thing. Right after WW2, many of the elite had just that epiphany that unless they have the common people behind them, they are toast. But now they are dead or dying, and their grandkids are basically once more thinking that they can go it alone. This because they have not had the required experiences that help develop the wisdom.

      Reply
  1. Paul Tioxon

    What Marx saw long ago, we can see today, and without relegating ourselves to his analysis, come to our own conclusions. Contradictions, summed up well by Lincoln as a house divided against itself cannot stand is just as true today. Millions of guns to protect the citizenry from tyranny have only resulted in a 1/4 million murders and 5 times as many shootings since Jan 1, 2000, some placing people in wheel chairs and other crippling gunshot afflictions, and more and more institutionalized state oppression, economic exploitation and miserable lives propped up in an alcoholic haze until the liver or brain gives out. We have more food than we know what to do with so we throw away almost as much as we eat. And we have eaten ourselves into morbid obesity, diabetes and heart disease. The contradictions abound from the kitchen table to the kitchen cabinet of the White House where there seems to be nothing passed so freely as bad advice.

    The Welfare State arose from the sacrifices of the population in giving their sweat, blood and tears to defend their nation during war, to be rewarded for their sacrifices, rewards which were demands for power sharing and more in the paycheck, more benefits and more time to enjoy the life spent in a more prosperous world. It seems to me that Obamacare is not simply in death spiral all of its own making, but even more so, because it is the best attempt capitalism can produce in an America that is the most capitalist of societies down to the marrow its bones. Little competition from the Church or the social relations between nobles and subjects set for in the laws that were disestablished to free markets for commodification and money making. Money making enterprises structured the laws from slavery, to the voting franchise with little from the state to cushion any of the hardships of life in America.

    Health care is the largest industry we have. It is approaching 20% of the GNP. I remember the great national freak out in the late 1970s when congress realized it was approaching 10%. Nothing seems to be stopping the costs from spiraling upward and onward. No risk of deflation here where nothing is spared to save a life, operate on some poor little afflicted child, or buy a piece of equipment the size of an office building that shoots a proton beam at cancer, one cancer cell at a time.

    When Obama Care becomes a clear burden to even the democrats who can point to it now as some sort of accomplishment, and it is an accomplishment for the people who finally get to see a doctor, get into a hospital, get that operation or diagnosis that saves their lives, when even those accomplishments number in the millions, it will be part of a health care industry for which $Trillions of dollars can no longer be justified or even funded. As that financial collapse approaches, it would be better for politicians to declare the defeat of a program better rolled into one universal single payer system currently operating as Medicare, than try to reform, shore up or the old tried and true public lie, get rid of its waste and corruption.

    Declare victory with Medicare as the solution and put everyone into it. The only paper work left should be each person's medical history with diagnosis and healing as the happy ending to the story.

    Reply
  2. jgordon

    There is a fundamental error in perception in the Western world that is so pervasive that people can't even see it. As a most basic component of a healthy society people need to be able to survive at a local community level without outside support. Only after that is taken care of should people concern themselves with luxuries, inter-community and international relations.

    Welfare–not to mention other government services–can appear to have positive impacts if one only looks at their effects in isolation, however I think there is a devastating and pernicious impact on people's ability to form community bonds and have local resilience with things like welfare.

    Also, let's also not forget that Americans consume far more of the earth's precious resources than any other group in the world. Welfare etc are social services that can only be funded through the world-wide looting operation of the American empire. Do these recipients of empire benefits have a moral right to share in the loot of empire? Perhaps instead of domestic welfare it would be more ethical for the American empire to provide social benefits for the indigenous peoples who are forced from their lands to work like slaves for the empire's benefit. Although admittedly if the American empire used it's loot for the benefit of the foreign peoples whose lives it destroyed then there'd probably be nothing left to spread around to the military, or to pacify and police the domestic population. So I suppose that's not a serious proposal.

    Reply
    1. Left in Wisconsin

      Welfare etc are social services that can only be funded through the world-wide looting operation of the American empire

      This is obviously not true. Unless every social democratic country in the world is considered as a piece of the American empire. And even then, I would argue that we can easily afford a generous welfare state with a small shift in priorities away from (globally destabilizing) defense spending to social productive spending on human development.

      Reply
      1. jgordon

        Obvious to who? America lavishes so much money on its military not only because of corruption, but also because it has the world reserve currency and is a guarantor of the safety of international shipping. These facts are inextricably linked to the America's status as the world hegemon. The empire provides order and structure, and enforces the extraction of resources from the periphery to the center. The bread and circuses are inextricably linked to the empire's military activities and trying to tease them apart will only lead to collapse of the entire system sooner than it will otherwise happen.

        "Social Democratic"–now that's an interesting phrase. Did you know that Syria is a democracy, and was an extremely prosperous and well-education nation prior to 2011?

        Reply
        1. Vatch

          "Did you know that Syria is a democracy"

          Here's a telling paragraph from the Wikipedia article about Syria:

          Hafez al-Assad died on 10 June 2000. His son, Bashar al-Assad, was elected President in an election in which he ran unopposed.[68] His election saw the birth of the Damascus Spring and hopes of reform, but by autumn 2001 the authorities had suppressed the movement, imprisoning some of its leading intellectuals.[84] Instead, reforms have been limited to some market reforms.

          [Dec 27, 2015] The Sneaky Way Austerity Got Sold to the Public Like Snake Oil

          Notable quotes:
          "... When children don't get good educations, the production of knowledge falls into private control. Power gets consolidated. The official theoretical frameworks that benefit the most powerful get locked in. ..."
          "... Not only were the politicians worried about votes but also the welfare state was a way to head off a left wing revolution. ..."
          "... the change began in 1976 with the election of Rockefeller-funded Jimmy Carter, who immediately launched an austerity program. Support for Keynesian economics was further eroded by the 70's stagflation which we now know was caused by Mid East oil but at the time the "left" were like deer in the headlights, with no clue what to do. ..."
          "... The final nail in the coffin was the fall of the Berlin Wall and the collapse of the USSR, discrediting communism. After that, "there was no alternative" to corporate capitalism. Or more accurately, the left was slow to formulate an alternative and to this day is still struggling with an alternative as we have observed with Syriza. It's not enough to oppose austerity, you have to have a constructive plan to fix things. ..."
          Dec 27, 2015 | naked capitalism
          LP: You indicate that this approach to budgeting was invented as a way of making the New Deal acceptable to the business community. How did that work? Over time, who has benefitted from it? Who has lost?

          OC: Back in the 1940s, workers were fighting for their rights, class struggle was heating up, and soldiers would soon be returning from the fronts. At that point, a new business organization, the Committee for Economic Development (CED), came together. Led by Beardsley Ruml and other influential business figures, the CED played a crucial role in developing a conservative approach to Keynesian economics that helped make policies that would help put all Americans to work acceptable to the business community.

          The idea was that more consumers would translate into more profits - which is good for business. After all, the economic experts and budget technicians said so, not just the politicians. And the business leaders were told that economic growth and price stability would go along with this, which they liked.

          But things changed progressively over the 1970s and early 1980s. Firms went global. They became financialized. The balance of power between workers and owners started to shift more towards the owners, the capitalists. People were told they needed to sacrifice, to accept cuts to social spending and fewer rights and benefits on the job - all in the name of economic science and capitalism. The CAB was turned into a tool for preventing excessive spending - or justifying selected cuts.

          Middle class folks were afraid that inflation would erode their savings, so they were more keen to approve draconian measures to cut wages and reduce public budgets. People on the lower rungs of the economic ladder felt the pain first. But eventually the middle class fell on the wrong side of the fence, too. Most of them became relatively poorer.

          I suppose this shows the limits of democracy when information, knowledge, and ultimately power are unequally distributed.

          LP: You're really talking about birth of austerity and the way lies about public spending and budgets have been sold to the public. Why is austerity such a powerful idea and why do politicians still win elections promoting it?

          OC: Austerity is so powerful today because it feeds off of itself. It makes people uncertain about their lives, their debts, and their jobs. They become afraid. It's a strong disciplinary mechanism. People stop joining forces and the political status quo gets locked down.

          Even the
          name of this tool, the "cyclically adjusted budget," carries an aura of respect. It diverts our attention. We don't question it. It creates a barrier between the individual and the political realm: it undermines democratic participation itself. This obscure theory validates, with its authority, a big economic mistake that sounds like common sense but is actually snake oil - the notion that the federal government budget is like a household budget. Actually, it isn't. Your household doesn't collect taxes. It doesn't print money. It works very differently, yet the nonsense that it should behave exactly like a household budget gets repeated by politicians and policymakers who really just want to squeeze ordinary people.

          LP: How does all this play out in the U.S. and in Europe?

          OC: The European Union requires its members to comply with something called a cyclically adjusted budget constraint. Each country has to review its economic and fiscal plans with the European Commission and prove that those are compatible with the Pact. It's a ceiling on a country's deficit, but it's also much more than that.

          Thanks to the estimate, the governments of Italy or Spain, for example, are supposed to force the economy toward some ideal economic condition, the definition of which is obviously quite controversial and has so far rewarded those countries that have implemented labor market deregulation, cut pensions, and even changed the way elections happen. Again, it's a control mechanism.

          In the U.S. this scenario plays out, too, although less strictly. Talk about the budget often relies on the same shifty and politically-shaded statistical tools to support one argument or the other. Usually we hear arguments that suggest we have to cut social programs and workers' rights and benefits or face economic doom. Tune in to the presidential debates and you'll hear this played out - and it isn't strictly limited to one party.

          LP: How do we stop powerful players from co-opting economics and budgets for their own purposes?

          OC: Our education system is increasingly unequal and deprived of public resources. This is true in the U.S. but also in Europe, where the crisis accelerated a process that was already underway. When children don't get good educations, the production of knowledge falls into private control. Power gets consolidated. The official theoretical frameworks that benefit the most powerful get locked in.

          In the economic field, we need to engage different points of view and keep challenging dominant narratives and frameworks. One day, human curiosity will save us from intellectual prostitution.

          craazyboy, December 25, 2015 at 10:10 am

          Most people don't eat, go to college, use healthcare, rent or buy housing on the east or west coast, or purchase military equipment (except perhaps small time stuff like assault rifles), so the BLS greatly underweights(or hedonics prices, or just pulls rent data outta their butts) these things in the inflation data they create. The Fed then goes into a tizzy if the data comes in a few tenths of a percent below 2%, even if the data spent years above 2%, and floods the country in liquidity so our job creators – banks and large corporations – will hire us and give us raises, and once they finish doing that, the BLS will signal that inflation is 2% and the Fed will then know all our problems are solved. It just takes time.

          See the book "Treasure Island" for how things are going on the revenue side. But more tax breaks for large corporations and the wealthy are needed so we don't force them to do any illegal tax avoidance stuff and they will then happily pay whatever they think their fair should be. Might be zero. They will then have money to buy stuff too, which is a big plus as well, when you think about it.

          So clearly, you can see why deficit spending almost seems inevitable.

          Then the next problem is we still have unemployment, and something needs to be done about that. For instance, lots of room for more government contracts for social purposes. Take Obamacare. Place a single source contract, now estimated between $1 and $2 billion, with a Canadian systems company that employs independent contractor Indian programmers. Eventually, we have Obamacare!

          We can do this if we just get serious about this and say "No More Austerity In America!"

          likbez, December 27, 2015 at 9:31 pm

          Emperor Severus is famously said to have given the advice to his sons: "Be harmonious, enrich the soldiers, and scorn all other men"

          Brooklin Bridge

          Can education provide the solution?

          I suspect that the educational bias occurs at all levels in the sense that much the same misinformation is provided regardless of neighborhood but progressively wrapped in more elegant pedagogical flim-flam-ery for the owner class. Basically, the bias changes, but not the message, as one goes from poor (austerity – this is your lot in life) to wealthy (austerity – you were born to make the tough decisions, it's in your genes – and you'll just have to accept the rewards, man up to your destiny and toss em a quarter on Sundays). The upper class does get a far better education, but the bias is or becomes unconscious over time.

          Basically, aristocracy is a nasty brutish cycle that keeps upping the ante of consequences.

          washunate, December 26, 2015 at 8:09 am

          Yves, INET and NEP and others have been lecturing that topic for years. How many trillions of dollars do we have to deficit spend before the failure of things to improve indicts the hypothesis itself?

          Maybe what matters is not the amount of the spending, but rather, the distribution.

          And what is so bad about deflation? The attachment of moral judgment to inflation and deflation is rather bizarre outside of establishment monetary economics. The basic monetary problem confronting the bottom 80% or so of American households is inflation, not deflation.


          Dan Lynch, December 25, 2015 at 11:27 am

          I don't buy the article's historical narrative.

          Conservatives have ALWAYS opposed spending on social programs and ALWAYS used the deficit as an excuse (unless the deficit was due to war or tax cuts for the rich). This was true during the New Deal; FDR himself was a deficit hawk.

          Nonetheless for years the public supported social programs and no politician dared to cut them. Not only were the politicians worried about votes but also the welfare state was a way to head off a left wing revolution.

          What changed? I would say the change began in 1976 with the election of Rockefeller-funded Jimmy Carter, who immediately launched an austerity program. Support for Keynesian economics was further eroded by the 70's stagflation which we now know was caused by Mid East oil but at the time the "left" were like deer in the headlights, with no clue what to do.

          The final nail in the coffin was the fall of the Berlin Wall and the collapse of the USSR, discrediting communism. After that, "there was no alternative" to corporate capitalism. Or more accurately, the left was slow to formulate an alternative and to this day is still struggling with an alternative as we have observed with Syriza. It's not enough to oppose austerity, you have to have a constructive plan to fix things.

          Vatch, December 25, 2015 at 12:40 pm

          History teaches us that peacetime austerity can be horribly disastrous. Some examples:

          British austerity during the 19th century included the Great Irish Famine of 1845-1849: The Irish population was about 8 million people in 1841, and the death toll of the famine was at least a million. This is a huge percentage loss of life. Due to the combination of deaths with emigration and births that did not occur, the 1851 population of 6.5 million was estimated to be about 2.5 million lower than expected. Since food was exported during the famine, this was definitely an extreme case of austerity.

          Soviet austerity during the 1930s: Millions died, and food was exported during the famine period of 1931-1933. Austerity is often associate with conservatives, so I guess conservative austerity enthusiasts must be pleased with the performance of the eminent conservative Josef Stalin.

          Chinese austerity during the Great Leap Forward of 1958-1962: Tens of millions died - perhaps as many as 45 million. The same irony about conservatives and Stalin is true about conservatives and Mao, but on a far greater scale.

          Merry Christmas.

          ben chifley

          july 24 2015: Krugman:Ignore the 'MIT gang' at US economy's peril Paul Krugman says while economists of the '70s discarded Keynes, he never went away at MIT.‏
          http://www.chron.com/opinion/outlook/article/Krugman-Ignore-the-MIT-gang-at-US-economy-s-6404243.php

          MIT: Libertarian Haven | Independent Political Report‏
          http://www.independentpoliticalreport.com/2011/01/mit-libertarian-haven/

          Soros | MIT Global Education & Career Development‏
          https://gecd.mit.edu/go-abroad/distinguished-fellowships/explore-fellowships/soros

          washunate

          This is a pretty remarkable piece of rambling drivel. To the extent coherent points can be taken away from this, it appears there are at least two major flaws:

          1) There is absolutely no link between public opinion and CAB. Germany chooses to have national healthcare, passenger rail, and renewable energy. The US chooses to have national security, predatory medicine, and car-dependent sprawl.

          2) There is absolutely no link between austerity and concentration of wealth and power. France has a much more equal distribution of wealth than the US. Yet the US has run enormous deficits while France is supposedly constrained by the techno mumbo jumbo nonsense of the EU.

          The notion that 'austerity' is sold to the public is just a blatant falsehood. Americans don't support the budget priorities in Washington. It's a collective action problem, not a public opinion problem.

        2. [Dec 24, 2015] The Fed Has Created A Monster And Just Made A Dangerous Mistake, Stephen Roach Warns

          Zero Hedge
          Stephen Roach is worried that the Fed has set the world up for another financial market meltdown.

          Lower for longer rates and the proliferation of unconventional monetary policy have created "a breeding ground for asset bubbles, credit bubbles, and all-too frequent crises, so the Fed is really a part of the problem of financial instability rather than trying to provide a sense of calm in an otherwise unstable world," Roach told Bloomberg TV in an interview conducted a little over a week ago.

          To be sure, Roach's sentiments have become par for the proverbial course. That is, it may have taken everyone a while (as in five years or so) to come to the conclusion we reached long ago, namely that central banks are setting the world up for a crisis that will make 2008 look like a walk in the park, but most of the "very serious" people are now getting concerned. Take BofAML for instance, who, in a note we outlined on Wednesday, demonstrated the prevailing dynamic with the following useful graphic:

          Perhaps Jeremy Grantham put it best: "..in the Greenspan/ Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully- fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006."

          Indeed. It's with that in mind that we bring you the following excerpts from a new piece by Roach in which the former Morgan Stanley chief economist and Yale fellow recounts the evolution of the Fed and how the FOMC ultimately became "beholden to the monster it had created".

          * * *

          From "The Perils of Fed Gradualism" as posted at Project Syndicate

          By now, it's an all-too-familiar drill. After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalization.

          A majority of financial market participants applaud this strategy. In fact, it is a dangerous mistake. The Fed is borrowing a page from the script of its last normalization campaign – the incremental rate hikes of 2004-2006 that followed the extraordinary accommodation of 2001-2003. Just as that earlier gradualism set the stage for a devastating financial crisis and a horrific recession in 2008-2009, there is mounting risk of yet another accident on what promises to be an even longer road to normalization.

          The problem arises because the Fed, like other major central banks, has now become a creature of financial markets rather than a steward of the real economy. This transformation has been under way since the late 1980s, when monetary discipline broke the back of inflation and the Fed was faced with new challenges.

          The challenges of the post-inflation era came to a head during Alan Greenspan's 18-and-a-half-year tenure as Fed Chair. The stock-market crash of October 19, 1987 – occurring only 69 days after Greenspan had been sworn in – provided a hint of what was to come. In response to a one-day 23% plunge in US equity prices, the Fed moved aggressively to support the brokerage system and purchase government securities.

          In retrospect, this was the template for what became known as the "Greenspan put" – massive Fed liquidity injections aimed at stemming financial-market disruptions in the aftermath of a crisis. As the markets were battered repeatedly in the years to follow – from the savings-and-loan crisis (late 1980s) and the Gulf War (1990-1991) to the Asian Financial Crisis (1997-1998) and terrorist attacks (September 11, 2001) – the Greenspan put became an essential element of the Fed's market-driven tactics.

          The Fed had, in effect, become beholden to the monster it had created. The corollary was that it had also become steadfast in protecting the financial-market-based underpinnings of the US economy.

          Largely for that reason, and fearful of "Japan Syndrome" in the aftermath of the collapse of the US equity bubble, the Fed remained overly accommodative during the 2003-2006 period. The federal funds rate was held at a 46-year low of 1% through June 2004, before being raised 17 times in small increments of 25 basis points per move over the two-year period from mid-2004 to mid-2006. Yet it was precisely during this period of gradual normalization and prolonged accommodation that unbridled risk-taking sowed the seeds of the Great Crisis that was soon to come.

          Today's Fed inherits the deeply entrenched moral hazard of the Asset Economy. The longer the Fed remains trapped in this mindset, the tougher its dilemma becomes – and the greater the systemic risks in financial markets and the asset-dependent US economy.

          Full post here

          * * *

          Roach goes on to say that we're already seeing the beginnings of what may very well turn out to be a dramatic unwind as high yield rolls over and the emerging world struggles to cope with a soaring dollar (remember, even though EM has largely avoided "original sin" i.e. borrowing in dollars, at the sovereign level, corporates are another story).

          As an aside, those interested in a comprehensive account of what Roach covers in the article cited above are encouraged to reach David Stockman's "The Great Deformation."

          [Dec 24, 2015] European Leaders Cry Foul Against Germany's Support for Gas Pipeline

          Dec 21, 2015 | OilPrice.com
          There is a growing chorus in Europe against Germany's support to expand a major natural gas pipeline from Russia over fears that it will leave Europe more dependent on their eastern neighbor.

          The Nord Stream 2 would build on the existing Nord Stream pipeline, a conduit that delivers Russian natural gas to Germany via the Baltic Sea. Crucially, the project cuts out Ukraine, a key strategic objective for Russia since the original project's inception.

          The latest $11 billion expansion would double the pipeline's current capacity of 55 billion cubic meters of gas per year. From Russia's perspective, the project will increase market share and gas sales; from Germany's point of view, the project increases sources of supply. Nord Stream 2 was originally conceived of years ago, but in June 2015 Gazprom signed a memorandum with Royal Dutch Shell and OMV to move forward.

          Nick Cunningham is a Vermont-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1

          [Dec 23, 2015] The Big Short Every American Should See This Movie

          Notable quotes:
          "... Enjoyed the movie, but in typical Hollywood fashion, the role of the Federal Reserve and government in pushing housing down to those unable to afford it was not even mentioned once. ..."
          Zero Hedge
          The Big Short opens nationwide today. But it happened to have one showing last night at a theater near me. My youngest son and I hopped in the car and went to see it. I loved the book by Michael Lewis. The cast assembled for the movie was top notch, but having the director of Anchorman and Talledaga Nights handle a subject matter like high finance seemed odd.

          The choice of Adam McKay as director turned out to be brilliant. The question was how do you make a movie about the housing market, mortgage backed securities, collateralized debt obligations, collateralized debt swaps, and synthetic CDOs interesting for the average person. He succeeded beyond all expectations.

          Interweaving pop culture icons, music, symbols of materialism, and unforgettable characters, McKay has created a masterpiece about the greed, stupidity, hubris, and arrogance of Wall Street bankers gone wild. He captures the idiocy and complete capture of the rating agencies (S&P, Moodys). He reveals the ineptitude and dysfunction of the SEC, where the goal of these regulators was to get a high paying job with banks they were supposed to regulate. He skewers the faux financial journalists at the Wall Street Journal who didn't want to rock the boat with the truth about the greatest fraud ever committed.

          ...Ultimately, it is a highly entertaining movie with the right moral overtone, despite non-stop profanity that captures the true nature of Wall Street traders. This is a dangerous movie for Wall Street, the government, and the establishment in general. They count on the complexity of Wall Street to confuse the average person and make their eyes glaze over. That makes it easier for them to keep committing fraud and harvesting the nation's wealth.

          This movie cuts through the crap and reveals those in power to be corrupt, greedy weasels who aren't really as smart as they want you to think they are. The finale of the movie is sobering and infuriating. After unequivocally proving that Wall Street bankers, aided and abetted by the Federal Reserve, Congress, the SEC, and the mainstream media, destroyed the global financial system, put tens of millions out of work, got six million people tossed from their homes, and created the worst crisis since the Great Depression, the filmmakers are left to provide the depressing conclusion.

          No bankers went to jail. The Too Big To Fail banks were not broken up – they were bailed out by the American taxpayers. They actually got bigger. Their profits have reached new heights, while the average family has seen their income fall. Wall Street is paying out record bonuses, while 46 million people are on food stamps. Wall Street and their lackeys at the Federal Reserve call the shots in this country. They don't give a fuck about you. And they're doing it again.

          Every American should see this movie and get fucking pissed off. The theater was deathly silent at the end of the movie. The audience was stunned by the fact that the criminals on Wall Street got away with the crime of the century, and they're still on the loose. I had a great discussion with my 16 year old son on the way home. At least there is one millennial who understand how bad his generation is getting screwed.

          wee-weed up

          I read the book last year... It is outstanding! Highest recommendation. If you have not read this book, you cannot understand how today's market really works.

          JRobby

          This subject matter has to be put in a form that can be understood by the masses. Hopefully the popular actors and this director is a step in that direction.

          Main stream Hollywood as an informer? Hmmmmm? This adds to the current assumptions and rumors of fractures among the elite groups.

          We are reasonable people. If the banking elite is sacrificed and the other corporate oligarchs come into a more socially acceptable line, we may be satisfied. However, the banking elite must be sacrificed. There is no negotiation on that point.

          Of course some will say I am over optimistic, they are throwing it in our faces to make $$$ and it ends up a total police state so enjoy your "entertainment" for now.

          Time goes on. Time will tell.

          chunga

          First you'd have to believe that politicians give a fuck about any damn thing but themselves. REAL concern for minorities or communities LOL! Then you'd have to believe banks were forced to do *anything* they don't want.

          Then, you'd have to fall right to sleep and miss the part where all this crap was sold on Wall Street while at the same time betting against all the "shitty deals" they made, then the whole thing getting bailed out @ par. With par being at the absurd fraudulent property appraisals that were made by the lenders or their agents. It's just nuts.

          This was all planned, beginning with Greenspan. AIG's Greenberg KNEW their CDS paper was no damn good, but didn't care because the also KNEW there would be a bailout. The only problem for him was Paulson and Blankfein conspired to steal the bailout money...and they did!

          That's why all this money went looking for people...it was all planned.

          chunga

          Hundreds of scandals have gone by since then, thoroughly unpunished, so I wonder why this movie is coming out now. I looked into some of the cronies calling the shots at the GSE's back then and saved it. A lot is outdated by now. Seems like a fairly bi-partisan effort.

          FRANKLIN RAINES [D] – FNMA CEO (1999 – 2004) Raines accepted "early retirement" from his CEO position while the SEC pretended to investigate accounting irregularities. Fannie's own OHFHEO also accused him of abetting widespread accounting errors, including the shifting of losses, so he and his fellow execs could "earn" large bonuses. The WSJ reported back in 2008 that Raines was one of several cronies that received below market rates for mortgages from Countrywide. Raines alone receive loans for over $3 million while CEO of FNMA. Raines' compensation for his "work" at FNMA - $90 million.

          RAINES GRADE – F

          DANIEL MUDD [R] – FNMA CEO (2005 – 2008) Before becoming CEO of FNMA, Mudd worked at the Office of the Secretary of Defense, was an advisor to Asia-Pacific Economic Corp., "served" on the board of the Council of Foreign Relations, "consulted" at the World Bank, and held many positions at GE Capital including president and CEO. Mudd was dismissed as CEO of FNMA when FHFA became conservator in 2008. In 2011 Mudd and other GSE execs were charged by SEC with securities fraud. After his career at FNMA Mudd became CEO of a NYC hedge fund named "Fortress". Fortress invested in purchasing tax liens on delinquent property taxes from local governments under many benign corporate names such as "Pleasant Valley Capital" and "Travis Farm Investments". Cozy. Mudd's compensation for his "work" at FNMA - $80 million.

          MUDD GRADE – F

          NEEL KASHKARI [R] – FNMA CEO (Tenure is murky) Kashkari was a former investment banker for Goldman Sachs, was tapped by Hank "The Shank" Paulson to lend his skills over at TARP HQ, and now rather ironically, continues God's work as a Managing Director at PIMCO. Kashkari's compensation for his "work" at FNMA is also murky; I'll just assume it was too much.

          KASHKARI GRADE - F

          HERB ALLISON [D] – FNMA CEO (2008 – 2009) The esteemed Mr. Allison was quickly whisked off to oversee the wildly successful TARP program. I didn't find much on his compensation during his brief stint as FNMA CEO. Allison served in various positions at Merrill Lynch and became a member of the board in 1997. He was a director of the NYSE from 2003 – 2005.

          ALLISON GRADE – F

          MICHAEL WILLIAMS [?] – FNMA CEO (2009 – Jan 1, 2012) Mr. Williams is a 20 year veteran at FNMA. While "serving" as FNMA CEO, Williams managed to scrape by on less than $6 million in 2011 alone. This could and should be considered a hardship, given the complexities involved in purloining ~ $60 billion of Fed bailout money.

          WILLIAMS GRADE – F

          FANNIE'S MAJOR DANCE PARTNER, FREDDIE MAC, HAS ALSO PERFORMED VERY POORLY.

          Charles (my friends call me "Ed") Haldeman has announced his retirement plans but intends to be a good sport and stay on with insolvent FHLMC until another crony can be found to fill his wing-tips.

          That might take a while. "Serving" as CEO of the ultimate backstops for the lion's share of the MBS Ponzi is very stressful.

          We'll have to accept former Freddie exec David Kellermann's testimony posthumously. Mr. Kellermann was found hanging by the neck in the basement of his posh Vienna, VA home in the affluent suburb of Washington. D.C. way back in April of 2009. It is presumed he had no help and local police have stated there was no evidence of foul play.

          Urban Redneck

          GREED is non-partisan. And all sides agreed MOAR "home ownership" was desirable. The left got its SJW colorblind automation, while the underwriters were able to increase volumes by thousands of percent while reducing overall headcount. Securitization wasn't actually "automated" since the fuckwits were using MS-Excel, but it was commoditized with Blackrock's pricing model.

          These were the days of the original algorithms of mass financial destruction, which were primitive and largely FICO-centric, but everyone wanted to minimize the cost (of logic coding and external data sources) so they coding decisioning based solely on information contained in the mortgage application and the applicant's electronic credit report.

          khakuda

          Enjoyed the movie, but in typical Hollywood fashion, the role of the Federal Reserve and government in pushing housing down to those unable to afford it was not even mentioned once.

          Keynesians

          Wall Street is laughing at all the clowns who think this movie will "wake up America". It would have never came out if it was any kind of danger to Wall Street, the FED, or the establishment.

          Agent P

          Directed by Adam McKay (Anchorman, Step Brothers, The Other Guys....), so ... yeah I'm going to go see it. Remember the end credits for The Other Guys? He hates Wall Street....

          GoldenDonuts

          Perhaps you should read the book. These are real characters from a non fiction book. They may have changed a name or two but these are real people. I will lend you my copy if you can't afford one.

          conraddobler

          Yeah I can't imagine a commercially successful movie out of this that would actually tell the truth and make it to the screens.

          What someone should do is write one of those fantastical novels where everything is a symbol for something else and jazz it up, put some romance, danger, intrigue and of course big boobs in it.

          The real message ala the olden days usually had to be hidden to avoid the wrath of those it was really aimed at.

          [Dec 21, 2015] Weak president, neoliberal Obama and housing bubble

          Notable quotes:
          "... The relationship between low interest rates and bubbles has nothing to do with the above. Low interest rates RAISE asset prices. Through the magic of low discount rates, the future earnings and cash flows are worth a lot higher today. This is why Bernanke cut rates and kept them low. Raising asset prices and the resultant higher net worth was supposed to lead to higher spending today. But outsized returns also attracts speculation. what is so difficult to understand? John Williams of SF Fed has shown how positive returns in asset markets raises the speculators expected returns. when this dynamic gets out of control, it is a bubble. ..."
          "... That is exactly the point. Expected returns in stocks have nothing to do with earnings growth. http://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2013/september/asset-price-bubbles-tomorrow-yesterday-never-today/ ..."
          "... You think a rise in stock prices created by a fall in the cost of capital is a bubble. ..."
          "... keeping the risk free rate at zero for 7 years is not a change in fundamentals. and if it is and it rises leading to a large fall in equity prices, you will be the first one crying uncle. so why put the economy through this? ..."
          "... Rising stock prices allow corporations to raise debt, because the stock is put up as collateral. This makes funding easier, but it doesnt favor any particular purpose of the funding. It could be to buy back stock, for example. Said buy back can raise the stock price even more, which in turn can pay off the borrowing. Didnt cost a dime. ..."
          "... It always seem to me that right wing economists credit businessmen with superhuman foresight and sophistication, except when it comes to the actions of the Fed and then something addles their brains and they become completely stupid. As I once put, it seems investors cant understand what the Fed is doing, even though they tell you. ..."
          "... Thats it exactly. Markets are efficient, unless the government does anything, and then markets lose their minds and its the governments fault. ..."
          "... Here is how they evaluate models: Good model; one that reaches the right good conclusions. Bad model; one that ends up saying stuff nobody should believe in. ..."
          "... Obama could have at least made the investigations a high priority...but he let Holder, a Wall Street attorney, consign them to the lowest. ..."
          "... Democrats filibuster-proof majority consisted of 58 Democrats and two independents who caucused with them. Only an inept President and Senate majority leader could have failed to take advantage of such a majority to implement significant parts of the party platform. ..."
          "... Gullible folks like pgl and his coterie believe what these Democrats say and waste our time defending their neoliberal behavior. ..."
          economistsview.typepad.com
          reason said... December 18, 2015 at 02:20 AM
          I wish Krugman would attack the view that is being propagated at the moment that low nominal interest rates (it seems irrespective of the reason for them) foster bubbles. It doesn't make the slightest bit of sense - leverage doesn't just magnify the gains, it magnifies the losses as well - what really counts is expectations regardless of nominal interest rates.)

          The distribution of the use of credit between pure financial speculation and productive investment is not a function of interest rates, but of things like bank culture, bank regulation and macro-economic and technological prospects.

          JF said in reply to reason... December 18, 2015 at 05:19 AM

          Great comment. I especially liked this point: "The distribution of the use of credit between pure financial speculation and productive investment is not a function of" ....

          Supervising regulators need to look carefully at the ratio of credit used for financial trading compared to credit used for what we've called real-economy matters. They should adjust the level of monitoring based on this view while they also inform policy makers including those in the legislature.

          There may be an opportunity in 2017 to revise the statutes so the public plainly says what the rules of Commerce are in these financial 'inter-mediation' areas - society is better served if more of such credit offerings go to investments in the real economy where inputs are real things like employees, supplies, equipment/technologies. The public's law can effect this change.

          david said in reply to JF...

          except that a significant chunk of institutional investors have sticky nominal targets for return thanks to the politics of return expectation setting (true for pension fund and endowments) -- low interest rates do encourage chasing phantoms or looking to extract some rents, for those subject to that kind of pressure

          sanjait said in reply to david... December 18, 2015 at 02:47 PM

          Are there enough of those to dominate securities prices?

          I don't see how there possibly could be. For everyone trying to reach for yield there are a lot of people happy to arbitrage or otherwise exploit those inefficiencies.

          pgl said in reply to reason... December 18, 2015 at 05:53 AM

          Nice comment. I think Krugman is letting others take out the bubble brains. But if he's reading your excellent comment - maybe he will go the fray.

          BenIsNotYoda said in reply to reason... December 18, 2015 at 06:35 AM

          "The distribution of the use of credit between pure financial speculation and productive investment is not a function of interest rates, but of things like bank culture, bank regulation and macro-economic and technological prospects."

          The relationship between low interest rates and bubbles has nothing to do with the above. Low interest rates RAISE asset prices. Through the magic of low discount rates, the future earnings and cash flows are worth a lot higher today. This is why Bernanke cut rates and kept them low. Raising asset prices and the resultant higher net worth was supposed to lead to higher spending today. But outsized returns also attracts speculation. what is so difficult to understand? John Williams of SF Fed has shown how positive returns in asset markets raises the speculator's expected returns. when this dynamic gets out of control, it is a bubble.

          Sanjait said in reply to BenIsNotYoda... December 18, 2015 at 07:35 AM

          It's hard to see how to your claim that expected returns are high when earnings yields across the board are historically low.

          BenIsNotYoda said in reply to Sanjait... December 18, 2015 at 07:38 AM

          That is exactly the point. Expected returns in stocks have nothing to do with earnings growth. http://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2013/september/asset-price-bubbles-tomorrow-yesterday-never-today/

          BenIsNotYoda said in reply to BenIsNotYoda... December 18, 2015 at 07:38 AM

          I mean earnings yields not earnings growth.

          Sanjait said in reply to BenIsNotYoda... December 18, 2015 at 07:48 AM

          So you say. And yet, stock values today conform very well with the standard model Williams says doesn't historically fit the data. While you are talking bubbles, the equity risk premium is parked in the normal range.

          How do you explain that?

          BenIsNotYoda said in reply to Sanjait... December 18, 2015 at 07:54 AM

          so says Williams. dividend yields, earnings yields and risk premiums are not necessarily weighted heavily in investors' formation of expected returns. past returns do, to a great extent. that is what Williams shows.

          BenIsNotYoda said in reply to BenIsNotYoda... December 18, 2015 at 07:56 AM

          our prehistoric brains are wired to trend follow patterns.

          pgl said in reply to BenIsNotYoda... December 18, 2015 at 09:13 AM

          Williams actually tries to model the rise in stock prices and defines any increase the model cannot explain a bubble. Of course maybe his modeling is not entirely spot on and fundamentals can explain the rise stock prices.

          But this is not what you do as you see any asset price increase as a bubble. Which is beyond stupid. Of course it would help if you ever bothered to do what Williams attempted - use a basic model of financial economics. Then again my guess is that is beyond your understanding of basic financial economics. So troll on!

          BenIsNotYoda said in reply to pgl... December 18, 2015 at 10:40 AM

          You think a rise in stock prices created by a fall in the cost of capital is a bubble. But no - it is a change in fundamentals.

          keeping the risk free rate at zero for 7 years is not a change in fundamentals. and if it is and it rises leading to a large fall in equity prices, you will be the first one crying uncle. so why put the economy through this?

          JohnH said in reply to pgl... December 18, 2015 at 04:22 PM

          The first thing pgl did when stocks corrected this summer was to call for QE4...he panicked because his portfolio was threatened...but claimed that he was only worried about workers!

          Fred C. Dobbs said in reply to reason... December 18, 2015 at 10:57 AM

          It does not seem reasonable or
          fair to pay practically no interest
          on savings, which is a consequence
          of Fed policy.

          A consequence of this is that people
          go into risky investments that lead
          to catastrophe, sometimes widespread.

          If the goal was to get people to spend
          (i.e. consume) more, it seems that they
          are persistently & stubbornly frugal.

          Chris Herbert said in reply to Fred C. Dobbs... December 18, 2015 at 02:31 PM

          Rising stock prices allow corporations to raise debt, because the stock is put up as collateral. This makes funding easier, but it doesn't favor any particular purpose of the funding. It could be to buy back stock, for example. Said buy back can raise the stock price even more, which in turn can pay off the borrowing. Didn't cost a dime.

          sanjait said in reply to reason...

          Let me be the fourth person to compliment that comment.

          "leverage doesn't just magnify the gains, it magnifies the losses as well - what really counts is expectations regardless of nominal interest rates."

          QFT!

          The one hypothetical caveat (as BINY alluded to, knowingly or not) is that expectations often get out of whack based on momentum trading. So hypothetically, lowering rates could possibly feed that.

          But guess what? Rates are already at zero. They can't go lower. It's not even a question of lowering rates, but rather whether to keep them where they are. So a bubbles-from-monetary-fed-momentum argument falls completely flat. We've been at zero for 7 years now!

          reason said...

          It always seem to me that right wing economists credit businessmen with superhuman foresight and sophistication, except when it comes to the actions of the Fed and then something addles their brains and they become completely stupid. As I once put, it seems investors can't understand what the Fed is doing, even though they tell you.

          Sanjait said in reply to reason...

          That's it exactly. Markets are efficient, unless the government does anything, and then markets lose their minds and it's the government's fault.

          And somehow the RW economists see no problem with this model

          DeDude said in reply to Sanjait...

          Here is how they evaluate models: Good model; one that reaches the "right" good conclusions. Bad model; one that ends up saying stuff nobody should believe in.
          likbez said in reply to Sanjait...
          "Markets are efficient, unless the government does anything"

          This is a dangerous neoliberal dogma. Total lie.

          === quote ===
          The efficient market hypothesis (EMH) is a flavor of economic Lysenkoism which became popular for the last 30 years in the USA. It is a pseudo scientific theory or, in more politically correct terms, unrealistic idealization of market behavior. Like classic Lysenkoism in the past was supported by Stalin's totalitarian state, it was supported by the power of neoliberal state, which is the state captured by financial oligarchy (see Casino Capitalism and Quiet coup for more details).

          Among the factors ignored by EMH is the positive feedback loop inherent in any system based on factional reserve banking, the level of market players ignorance, unequal access to the real information about the markets, the level of brainwashing performed on "lemmings" by controlled by elite MSM and market manipulation by the largest players and the state.

          Economics, it is said, is the study of scarcity. There is, however, one thing that certainly isn't scarce, but which deserves the attention of economists - ignorance.
          ...Conventional economics analyses how individuals choose - maybe rationally, maybe not - from a range of options. But this raises the question: how do they know what these options are? Many feasible - even optimum - options might not occur to them. This fact has some important implications. ...
          Slightly simplifying, we can say that (financial) markets are mainly efficient in separation of fools and their money... And efficient market hypothesis mostly bypasses important question about how the inequity of resources which inevitably affects the outcomes of market participants. For example, the level of education of market players is one aspect of the inequity of resources. Herd behavior is another important, but overlooked in EMH factor.

          http://www.softpanorama.org/Skeptics/Financial_skeptic/Casino_capitalism/Pseudo_theories/Permanent_equilibrium_fallacy/Efficient_market_hypothesys/index.shtml

          Peter K. said in reply to reason...

          And/or the markets are telling the Fed something, like they don't believe the Fed's forecasts about growth and inflation and are betting otherwise, but the hawks at the Fed dismiss the markets and say we need to raise rates now.

          It's all very convenient reasoning about markets.

          Vile Content said...

          "
          constant repetition, especially in captive media, keeps this imaginary history in circulation no matter how often it is shown to be false.
          "
          ~~pK~

          ... ... ...

          anne said...

          http://krugman.blogs.nytimes.com/2015/11/23/shorts-subject/

          November 23, 2015

          Shorts Subject
          By Paul Krugman

          Last night I was invited to a screening of "The Big Short," which I thought was terrific; who knew that collateralized debt obligations and credit default swaps could be made into an edge-of-your-seat narrative (with great acting)?

          But there was one shortcut the narrative took, which was understandable and possibly necessary, but still worth noting.

          In the film, various eccentrics and oddballs make the discovery that subprime-backed securities are garbage, which is pretty much what happened; but this is wrapped together with their realization that there was a massive housing bubble, which is presented as equally contrary to anything anyone respectable was saying. And that's not quite right.

          It's true that Greenspan and others were busy denying the very possibility of a housing bubble. And it's also true that anyone suggesting that such a bubble existed was attacked furiously - "You're only saying that because you hate Bush!" Still, there were a number of economic analysts making the case for a massive bubble. Here's Dean Baker in 2002. * Bill McBride (Calculated Risk) was on the case early and very effectively. I keyed off Baker and McBride, arguing for a bubble in 2004 and making my big statement about the analytics in 2005, ** that is, if anything a bit earlier than most of the events in the film. I'm still fairly proud of that piece, by the way, because I think I got it very right by emphasizing the importance of breaking apart regional trends.

          So the bubble itself was something number crunchers could see without delving into the details of mortgage-backed securities, traveling around Florida, or any of the other drama shown in the film. In fact, I'd say that the housing bubble of the mid-2000s was the most obvious thing I've ever seen, and that the refusal of so many people to acknowledge the possibility was a dramatic illustration of motivated reasoning at work.

          The financial superstructure built on the bubble was something else; I was clueless about that, and didn't see the financial crisis coming at all.

          * http://www.cepr.net/documents/publications/housing_2002_08.pdf

          ** http://www.nytimes.com/2005/08/08/opinion/that-hissing-sound.html

          anne said in reply to anne...

          http://www.nytimes.com/2002/08/16/opinion/mind-the-gap.html

          August 16, 2002

          Mind the Gap
          By PAUL KRUGMAN

          More and more people are using the B-word about the housing market. A recent analysis * by Dean Baker, of the Center for Economic Policy Research, makes a particularly compelling case for a housing bubble. House prices have run well ahead of rents, suggesting that people are now buying houses for speculation rather than merely for shelter. And the explanations one hears for those high prices sound more and more like the rationalizations one heard for Nasdaq 5,000.

          If we do have a housing bubble, and it bursts, we'll be looking a lot too Japanese for comfort....

          * http://www.cepr.net/documents/publications/housing_2002_08.pdf

          anne said in reply to anne...

          http://www.nytimes.com/2005/08/08/opinion/that-hissing-sound.html

          August 8, 2005

          That Hissing Sound
          By PAUL KRUGMAN

          This is the way the bubble ends: not with a pop, but with a hiss.

          Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.

          So the news that the U.S. housing bubble is over won't come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.

          Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

          One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller "Dow 36,000" are now among the most vocal proponents of the view that there is no housing bubble.

          Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

          In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

          But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

          And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble....

          EMichael said in reply to anne...

          Yeah, the only thing he missed was the timing of the collapse.

          The day he wrote this the Fed had already raised rates 250% in one year, on the way to a total of 400% in the next 6 months.

          Yet prices accelerated until the top was reached a year after the column.

          anne said in reply to EMichael...

          http://www.nytimes.com/2006/08/25/opinion/25krugman.html

          August 25, 2006

          Housing Gets Ugly
          By PAUL KRUGMAN

          Bubble, bubble, Toll's in trouble. This week, Toll Brothers, the nation's premier builder of McMansions, announced that sales were way off, profits were down, and the company was walking away from already-purchased options on land for future development.

          Toll's announcement was one of many indications that the long-feared housing bust has arrived. Home sales are down sharply; home prices, which rose 57 percent over the past five years (and much more than that along the coasts), are now falling in much of the country. The inventory of unsold existing homes is at a 13-year high; builders' confidence is at a 15-year low.

          A year ago, Robert Toll, who runs Toll Brothers, was euphoric about the housing boom, declaring: "We've got the supply, and the market has got the demand. So it's a match made in heaven." In a New York Times profile of his company published last October, he dismissed worries about a possible bust. "Why can't real estate just have a boom like every other industry?" he asked. "Why do we have to have a bubble and then a pop?"

          The current downturn, Mr. Toll now says, is unlike anything he's seen: sales are slumping despite the absence of any "macroeconomic nasty condition" taking housing down along with the rest of the economy. He suggests that unease about the direction of the country and the war in Iraq is undermining confidence. All I have to say is: pop! ...

          EMichael said in reply to anne...

          "Mr. Toll now says, is unlike anything he's seen: sales are slumping despite the absence of any "macroeconomic nasty condition""

          You gotta love builders and RE agents. It wasn't macro that caused it, it was default rates across the board on supposedly safe investments that caused mortgage money supply to totally disappear.

          One day people will understand that payments are the key to all finance.

          JohnH said...

          "and it is an outrage that basically nobody ended up being punished ."

          Yes, indeed. And who do we have to blame for that? Obama and Holder, of course. They made the investigation of mortgage securities fraud DOJ's lowest priority. Krugman's Democratic proclivities prevent him from stating the obvious.

          I' m sure that pgl and his band of merry Obamabots will try to spin this in Obama's favor...I.e. Congress prevented him from implementing the law, even though Congress has nothing to do with it.

          Fact is, Obama has intentionally been a lame duck ever since he took office. He was even clueless on how to capitalize on a filibuster-proof majority in the midst of an economic crisis...which brings us to Trump. Many are so desperate for leadership after Obama's hollow presidency that they'll even support a racist demagogue to avoid another empty White House.

          JohnH said in reply to anne...

          Oh, please...Krugman could barely criticize Obama, even when Obama introduced an austerity budget back in 2011.

          The tendency of people like Krugman to overlook Democrats' bad behavior only encourages more bad behavior. If Krugman really cared about the policies he champions, he would let the chips fall wherever...and not let empty suits like Obama get away with austerity and failure to enforce the law when Wall Street willfully violates it.

          pgl said in reply to JohnH...

          Did you forgot to read the post before firing off your usual hate filled fact free rant? Here - let me help you out:

          "some members of the new commission had a different goal. George Santayana famously remarked that "those who cannot remember the past are condemned to repeat it." What he didn't point out was that some people want to repeat the past - and that such people have an interest in making sure that we don't remember what happened, or that we remember it wrong. Sure enough, some commission members sought to block consideration of any historical account that might support efforts to rein in runaway bankers."

          It seems Krugman indeed bashed how the government sort of let this crooks off the hook. We know you have an insane hatred for President Obama. But do you also hate your poor mom? Why else would you continue to write such incredibly stupid things?

          JohnH said in reply to pgl...

          As I expected, rationalizations for Obama's refusal to enforce the law...since when does the buck no longer stop at the White House? And what's with trying to defend people who refuse to do their job and uphold the rule of law?

          pgl said in reply to JohnH...

          Krugman did not rationalize that. Neither have I.

          Either you know you are lying or you flunked preK reading.

          JohnH said in reply to pgl...

          Of course pgl rationalizs Obama's failures...he spent a lot of time denying that Obama introduced and signed off on austerity...and that he proposed cutting Social Security. And now he can't admit that Obama and Holder have refused to defend the rule of law by not prosecuting...or even seriously investigating...Wall Street criminality.

          RGC said in reply to William...

          Prosecutions don't require congressional action.

          Most of the New Deal was accomplished in 100 days.

          Promotion by a president can galvanize action.

          pgl said in reply to EMichael...

          The lack of prosecutions was a bad thing. Of course any prosecutor would tell you putting rich people in jail for anything is often difficult. Rich people get to hire expensive, talented, and otherwise slimy defense attorneys. I have to laugh at the idea that JohnH thinks he could have pulled this off. The slimy defense attorneys would have had his lunch before the judge's gavel could come down.

          JohnH said in reply to pgl...

          Obama could have at least made the investigations a high priority...but he let Holder, a Wall Street attorney, consign them to the lowest.

          pgl is intent on explaining away Obama's failure to enforce the law...thereby encouraging more lawlessness.

          JohnH said in reply to William...

          Democrats' filibuster-proof majority consisted of 58 Democrats and two independents who caucused with them. Only an inept President and Senate majority leader could have failed to take advantage of such a majority to implement significant parts of the party platform. Even Lieberman had a good record on many issues. Except for ACA, it turned out to be a do-nothing Congress, reflecting an abject lack of leadership...which is why many are so desperate for leadership. Having lacked it for seven years, many are willing to turn to anybody, even Trump, to provide it. Pathetic!

          RGC said in reply to William...

          No vitriol, just facts. And Obama had the example of FDR to follow - why didn't he follow it? I have been deeply disappointed in Obama.

          JohnH said in reply to pgl...

          pgl conveniently forgets my choice words about Bill Clinton, Harry Reid and Nancy Pelosi. What I object to is Democrats who position themselves to sound like FDR and then prosecute a neo-liberal agenda.

          Gullible folks like pgl and his coterie believe what these Democrats say and waste our time defending their neoliberal behavior.

          [Dec 20, 2015] Paul Krugman: The Big Short, Housing Bubbles and Retold Lies

          Notable quotes:
          "... I get the feeling that if doing a film review of The Force Awakens , most economists would be rooting for the Empire to win - after all the empire will bring free trade within its borders, like the EU. ..."
          "... In market fundamentalist world, markets dont fail. They can only be failed. Though its still not clear how they think a little bit of government incentive for loans to low income borrowers caused the entire financial sector to lose its mind wrt CDOs. ..."
          "... The distribution of the use of credit between pure financial speculation and productive investment is not a function of interest rates, but of things like bank culture, bank regulation and macro-economic and technological prospects. ..."
          "... ....Supervising regulators need to look carefully at the ratio of credit used for financial trading compared to credit used for what weve called real-economy matters. They should adjust the level of monitoring based on this view while they also inform policy makers including those in the legislature. ..."
          "... except that a significant chunk of institutional investors have sticky nominal targets for return thanks to the politics of return expectation setting (true for pension fund and endowments) -- low interest rates do encourage chasing phantoms or looking to extract some rents, for those subject to that kind of pressure ..."
          "... The relationship between low interest rates and bubbles has nothing to do with the above. Low interest rates RAISE asset prices. Through the magic of low discount rates, the future earnings and cash flows are worth a lot higher today. This is why Bernanke cut rates and kept them low. Raising asset prices and the resultant higher net worth was supposed to lead to higher spending today. But outsized returns also attracts speculation. what is so difficult to understand? John Williams of SF Fed has shown how positive returns in asset markets raises the speculators expected returns. when this dynamic gets out of control, it is a bubble. ..."
          "... Yes, indeed. And who do we have to blame for that? Obama and Holder, of course. They made the investigation of mortgage securities fraud DOJs lowest priority. Krugmans Democratic proclivities prevent him from stating the obvious. ..."
          "... Fact is, Obama has intentionally been a lame duck ever since he took office. He was even clueless on how to capitalize on a filibuster-proof majority in the midst of an economic crisis...which brings us to Trump. Many are so desperate for leadership after Obamas hollow presidency that theyll even support a racist demagogue to avoid another empty White House. ..."
          "... Yes you are correct. From 2001 into 2008 when all of the liar and ninja loans were being made, not one government official stepped forward to investigate the possibility of fraud, the predatory lending, the misrepresentation of loans taking place, the loans with teaser rates which later ballooned, the packing of loans with deceptive fees, the illegal kick backs, etc. Not one. To make matters worst, the administration from 2001-2008 aligned itself with the banks along with the maestro hisself Greenspan. ..."
          "... When state AGs took on the burden of investigating the flagrant violations, the administration moves to block them saying they had no jurisdiction to do so. It did this through the OCC issuing rules preventing the states from prosecuting the banks. Besides blocking any investigation, the OCC failed in its mission to audit the banks for which it was by law to do. ..."
          economistsview.typepad.com

          Why are Murdoch-controlled newspapers attacking "The Big Short?"

          'The Big Short,' Housing Bubbles and Retold Lies, by Paul krugman, Commentary, NY Times: In May 2009 Congress created a special commission to examine the causes of the financial crisis. The idea was to emulate the celebrated Pecora Commission of the 1930s, which used careful historical analysis to help craft regulations that gave America two generations of financial stability.

          But some members of the new commission had a different goal. ... Peter Wallison of the American Enterprise Institute, wrote to a fellow Republican on the commission ... it was important that what they said "not undermine the ability of the new House G.O.P. to modify or repeal Dodd-Frank"...; the party line, literally, required telling stories that would help Wall Street do it all over again.

          Which brings me to a new movie the enemies of financial regulation really, really don't want you to see.

          "The Big Short" ... does a terrific job of making Wall Street skulduggery entertaining, of exploiting the inherent black humor of how it went down. ... But you don't want me to play film critic; you want to know whether the movie got the underlying ... story right. And the answer is yes, in all the ways that matter. ...

          The ...housing ... bubble ... was inflated largely via opaque financial schemes that in many cases amounted to outright fraud - and it is an outrage that basically nobody ended up being punished ... aside from innocent bystanders, namely the millions of workers who lost their jobs and the millions of families that lost their homes.

          While the movie gets the essentials of the financial crisis right, the true story ... is deeply inconvenient to some very rich and powerful people. They and their intellectual hired guns have therefore spent years disseminating an alternative view ... that places all the blame ... on ... too much government, especially government-sponsored agencies supposedly pushing too many loans on the poor.

          Never mind that the supposed evidence for this view has been thoroughly debunked..., constant repetition, especially in captive media, keeps this imaginary history in circulation no matter how often it is shown to be false.

          Sure enough, "The Big Short" has already been the subject of vitriolic attacks in Murdoch-controlled newspapers...

          The ... people who made "The Big Short" should consider the attacks a kind of compliment: The attackers obviously worry that the film is entertaining enough that it will expose a large audience to the truth. Let's hope that their fears are justified.

          btg said in reply to pgl...

          I get the feeling that if doing a film review of "The Force Awakens", most economists would be rooting for the Empire to win - after all the empire will bring free trade within its borders, like the EU. Krugman would not, however.

          Sanjait said...

          In market fundamentalist world, markets don't fail. They can only be failed. Though it's still not clear how they think a little bit of government incentive for loans to low income borrowers caused the entire financial sector to lose its mind wrt CDOs.

          Are markets efficient or not? I feel like the fundiesndont really have a coherent explanation for what happened, other than insisting the government somehow did it.

          reason said...

          I wish Krugman would attack the view that is being propagated at the moment that low nominal interest rates (it seems irrespective of the reason for them) foster bubbles. It doesn't make the slightest bit of sense - leverage doesn't just magnify the gains, it magnifies the losses as well - what really counts is expectations regardless of nominal interest rates.)

          The distribution of the use of credit between pure financial speculation and productive investment is not a function of interest rates, but of things like bank culture, bank regulation and macro-economic and technological prospects.

          reason said... December 18, 2015 at 02:32 AM

          It always seem to me that right wing economists credit businessmen with superhuman foresight and sophistication, except when it comes to the actions of the Fed and then something addles their brains and they become completely stupid. As I once put, it seems investors can't understand what the Fed is doing, even though they tell you.

          Sanjait said in reply to reason... December 18, 2015 at 08:06 AM

          That's it exactly. Markets are efficient, unless the government does anything, and then markets lose their minds and it's the government's fault.

          And somehow the RW economists see no problem with this model

          DeDude said in reply to Sanjait... December 18, 2015 at 08:18 AM

          Here is how they evaluate models:

          Good model; one that reaches the "right" good conclusions. Bad model; one that ends up saying stuff nobody should believe in.

          likbez said in reply to Sanjait...

          "Markets are efficient, unless the government does anything"

          This is a dangerous neoliberal dogma. Total lie.

          === quote ===
          The efficient market hypothesis (EMH) is a flavor of economic Lysenkoism which became popular for the last 30 years in the USA. It is a pseudo scientific theory or, in more politically correct terms, unrealistic idealization of market behavior. Like classic Lysenkoism in the past was supported by Stalin's totalitarian state, it was supported by the power of neoliberal state, which is the state captured by financial oligarchy (see Casino Capitalism and Quiet coup for more details).

          Among the factors ignored by EMH is the positive feedback loop inherent in any system based on factional reserve banking, the level of market players ignorance, unequal access to the real information about the markets, the level of brainwashing performed on "lemmings" by controlled by elite MSM and market manipulation by the largest players and the state.

          Economics, it is said, is the study of scarcity. There is, however, one thing that certainly isn't scarce, but which deserves the attention of economists - ignorance.
          ...Conventional economics analyses how individuals choose - maybe rationally, maybe not - from a range of options. But this raises the question: how do they know what these options are? Many feasible - even optimum - options might not occur to them. This fact has some important implications. ...
          Slightly simplifying, we can say that (financial) markets are mainly efficient in separation of fools and their money... And efficient market hypothesis mostly bypasses important question about how the inequity of resources which inevitably affects the outcomes of market participants. For example, the level of education of market players is one aspect of the inequity of resources. Herd behavior is another important, but overlooked in EMH factor.

          http://www.softpanorama.org/Skeptics/Financial_skeptic/Casino_capitalism/Pseudo_theories/Permanent_equilibrium_fallacy/Efficient_market_hypothesys/index.shtml

          JF said in reply to reason...

          Great comment. I especially liked this point: "The distribution of the use of credit between pure financial speculation and productive investment is not a function of"

          ....Supervising regulators need to look carefully at the ratio of credit used for financial trading compared to credit used for what we've called real-economy matters. They should adjust the level of monitoring based on this view while they also inform policy makers including those in the legislature.

          There may be an opportunity in 2017 to revise the statutes so the public plainly says what the rules of Commerce are in these financial 'inter-mediation' areas - society is better served if more of such credit offerings go to investments in the real economy where inputs are real things like employees, supplies, equipment/technologies. The public's law can effect this change.

          david said in reply to JF...

          except that a significant chunk of institutional investors have sticky nominal targets for return thanks to the politics of return expectation setting (true for pension fund and endowments) -- low interest rates do encourage chasing phantoms or looking to extract some rents, for those subject to that kind of pressure

          BenIsNotYoda said in reply to reason...

          "The distribution of the use of credit between pure financial speculation and productive investment is not a function of interest rates, but of things like bank culture, bank regulation and macro-economic and technological prospects."

          The relationship between low interest rates and bubbles has nothing to do with the above. Low interest rates RAISE asset prices. Through the magic of low discount rates, the future earnings and cash flows are worth a lot higher today. This is why Bernanke cut rates and kept them low. Raising asset prices and the resultant higher net worth was supposed to lead to higher spending today. But outsized returns also attracts speculation. what is so difficult to understand? John Williams of SF Fed has shown how positive returns in asset markets raises the speculator's expected returns. when this dynamic gets out of control, it is a bubble.

          Sanjait said in reply to BenIsNotYoda...

          It's hard to see how to your claim that expected returns are high when earnings yields across the board are historically low.

          BenIsNotYoda said in reply to Sanjait...

          That is exactly the point. Expected returns in stocks have nothing to do with earnings growth.

          http://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2013/september/asset-price-bubbles-tomorrow-yesterday-never-today/

          Fred C. Dobbs said in reply to reason...

          It does not seem reasonable or fair to pay practically no interest on savings, which is a consequence of Fed policy. A consequence of this is that people go into risky investments that lead to catastrophe, sometimes widespread. If the goal was to get people to spend (i.e. consume) more, it seems that they are persistently & stubbornly frugal.

          anne, December 18, 2015 at 06:37 AM

          http://krugman.blogs.nytimes.com/2015/11/23/shorts-subject/

          November 23, 2015

          Shorts Subject
          By Paul Krugman

          Last night I was invited to a screening of "The Big Short," which I thought was terrific; who knew that collateralized debt obligations and credit default swaps could be made into an edge-of-your-seat narrative (with great acting)?

          But there was one shortcut the narrative took, which was understandable and possibly necessary, but still worth noting.

          In the film, various eccentrics and oddballs make the discovery that subprime-backed securities are garbage, which is pretty much what happened; but this is wrapped together with their realization that there was a massive housing bubble, which is presented as equally contrary to anything anyone respectable was saying. And that's not quite right.

          It's true that Greenspan and others were busy denying the very possibility of a housing bubble. And it's also true that anyone suggesting that such a bubble existed was attacked furiously - "You're only saying that because you hate Bush!" Still, there were a number of economic analysts making the case for a massive bubble. Here's Dean Baker in 2002. * Bill McBride (Calculated Risk) was on the case early and very effectively. I keyed off Baker and McBride, arguing for a bubble in 2004 and making my big statement about the analytics in 2005, ** that is, if anything a bit earlier than most of the events in the film. I'm still fairly proud of that piece, by the way, because I think I got it very right by emphasizing the importance of breaking apart regional trends.

          So the bubble itself was something number crunchers could see without delving into the details of mortgage-backed securities, traveling around Florida, or any of the other drama shown in the film. In fact, I'd say that the housing bubble of the mid-2000s was the most obvious thing I've ever seen, and that the refusal of so many people to acknowledge the possibility was a dramatic illustration of motivated reasoning at work.

          The financial superstructure built on the bubble was something else; I was clueless about that, and didn't see the financial crisis coming at all.

          * http://www.cepr.net/documents/publications/housing_2002_08.pdf

          ** http://www.nytimes.com/2005/08/08/opinion/that-hissing-sound.html

          anne said in reply to anne... December 18, 2015 at 06:43 AM

          http://www.nytimes.com/2002/08/16/opinion/mind-the-gap.html

          August 16, 2002

          Mind the Gap
          By PAUL KRUGMAN

          More and more people are using the B-word about the housing market. A recent analysis * by Dean Baker, of the Center for Economic Policy Research, makes a particularly compelling case for a housing bubble. House prices have run well ahead of rents, suggesting that people are now buying houses for speculation rather than merely for shelter. And the explanations one hears for those high prices sound more and more like the rationalizations one heard for Nasdaq 5,000.

          If we do have a housing bubble, and it bursts, we'll be looking a lot too Japanese for comfort....

          * http://www.cepr.net/documents/publications/housing_2002_08.pdf

          anne said in reply to anne... December 18, 2015 at 06:44 AM

          http://www.nytimes.com/2005/08/08/opinion/that-hissing-sound.html

          August 8, 2005

          That Hissing Sound
          By PAUL KRUGMAN

          This is the way the bubble ends: not with a pop, but with a hiss.

          Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.

          So the news that the U.S. housing bubble is over won't come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.

          Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

          One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller "Dow 36,000" are now among the most vocal proponents of the view that there is no housing bubble.

          Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

          In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

          But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

          And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble....

          EMichael said in reply to anne... December 18, 2015 at 06:59 AM

          Yeah, the only thing he missed was the timing of the collapse. The day he wrote this the Fed had already raised rates 250% in one year, on the way to a total of 400% in the next 6 months.

          Yet prices accelerated until the top was reached a year after the column.

          anne said in reply to EMichael... December 18, 2015 at 07:43 AM

          http://www.nytimes.com/2006/08/25/opinion/25krugman.html

          August 25, 2006

          Housing Gets Ugly
          By PAUL KRUGMAN

          Bubble, bubble, Toll's in trouble. This week, Toll Brothers, the nation's premier builder of McMansions, announced that sales were way off, profits were down, and the company was walking away from already-purchased options on land for future development.

          Toll's announcement was one of many indications that the long-feared housing bust has arrived. Home sales are down sharply; home prices, which rose 57 percent over the past five years (and much more than that along the coasts), are now falling in much of the country. The inventory of unsold existing homes is at a 13-year high; builders' confidence is at a 15-year low.

          A year ago, Robert Toll, who runs Toll Brothers, was euphoric about the housing boom, declaring: "We've got the supply, and the market has got the demand. So it's a match made in heaven." In a New York Times profile of his company published last October, he dismissed worries about a possible bust. "Why can't real estate just have a boom like every other industry?" he asked. "Why do we have to have a bubble and then a pop?"

          The current downturn, Mr. Toll now says, is unlike anything he's seen: sales are slumping despite the absence of any "macroeconomic nasty condition" taking housing down along with the rest of the economy. He suggests that unease about the direction of the country and the war in Iraq is undermining confidence. All I have to say is: pop! ...

          EMichael said in reply to anne... December 18, 2015 at 07:52 AM

          "Mr. Toll now says, is unlike anything he's seen: sales are slumping despite the absence of any "macroeconomic nasty condition""

          You gotta love builders and RE agents. It wasn't macro that caused it, it was default rates across the board on supposedly safe investments that caused mortgage money supply to totally disappear.

          One day people will understand that payments are the key to all finance.

          JohnH said...

          "and it is an outrage that basically nobody ended up being punished ."

          Yes, indeed. And who do we have to blame for that? Obama and Holder, of course. They made the investigation of mortgage securities fraud DOJ's lowest priority. Krugman's Democratic proclivities prevent him from stating the obvious.

          I' m sure that pgl and his band of merry Obamabots will try to spin this in Obama's favor...I.e. Congress prevented him from implementing the law, even though Congress has nothing to do with it.

          Fact is, Obama has intentionally been a lame duck ever since he took office. He was even clueless on how to capitalize on a filibuster-proof majority in the midst of an economic crisis...which brings us to Trump. Many are so desperate for leadership after Obama's hollow presidency that they'll even support a racist demagogue to avoid another empty White House.

          run75441 said in reply to JohnH...

          Yes you are correct. From 2001 into 2008 when all of the liar and ninja loans were being made, not one government official stepped forward to investigate the possibility of fraud, the predatory lending, the misrepresentation of loans taking place, the loans with "teaser" rates which later ballooned, the packing of loans with deceptive fees, the illegal kick backs, etc. Not one. To make matters worst, the administration from 2001-2008 aligned itself with the banks along with the maestro hisself "Greenspan."

          When state AGs took on the burden of investigating the flagrant violations, the administration moves to block them saying they had no jurisdiction to do so. It did this through the OCC issuing rules preventing the states from prosecuting the banks. Besides blocking any investigation, the OCC failed in its mission to audit the banks for which it was by law to do.

          What was the SEC doing during this time period? What was the administration doing with Enron in 2002? Didn't Cheney get sued by the GAO to find out who he was talking to at Enron?

          Yes there is the matter of not prosecuting banking execs after 2008; however, the issue was allowed to grow during the prior administration and left on the next administration's doorstep. Closing the barn door after the perps have escaped is a bit late and it should have been stopped dead in its tracks during the prior 8 years.

          So keep going down that path and we can also talk about fraud with tranching, CDS, Naked CDs, reserves, etc.

          So, where was the administration during this time period?

          DeDude said...

          Subprime loans in poor communities represented a very small fraction of the total subprime volume and defaulted loans. I mean talk about the mouse and the elephant. Yet the FoxBots are being convinced to look at those scary mice and all that thundering noise they are making.

          Alex H said in reply to Peter K....
          In the book, one of the supposed villains went to the division of AIG that was selling CDSes (i.e. "insuring" the toxic crap) and explained to a direct subordinate of the division exactly how his bank and the other companies of Wall Street were suckering them into taking on absurd risks. In *2005*.

          Because he was massively short in this market, and AIG pulling the plug would have popped the bubble. Nobody else was selling CDSes (then), and Wall Street couldn't have pretended that their risks were covered without them. That doesn't make him a hero, but seriously, if AIG had listened, no collapse.

          Several of the characters effectively called up the ratings agencies to shout at them. Others called NYT and WSJ reporters, who ignored them. Then they called the SEC's enforcement division, who ignored them.

          Besides, if the other side in all of those bets were foreign "widows and orphans", then it wouldn't have wrecked the financial system. If Bear Stearns had been sitting as the middleman between a Korean pension fund and Steve Eisman, they'd have just taken their cut and moved on.

          [Dec 19, 2015] The Enduring Relevance of "Manias, Panics, and Crashes"

          Notable quotes:
          "... Manias, Panics, and Crashes ..."
          "... The New International Money Game ..."
          "... Manias, Panics and Crashes ..."
          "... Why Minsky Matters ..."
          "... Manias, Panics and Crashes ..."
          "... Manias, Panics and Crashes ..."
          December 17, 2015 | Angry Bear

          by Joseph Joyce

          The Enduring Relevance of "Manias, Panics, and Crashes"

          The seventh edition of Manias, Panics, and Crashes has recently been published by Palgrave Macmillan. Charles Kindleberger of MIT wrote the first edition, which appeared in 1978, and followed it with three more editions. Robert Aliber of the Booth School of Business at the University of Chicago took over the editing and rewriting of the fifth edition, which came out in 2005. (Aliber is also the author of another well-known book on international finance, The New International Money Game.) The continuing popularity of Manias, Panics and Crashes shows that financial crises continue to be a matter of widespread concern.

          Kindleberger built upon the work of Hyman Minsky, a faculty member at Washington University in St. Louis. Minsky was a proponent of what he called the "financial instability hypothesis," which posited that financial markets are inherently unstable. Periods of financial booms are followed by busts, and governmental intervention can delay but not eliminate crises. Minsky's work received a great deal of attention during the global financial crisis (see here and here; for a summary of Minksy's work, see Why Minsky Matters by L. Randall Wray of the University of Missouri-Kansas City and the Levy Economics Institute).

          Kindleberger provided a more detailed description of the stages of a financial crisis. The period preceding a crisis begins with a "displacement," a shock to the system. When a displacement improves the profitability of at least one sector of an economy, firms and individuals will seek to take advantage of this opportunity. The resulting demand for financial assets leads to an increase in their prices. Positive feedback in asset markets lead to more investments and financial speculation, and a period of "euphoria," or mania develops.

          At some point, however, insiders begin to take profits and withdraw from the markets. Once market participants realize that prices have peaked, flight from the markets becomes widespread. As prices plummet, a period of "revulsion" or panic ensues. Those who had financed their positions in the market by borrowing on the promise of profits on the purchased assets become insolvent. The panic ends when prices fall so far that some traders are tempted to come back into the market, or trading is limited by the authorities, or a lender of last resort intervenes to halt the decline.

          In addition to elaborating on the stages of a financial crisis, Kindleberger also placed them in an international context. He wrote about the propagation of crises through the arbitrage of divergences in the prices of assets across markets or their substitutes. Capital flows and the spread of euphoria also contribute to the simultaneous rises in asset prices in different countries. (Piero Pasotti and Alessandro Vercelli of the University of Siena provide an analysis of Kindleberger's contributions.)

          Aliber has continued to update the book, and the new edition has a chapter on the European sovereign debt crisis. (The prior edition covered the events of 2008-09.) But he has also made his own contributions to the Minsky-Kindleberger (and now –Aliber) framework. Aliber characterizes the decades since the early 1980s as "…the most tumultuous in monetary history in terms of the number, scope and severity of banking crises." To date, there have been four waves of such crises, which are almost always accompanied by currency crises. The first wave was the debt crisis of developing nations during the 1980s, and it was followed by a second wave of crises in Japan and the Nordic countries in the early 1990s. The third wave was the Asian financial crisis of 1997-98, and the fourth is the global financial crisis.

          Aliber emphasizes the role of cross-border investment flows in precipitating the crises. Their volatility has risen under flexible exchange rates, which allow central banks more freedom in formulating monetary policies that influence capital allocation. He also draws attention to the increases in household wealth due to rising asset prices and currency appreciation that contribute to consumption expenditures and amplify the boom periods. The reversal in wealth once investors revise their expectations and capital begins to flow out makes the resulting downturn more acute.

          These views are consistent in many ways with those of Claudio Borio of the Bank for International Settlements (see also here). He has written that the international monetary and financial system amplifies the "excess financial elasticity," i.e., the buildup of financial imbalances that characterizes domestic financial markets. He identifies two channels of transmission. First, capital inflows contribute to the rise in domestic credit during a financial boom. The impact of global conditions on domestic financial markets exacerbates this development (see here). Second, monetary regimes may facilitate the expansion of monetary conditions from one country to others. Central bankers concerned about currency appreciation and a loss of competitiveness keep interest rates lower than they would otherwise, which furthers a domestic boom. In addition, the actions of central banks with international currencies such as the dollar has international ramifications, as the current widespread concern about the impending rise in the Federal Funds rate shows.

          Aliber ends the current edition of Manias, Panics and Crashes with an appendix on China's financial situation. He compares the surge in China's housing markets with the Japanese boom of the 1980s and subsequent bust that initiated decades of slow economic growth. An oversupply of new housing in China has resulted in a decline in prices that threatens the solvency of property developers and the banks and shadow banks that financed them. Aliber is dubious of the claim that the Chinese government will support the banks, pointing out that such support will only worsen China's indebtedness. The need for an eighth edition of Manias, Panics and Crashes may soon be apparent.

          cross posted with Capital Ebbs and Flows

          [Dec 19, 2015] The Washington Post's Non-Political Fed Looks a Lot Like Wall Street's Fed

          Notable quotes:
          "... Any serious discussion of Fed policy would note that the banking industry appears to have a grossly disproportionate say in the country's monetary policy. ..."
          Dec 19, 2015 | Beat the Press

          ... ... ...

          But what is even more striking is the Post's ability to treat the Fed a neutral party when the evidence is so overwhelming in the opposite direction. The majority of the Fed's 12 district bank presidents have long been pushing for a rate hike. While there are some doves among this group, most notably Charles Evans, the Chicago bank president, and Narayana Kocherlakota, the departing president of the Minneapolis bank, most of this group has publicly pushed for higher rate hikes for some time. By contrast, the governors who are appointed through the democratic process, have been far more cautious about raising rates.

          It should raise serious concerns that the bank presidents, who are appointed through a process dominated by the banking industry, has such a different perspective on the best path forward for monetary policy. With only five of the seven governor slots currently filled, there are as many presidents with voting seats on the Fed's Open Market Committee as governors. In total, the governors are outnumbered at meetings by a ratio of twelve to five.

          Any serious discussion of Fed policy would note that the banking industry appears to have a grossly disproportionate say in the country's monetary policy. Furthermore, it seems determined to use that influence to push the Fed on a path that slows growth and reduces the rate of job creation. The Post somehow missed this story or at least would prefer that the rest of us not take notice.

          * https://www.washingtonpost.com/opinions/the-federal-reserve-makes-a-good-judgment-call-in-raising-interest-rates/2015/12/18/7954e1c6-a4f8-11e5-ad3f-991ce3374e23_story.html

          -- Dean Baker

          [Dec 18, 2015] The Upward Redistribution of Income: Are Rents the Story?

          Looks like growth of financial sector represents direct threat to the society
          Notable quotes:
          "... Perhaps the financialization of the economy and rising inequality leads to a corruption of the political process which leads to monetary, currency and fiscal policy such that labor markets are loose and inflation is low. ..."
          "... Growth of the non-financial-sector == growth in productivity ..."
          "... In complex subject matters, even the most competent person joining a company has to become familiar with the details of the products, the industry niche, the processes and professional/personal relationships in the company or industry, etc. All these are not really teachable and require between months and years in the job. This represents a significant sunk cost. Sometimes (actually rather often) experience within the niche/industry is in a degree portable between companies, but some company still had to employ enough people to build this experience, and it cannot be readily bought by bringing in however competent freshers. ..."
          December 18, 2015 | cepr.netDean Baker:
          Working Paper: : In the years since 1980, there has been a well-documented upward redistribution of income. While there are some differences by methodology and the precise years chosen, the top one percent of households have seen their income share roughly double from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period.

          This paper argues that the bulk of this upward redistribution comes from the growth of rents in the economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals. The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to this rapid rise in inequality, as for example argued by Thomas Piketty.

          Flash | PDF

          RC AKA Darryl, Ron said in reply to Fair Economist, December 18, 2015 at 11:34 AM

          "...the growth of finance capitalism was what would kill capitalism off..."

          "Financialization" is a short-cut terminology that in full is term either "financialization of non-financial firms" or "financialization of the means of production." In either case it leads to consolidation of firms, outsourcing, downsizing, and offshoring to reduce work force and wages and increase rents.

          Consolidation, the alpha and omega of financialization can only be executed with very liquid financial markets, big investment banks to back necessary leverage to make the proffers, and an acute capital gains tax preference relative to dividends and interest earnings, the grease to liquidity.

          It takes big finance to do "financialization" and it takes "financialization" to extract big rents while maintaining low wages.

          RC AKA Darryl, Ron said in reply to RC AKA Darryl, Ron, December 18, 2015 at 11:42 AM
          [THANKS to djb just down thread who supplied this link:]

          http://www.democraticunderground.com/10021305040

          Finance sector as percent of US GDP, 1860-present: the growth of the rentier economy

          [graph]

          Financialization is a term sometimes used in discussions of financial capitalism which developed over recent decades, in which financial leverage tended to override capital (equity) and financial markets tended to dominate over the traditional industrial economy and agricultural economics.

          Financialization is a term that describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument. The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument... Financialization also makes economic rents possible...financial leverage tended to override capital (equity) and financial markets tended to dominate over the traditional industrial economy and agricultural economics...

          Companies are not able to invest in new physical capital equipment or buildings because they are obliged to use their operating revenue to pay their bankers and bondholders, as well as junk-bond holders. This is what I mean when I say that the economy is becoming financialized. Its aim is not to provide tangible capital formation or rising living standards, but to generate interest, financial fees for underwriting mergers and acquisitions, and capital gains that accrue mainly to insiders, headed by upper management and large financial institutions. The upshot is that the traditional business cycle has been overshadowed by a secular increase in debt.

          Instead of labor earning more, hourly earnings have declined in real terms. There has been a drop in net disposable income after paying taxes and withholding "forced saving" for social Security and medical insurance, pension-fund contributions and–most serious of all–debt service on credit cards, bank loans, mortgage loans, student loans, auto loans, home insurance premiums, life insurance, private medical insurance and other FIRE-sector charges. ... This diverts spending away from goods and services.

          In the United States, probably more money has been made through the appreciation of real estate than in any other way. What are the long-term consequences if an increasing percentage of savings and wealth, as it now seems, is used to inflate the prices of already existing assets - real estate and stocks - instead of to create new production and innovation?

          http://en.wikipedia.org/wiki/Financialization

          pgl said in reply to RC AKA Darryl, Ron, December 18, 2015 at 03:25 PM
          Your graph shows something I've been meaning to suggest for a while. Take a look at the last time that the financial sector share of GDP rose. The late 1920's. Which was followed by the Great Depression which has similar causes as our Great Recession. Here is my observation.

          Give that Wall Street clowns a huge increase in our national income and we don't get more services from them. What we get is screwed on the grandest of scales.

          BTW - there is a simple causal relationship that explains both the rise in the share of financial sector income/GDP and the massive collapses of the economy (1929 and 2007). It is called stupid financial deregulation. First we see the megabanks and Wall Street milking the system for all its worth and when their unhanded and often secretive risk taking falls apart - the rest of bear the brunt of the damage.

          Which is why this election is crucial. Elect a Republican and we repeat this mistake again. Elect a real progressive and we can put in place the types of financial reforms FDR was known for.

          Peter K. said in reply to RC AKA Darryl, Ron, December 18, 2015 at 11:50 AM

          " and it takes "financialization" to extract big rents while maintaining low wages."

          It takes governmental macro policy to maintain loose labor markets and low wages. Perhaps the financialization of the economy and rising inequality leads to a corruption of the political process which leads to monetary, currency and fiscal policy such that labor markets are loose and inflation is low.

          djb said...

          http://www.democraticunderground.com/10021305040

          I don't know about the last couple years but this chart indicates a large growth in financials as a share of gdp over the years since the 40's

          RC AKA Darryl, Ron said in reply to djb, December 18, 2015 at 12:03 PM
          [Anne gave you FIRE sector profits as a share of GDP while this gives FIRE sector profits as a share of total corporate profits.]

          *

          [Smoking gun excerpt:]

          "...The financial system has grown rapidly since the early 1980s. In the 1950s, the financial sector accounted for about 3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5 percent. The sector's yearly rate of growth doubled after 1980, rising to a peak of 7.5 percent of GDP in 2006. As finance has grown in relative size it has also grown disproportionately more profitable. In 1950, financial-sector profits were about 8 percent of overall U.S. profits-meaning all the profit earned by any kind of business enterprise in the country. By the 2000s, they ranged between 20 and 40 percent...

          [Ouch!]

          [Now the whole enchilada:]

          http://www.washingtonmonthly.com/magazine/novemberdecember_2014/features/frenzied_financialization052714.php?page=all

          If you want to know what happened to economic equality in this country, one word will explain a lot of it: financialization. That term refers to an increase in the size, scope, and power of the financial sector-the people and firms that manage money and underwrite stocks, bonds, derivatives, and other securities-relative to the rest of the economy.

          The financialization revolution over the past thirty-five years has moved us toward greater inequality in three distinct ways. The first involves moving a larger share of the total national wealth into the hands of the financial sector. The second involves concentrating on activities that are of questionable value, or even detrimental to the economy as a whole. And finally, finance has increased inequality by convincing corporate executives and asset managers that corporations must be judged not by the quality of their products and workforce but by one thing only: immediate income paid to shareholders.

          The financial system has grown rapidly since the early 1980s. In the 1950s, the financial sector accounted for about 3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5 percent. The sector's yearly rate of growth doubled after 1980, rising to a peak of 7.5 percent of GDP in 2006. As finance has grown in relative size it has also grown disproportionately more profitable. In 1950, financial-sector profits were about 8 percent of overall U.S. profits-meaning all the profit earned by any kind of business enterprise in the country. By the 2000s, they ranged between 20 and 40 percent. This isn't just the decline of profits in other industries, either. Between 1980 and 2006, while GDP increased five times, financial-sector profits increased sixteen times over. While financial and nonfinancial profits grew at roughly the same rate before 1980, between 1980 and 2006 nonfinancial profits grew seven times while financial profits grew sixteen times.

          This trend has continued even after the financial crisis of 2008 and subsequent financial reforms, including the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Financial profits in 2012 were 24 percent of total profits, while the financial sector's share of GDP was 6.8 percent. These numbers are lower than the high points of the mid-2000s; but, compared to the years before 1980, they are remarkably high.

          This explosion of finance has generated greater inequality. To begin with, the share of the total workforce employed in the financial sector has barely budged, much less grown at a rate equivalent to the size and profitability of the sector as a whole. That means that these swollen profits are flowing to a small sliver of the population: those employed in finance. And financiers, in turn, have become substantially more prominent among the top 1 percent. Recent work by the economists Jon Bakija, Adam Cole, and Bradley T. Heim found that the percentage of those in the top 1 percent of income working in finance nearly doubled between 1979 and 2005, from 7.7 percent to 13.9 percent.

          If the economy had become far more productive as a result of these changes, they could have been worthwhile. But the evidence shows it did not. Economist Thomas Philippon found that financial services themselves have become less, not more, efficient over this time period. The unit cost of financial services, or the percentage of assets it costs to produce all financial issuances, was relatively high at the dawn of the twentieth century, but declined to below 2 percent between 1901 and 1960. However, it has increased since the 1960s, and is back to levels seen at the early twentieth century. Whatever finance is doing, it isn't doing it more cheaply.

          In fact, the second damaging trend is that financial institutions began to concentrate more and more on activities that are worrisome at best and destructive at worst. Harvard Business School professors Robin Greenwood and David Scharfstein argue that between 1980 and 2007 the growth in financial-industry revenues came from two things: asset management and loan origination. Fees associated either with asset management or with household credit in particular were responsible for 74 percent of the growth in financial-sector output over that period.

          The asset management portion reflects the explosion of mutual funds, which increased from $134 billion in assets in 1980 to $12 trillion in 2007. Much of it also comes from "alternative investment vehicles" like hedge funds and private equity. Over this time, the fee rate for mutual funds fell, but fees associated with alternative investment vehicles exploded. This is, in essence, money for nothing-there is little evidence that hedge funds actually perform better than the market over time. And, unlike mutual funds, alternative investment funds do not fully disclose their practices and fees publicly.

          Beginning in 1980 and continuing today, banks generate less and less of their income from interest on loans. Instead, they rely on fees, from either consumers or borrowers. Fees associated with household credit grew from 1.1 percent of GDP in 1980 to 3.4 percent in 2007. As part of the unregulated shadow banking sector that took over the financial sector, banks are less and less in the business of holding loans and more and more concerned with packaging them and selling them off. Instead of holding loans on their books, banks originate loans to sell off and distribute into this new type of banking sector.

          Again, if this "originate-to-distribute" model created value for society, it could be a worthwhile practice. But, in fact, this model introduced huge opportunities for fraud throughout the lending process. Loans-such as "securitized mortgages" made up of pledges of the income stream from subprime mortgage loans-were passed along a chain of buyers until someone far away held the ultimate risk. Bankers who originated the mortgages received significant commissions, with virtually no accountability or oversight. The incentive, in fact, was perverse: find the worst loans with the biggest fees instead of properly screening for whether the loans would be any good for investors.

          The same model made it difficult, if not impossible, to renegotiate bad mortgages when the system collapsed. Those tasked with tackling bad mortgages on behalf of investors had their own conflicts of interests, and found themselves profiting while loans struggled. This process created bad debts that could never be paid, and blocked attempts to try and rework them after the fact. The resulting pool of bad debt has been a drag on the economy ever since, giving us the fall in median wages of the Great Recession and the sluggish recovery we still live with.

          And of course it's been an epic disaster for the borrowers themselves. Many of them, we now know, were moderate- and lower-income families who were in no financial position to borrow as much as they did, especially under such predatory terms and with such high fees. Collapsing home prices and the inability to renegotiate their underwater mortgages stripped these folks of whatever savings they had and left them in deep debt, widening even further the gulf of inequality in this country.

          Moreover, financialization isn't just confined to the financial sector itself. It's also ultimately about who controls, guides, and benefits from our economy as a whole. And here's the last big change: the "shareholder revolution," started in the 1980s and continuing to this very day, has fundamentally transformed the way our economy functions in favor of wealth owners.

          To understand this change, compare two eras at General Electric. This is how business professor Gerald Davis describes the perspective of Owen Young, who was CEO of GE almost straight through from 1922 to 1945: "[S]tockholders are confined to a maximum return equivalent to a risk premium. The remaining profit stays in the enterprise, is paid out in higher wages, or is passed on to the customer." Davis contrasts that ethos with that of Jack Welch, CEO from 1981 to 2001; Welch, Davis says, believed in "the shareholder as king-the residual claimant, entitled to the [whole] pot of earnings."

          This change had dramatic consequences. Economist J. W. Mason found that, before the 1980s, firms tended to borrow funds in order to fuel investment. Since 1980, that link has been broken. Now when firms borrow, they tend to use the money to fund dividends or buy back stocks. Indeed, even during the height of the housing boom, Mason notes, "corporations were paying out more than 100 percent of their cash flow to shareholders."

          This lack of investment is obviously holding back our recovery. Productive investment remains low, and even extraordinary action by the Federal Reserve to make investments more profitable by keeping interest rates low has not been able to counteract the general corporate presumption that this money should go to shareholders. There is thus less innovation, less risk taking, and ultimately less growth. One of the reasons this revolution was engineered in the 1980s was to put a check on what kinds of investments CEOs could make, and one of those investments was wage growth. Finance has now won the battle against wage earners: corporations today are reluctant to raise wages even as the economy slowly starts to recover. This keeps the economy perpetually sluggish by retarding consumer demand, while also increasing inequality.

          How can these changes be challenged? The first thing we must understand is the scope of the change. As Mason writes, the changes have been intellectual, legal, and institutional. At the intellectual level, academic research and conventional wisdom among economists and policymakers coalesced around the ideas that maximizing returns to shareholders is the only goal of a corporation, and that the financial markets were always right. At the legal level, laws regulating finance at the state level were overturned by the Supreme Court or preempted by federal regulators, and antitrust regulations were gutted by the Reagan administration and not taken up again.

          At the institutional level, deregulation over several administrations led to a massive concentration of the financial sector into fewer, richer firms. As financial expertise became more prestigious than industry-specific knowledge, CEOs no longer came from within the firms they represented but instead from other firms or from Wall Street; their pay was aligned through stock options, which naturally turned their focus toward maximizing stock prices. The intellectual and institutional transformation was part of an overwhelming ideological change: the health and strength of the economy became identified solely with the profitability of the financial markets.

          This was a bold revolution, and any program that seeks to change it has to be just as bold intellectually. Such a program will also require legal and institutional changes, ones that go beyond making sure that financial firms can fail without destroying the economy. Dodd-Frank can be thought of as a reaction against the worst excesses of the financial sector at the height of the housing bubble, and as a line of defense against future financial panics. Many parts of it are doing yeoman's work in curtailing the financial sector's abuses, especially in terms of protecting consumers from fraud and bringing some transparency to the Wild West of the derivatives markets. But the scope of the law is too limited to roll back these larger changes.

          One provision of Dodd-Frank, however, suggests a way forward. At the urging of the AFL-CIO, Dodd-Frank empowered the Securities and Exchange Commission to examine the activities of private equity firms on behalf of their investors. At around $3.5 trillion, private equity is a massive market with serious consequences for the economy as a whole. On its first pass, the SEC found extensive abuses. Andrew Bowden, the director of the SEC's examinations office, stated that the agency found "what we believe are violations of law or material weaknesses in controls over 50 percent of the time."

          Lawmakers could require private equity and hedge funds to standardize their disclosures of fees and holdings, as is currently the case for mutual funds. The decline in fees for mutual funds noted above didn't just happen by itself; it happened because the law structured the market for actual transparency and price competition. This will need to happen again for the broader financial sector.

          But the most important change will be intellectual: we must come to understand our economy not as simply a vehicle for capital owners, but rather as the creation of all of us, a common endeavor that creates space for innovation, risk taking, and a stronger workforce. This change will be difficult, as we will have to alter how we approach the economy as a whole. Our wealth and companies can't just be strip-mined for a small sliver of capital holders; we'll need to bring the corporation back to the public realm. But without it, we will remain trapped inside an economy that only works for a select few.

          [Whew!]

          Puerto Barato said in reply to RC AKA Darryl, Ron,
          "3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5"
          ~~RC AKA Darryl, Ron ~

          Growth of the non-financial-sector == growth in productivity

          Growth of the financial-sector == growth in upward transfer of wealth

          Ostensibly financial-sector is there to protect your money from being eaten up by inflation. Closer inspection shows that the prevention of *eaten up* is by the method of rent collection.

          Accountants handle this analysis poorly, but you can see what is happening. Boiling it down to the bottom line you can easily see that wiping out the financial sector is the remedy to the Piketty.

          Hell! Financial sector wiped itself out in 008. Problem was that the GSE and administration brought the zombie back to life then put the vampire back at our throats. What was the precipitating factor that snagged the financial sector without warning?

          Unexpected
          deflation
          !

          Gimme some
          of that

          pgl said in reply to djb...

          People like Brad DeLong have noted this for a while. Twice as many people making twice as much money per person. And their true value to us - not a bit more than it was back in the 1940's.

          Rock O Sock O Choco said in reply to djb... December 18, 2015 at 06:26 PM

          JEC - MeanSquaredErrors said...

          Wait, what?

          Piketty looks at centuries of data from all over the world and concludes that capitalism has a long-run bias towards income concentration. Baker looks at 35 years of data in one country and concludes that Piketty is wrong. Um...?

          A little more generously, what Baker actually writes is:

          "The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to **this** rapid rise in inequality, as for example argued by Thomas Piketty." (emphasis added)

          But Piketty has always been very explicit that the recent rise in US income inequality is anomalous -- driven primarily by rising inequality in the distribution of labor income, and only secondarily by any shift from labor to capital income.

          So perhaps Baker is "correctly" refuting Straw Thomas Piketty. Which I suppose is better than just being obviously wrong. Maybe.

          tew said...

          Some simple math shows that this assertion is false "As a result of this upward redistribution, most workers have seen little improvement in living standards" unless you think an apprx. 60% in per-capita real income (expressed as GDP) among the 99% is "little improvement".

          Real GDP 2015 / Real GDP 1980 = 2.57 (Source: FRED)
          If the income share of the 1% shifted from 10% to 20% then The 1%' real GDP component went up 410% while that of The 99% went up 130%. Accounting for a population increase of about 41% brings those numbers to a 265% increase and a 62% increase.

          Certainly a very unequal distribution of the productivity gains but hard to call "little".

          I believe the truth of the statement is revealed when you look at the Top 5% vs. the other 95%.

          cm said in reply to tew...

          For most "working people", their raises are quickly eaten up by increases in housing/rental, food, local services, and other nondiscretionary costs. Sure, you can buy more and better imported consumer electronics per dollar, but you have to pay the rent/mortgage every months, how often do you buy a new flat screen TV? In a high-cost metro, a big ass TV will easily cost less than a single monthly rent (and probably less than your annual cable bill that you need to actually watch TV).

          pgl said in reply to tew...

          Are you trying to be the champion of the 1%? Sorry dude but Greg Mankiw beat you to this.

          anne said...

          In the years since 1980, there has been a well-documented upward redistribution of income. While there are some differences by methodology and the precise years chosen, the top one percent of households have seen their income share roughly double from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period....

          -- Dean Baker

          anne said in reply to anne...

          http://www.census.gov/hhes/www/income/data/historical/household/

          September 16, 2015

          Real Median Household Income, 1980 & 2014


          1980 ( 48,462)

          2014 ( 53,657)


          53,657 - 48,462 = 5,195

          5,195 / 48,462 = 10.7%


          Between 1980 and 2014 real median household income increased by a mere 10.7%.

          anne said in reply to don...

          I would be curious to know what has happened to the number of members per household....

          http://www.census.gov/hhes/www/income/data/historical/household/

          September 16, 2015

          Household Size

          2014 ( 2.54)
          1980 ( 2.73)

          [ The difference in household size to real median household incomes is not statistically significant. ]

          anne said in reply to anne...

          http://www.census.gov/hhes/www/income/data/historical/families/index.html

          September 16, 2015

          Real Median Family Income, 1948-1980-2014


          1948 ( 27,369)

          1980 ( 57,528)

          2014 ( 66,632)


          57,528 - 27,369 = 30,159

          30,159 / 27,369 = 110.2%


          66,632 - 57,528 = 9,104

          9,104 / 57,528 = 15.8%


          Between 1948 and 1980, real median family income increased by 110.2%, while between 1980 and 2014 real median family income increased by a mere 15.8%.

          cm said...

          "protectionist measures that have boosted the pay of doctors and other highly educated professionals"

          Protectionist measures (largely of the variety that foreign credentials are not recognized) apply to doctors and similar accredited occupations considered to be of some importance, but certainly much less so to "highly educated professionals" in tech, where the protectionism is limited to annual quotas for some categories of new workers imported into the country and requiring companies to pay above a certain wage rate for work visa holders in jobs claimed to have high skills requirements.

          A little mentioned but significant factor for growing wages in "highly skilled" jobs is that the level of foundational and generic domain skills is a necessity, but is not all the value the individual brings to the company. In complex subject matters, even the most competent person joining a company has to become familiar with the details of the products, the industry niche, the processes and professional/personal relationships in the company or industry, etc. All these are not really teachable and require between months and years in the job. This represents a significant sunk cost. Sometimes (actually rather often) experience within the niche/industry is in a degree portable between companies, but some company still had to employ enough people to build this experience, and it cannot be readily bought by bringing in however competent freshers.

          This applies less so e.g. in medicine. There are of course many heavily specialized disciplines, but a top flight brain or internal organ surgeon can essentially work on any person. The variation in the subject matter is large and complex, but much more static than in technology.

          That's not to knock down the skill of medical staff in any way (or anybody else who does a job that is not trivial, and that's true for many jobs). But specialization vs. genericity follow a different pattern than in tech.

          Another example, the legal profession. There are similar principles that carry across, with a lot of the specialization happening along different legislation, case law, etc., specific to the jurisdiction and/or domain being litigated.

          [Dec 13, 2015] Deregulation of exotic financial instruments like derivatives and credit-default swaps and corruption of Congress and government

          Notable quotes:
          "... Can you list all of the pro- or anti- Wall Street reforms and actions Bill Clinton performed as President including nominating Alan Greenspan as head regulator? Cutting the capital gains tax? Are you aware of Greenspans record? ..."
          "... Its actually pro-neoliberalism crowd vs anti-neoliberalism crowd. In no way anti-neoliberalism commenters here view this is a character melodrama, although psychologically Hillary probably does has certain problems as her reaction to the death of Gadhafi attests. The key problem with anti-neoliberalism crowd is the question What is a realistic alternative? Thats where differences and policy debate starts. ..."
          "... Events do not occur in isolation. GLBA increased TBTF in AIG and Citi. TBTF forced TARP. GLBA greased the skids for CFMA. Democrats gained majority, but not filibuster proof, caught between Iraq and a hard place following their votes for TARP and a broader understanding of their participation in the unanimous consent passage of the CFMA, over objection by Senators James Inhofe (R-OK) and Paul Wellstone (D-MN). ..."
          "... It certainly fits the kind of herd mentality that I always saw in corporate Amerika until I retired. The William Greider article posted by RGC was very consistent in its account by John Reed with the details of one or two books written about AIG back in 2009 or so. I dont have time to hunt them up now. Besides, no one would read them anyway. ..."
          "... GS was one of several actions taken by the New Deal. That it wasnt sufficient by itself doesnt equate to it wasnt beneficial. ..."
          "... "Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century," said then-Treasury Secretary Lawrence Summers. "This historic legislation will better enable American companies to compete in the new economy." ..."
          "... The repeal of Glass Steagal was a landmark victory in deregulation that greased the skids for the passage of CFMA once Democrats had been further demoralized by the SCOTUS decision on Bush-v-Gore. The first vote on GLBA was split along party lines, but passed because Republicans had majority and Clinton was willing to sign which was clear from the waiver that had been granted to illegal Citi merger with Travelers. Both Citi and AIG mergers contributed to too big to fail. The CFMA was the nail in the coffin that probably would have never gotten off the ground if Democrats had held the line on the GLBA. Glass-Steagal was insufficient as a regulatory system to prevent the 2008 mortgage crisis, but it was giant as an icon of New Deal financial system reform. Its loss institutionalized too big to fail ..."
          "... Gramm Leach Biley was a mistake. But it was not the only failure of US regulatory policies towards financial institutions nor the most important. ..."
          "... It was more symbolic caving in on financial regulation than a specific technical failure except for making too big to fail worse at Citi and AIG. It marked a sea change of thinking about financial regulation. Nothing mattered any more, including the CFMA just a little over one year later. Deregulation of derivatives trading mandated by the CFMA was a colossal failure and it is not bizarre to believe that GLBA precipitated the consensus on financial deregulation enough that after the demoralizing defeat of Democrats in Bush-v-Gore then there was no New Deal spirit of financial regulation left. Social development is not just a series of unconnected events. It is carried on a tide of change. A falling tide grounds all boats. ..."
          "... We had a financial dereg craze back in the late 1970s and early 1980s which led to the S L disaster. One would have thought we would have learned from that. But then came the dereg craziness 20 years later. And this disaster was much worse. ..."
          "... This brings us to Lawrence Summers, the former Treasury Secretary of the United States and at the time right hand man to then Treasury Security Robert Rubin. Mr. Summers was widely credited with implementation of the aggressive tactics used to remove Ms. Born from her office, tactics that multiple sources describe as showing an old world bias against women piercing the glass ceiling. ..."
          "... According to numerous published reports, Mr. Summers was involved in. silencing those who questioned the opaque derivative product's design. ..."
          "... The Tax Policy Center estimated that a 0.1 percent tax on stock trades, scaled with lower taxes on other assets, would raise $50 billion a year in tax revenue. The implied reduction in trading revenue was even larger. Senator Sanders has proposed a tax of 0.5 percent on equities (also with a scaled tax on other assets). This would lead to an even larger reduction in revenue for the financial industry. ..."
          "... Great to see Bakers acknowledgement that an updated Glass-Steagall is just one component of the progressive wings plan to rein in Wall Street, not the sum total of it. Besides, if Wall Street types dont think restoring Glass-Steagall will have any meaningful effects, why do they expend so much energy to disparage it? Methinks they doth protest too much. ..."
          "... Yes thats a good way to look it. Wall Street gave the Democrats and Clinton a lot of campaign cash so that they would dismantle Glass-Steagall. ..."
          "... Slippery slope. Ya gotta find me a business of any type that does not protest any kind of regulation on their business. ..."
          "... Yeah, but usually because of all the bad things they say will happen because of the regulation. The question is, what do they think of Clintons plan? Ive heard surprisingly little about that, and what I have heard is along these lines: http://money.cnn.com/2015/10/08/investing/hillary-clinton-wall-street-plan/ ..."
          "... Hillary Clinton unveiled her big plan to curb the worst of Wall Streets excesses on Thursday. The reaction from the banking community was a shrug, if not relief. ..."
          "... Iceland's government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled "A better monetary system for Iceland". ..."
          economistsview.typepad.com

          RGC said...

          Hillary Clinton Is Whitewashing the Financial Catastrophe

          She has a plan that she claims will reform Wall Street-but she's deflecting responsibility from old friends and donors in the industry.

          By William Greider
          Yesterday 3:11 pm

          Hillary Clinton's recent op-ed in The New York Times, "How I'd Rein In Wall Street," was intended to reassure nervous Democrats who fear she is still in thrall to those mega-bankers of New York who crashed the American economy. Clinton's brisk recital of plausible reform ideas might convince wishful thinkers who are not familiar with the complexities of banking. But informed skeptics, myself included, see a disturbing message in her argument that ought to alarm innocent supporters.

          Candidate Clinton is essentially whitewashing the financial catastrophe. She has produced a clumsy rewrite of what caused the 2008 collapse, one that conveniently leaves her husband out of the story. He was the president who legislated the predicate for Wall Street's meltdown. Hillary Clinton's redefinition of the reform problem deflects the blame from Wall Street's most powerful institutions, like JPMorgan Chase and Goldman Sachs, and instead fingers less celebrated players that failed. In roundabout fashion, Hillary Clinton sounds like she is assuring old friends and donors in the financial sector that, if she becomes president, she will not come after them.

          The seminal event that sowed financial disaster was the repeal of the New Deal's Glass-Steagall Act of 1933, which had separated banking into different realms: investment banks, which organize capital investors for risk-taking ventures; and deposit-holding banks, which serve people as borrowers and lenders. That law's repeal, a great victory for Wall Street, was delivered by Bill Clinton in 1999, assisted by the Federal Reserve and the financial sector's armies of lobbyists. The "universal banking model" was saluted as a modernizing reform that liberated traditional banks to participate directly and indirectly in long-prohibited and vastly more profitable risk-taking.

          Exotic financial instruments like derivatives and credit-default swaps flourished, enabling old-line bankers to share in the fun and profit on an awesome scale. The banks invented "guarantees" against loss and sold them to both companies and market players. The fast-expanding financial sector claimed a larger and larger share of the economy (and still does) at the expense of the real economy of producers and consumers. The interconnectedness across market sectors created the illusion of safety. When illusions failed, these connected guarantees became the dragnet that drove panic in every direction. Ultimately, the federal government had to rescue everyone, foreign and domestic, to stop the bleeding.

          Yet Hillary Clinton asserts in her Times op-ed that repeal of Glass-Steagall had nothing to do with it. She claims that Glass-Steagall would not have limited the reckless behavior of institutions like Lehman Brothers or insurance giant AIG, which were not traditional banks. Her argument amounts to facile evasion that ignores the interconnected exposures. The Federal Reserve spent $180 billion bailing out AIG so AIG could pay back Goldman Sachs and other banks. If the Fed hadn't acted and had allowed AIG to fail, the banks would have gone down too.

          These sound like esoteric questions of bank regulation (and they are), but the consequences of pretending they do not matter are enormous. The federal government and Federal Reserve would remain on the hook for rescuing losers in a future crisis. The largest and most adventurous banks would remain free to experiment, inventing fictitious guarantees and selling them to eager suckers. If things go wrong, Uncle Sam cleans up the mess.

          Senator Elizabeth Warren and other reformers are pushing a simpler remedy-restore the Glass-Steagall principles and give citizens a safe, government-insured place to store their money. "Banking should be boring," Warren explains (her co-sponsor is GOP Senator John McCain).
          That's a hard sell in politics, given the banking sector's bear hug of Congress and the White House, its callous manipulation of both political parties. Of course, it is more complicated than that. But recreating a safe, stable banking system-a place where ordinary people can keep their money-ought to be the first benchmark for Democrats who claim to be reformers.

          Actually, the most compelling witnesses for Senator Warren's argument are the two bankers who introduced this adventure in "universal banking" back in the 1990s. They used their political savvy and relentless muscle to seduce Bill Clinton and his so-called New Democrats. John Reed was CEO of Citicorp and led the charge. He has since apologized to the nation. Sandy Weill was chairman of the board and a brilliant financier who envisioned the possibilities of a single, all-purpose financial house, freed of government's narrow-minded regulations. They won politically, but at staggering cost to the country.

          Weill confessed error back in 2012: "What we should probably do is go and split up investment banking from banking. Have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail."

          John Reed's confession explained explicitly why their modernizing crusade failed for two fundamental business reasons. "One was the belief that combining all types of finance into one institution would drive costs down-and the larger institution the more efficient it would be," Reed wrote in the Financial Times in November. Reed said, "We now know that there are very few cost efficiencies that come from the merger of functions-indeed, there may be none at all. It is possible that combining so much in a single bank makes services more expensive than if they were instead offered by smaller, specialised players."

          The second grave error, Reed said, was trying to mix the two conflicting cultures in banking-bankers who are pulling in opposite directions. That tension helps explain the competitive greed displayed by the modernized banking system. This disorder speaks to the current political crisis in ways that neither Dems nor Republicans wish to confront. It would require the politicians to critique the bankers (often their funders) in terms of human failure.

          "Mixing incompatible cultures is a problem all by itself," Reed wrote. "It makes the entire finance industry more fragile…. As is now clear, traditional banking attracts one kind of talent, which is entirely different from the kinds drawn towards investment banking and trading. Traditional bankers tend to be extroverts, sociable people who are focused on longer term relationships. They are, in many important respects, risk averse. Investment bankers and their traders are more short termist. They are comfortable with, and many even seek out, risk and are more focused on immediate reward."

          Reed concludes, "As I have reflected about the years since 1999, I think the lessons of Glass-Steagall and its repeal suggest that the universal banking model is inherently unstable and unworkable. No amount of restructuring, management change or regulation is ever likely to change that."

          This might sound hopelessly naive, but the Democratic Party might do better in politics if it told more of the truth more often: what they tried do and why it failed, and what they think they may have gotten wrong. People already know they haven't gotten a straight story from politicians. They might be favorably impressed by a little more candor in the plain-spoken manner of John Reed.

          Of course it's unfair to pick on the Dems. Republicans have been lying about their big stuff for so long and so relentlessly that their voters are now staging a wrathful rebellion. Who knows, maybe a little honest talk might lead to honest debate. Think about it. Do the people want to hear the truth about our national condition? Could they stand it?

          http://www.thenation.com/article/hillary-clinton-is-whitewashing-the-financial-catastrophe/

          EMichael -> RGC...
          "She claims that Glass-Steagall would not have limited the reckless behavior of institutions like Lehman Brothers or insurance giant AIG, which were not traditional banks."

          Of course this claim is absolutely true. Just like GS would not have affected the other investment banks, whatever their name was. And just like we would have had to bail out those other banks whatever their name was.

          Peter K. -> EMichael...
          Can you list all of the pro- or anti- Wall Street "reforms" and actions Bill Clinton performed as President including nominating Alan Greenspan as head regulator? Cutting the capital gains tax? Are you aware of Greenspan's record?

          Yes Hillary isn't Bill but she hasn't criticized her husband specifically about his record and seems to want to have her cake and eat it too.

          Of course Hillary is much better than the Republicans, pace Rustbucket and the Green Lantern Lefty club. Still, critics have a point.

          I won't be surprised if she doesn't do much to rein in Wall Street besides some window dressing.

          sanjait -> Peter K....
          "Can you list all of the pro- or anti- Wall Street "reforms" and actions Bill Clinton performed..."

          That, right there, is what's wrong with Bernie and his fans. They measure everything by whether it is "pro- or anti- Wall Street". Glass Steagall is anti-Wall Street. A financial transactions tax is anti-Wall Street. But neither has any hope of controlling systemic financial risk in this country. None.

          You guys want to punish Wall Street but not even bother trying to think of how to achieve useful policy goals. Some people, like Paine here, are actually open about this vacuity, as if the only thing that were important were winning a power struggle.

          Hillary's plan is flat out better. It's more comprehensive and more effective at reining in the financial system to limit systemic risk. Period.

          You guys want to make this a character melodrama rather than a policy debate, and I fear the result of that will be that the candidate who actually has the best plan won't get to enact it.

          likbez -> sanjait...

          "You guys want to make this a character melodrama rather than a policy debate, and I fear the result of that will be that the candidate who actually has the best plan won't get to enact it."

          You are misrepresenting the positions. It's actually pro-neoliberalism crowd vs anti-neoliberalism crowd. In no way anti-neoliberalism commenters here view this is a character melodrama, although psychologically Hillary probably does has certain problems as her reaction to the death of Gadhafi attests. The key problem with anti-neoliberalism crowd is the question "What is a realistic alternative?" That's where differences and policy debate starts.

          RGC -> EMichael...
          "Her argument amounts to facile evasion"

          Fred C. Dobbs -> RGC...

          'The majority favors policies to the left of Hillary.'

          Nah. I don't think so.

          No, Liberals Don't Control the Democratic Party http://www.theatlantic.com/politics/archive/2014/02/no-liberals-dont-control-the-democratic-party/283653/
          The Atlantic - Feb 7, 2014

          ... The Democrats' liberal faction has been greatly overestimated by pundits who mistake noisiness for clout or assume that the left functions like the right. In fact, liberals hold nowhere near the power in the Democratic Party that conservatives hold in the Republican Party. And while they may well be gaining, they're still far from being in charge. ...

          Paine -> RGC...

          What's not confronted ? Suggest what a System like the pre repeal system would have done in the 00's. My guess we'd have ended in a crisis anyway. Yes we can segregate the depository system. But credit is elastic enough to build bubbles without the depository system involved

          EMichael -> Paine ...

          Exactly.

          Most people think of lending like the Bailey Brothers Savings and Loan still exists.

          RC AKA Darryl, Ron -> EMichael...

          Don't be such a whistle dick. Just because you cannot figure out why GLBA made such an impact that in no way means that people that do understand are stupid. See my posted comment to RGC on GLBA just down thread for an more detailed explanation including a linked web article. No, GS alone would not have prevented the mortgage bubble, but it would have lessened TBTF and GS stood as icon, a symbol of financial regulation. Hell, if we don't need GS then why don't we just allow unregulated derivatives trading? Who cares, right? Senators Byron Dorgan, Barbara Boxer, Barbara Mikulski, Richard Shelby, Tom Harkin, Richard Bryan, Russ Feingold and Bernie Sanders all voted against GLBA to repeal GS for some strange reason and Dorgan made a really big deal out of it at the time. I doubt everyone on that list of Senators was just stupid because they did not see it your way.

          RC AKA Darryl, Ron -> EMichael...
          I ran all out of ceteris paribus quite some time ago. Events do not occur in isolation. GLBA increased TBTF in AIG and Citi. TBTF forced TARP. GLBA greased the skids for CFMA. Democrats gained majority, but not filibuster proof, caught between Iraq and a hard place following their votes for TARP and a broader understanding of their participation in the unanimous consent passage of the CFMA, over "objection" by Senators James Inhofe (R-OK) and Paul Wellstone (D-MN). We have had a Republican majority in the House since the 2010 election and now they have the Senate as well. If you are that sure that voters just choose divided government, then aren't we better off to have a Republican POTUS and Democratic Congress?

          sanjait -> RC AKA Darryl, Ron...

          "I ran all out of ceteris paribus quite some time ago. Events do not occur in isolation. GLBA increased TBTF in AIG and Citi. TBTF forced TARP. GLBA greased the skids for CFMA. "

          I know you think this is a really meaningful string that evidences causation, but it just looks like you are reaching, reaching, reaching ...

          RC AKA Darryl, Ron -> sanjait...

          Maybe. No way to say for sure. It certainly fits the kind of herd mentality that I always saw in corporate Amerika until I retired. The William Greider article posted by RGC was very consistent in its account by John Reed with the details of one or two books written about AIG back in 2009 or so. I don't have time to hunt them up now. Besides, no one would read them anyway.

          I am voting for whoever wins the Democratic nomination for POTUS. Bernie without a like-minded Congress would not do much good. But when we shoot each other down here at EV without offering any agreement or consideration that we might not be 100% correct, then that goes against Doc Thoma's idea of an open forum. Granted, with my great big pair then I am willing to state my opinion with no consideration for validation or acceptance, but not everyone has that degree of a comfort zone. Besides, I am so old an cynical that shooting down the overdogs that go after the underdogs is one of the few things that I still care about.

          RGC -> Paine ...

          GS was one of several actions taken by the New Deal. That it wasn't sufficient by itself doesn't equate to it wasn't beneficial.

          RC AKA Darryl, Ron -> RGC...

          [Lock and load.]

          http://www.occasionalplanet.org/2015/05/13/glass-steagall-one-democratic-senator-who-got-it-right/

          Glass-Steagall: Warren and Sanders bring it back into focus

          Madonna Gauding / May 13, 2015

          Senators Bernie Sanders and Elizabeth Warren are putting a new focus on the Glass-Steagall Act, which was, unfortunately, repealed in 1999 and led directly to the financial crises we have faced ever since. Here's a bit of history of this legislative debacle from an older post on Occasional Planet published several years ago :

          On November 4, 1999, Senator Byron Dorgan (D-ND) took to the floor of the senate to make an impassioned speech against the repeal of the Glass-Steagall Act, (alternately known as Gramm Leach Biley, or the "Financial Modernization Act") Repeal of Glass-Steagall would allow banks to merge with insurance companies and investments houses. He said "I want to sound a warning call today about this legislation, I think this legislation is just fundamentally terrible."

          According to Sam Stein, writing in 2009 in the Huffington Post, only eight senators voted against the repeal. Senior staff in the Clinton administration and many now in the Obama administration praised the repeal as the "most important breakthrough in the world of finance and politics in decades"

          According to Stein, Dorgan warned that banks would become "too big to fail" and claimed that Congress would "look back in a decade and say we should not have done this." The repeal of Glass Steagall, of course, was one of several bad policies that helped lead to the current economic crisis we are in now.

          Dorgan wasn't entirely alone. Sens. Barbara Boxer, Barbara Mikulski, Richard Shelby, Tom Harkin, Richard Bryan, Russ Feingold and Bernie Sanders also cast nay votes. The late Sen. Paul Wellstone opposed the bill, and warned at the time that Congress was "about to repeal the economic stabilizer without putting any comparable safeguard in its place."

          Democratic Senators had sufficient knowledge about the dangers of the repeal of Glass Steagall, but chose to ignore it. Plenty of experts warned that it would be impossible to "discipline" banks once the legislation was passed, and that they would get too big and complex to regulate. Editorials against repeal appeared in the New York Times and other mainstream venues, suggesting that if the new megabanks were to falter, they could take down the entire global economy, which is exactly what happened. Stein quotes Ralph Nader who said at the time, "We will look back at this and wonder how the country was so asleep. It's just a nightmare."

          According to Stein:

          "The Senate voted to pass Gramm-Leach-Bliley by a vote of 90-8 and reversed what was, for more than six decades, a framework that had governed the functions and reach of the nation's largest banks. No longer limited by laws and regulations commercial and investment banks could now merge. Many had already begun the process, including, among others, J.P. Morgan and Citicorp. The new law allowed it to be permanent. The updated ground rules were low on oversight and heavy on risky ventures. Historically in the business of mortgages and credit cards, banks now would sell insurance and stock.

          Nevertheless, the bill did not lack champions, many of whom declared that the original legislation - forged during the Great Depression - was both antiquated and cumbersome for the banking industry. Congress had tried 11 times to repeal Glass-Steagall. The twelfth was the charm.

          "Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century," said then-Treasury Secretary Lawrence Summers. "This historic legislation will better enable American companies to compete in the new economy."

          "I welcome this day as a day of success and triumph," said Sen. Christopher Dodd, (D-Conn.).

          "The concerns that we will have a meltdown like 1929 are dramatically overblown," said Sen. Bob Kerrey, (D-Neb.).

          "If we don't pass this bill, we could find London or Frankfurt or years down the road Shanghai becoming the financial capital of the world," said Sen. Chuck Schumer, D-N.Y. "There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive."

          Unfortunately, the statement by Chuck Schumer sounds very much like it was prepared by a lobbyist. This vote underscores the way in which our elected officials are so heavily swayed by corporate and banking money that our voices and needs become irrelevant. It is why we need publicly funded elections. Democratic senators, the so-called representatives of the people, fell over themselves to please their Wall Street donors knowing full well there were dangers for the country at large, for ordinary Americans, in repealing Glass-Steagall.

          It is important to hold Democratic senators (along with current members of the Obama administration) accountable for the significant role they have played in the current economic crisis that has caused so much suffering for ordinary Americans. In case you were wondering, the current Democratic Senators who voted yes to repeal the Glass-Steagall act are the following:

          Daniel Akaka – Max Baucus – Evan Bayh – Jeff Bingaman – Kent Conrad – Chris Dodd – Dick Durbin – Dianne Feinstein – Daniel Inouye – Tim Johnson – John Kerry – Herb Kohl – Mary Landrieu – Frank Lautenberg – Patrick Leahy – Carl Levin – Joseph Lieberman – Blanche Lincoln – Patty Murray – Jack Reed – Harry Reid – Jay Rockefeller – Chuck Schumer – Ron Wyden

          Former House members who voted for repeal who are current Senators.

          Mark Udall [as of 2010] – Debbie Stabenow – Bob Menendez – Tom Udall -Sherrod Brown

          No longer in the Senate, or passed away, but who voted for repeal:

          Joe Biden -Ted Kennedy -Robert Byrd

          These Democratic senators would like to forget or make excuses for their enthusiastic vote on the repeal of Glass Steagall, but it is important to hold them accountable for helping their bank donors realize obscene profits while their constituents lost jobs, savings and homes. And it is important to demand that they serve the interests of the American people.

          *

          [The repeal of Glass Steagal was a landmark victory in deregulation that greased the skids for the passage of CFMA once Democrats had been further demoralized by the SCOTUS decision on Bush-v-Gore. The first vote on GLBA was split along party lines, but passed because Republicans had majority and Clinton was willing to sign which was clear from the waiver that had been granted to illegal Citi merger with Travelers. Both Citi and AIG mergers contributed to too big to fail. The CFMA was the nail in the coffin that probably would have never gotten off the ground if Democrats had held the line on the GLBA. Glass-Steagal was insufficient as a regulatory system to prevent the 2008 mortgage crisis, but it was giant as an icon of New Deal financial system reform. Its loss institutionalized too big to fail.]

          pgl -> RC AKA Darryl, Ron...

          Gramm Leach Biley was a mistake. But it was not the only failure of US regulatory policies towards financial institutions nor the most important. I think that is what Hillary Clinton is saying.

          RC AKA Darryl, Ron -> pgl...

          It was more symbolic caving in on financial regulation than a specific technical failure except for making too big to fail worse at Citi and AIG. It marked a sea change of thinking about financial regulation. Nothing mattered any more, including the CFMA just a little over one year later. Deregulation of derivatives trading mandated by the CFMA was a colossal failure and it is not bizarre to believe that GLBA precipitated the consensus on financial deregulation enough that after the demoralizing defeat of Democrats in Bush-v-Gore then there was no New Deal spirit of financial regulation left. Social development is not just a series of unconnected events. It is carried on a tide of change. A falling tide grounds all boats.

          pgl -> RC AKA Darryl, Ron...

          We had a financial dereg craze back in the late 1970's and early 1980's which led to the S&L disaster. One would have thought we would have learned from that. But then came the dereg craziness 20 years later. And this disaster was much worse.

          I don't care whether Hillary says 1999 was a mistake or not. I do care what the regulations of financial institutions will be like going forward.

          RC AKA Darryl, Ron -> pgl...

          I cannot disagree with any of that.

          sanjait -> RC AKA Darryl, Ron...

          "Deregulation of derivatives trading mandated by the CFMA was a colossal failure and it is not bizarre to believe that GLBA precipitated the consensus"

          Yeah, it is kind of bizarre to blame one bill for a crisis that occurred largely because another bill was passed, based on some some vague assertion about how the first bill made everyone think crazy.

          RC AKA Darryl, Ron -> sanjait...
          Democrats did not vote for GLBA until after reconciliation between the House and Senate bills. Democrats were tossed a bone in the Community Reinvestment Act financing provisions and given that Bill Clinton was going to sign anyway and that Republicans were able to pass the bill without a single vote from Democrats then all but a few Democrats bought in. They could not stop it, so they just bought into it. I thought there was supposed to be an understanding of behaviorism devoted to understanding the political economy. For that matter Republicans did not need Democrats to vote for the CFMA either, but they did. That gave Republicans political cover for whatever went wrong later on. No one with a clue believed things would go well from the passage of either of these bills. It was pure Wall Street driven kleptocracy.
          likbez -> sanjait...
          It was not one bill or another. It was a government policy to get traders what they want.

          See

          Bruce E. Woych | August 6, 2013 at 5:45 pm |

          http://www.imackgroup.com/mathematics/989981-the-untold-story-brooksley-born-larry-summers-the-truth-about-unlimited-risk-potential/

          The Untold Story: Brooksley Born, Larry Summers & the Truth …
          http://www.imackgroup.com/mathematics/989981-the-untold-story-brooksley-born-larry...
          Oct 5, 2012 … Larry Summers is attempting to re-write history at the expense of … and they might just find one critical point revealed in Mr. Cohan's article.
          [PERTINENT EXCERPT]: Oct 5, 2012

          "As the western world wakes to the fact it is in the middle of a debt crisis spiral, intelligent voices are wondering how this manifested itself? As we speak, those close to the situation could be engaging in historical revisionism to obfuscate their role in the design of faulty leverage structures that were identified in the derivatives markets in 1998 and 2008. These same design flaws, first identified in 1998, are persistent today and could become graphically evident in the very near future under the weight of a European debt crisis.

          Author and Bloomberg columnist William Cohan chronicles the fascinating start of this historic leverage implosion in his recent article Rethinking Robert Rubin. Readers may recall it was Mr. Cohan who, in 2004, noted leverage issues that ultimately imploded in 2007-08.

          At some point, market watchers will realize the debt crisis story will literally change the world. They will look to the root cause of the problem, and they might just find one critical point revealed in Mr. Cohan's article.

          This point occurs in 1998 when then Commodity Futures Trading Commission (CFTC) ChairwomanBrooksley Born identified what now might be recognized as core design flaws in leverage structure used in Over the Counter (OTC) transactions. Ms. Born brought her concerns public, by first asking just to study the issue, as appropriate action was not being taken. She issued a concept release paper that simply asked for more information. "The Commission is not entering into this process with preconceived results in mind," the document reads.

          Ms. Born later noted in, the PBS Frontline documentary on the topic speculation at the CFTC was the unregulated OTC derivatives were opaque, the risk to the global economy could not be determined and the risk was potentially catastrophic. As a result of this inquiry, Ms. Born was ultimately forced from office.

          This brings us to Lawrence Summers, the former Treasury Secretary of the United States and at the time right hand man to then Treasury Security Robert Rubin. Mr. Summers was widely credited with implementation of the aggressive tactics used to remove Ms. Born from her office, tactics that multiple sources describe as showing an old world bias against women piercing the glass ceiling.

          According to numerous published reports, Mr. Summers was involved in. silencing those who questioned the opaque derivative product's design. "

          RC AKA Darryl, Ron -> Paine ...

          TBTF on steroids, might as well CFMA - why not?

          Bubbles with less TBTF and a lot less credit default swaps would have been a lot less messy going in. Without TARP, then Congress might have still had the guts for making a lesser New Deal.

          EMichael -> RC AKA Darryl, Ron...

          TARP was window dressing. The curtain that covered up the FED's actions.

          pgl -> RGC...

          Where have I heard about William Greider? Oh yea - this critique of something stupid he wrote about a Supreme Court decision:

          www.washingtonpost.com/news/volokh-conspiracy/wp/2014/06/06/how-many-errors-can-william-greider-make-in-two-sentences-describing-lochner-v-new-york/

          pgl -> RGC...

          "Exotic financial instruments like derivatives and credit-default swaps flourished, enabling old-line bankers to share in the fun and profit on an awesome scale."

          These would have flourished even if Glass-Steagall remained on the books. Leave it to RGC to find some critic of HRC who knows nothing about financial markets.

          RGC -> pgl...

          Derivatives flourished because of the other deregulation under Clinton, the CFMA. The repeal of GS helped commercial banks participate.

          RGC -> pgl...

          The repeal of GS helped commercial banks participate.

          Fred C. Dobbs -> pgl...

          Warren Buffet used to rail about how risky derivative investing is, until he realized they are *extremely* important in the re-insurance biz, which is a
          big part of Berkshire Hathaway.

          Peter K. said...

          http://cepr.net/blogs/beat-the-press/hillary-clinton-bernie-sanders-and-cracking-down-on-wall-street

          Hillary Clinton, Bernie Sanders, and Cracking Down on Wall Street
          by Dean Baker

          Published: 12 December 2015

          The New Yorker ran a rather confused piece on Gary Sernovitz, a managing director at the investment firm Lime Rock Partners, on whether Bernie Sanders or Hillary Clinton would be more effective in reining in Wall Street. The piece assures us that Secretary Clinton has a better understanding of Wall Street and that her plan would be more effective in cracking down on the industry. The piece is bizarre both because it essentially dismisses the concern with too big to fail banks and completely ignores Sanders' proposal for a financial transactions tax which is by far the most important mechanism for reining in the financial industry.

          The piece assures us that too big to fail banks are no longer a problem, noting their drop in profitability from bubble peaks and telling readers:

          "not only are Sanders's bogeybanks just one part of Wall Street but they are getting less powerful and less problematic by the year."

          This argument is strange for a couple of reasons. First, the peak of the subprime bubble frenzy is hardly a good base of comparison. The real question is should we anticipate declining profits going forward. That hardly seems clear. For example, Citigroup recently reported surging profits, while Wells Fargo's third quarter profits were up 8 percent from 2014 levels.

          If Sernovitz is predicting that the big banks are about to shrivel up to nothingness, the market does not agree with him. Citigroup has a market capitalization of $152 billion, JPMorgan has a market cap of $236 billion, and Bank of America has a market cap of $174 billion. Clearly investors agree with Sanders in thinking that these huge banks will have sizable profits for some time to come.

          The real question on too big to fail is whether the government would sit by and let a Goldman Sachs or Citigroup go bankrupt. Perhaps some people think that it is now the case, but I've never met anyone in that group.

          Sernovitz is also dismissive on Sanders call for bringing back the Glass-Steagall separation between commercial banking and investment banking. He makes the comparison to the battle over the Keystone XL pipeline, which is actually quite appropriate. The Keystone battle did take on exaggerated importance in the climate debate. There was never a zero/one proposition in which no tar sands oil would be pumped without the pipeline, while all of it would be pumped if the pipeline was constructed. Nonetheless, if the Obama administration was committed to restricting greenhouse gas emissions, it is difficult to see why it would support the building of a pipeline that would facilitate bringing some of the world's dirtiest oil to market.

          In the same vein, Sernovitz is right that it is difficult to see how anything about the growth of the housing bubble and its subsequent collapse would have been very different if Glass-Steagall were still in place. And, it is possible in principle to regulate bank's risky practices without Glass-Steagall, as the Volcker rule is doing. However, enforcement tends to weaken over time under industry pressure, which is a reason why the clear lines of Glass-Steagall can be beneficial. Furthermore, as with Keystone, if we want to restrict banks' power, what is the advantage of letting them get bigger and more complex?

          The repeal of Glass-Steagall was sold in large part by boasting of the potential synergies from combining investment and commercial banking under one roof. But if the operations are kept completely separate, as is supposed to be the case, where are the synergies?

          But the strangest part of Sernovitz's story is that he leaves out Sanders' financial transactions tax (FTT) altogether. This is bizarre, because the FTT is essentially a hatchet blow to the waste and exorbitant salaries in the industry.

          Most research shows that trading volume is very responsive to the cost of trading, with most estimates putting the elasticity close to one. This means that if trading costs rise by 50 percent, then trading volume declines by 50 percent. (In its recent analysis of FTTs, the Tax Policy Center assumed that the elasticity was 1.5, meaning that trading volume decline by 150 percent of the increase in trading costs.) The implication of this finding is that the financial industry would pay the full cost of a financial transactions tax in the form of reduced trading revenue.

          The Tax Policy Center estimated that a 0.1 percent tax on stock trades, scaled with lower taxes on other assets, would raise $50 billion a year in tax revenue. The implied reduction in trading revenue was even larger. Senator Sanders has proposed a tax of 0.5 percent on equities (also with a scaled tax on other assets). This would lead to an even larger reduction in revenue for the financial industry.

          It is incredible that Sernovitz would ignore a policy with such enormous consequences for the financial sector in his assessment of which candidate would be tougher on Wall Street. Sanders FTT would almost certainly do more to change behavior on Wall Street then everything that Clinton has proposed taken together by a rather large margin. It's sort of like evaluating the New England Patriots' Super Bowl prospects without discussing their quarterback.

          Syaloch -> Peter K....

          Great to see Baker's acknowledgement that an updated Glass-Steagall is just one component of the progressive wing's plan to rein in Wall Street, not the sum total of it. Besides, if Wall Street types don't think restoring Glass-Steagall will have any meaningful effects, why do they expend so much energy to disparage it? Methinks they doth protest too much.

          Peter K. -> Syaloch...

          Yes that's a good way to look it. Wall Street gave the Democrats and Clinton a lot of campaign cash so that they would dismantle Glass-Steagall. If they want it done, it's probably not a good idea.

          EMichael -> Syaloch...

          Slippery slope. Ya' gotta find me a business of any type that does not protest any kind of regulation on their business.

          Syaloch -> EMichael...

          Yeah, but usually because of all the bad things they say will happen because of the regulation. The question is, what do they think of Clinton's plan? I've heard surprisingly little about that, and what I have heard is along these lines: http://money.cnn.com/2015/10/08/investing/hillary-clinton-wall-street-plan/

          "Hillary Clinton unveiled her big plan to curb the worst of Wall Street's excesses on Thursday. The reaction from the banking community was a shrug, if not relief."

          pgl -> Syaloch...

          Two excellent points!!!

          sanjait -> Syaloch...

          "Besides, if Wall Street types don't think restoring Glass-Steagall will have any meaningful effects, why do they expend so much energy to disparage it? Methinks they doth protest too much."

          It has an effect of shrinking the size of a few firms, and that has a detrimental effect on the top managers of those firms, who get paid more money if they have larger firms to manage. But it has little to no meaningful effect on systemic risk.

          So if your main policy goal is to shrink the compensation for a small number of powerful Wall Street managers, G-S is great. But if you actually want to accomplish something useful to the American people, like limiting systemic risk in the financial sector, then a plan like Hillary's is much much better. She explained this fairly well in her recent NYT piece.

          Paine -> Peter K....

          There is absolutely NO question Bernie is for real. Wall Street does not want Bernie. So they'll let Hillary talk as big as she needs to . Why should we believe her when an honest guy like Barry caved once in power

          Paine -> Paine ...

          Bernie has been anti Wall Street his whole career . He's on a crusade. Hillary is pulling a sham bola

          Paine -> Paine ...

          Perhaps too often we look at Wall Street as monolithic whether consciously or not. Obviously we know it's no monolithic: there are serious differences

          When the street is riding high especially. Right now the street is probably not united but too cautious to display profound differences in public. They're sitting on their hands waiting to see how high the anti Wall Street tide runs this election cycle. Trump gives them cover and I really fear secretly Hillary gives them comfort

          This all coiled change if Bernie surges. How that happens depends crucially on New Hampshire. Not Iowa

          EMichael -> Paine ...

          If Bernie surges and wins the nomination, we will all get to watch the death of the Progressive movement for a decade or two. Congress will become more GOP dominated, and we will have a President in office who will make Hoover look like a Socialist.

          Syaloch -> EMichael...

          Of course. In politics, as they say in the service, one must always choose the lesser of two evils. https://www.youtube.com/watch?v=e4PzpxOj5Cc

          pgl -> EMichael...

          You should like the moderate Democrats after George McGovern ran in 1972. I'm hoping we have another 1964 with Bernie leading a united Democratic Congress.

          EMichael -> pgl...

          Not a chance in the world. And I like Sanders much more than anyone else. It just simply cannot, and will not, happen. He is a communist. Not to me, not to you, but to the vast majority of American voters.

          pgl -> EMichael...

          He is not a communist. But I agree - Hillary is winning the Democratic nomination. I have only one vote and in New York, I'm badly outnumbered.

          ilsm -> Paine ...

          I believe Hillary will be to liberal causes after she is elected as LBJ was to peace in Vietnam. Like Bill and Obomber.

          pgl -> ilsm...

          By 1968, LBJ finally realized it was time to end that stupid war. But it seems certain members in the State Department undermined his efforts in a cynical ploy to get Nixon to be President. The Republican Party has had more slime than substance of most of my life time.

          pgl -> Peter K....

          Gary Sernovitz, a managing director at the investment firm Lime Rock Partners? Why are we listening to this guy too. It's like letting the fox guard the hen house.

          sanjait -> Peter K....

          "The piece is bizarre both because it essentially dismisses the concern with too big to fail banks and completely ignores Sanders' proposal for a financial transactions tax which is by far the most important mechanism for reining in the financial industry."

          This is just wrong. Is financial system risk in any way correlated with the frequency of transactions? Except for market volatility from HFT ... no. The financial crisis wasn't caused by a high volume of trades. It was caused by bad investments into highly illiquid assets. Again, great example of wanting to punish Wall Street but not bothering to think about what actually works.

          Peter K. said...

          Robert Reich to the Fed: this is not the time to raise rates.

          https://www.facebook.com/video.php?v=1116088268403768

          RGC said...

          Iceland's Radical Money Plan

          Iceland, too, is looking at a radical transformation of its money system, after suffering the crushing boom/bust cycle of the private banking model that bankrupted its largest banks in 2008. According to a March 2015 article in the UK Telegraph:

          Iceland's government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled "A better monetary system for Iceland".

          "The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy," Prime Minister Sigmundur David Gunnlaugsson said. The report, commissioned by the premier, is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008.

          Under this "Sovereign Money" proposal, the country's central bank would become the only creator of money. Banks would continue to manage accounts and payments and would serve as intermediaries between savers and lenders. The proposal is a variant of the Chicago Plan promoted by Kumhof and Benes of the IMF and the Positive Money group in the UK.

          Public Banking Initiatives in Iceland, Ireland and the UK

          A major concern with stripping private banks of the power to create money as deposits when they make loans is that it will seriously reduce the availability of credit in an already sluggish economy. One solution is to make the banks, or some of them, public institutions. They would still be creating money when they made loans, but it would be as agents of the government; and the profits would be available for public use, on the model of the US Bank of North Dakota and the German Sparkassen (public savings banks).

          In Ireland, three political parties – Sinn Fein, the Green Party and Renua Ireland (a new party) - are now supporting initiatives for a network of local publicly-owned banks on the Sparkassen model. In the UK, the New Economy Foundation (NEF) is proposing that the failed Royal Bank of Scotland be transformed into a network of public interest banks on that model. And in Iceland, public banking is part of the platform of a new political party called the Dawn Party.

          December 11, 2015
          Reinventing Banking: From Russia to Iceland to Ecuador

          by Ellen Brown

          http://www.counterpunch.org/2015/12/11/reinventing-banking-from-russia-to-iceland-to-ecuador/

          pgl -> RGC...

          "Banks would continue to manage accounts and payments and would serve as intermediaries between savers and lenders."

          OK but that means they issue bank accounts which of course we call deposits. So is this just semantics? People want checking accounts. People want savings accounts. Otherwise they would not exist. Iceland plans to do what to stop the private sector from getting what it wants?

          I like the idea of public banks. Let's nationalize JPMorganChase so we don't have to listen to Jamie Dimon anymore!

          sanjait -> pgl...

          I don't know for sure (not bothering to search and read the referenced proposals), but I assumed the described proposal was for an end to fractional reserve banking. Banks would have to have full reserves to make loans. Or something. I could be wrong about that.

          Syaloch said...

          Sorry, but Your Favorite Company Can't Be Your Friend

          http://www.nytimes.com/2015/12/13/upshot/sorry-but-your-favorite-company-cant-be-your-friend.html?partner=rss&emc=rss&_r=0

          To think that an artificial person, whether corporeal or corporate, can ever be your friend requires a remarkable level of self-delusion.

          A commenter on the Times site aptly quotes Marx in response:

          "The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations. It has pitilessly torn asunder the motley feudal ties that bound man to his "natural superiors", and has left remaining no other nexus between man and man than naked self-interest, than callous "cash payment". It has drowned the most heavenly ecstasies of religious fervour, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egotistical calculation. It has resolved personal worth into exchange value, and in place of the numberless indefeasible chartered freedoms, has set up that single, unconscionable freedom - Free Trade. In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation.

          "The bourgeoisie has stripped of its halo every occupation hitherto honoured and looked up to with reverent awe. It has converted the physician, the lawyer, the priest, the poet, the man of science, into its paid wage labourers."

          https://www.marxists.org/archive/marx/works/1848/communist-manifesto/ch01.htm

          [Dec 11, 2015] Why Its Tricky for Fed Officials to Talk Politically

          "There is no reason for central banks to have the kind of independence that judicial institutions have. Justice may be blind and above politics, but money and banking are not." Economic and politics are like Siamese twins (which actually . If somebody trying to separate them it is a clear sign that the guy is either neoliberal propagandists or outright crook.
          Notable quotes:
          "... I think FED chairman is the second most powerful political position in the USA after the POTUS. Or may be in some respects it is even the first ;-) So it is quintessentially high-power political position masked with the smokescreen of purely economic (like many other things are camouflaged under neoliberalism.) ..."
          "... I think that is a hidden principle behind attacks on FED chair. A neoliberal principle that the state should not intrude into economics and limit itself to the police, security, defense, law enforcement and few other related to this functions. So their point that she overextended her mandate is an objection based on principle. Which can be violated only if it is used to uphold neoliberalism, as Greenspan did during his career many times. ..."
          "... This kind of debate seems to be a by-product of the contemporary obsession with having an independent central bank, run according to the fantasy that there is such a thing as a neutral or apolitical way to conduct monetary policy. ..."
          "... A number of commenters and authors have recently pointed out that inequality may not just be an unrelated phenomenon to monetary policy, but actually, in part at least, a byproduct of it. ..."
          "... The theory is that the Fed in the Great Moderation age has been so keen to stave off even the possibility of inflation that it chokes down the vigor of recoveries before they get to the part where median wages start rising quickly. The result is that wages get ratcheted down with the economic cycle, falling during recessions and never fully recovering during the recoveries. ..."
          "... Two Things: (i) The Fed should be open and honest about monetary policy. No one wants to return to the Greenspan days. (ii) Brad Delong is a neoliberal hack. ..."
          "... As to why risk a political backlash in the piece, the short answer is: to invoke the debate on whether politics or fact (science) is going to dominate. Because they can't both. See: Romer. Let's have this out once and for all. ..."
          Dec 11, 2015 | Economist's View
          anne said...
          Fine column, with which I agree. Federal Reserve policy as such is difficult and contentious enough to avoid wandering to social-economic analysis or philosophy from aspects of the Fed mandate.

          As for the use of the word "hack" in referring to Janet Yellen, that needlessly insulting use was by a Washington Post editor and not by columnist Michael Strain.

          anne -> RW (the other)...

          As Brad notes, many Fed Chairs before Yellen have opined on matters outside monetary policy so why is Yellen subject to a different standard?

          [ Fine, I have reconsidered and agree. No matter how the headline was written, the headline was meant to be intimidating and was willfully mean and that could and should have been made clear immediately by the writer of the column. ]

          likbez -> anne...

          "Federal Reserve policy as such is difficult and contentious enough to avoid wandering to social-economic analysis or philosophy from aspects of the Fed mandate."

          Anne,

          I think FED chairman is the second most powerful political position in the USA after the POTUS. Or may be in some respects it is even the first ;-) So it is quintessentially high-power political position masked with the smokescreen of "purely economic" (like many other things are camouflaged under neoliberalism.)

          That's why Greenspan got it, while being despised by his Wall-Street colleagues...

          He got it because he was perfect for promoting deregulation political agenda from the position of FED chair.

          pgl -> likbez...

          Greenspan was despised on Wall Street? Wow as he tried so hard to serve their interests. I guess the Wall Street crowd is never happy no matter how much income we feed these blow hards.

          anne -> likbez...

          So it is quintessentially high-power political position masked with the smokescreen of "purely economic" (like many other things are camouflaged under neoliberalism.)

          [ I understand, and am convinced. ]

          Peter K. said...

          I respectfully disagree. Republicans are always working the refs and despite what the writer from AEI said, they're okay with conservative Fed chairs talking politics. They have double standards.

          Greenspan testified to Congress on behalf of Bush's tax cuts for the rich. Something about how since Clinton balanced the budget, the financial markets had too little safe debt to work with. (maybe that's why they dove into mortgaged-backed securities). But tax cuts versus more government spending? He and Rubin advised Clinton to drop his middle class spending bill and trade deficit reduction for lower interest rates. That's economics which have political outcomes.

          So if the rightwing is going to work the the refs, so should the left. We shouldn't unilaterally disarm over fears Congress will gun for the Fed. There should be more groups like Fed Up protesting.

          The good thing about Yellen's speech is that it's a signal to progressives that inequality is problem for her even as she is raising rates in a political dance with hawks and Congress.

          The Fed is constantly accused of increasing inequality so it's good Yellen is saying she thinks it's a bad thing and not American.

          Bernie Sanders is right that for change to happen we'll need more political involvement from regular citizens. We'll need a popular movement with many leaders.

          The Fed should be square in the sights of a progressive movement. A high-pressured economy with full employment should be a top priority.

          Instead I saw Nancy Pelosi being interviewed by Al Hunt on Charlie Rose the other night. Hunt asked her about Yellen raising rates.

          Pelosi said no comment as she wasn't looking at the data Yellen was and didn't want to interfere. The Fed should be independent, etc. Perhaps like Thoma she has the best of motives and doesn't want to motivate the Republicans to go after the Fed and oppose what she wants.

          Still I felt the Democratic leadership should be committed to a high-pressure economy. Her staff should know what Krugman, Summers etc are saying. What the IMF and World Bank are sayings.

          She should have said "they shouldn't raise rates until they see the whites of inflation's eyes" as Krugman memorably put it. She should have said that emphatically.

          We need a Democratic Party like that.

          Instead Peter Diamond is blocked from becoming a Fed governor by Republicans and Pelosi is afraid to comment on monetary policy.

          Peter K. -> Peter K....

          A longer reply from DeLong:

          http://www.bradford-delong.com/2015/12/must-read-i-would-beg-the-highly-esteemed-mark-thoma-to-draw-a-distinction-here-between-inappropriate-and-unwise-in-m.html

          Must-Read: I would beg the highly-esteemed Mark Thoma to draw a distinction here between "inappropriate" and unwise. In my view, it is not at all inappropriate for Fed Chair Janet Yellen to express her concern about excessive inequality. Previous Fed Chairs, after all, have expressed their liking for inequality as an essential engine of economic growth over and over again over the past half century--with exactly zero critical snarking from the American Enterprise Institute for trespassing beyond the boundaries of their role.

          But that it is not inappropriate for Janet Yellen to do so does not mean that it is wise. Mark's argument is, I think, that given the current political situation it is unwise for Janet to further incite the ire of the nutboys in the way that even the mildest expression of concern about rising inequality will do.

          That may or may not be true. I think it is not.

          But I do not think that bears on my point that Michael R. Strain's arguments that Janet Yellen's speech on inequality was inappropriate are void, wrong, erroneous, inattentive to precedent, shoddy, expired, expired, gone to meet their maker, bereft of life, resting in peace, pushing up the daisies, kicked the bucket, shuffled off their mortal coil, run down the curtain, and joined the bleeding choir invisible:

          Mark Thoma: Why It's Tricky for Fed Officials to Talk Politically: "I think I disagree with Brad DeLong...

          pgl -> Peter K....

          "my point that Michael R. Strain's arguments that Janet Yellen's speech on inequality was inappropriate are void, wrong, erroneous..."

          DeLong is exactly right here. Strain's argument has its own share of partisan lies whereas Yellen is telling the truth. Brad will not be intimidated by this AEI weasel.

          sanjait said...

          Why would Yellen not talk about inequality? It's an important macroeconomic topic and one that is relevant for her job. It's both an input and an output variable that is related to monetary policy.

          And, arguably I think, median wage growth should be regarded as a policy goal for the Fed, related to its explicit mandate of "maximum employment."

          But even if you think inequality is unrelated to the Fed's policy goals, that doesn't stop them from talking about other topics. Do people accuse the Fed of playing politics when they talk about desiring reduced financial market volatility? That has little to do with growth, employment and general price stability.

          likbez -> sanjait...

          I think that is a hidden principle behind attacks on FED chair. A neoliberal principle that the state should not intrude into economics and limit itself to the police, security, defense, law enforcement and few other related to this functions. So their point that she overextended her mandate is an objection based on principle. Which can be violated only if it is used to uphold neoliberalism, as Greenspan did during his career many times.

          Sandwichman said...

          I think I disagree with Mark Thoma's disagreement with Brad DeLong. Actually, ALL economic discourse is political and efforts to restrain the politics are inevitably efforts to keep the politics one-sided

          Dan Kervick said...

          This kind of debate seems to be a by-product of the contemporary obsession with having an "independent" central bank, run according to the fantasy that there is such a thing as a neutral or apolitical way to conduct monetary policy.

          But there really isn't. Different kinds of social, economic and political values and policy agendas are going to call for different kinds monetary and credit policies. It might be better for our political health if the Fed were administratively re-located as an executive branch agency that is in turn part of a broader Department of Money and Banking - no different from the Departments of Agriculture, Labor, Education, etc. In that case everybody would then view Fed governors as ordinary executive branch appointees who report to the President, and whose policies are naturally an extension of the administration's broader agenda. Then if people don't like the monetary policies that are carried out, that would be one factor in their decision about whom to vote for.

          There is no reason for central banks to have the kind of independence that judicial institutions have. Justice may be blind and above politics, but money and banking are not. Decisions in that latter area should be no more politics-free than decisions about taxing and spending. If we fold the central bank more completely into the regular processes of representative government, then if a candidate wants to run on a platform of keeping interest rates low, small business credit easy, bank profits small, etc., they could do so without all of the doubletalk about the protecting the independence of the sacrosanct bankers' temple.

          We could also then avoid unproductive wheel-spinning about that impossibly vague and hedged Fed mandate that can be stretched to mean almost anything people want it to mean. The Fed's mandate under the political solution would just be whatever monetary policy the President ran on.

          likbez -> Dan Kervick...

          "The Fed's mandate under the political solution would just be whatever monetary policy the President ran on"

          Perfect !

          Actually sanjait in his post made a good point why this illusive goal is desirable (providing "electoral advantage") although Greenspan probably violated this rule. A couple of hikes of interest rates from now till election probably will doom Democrats.

          Also the idea of FEB independence went into overdrive since 80th not accidentally. It has its value in enhancing the level of deregulation.

          Among other things it helps to protect large financial institutions from outright nationalization in cases like 2008.

          Does somebody in this forum really think that Bernanke has an option of putting a couple of Wall-Street most violent and destructive behemoths into receivership (in other words nationalize them) in 2008 without Congress approval ?

          Dan Kervick -> Sanjait ...

          Sanjait, with due respect, you are not really responding to the reform proposal, but only affirming the differences between that proposal and the current system.

          Yes, of course fiscal policy is "constrained" by Congress. Indeed, it is not just constrained by Congress but actually made by Congress, subject only to an overridable executive branch veto. The executive branch is responsible primarily for carrying out the legislature's fiscal directives. That's the point. In a democratic system decisions about all forms of taxation and government spending are supposed to be made by the elected legislative branch, and then executed by agencies of the executive branch. My proposal is that monetary policy should be handled in the same way: by the elected political branches of the government.

          You point out that under current arrangements, central banks can, if they choose, effect large monetary offsets to fiscal policy (or at least to some of the aggregate macroeconomic effects of those policies). I don't understand why any non-elected and politically unaccountable branch of our government should have the power to offset the policies of the elected branches in this way. Fiscal and monetary policy need to be yoked together to achieve policy ends effectively. Those policy ends should be the ones people vote for, not the ones a handful of men and women happen to think are appropriate.

          JF -> Dan Kervick...

          "In a democratic system" is what you wrote.

          It is more proper to refer to it as republicanism. The separation of powers doctrine, underlying the US constitution, is a reflection of James Madison's characterization in the 51st The Federalist Paper, and it is a US-defined republicanism that is almost unique:

          "the republican form, wherein the legislative authority necessarily predominates."

          - or something like that is the quote.

          In the US framers' view, at least those who constructed the re-write in 1787 and were the leaders - I'd say the most important word in Madison's explanation is the word "necessarily" - this philosophy has all law and policy stemming from the public, it presumes that you can't have stability and dynamic change of benefit to society without this.

          Arguably, aristocracies, fascists, totalitarians, and all the other isms, just don't see it that way, they see things as top-down ordering of society.

          The mythology of the monetary theorizing and the notions about a central bank being independently delphic has some of this top-down ordering view to it (austerianism, comes to mind). Well, I don't believe in a religious sense that this is how it should be, nor do you it seems.

          It will be an interesting Congress in 2017 when new legislative authorities are enacted to establish clearer framing of the ministerial duties now held by the FRB.

          Are FED officials scared that this will happen, and as a result they circle the wagons with their associates in the financial community now to fend off the public????

          I hope this is not true. They can allay their own fears by leading not back toward 1907, in my opinion.

          Of course, I could say where I'd like economic policies to go, and do here often, but this thread is about Yellin and other FED officials.

          I recognize that FRB officials can say things too, and should, as leaders of this nation (with a whole lot of research power and evidence available to them their commentary on political economics should have merit and be influential).

          Thanks for continuing to remind people that we govern ourselves in the US in a US-defined republican-form. But I think the people still respect and listen to leadership - so speak out FED officials.

          JF -> Dan Kervick...

          But Dan K, then you'd de-mythologize an entire wing of macroeconomics in a wing referred to as monetary theory based on a separate Central Bank, or some non-political theory of money.

          Don't mind the theory as it is an analytic framework that questions and sometimes informs - but it is good to step back and realize some of the religious-like framing.

          It is political-economy.

          Peter K. -> pgl...

          Yellen really lays it out in her speech.

          "The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then.2 It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity."

          And even links to Piketty in footnote 42.

          "Along with other economic advantages, it is likely that large inheritances play a role in the fairly limited intergenerational mobility that I described earlier.42"

          42. This topic is discussed extensively in Thomas Piketty (2014), Capital in the 21st Century, trans. Arthur Goldhammer (Cambridge, Mass.: Belknap Press). Return to text

          Sanjait said...

          A number of commenters and authors have recently pointed out that inequality may not just be an unrelated phenomenon to monetary policy, but actually, in part at least, a byproduct of it.

          The theory is that the Fed in the Great Moderation age has been so keen to stave off even the possibility of inflation that it chokes down the vigor of recoveries before they get to the part where median wages start rising quickly. The result is that wages get ratcheted down with the economic cycle, falling during recessions and never fully recovering during the recoveries.

          Do I believe this theory? Increasingly, yes I do. And seeing the Fed right now decide to raise rates, citing accelerating wage growth as one of the main reasons, has reinforced my belief.

          A Boy Named Sue said...

          Two Things: (i) The Fed should be open and honest about monetary policy. No one wants to return to the Greenspan days. (ii) Brad Delong is a neoliberal hack.

          A Boy Named Sue -> A Boy Named Sue...

          I do admit, Delong is my favorite conservative economist. He is witty and educational, unlike most RW hacks.

          Jeff said...

          As to "why risk a political backlash" in the piece, the short answer is: to invoke the debate on whether politics or fact (science) is going to dominate. Because they can't both. See: Romer. Let's have this out once and for all.

          [Dec 10, 2015] Special Report Buybacks enrich the bosses even when business sags

          Notable quotes:
          "... Most publicly traded U.S. companies reward top managers for hitting performance targets, meant to tie the interests of managers and shareholders together. At many big companies, those interests are deemed to be best aligned by linking executive performance to earnings per share, along with measures derived from the company's stock price. ..."
          "... But these metrics may not be solely a reflection of a company's operating performance. They can be, and often are, influenced through stock repurchases. In addition to cutting the number of a company's shares outstanding, and thus lifting EPS, buybacks also increase demand for the shares, usually providing a lift to the share price, which affects other performance markers. ..."
          "... Pay for performance as it is often structured creates "very troublesome, problematic incentives that can potentially drive very short-term thinking." ..."
          "... As reported in the first article in this series, share buybacks by U.S. non-financial companies reached a record $520 billion in the most recent reporting year. A Reuters analysis of 3,300 non-financial companies found that together, buybacks and dividends have surpassed total capital expenditures and are more than double research and development spending. ..."
          "... "There's been an over-focus on buybacks and raising EPS to hit share option targets, and we know that those are concentrated in the hands of the few, and that the few is in the top 1 percent," said James Montier, a member of the asset allocation team at global investment firm GMO in London, which manages more than $100 billion in assets. ..."
          "... The introduction of performance targets has been a driver of surging executive pay, helping to widen the gap between the richest in America and the rest of the country. Median CEO pay among companies in the S P 500 increased to a record $10.3 million last year, up from $8.6 million in 2010, according to data firm Equilar. ..."
          "... At those levels, CEOs last year were paid 303 times what workers in their industries earned, compared with a ratio of 59 times in 1989, according to the Economic Policy Institute, a Washington-based nonprofit. ..."
          finance.yahoo.com

          NEW YORK(Reuters) - When health insurer Humana Inc reported worse-than-expected quarterly earnings in late 2014 – including a 21 percent drop in net income – it softened the blow by immediately telling investors it would make a $500 million share repurchase.

          In addition to soothing shareholders, the surprise buyback benefited the company's senior executives. It added around two cents to the company's annual earnings per share, allowing Humana to surpass its $7.50 EPS target by a single cent and unlocking higher pay for top managers under terms of the company's compensation agreement.

          Thanks to Humana hitting that target, Chief Executive Officer Bruce Broussard earned a $1.68 million bonus for 2014.

          Most publicly traded U.S. companies reward top managers for hitting performance targets, meant to tie the interests of managers and shareholders together. At many big companies, those interests are deemed to be best aligned by linking executive performance to earnings per share, along with measures derived from the company's stock price.

          But these metrics may not be solely a reflection of a company's operating performance. They can be, and often are, influenced through stock repurchases. In addition to cutting the number of a company's shares outstanding, and thus lifting EPS, buybacks also increase demand for the shares, usually providing a lift to the share price, which affects other performance markers.

          As corporate America engages in an unprecedented buyback binge, soaring CEO pay tied to short-term performance measures like EPS is prompting criticism that executives are using stock repurchases to enrich themselves at the expense of long-term corporate health, capital investment and employment.

          "We've accepted a definition of performance that is narrow and quite possibly inappropriate," said Rosanna Landis Weaver, program manager of the executive compensation initiative at As You Sow, a Washington, D.C., nonprofit that promotes corporate responsibility. Pay for performance as it is often structured creates "very troublesome, problematic incentives that can potentially drive very short-term thinking."

          A Reuters analysis of the companies in the Standard & Poor's 500 Index found that 255 of those companies reward executives in part by using EPS, while another 28 use other per-share metrics that can be influenced by share buybacks.

          In addition, 303 also use total shareholder return, essentially a company's share price appreciation plus dividends, and 169 companies use both EPS and total shareholder return to help determine pay.

          STANDARD PRACTICE

          EPS and share-price metrics underpin much of the compensation of some of the highest-paid CEOs, including those at Walt Disney Co, Viacom Inc, 21st Century Fox Inc, Target Corp and Cisco Systems Inc.

          ... ... ...

          As reported in the first article in this series, share buybacks by U.S. non-financial companies reached a record $520 billion in the most recent reporting year. A Reuters analysis of 3,300 non-financial companies found that together, buybacks and dividends have surpassed total capital expenditures and are more than double research and development spending.

          Companies buy back their shares for various reasons. They do it when they believe their shares are undervalued, or to make use of cash or cheap debt financing when business conditions don't justify capital or R&D spending. They also do it to meet the expectations of increasingly demanding investors.

          Lately, the sheer volume of buybacks has prompted complaints among academics, politicians and investors that massive stock repurchases are stifling innovation and hurting U.S. competitiveness - and contributing to widening income inequality by rewarding executives with ever higher pay, often divorced from a company's underlying performance.

          "There's been an over-focus on buybacks and raising EPS to hit share option targets, and we know that those are concentrated in the hands of the few, and that the few is in the top 1 percent," said James Montier, a member of the asset allocation team at global investment firm GMO in London, which manages more than $100 billion in assets.

          The introduction of performance targets has been a driver of surging executive pay, helping to widen the gap between the richest in America and the rest of the country. Median CEO pay among companies in the S&P 500 increased to a record $10.3 million last year, up from $8.6 million in 2010, according to data firm Equilar.

          At those levels, CEOs last year were paid 303 times what workers in their industries earned, compared with a ratio of 59 times in 1989, according to the Economic Policy Institute, a Washington-based nonprofit.

          SALARY AND A LOT MORE

          Today, the bulk of CEO compensation comes from cash and stock awards, much of it tied to performance metrics. Last year, base salary accounted for just 8 percent of CEO pay for S&P 500 companies, while cash and stock incentives made up more than 45 percent, according to proxy advisory firm Institutional Shareholder Services.

          ...In 1992, Congress changed the tax code to curb rising executive pay and encourage performance-based compensation. It didn't work. Instead, the shift is widely blamed for soaring executive pay and a heavier emphasis on short-term results.

          Companies started tying performance pay to "short-term metrics, and suddenly all the things we don't want to happen start happening," said Lynn Stout, a professor of corporate and business law at Cornell Law School in Ithaca, New York. "Despite 20 years of trying, we have still failed to come up with an objective performance metric that can't be gamed."

          Shareholder expectations have changed, too. The individuals and other smaller, mostly passive investors who dominated equity markets during the postwar decades have given way to large institutional investors. These institutions tend to want higher returns, sooner, than their predecessors. Consider that the average time investors held a particular share has fallen from around eight years in 1960 to a year and a half now, according to New York Stock Exchange data.

          "TOO EASY TO MANIPULATE"

          Companies like to use EPS as a performance metric because it is the primary focus of financial analysts when assessing the value of a stock and of investors when evaluating their return on investment.

          But "it is not an appropriate target, it's too easy to manipulate," said Almeida, the University of Illinois finance professor.

          ...By providing a lift to a stock's price, buybacks can increase total shareholder return to target levels, resulting in more stock awards for executives. And of course, the higher stock price lifts the value of company stock they already own.

          "It can goose the price at time when the high price means they earn performance shares … even if the stock price later goes back down, they got their shares," said Michael Dorff, a law professor at the Southwestern Law School in Los Angeles.

          Exxon Corp, the largest repurchaser of shares over the past decade, has rejected shareholder proposals that it add three-year targets based on shareholder return to its compensation program. In its most recent proxy, the energy company said doing so could increase risk-taking and encourage underinvestment to achieve short-term results.

          The energy giant makes half of its annual executive bonus payments contingent on meeting longer-term EPS thresholds. Since 2005, the company has spent more than $200 billion on buybacks.

          ADDITIONAL TWEAKS

          While performance targets are specific, they aren't necessarily fixed. Corporate boards often adjust them or how they are calculated in ways that lift executive pay.

          [Dec 07, 2015] The key prerequisite of casino capitalism is corruption of regulators

          Economist's View

          likbez said...

          When capital became unable of reaping large and fairly secure profits from manufacturing it like water tries to find other ways. It starts with semi-criminalizing finance -- that's the origin of the term "casino capitalism" (aka neoliberalism). I see casino capitalism as a set of semi-criminal ways of maintaining the rate of profits.

          The key prerequisite here is corruption of regulators. So laws on the book does not matter much if regulators do not enforce them.

          As Joseph Schumpeter noted, capitalism is not a steady-state system. It is unstable system in which population constantly experience and then try to overcome one crisis after another. Joseph Schumpeter naively assumed that the net result is reimaging itself via so called "creative destruction". But what we observe now it "uncreative destruction". In other words casino capitalism is devouring the host, the US society.

          So all those Hillary statements are for plebs consumption only (another attempt to play "change we can believe in" trick). Just a hot air designed to get elected. Both Clintons are in the pocket of financial oligarchy and will never be able to get out of it alive.

          GeorgeK said...

          I believe I'm the only one on this blog that has actually traded bonds, done swaps and hedged bank portfolios with futures contracts. Sooo I kinda know something about this topic.

          Hilary is a fraud; her daughter worked at a Hedge fund where she met her husband Marc Mezvinsky, who is now a money manager at the Eaglevale fund. Oddly many of the Eaglevale investors are investors in the Clinton Foundation and have also given money to Hilary's campaign. The Clinton Foundation gets boat loads of money from Hedge funds and will not raise taxes on such a rich source of funding.

          The grooms mother is Marjory Margolies (ex)Mezvinsky, she cast the final vote giving Clinton the winning vote to raise taxes. She subsequently lost her run for reelection to congress, then her husband was convicted of fraud and they divorced.

          This speech is an attempt to pry people away from Bernie, it won't work with primary voters but might with what's left of rational Republicans in the general election.

          [Dec 07, 2015] Hillary Clinton How I'd Rein In Wall Street

          Economist's View

          likbez said...

          When capital became unable of reaping large and fairly secure profits from manufacturing it like water tries to find other ways. It starts with semi-criminalizing finance -- that's the origin of the term "casino capitalism" (aka neoliberalism). I see casino capitalism as a set of semi-criminal ways of maintaining the rate of profits.

          The key prerequisite here is corruption of regulators. So laws on the book does not matter much if regulators do not enforce them.

          As Joseph Schumpeter noted, capitalism is not a steady-state system. It is unstable system in which population constantly experience and then try to overcome one crisis after another. Joseph Schumpeter naively assumed that the net result is reimaging itself via so called "creative destruction". But what we observe now it "uncreative destruction". In other words casino capitalism is devouring the host, the US society.

          So all those Hillary statements are for plebs consumption only (another attempt to play "change we can believe in" trick). Just a hot air designed to get elected. Both Clintons are in the pocket of financial oligarchy and will never be able to get out of it alive.

          GeorgeK said...

          I believe I'm the only one on this blog that has actually traded bonds, done swaps and hedged bank portfolios with futures contracts. Sooo I kinda know something about this topic.

          Hilary is a fraud; her daughter worked at a Hedge fund where she met her husband Marc Mezvinsky, who is now a money manager at the Eaglevale fund. Oddly many of the Eaglevale investors are investors in the Clinton Foundation and have also given money to Hilary's campaign. The Clinton Foundation gets boat loads of money from Hedge funds and will not raise taxes on such a rich source of funding.

          The grooms mother is Marjory Margolies (ex)Mezvinsky, she cast the final vote giving Clinton the winning vote to raise taxes. She subsequently lost her run for reelection to congress, then her husband was convicted of fraud and they divorced.

          This speech is an attempt to pry people away from Bernie, it won't work with primary voters but might with what's left of rational Republicans in the general election.

          [Dec 04, 2015] The alleged 'decoupling' of GDP from energy

          peakoilbarrel.com
          Don Stewart, 12/01/2015 at 12:25 pm

          Dear Ron and Others
          Relative to the alleged 'decoupling' of GDP from energy. Please see:
          http://www.pnas.org/content/112/20/6271.full
          The material footprint of nations

          The apparent decoupling turns out to be mostly a mirage. It is true that rich countries outsource some of the more energy and materials intensive operations to poor countries, but if you count back from consumption, the rich countries are essentially as energy and materials dependent as they ever were. For fossil fuels, the coefficient is 90 percent…a 90 point increase in fossil fuels is needed for a 100 point increase in GDP.

          Part of what happens can perhaps be understood by thinking about beef imports. If England imports beef from Africa, then there is a great deal of materials and energy consumed in Africa to produce the beef. Only a small percentage of the resource used gets exported to England. If you start with the steak in England and look back at the supply chain, you find that the consumption of the pound of steak in England was responsible for the consumption of lots of energy and materials in Africa.

          I think that 'decoupling' is not the same as energy efficiency. Suppose, for example, that we look at the efficiency with which firewood is burned in an ordinary house. Back in the olden days, the wood was burned in a fireplace, which is inefficient. Then Franklin invented the Franklin stove and heating became more efficient in terms of calories of usable heat per cord of wood. But the stove wasn't necessarily any less or more expensive than the fireplace. Since GDP essentially measures cash outlay, the increased efficiency doesn't necessary have any direct impact on GDP.

          Recently, we have begun to adjust GDP for 'hedonic factors'. Suppose, for example, that one has an old radio with lots of static and poor sound quality. Then one buys a new radio with better sound quality. But suppose that the price you pay for the new radio is the same as it was for the old radio. GDP would be the same for both radios. But, recently, the US government has begun to make adjustments for the quality of the sound.

          Whether the hedonic adjustments make any sense depends on what sort of question you are trying to answer. If you are asking 'will my radio company be able to pay our debts?', then all that matters is your actual income. The fact that you had to improve the sound quality in order to remain competitive is an ancillary fact. If you are not getting any more income, then paying your debts doesn't get any easier.

          Don Stewart

          Fred Magyar, 12/01/2015 at 1:41 pm
          Why the GDP Is Not An Good Measure of A Nation's Well Being
          https://goo.gl/xKKHZx

          In their book, The Spirit Level: Why Greater Equality Makes Societies Stronger (link is external), Professors Richard Wilkinson and Kate Pickett, present data taken from multiple credible sources that show the gap between the poor and rich the greatest in the U.S. among all developed nations; child well being is the worst in the U.S. among all developed nations; and levels of trust among people in the U.S. among the worst of all developed nations.

          The Subcommittee on International Organizations, Human Rights and Oversight of the U.S. Congress' House Committee on Foreign Affairs stated, after examining the issue of the U.S.'s declining image abroad, "the decline in international approval of U.S. leadership is caused largely by opposition to the invasion of Iraq, U.S. support for dictators, and practices such as torture and rendition. They testified that this opposition is strengthened by the perception that our decisions are made unilaterally and without constraint by international law or standards-and that our rhetoric about democracy and human rights is hypocritical."

          The US ranks 114th out of 125 countries in international peace and security.

          http://www.goodcountry.org/

          To those in power who believe that only strength counts, and that people are always self-interested, I say "We tried it your way, and it didn't work. Let's try something new."

          Simon Anholt

          Ves, 12/02/2015 at 8:49 am
          Hi Dennis,
          I see up there little discussion about GDP and what it means.
          Let's say:
          Country A: use washable rags to clean kitchen counter-tops.
          Country B: use paper towels to clean same kitchen counter-tops.

          As result they both have clean kitchen counter-tops but Country B has higher GDP due to use of paper towels.

          So GDP means absolutely nothing or anything depending what you want to present.

          GDP is like looking at the sunset and your mind is thinking that you are actually looking at the sunset. But it takes 8 minutes for sunlight to reach the earth and that sun that we think we are looking at is already gone. (Since this site is loaded with scientist they can correct me with if that 8 minutes is more or less correct )

          Anyway, mostly GDP is used by some "smart" people we call economist to tell us some "story". For example they tell us: "You see sunny boy that GDP is big number this year, bigger than one from last year. So you should be content and happy. Not convinced? Don't worry we will "super size" that GDP for you next year. Isn't your tummy already feeling full and content?"

          This kind of storytelling is usually printed as financial news about GDP. Meaningless if you ask me from the point of average citizen.

          I have to go now because I have whole day of work planned for me by this economy and I will catch you later tonight to see your thoughts. Another thing that crosses my mind is how come that we work more or at least the same now when oil is at $40 compared to when oil was $100 last year? Wasn't the official meme that use of oil as our biggest invention beside sliced bread, made our life easier so we actually work less and spent more time with family & friends and doing odd staff like canoeing How come I don't feel that I did not get 60% discount due to price of oil in terms of work load from the last year Who is pocketing that 60%
          How about employed folks who bought kiwi Leaf? Do they work less and have more time with family and friends or they are paddling in the same hamster wheel we call economy?

          Dennis Coyne, 12/02/2015 at 12:39 pm
          Hi Ves,

          I agree GDP is a poor measure of well being. Another example would be World War 2 where a lot of output was created to destroy stuff (tanks, bombs, planes, ships, guns, etc), then stuff was destroyed, cities and other infrastructure in Europe and Asia and then it was rebuilt leading to a lot of economic growth. Were we better off? Probably not, especially the millions who died and their families.

          GDP has many problems, beyond paper towels and paper plates and other wasteful (in my opinion) uses of resources.

          I did a different chart using the human development index (HDI) from 1980 to 2013 which shows World primary energy use per unit of HDI(a dimensionless number) has been increasing roughly linearly, not decreasing as is the case for energy intensity.

          The HDI is also far from perfect as a measure of human welfare, but probably better than GDP.

          [Dec 04, 2015] German Financialization and the Eurozone Crisis

          Notable quotes:
          "... Bundenstalt für Finanzdienstleistungsaufsicht ..."
          naked capitalism
          Many studies of the Eurozone crisis focus on peripheral European states' current account deficits, or German neo-mercantilist policies that promoted export surpluses. However, German financialization and input on the eurozone's financial architecture promoted deficits, increased systemic risk, and facilitated the onset of Europe's subsequent crises.

          Increasing German financial sector competition encouraged German banks' increasing securitization and participation in global capital markets. Regional liberalization created new marketplaces for German finance and increased crisis risk as current accounts diverged between Europe's core and periphery. After the global financial crisis of 2008, German losses on international securitized assets prompted retrenchment of lending, paving the way for the eurozone's sovereign debt crisis. Rethinking how financial liberalization facilitated German and European financial crises may prevent the eurozone from repeating these performances in the future.

          After the 1970s, German banks' trading activity came to surpass lending as the largest share of assets, while German firms increasingly borrowed in international capital markets rather than from domestic banks. Private banks alleged that political subsidies and higher credit ratings for Landesbanks, public banks that insured household, small enterprise, and local banks' access to capital, were unfair, and, in response, German lawmakers eliminated state guarantees for public banks. Landesbanks, despite their historic role as stable, non-profit, providers of credit, consequently had to compete with Germany's largest private banks for business. Changes in competition restructured the German financial system. Mergers and takeovers occurred, especially in commercial banks and Landesbanks. German financial intermediation ratios-total financial assets of financial corporations divided by the total financial assets of the economy-increased. Greater securitization and shadow banking relative to long-term lending increased German propensity for financial crisis, as securities, shares, and securitized debt constituted increasing percentages of German banks' assets and liabilities.

          Throughout this period, Germany lacked a centralized financial regulatory apparatus. Only in 2002 did the country's central bank, the Bundesbank, establish the Bundenstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority, known as BaFin), which consolidated the responsibilities of three agencies to oversee the whole financial sector. However, neither institution could keep pace with new sources of financial and economic instability. German banking changes continued apace and destabilizing trends in banking grew.

          German desire for financial liberalization at the European level, meanwhile, helped increase potential systemic risk of European finance. Despite some European opposition to removing barriers to capital and trade flows, Germany prevailed in setting these preconditions for membership in the European economic union. Germany's negotiating power stemmed from its strong currency, as well as French, Italian, and smaller European economies' desire for currency stability. Germany demanded an independent central bank for the union, removal of capital controls, and an expansion of the tasks banks could perform within the Economic and Monetary Union (EMU). The Second Banking Coordination Directive (SBCD) mandated that banks perform commercial and investment intermediation to be certified within the EMU; the Single Market Passport (SMP) required free trade and capital flows throughout the EMU. The SMP and SBCD increased the scope of activity that financial institutions throughout the union were expected to provide, and opened banks up to markets, instruments, and activities they could neither monitor nor regulate, and hence to destabilizing shocks.

          Intra-EMU lending and borrowing subsequently increased, and total lending and borrowing grew relative to European countries' GDP from the early 1990s onward. Asymmetries emerged in capital flows between Europe's core, particularly the UK, Germany, and the Netherlands, to Europe's newly liberalized periphery. German banks lent increasing volumes to EMU member states, especially peripheral states. Though this lending on a country-by-country basis was a small percentage of Germany's GDP, it constituted larger percentages of borrowers' GDPs. In 2007, Germany lent 1.23% of its GDP to Portugal; this represented 17.68% of Portugal's GDP; in 2008, Germany lent 6% of its GDP to Ireland; this was 84% of Irish GDP. Germany, the largest European economy, lent larger percentages of its GDP to peripheral EMU nations relative to its lending to richer European economies. These flows, more potentially disruptive for borrowers than for the lender, reflected lack of oversight in asset management. German lending helped destabilize European financial systems more vulnerable to rapid capital inflows, and created conditions for large-scale capital flight in a crisis.

          Financial competition increased in Europe over this period. Financial merger activity first accelerated within national borders, and later grew at supra-national levels. These movements increased eurozone access to capital, but increased pressure for banks to widen the scope of the services and lending that they provided. Rising European securitization in this period increased systemic risk for the EMU financial system. European holdings of U.S.-originated asset-backed securities increased by billions of dollars from the early 2000s until shortly before 2008. German banks were among the EMU's top issuers and acquirers of such assets. As banks' holdings of these assets increased, European systemic risk increased as well.

          European total debt as a percentage of GDP rose in this period. Financial debt relative to GDP grew particularly sharply in core economies; Ireland was the only peripheral EMU economy with comparable levels of financial debt. Though government debt relative to GDP fell or held constant for most EMU nations, cross-border acquisition of sovereign debt increased until 2007. German banks acquired substantially larger portfolios of sovereign debt issued by other European states, which would not decrease until 2010. Only in 2009 did government debt relative to GDP increase throughout the eurozone, as governments guaranteed their financial systems to minimize the costs of the ensuing financial crisis.

          The newly liberalized financial architecture of the eurozone increased both the market for German financial services and overall systemic risk of the European financial system; these dynamics helped destabilize the German financial system and economy at large. Rising German exports of goods, services, and capital to the rest of Europe grew the German economy, but divergence of current account balances within the EMU exposed it to sovereign debt risk in peripheral states. Potential systemic risk changed into systemic risk after the subprime mortgage crisis began. EMU economies would not have subsequently experienced such pressure to backstop national financial systems or to repay sovereign loans had German banks not lent so much or purchased so many sovereign bonds within the union. Narratives that fail to acknowledge Germany's role in promoting the circumstances that underlay the eurozone crisis ignore the destabilizing power of financial liberalization, even for a global financial center like Germany.

          susan the other, December 3, 2015 at 1:06 pm

          This is very interesting. It describes just how the EU mess unfolded beginning in 1970 with deregulation of the financial industry in the core. Big fish eat little fish. It is as if for 4 decades the banks in Germany compensated their losses to the bigger international lenders by taking on the riskier borrowers and were able to do so because of German mercantilism and financial deregulation. Like the German domestic banks loaned the periphery money with abandon, and effectively borrowed their own profits by speculating on bad customers. As German corporations did business with big international banksters, who lent at lower rates, other German banks resorted to buying the sovereign bonds of the periphery and selling CDOs, etc. The German banks were as over-extended looking for profit as consumers living on their credit cards. Deregulation enriched only the biggest international banks. We could call this behavior a form of digging your own grave. In 2009 the periphery saw their borrowing costs threatened and guaranteed their own financial institutions creating the "sovereign debt" that the core then refused to touch. Hypocrisy ruled. Generosity was in short supply. The whole thing fell apart. Deregulation was just another form of looting.

          washunate, December 3, 2015 at 1:28 pm

          German losses on international securitized assets prompted retrenchment of lending, paving the way for the eurozone's sovereign debt crisis.

          I agree with the general conclusion at the end that German financialization is part of the overall narrative of EMU, but I don't follow this specific link in the chain of events as described. The eurozone has a sovereign debt crisis because those sovereign governments privatized the profits and socialized the losses of a global system of fraud. And if we're assigning national blame, it's a system run out of DC, NY, and London a lot more than Berlin, Frankfurt, and Brussels.

          Current and capital account imbalances cancel each other out in the overall balance of payments. As bank lending decreases (capital account surplus shrinks) then the current account deficit shrinks as well (the 'trade deficit'). The problem is when governments step in and haphazardly backstop some of the losses – at least, when they do so without imposing taxes on the wealthy to a sufficient degree to pay for these bailouts.

          [Dec 04, 2015] Congressional Aid to Multinationals Avoiding Taxes

          EconoSpeak

          The OECD's Base Erosion and Profit Shifting (BEPS) initiative is an effort by the G20 to curb the abuse of transfer pricing by multinationals. Senator Hatch is not a fan:

          Throughout this process we have heard concerns from large sectors of the business community that the BEPS project could be used to further undermine our nation's competitiveness and to unfairly subject U.S. companies to greater tax liabilities abroad. Companies have also been concerned about various reporting requirements that could impose significant compliance costs on American businesses and force them to share highly sensitive proprietary information with foreign governments. I expect that we'll hear about these concerns from the business community and others during today's hearing.
          Indeed we heard from some lawyer representing The Software Coalition who was there to mansplain to us how BEPS is evil. I learned two startling things. First – Bermuda must be part of the US tax base. Secondly, if Google is expected to pay taxes in the UK, it will take all those 53,600 jobs which are mainly in California and move them to Bermuda:
          in particular how the changes to the international tax rules as developed under BEPS will significantly reduce the U.S. tax base and create disincentives for U.S. multinational corporations (MNCs) to create R&D jobs in the United States
          Yes – I find his testimony absurd at so many levels. Let's take Google as an example. When they say foreign subsidiaries – think Bermuda. Over the past three year, Google's income has average $15.876 billion per year but its income taxes have only average $2.933 billion for an effective tax rate of only 18.5%. How did that happen? Well – 55% of its income is sourced to these foreign subsidiaries and the average tax rate on this income is only 6.5%. Nice deal! Google's tax model is not only easy to explain but is also a very common one for those in the Software Coalition. While all of the R&D is done in the U.S. and 45% of its sales are in the U.S. – U.S. source income is only 45% of worldwide income. Very little of the foreign sourced income ends up in places like the UK even 11% of Google's sales are to UK customers. Only problem is that income ends up on Ireland's books with the UK getting a very modest amount of the profits. Now you might be wondering how Google got to the foreign taxes to be only 6.5% of foreign sourced income since Ireland's tax rate is 12.5%. But think Double Irish Dutch Sandwich and you'll get how the profits ended up in Bermuda as well as perhaps a good lunch! But what about that repatriation tax you ask. Google's most recent 10-K proudly notes:
          "We have not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries".
          In other words, they are not paying that repatriation tax. Besides the Republicans want to eliminate. Let's be honest – Congress has hamstringed the IRS efforts to enforce transfer pricing. The BEPS initiative arose out of this failure. And now the Republicans in Congress are objecting to even these efforts. And if Europe has the temerity of expecting its fair share of taxes, U.S. multinationals will leave California and relocate in Bermuda? Who is this lawyer kidding? Myrtle Blackwood
          The development model in nation after nation is dependent upon global corporations. What is happening is simply a byproduct of this.
          Jack
          Would the problem of transfer mythical corporate location and the resulting lost taxes be resolved if taxes were based on point of revenue? Tax gross income where it is earned instead of taxing profits where they are not earned.

          [Dec 04, 2015] Turkish Stream is now officially cancelled. All the eggs are now in the same basket: Nord Stream II.

          Notable quotes:
          "... "Firstly, Ukraine is an energy-deficient country and the tendency we observe today will continue and develop: gas production in Ukraine will decline and consumption will grow. We proceed from the assumption that the Ukrainian economy will develop successfully. The present-day level of gas consumption clearly shows that Ukraine has not solved all of its economic problems. In this regard, gas supplies to Ukraine will increase in the medium and long term. Secondly, if a merger takes place, we will load Ukraine's gas transmission system to the extent possible and it surely means additional income that is significant for the Ukrainian budget. At the same time, if the Ukrainian gas transmission system is loaded with some 95 billion cubic meters of gas per year, we know well that it may deliver 120 and even 125 billion cubic meters with a particular level of investments in modernization and reconstruction, of course. And if small investments are made in new compressor stations and pipeline loops, we may probably speak of 140 billion cubic meters of gas. However, we realize that European gas consumption will grow. According to our estimates, gas demand in Europe may grow up to 130-140 billion cubic meters of gas by the turn of 2020." ..."
          "... Remember the story with biogas, wonderful – 20 per cent by 2020, and mass media start writing that it will enable escaping from dependence on Russia. Then we find out that biogas is there, together with food supply problems, etc. Then we observed the European Union's wonderful program – "20-20-20". I think, there's no need of deciphering it – everyone knows about it. And again mass media say that it will enable reducing dependence on Gazprom and Russia. The same thing is with shale gas. First, no one will cope with shale gas transportation, because it is too expensive, add transport – and it is already a business with no prospects. I have a plea for mass media – would you please stop frightening Europe, stop frightening everyone around with Russia and Gazprom. For Europe it is a real blessing that it has such a powerful neighbor with such conventional gas reserves. Exploration of non-conventionals [N.B.: Non-conventional energy resources] may end with no results, as experience of certain countries shows. So let's live in peace and friendship and contribute to strengthening Russia's contacts and ties with the European Union and Ukraine . ..."
          marknesop.wordpress.com
          karl1haushofer, December 3, 2015 at 9:42 am
          Turkish Stream is now officially cancelled. All the eggs are now in the same basket: Nord Stream II. Hopefully the US/UK/Baltics/Poland front will not be able to stop it. Because otherwise Russia is stuck with Ukraine as a transit country.
          marknesop, December 3, 2015 at 10:45 am
          Well, I don't think they want to stop it. They want the gas the same as before – they just want it on their own terms. Brussels wants to exercise control over whose gas goes through the pipeline, so that if they are have a "spat" with Russia, they can stop orders of Russian gas and bring some at-this-moment-unknown supplier's gas through the same pipeline, probably Azerbaijan.

          Read this 2011 press conference with Gazprom; I found it while looking for a layman's explanation of what the Third Energy Package actually entails. Because it appears what is most unappealing to it from Gazprom's point of view is that it limits vital investment in gas futures, considering it would substantially restrict long-term contracts. They could be happy with you today, buying off your competitors tomorrow. According to Brussels, that's healthy competition which ensures the customer gets the best price, while Gazprom naturally prefers to deal in long-term contracts which lock the customer in, although they are usually willing to talk out a deal if it looks like the customer is really unhappy because unhappy customers are bad for business, even in the gas industry.

          Right away, you notice that Europe accepts long-term contracts, but nonetheless takes the position that long-term capacity supply orders upset the market. As Gazprom correctly points out, these two views cannot reasonably coexist.

          In 2011, Gazprom was still considering a joint venture with NaftoGaz Ukraine, and intended to actually increase gas transit through Ukraine while simultaneously building South Stream. They were also considering a merger, and Miller said if that came about, Ukrainian gas consumers would pay the same prices as Russia. Look how far they are away from that now – funny old world, innit? Here was Miller's vision, at the time, for a Gazprom-NaftoGaz merger:

          "Firstly, Ukraine is an energy-deficient country and the tendency we observe today will continue and develop: gas production in Ukraine will decline and consumption will grow. We proceed from the assumption that the Ukrainian economy will develop successfully. The present-day level of gas consumption clearly shows that Ukraine has not solved all of its economic problems. In this regard, gas supplies to Ukraine will increase in the medium and long term.
          Secondly, if a merger takes place, we will load Ukraine's gas transmission system to the extent possible and it surely means additional income that is significant for the Ukrainian budget. At the same time, if the Ukrainian gas transmission system is loaded with some 95 billion cubic meters of gas per year, we know well that it may deliver 120 and even 125 billion cubic meters with a particular level of investments in modernization and reconstruction, of course. And if small investments are made in new compressor stations and pipeline loops, we may probably speak of 140 billion cubic meters of gas. However, we realize that European gas consumption will grow. According to our estimates, gas demand in Europe may grow up to 130-140 billion cubic meters of gas by the turn of 2020."

          You can see, I'm sure, why Brussels didn't like it. Under the Third Energy Package, the operator of the gas transit system will be elected by the European Union on a tender basis. You can see, I'm sure, why Gazprom didn't like that. If the merger between Gazprom and NaftoGaz Ukraine had come about, Ukrainians would have paid Russian domestic prices, in a word, forever.

          What Europe's position boils down to is it wants a system whereby its suppliers do not own anything of the transit system, and the operator could be anyone depending on who sucks up to Europe the most, so that it can make its suppliers fight with one another and be assured of the cheapest prices. Until that magical sugar-daddy supplier appears that can provide steady and sustained competition to Russia, Europe is not in a very good bargaining position. But you bet that would change fast if the western alliance could get rid of Assad, partition Syria and get a Qatari gas pipeline laid across it.

          Here's a poignant reminder of what might have been, which serves to point up who are the real troublemakers:

          "Remember the story with biogas, wonderful – 20 per cent by 2020, and mass media start writing that it will enable escaping from dependence on Russia. Then we find out that biogas is there, together with food supply problems, etc. Then we observed the European Union's wonderful program – "20-20-20". I think, there's no need of deciphering it – everyone knows about it. And again mass media say that it will enable reducing dependence on Gazprom and Russia. The same thing is with shale gas. First, no one will cope with shale gas transportation, because it is too expensive, add transport – and it is already a business with no prospects. I have a plea for mass media – would you please stop frightening Europe, stop frightening everyone around with Russia and Gazprom. For Europe it is a real blessing that it has such a powerful neighbor with such conventional gas reserves. Exploration of non-conventionals [N.B.: Non-conventional energy resources] may end with no results, as experience of certain countries shows. So let's live in peace and friendship and contribute to strengthening Russia's contacts and ties with the European Union and Ukraine."

          kirill , December 3, 2015 at 2:17 pm
          See above. It is time for Russia to lay down the law. Russia can go without the $25 billion per year of lost revenues. But whole EU economies will crash into epic depressions without this energy supply. In other words, the EU is looking at TRILLIONS of DOLLARS in economic damage. The Brussels Uncle Scam cocksuckers will have to justify their actions. Russia does not have to since it is the vendor. If you are not happy, then shop the fuck elsewhere, idiots.

          [Dec 03, 2015] GDP and energy

          Notable quotes:
          "... A paper published earlier this year in Proceedings of the National Academy of Sciences proposes that even the relative decoupling we claim to have achieved is an artefact of false accounting. ..."
          "... GDP is about as decoupled from energy about as much as a dog's tail is decoupled from his ass. ..."
          "... I'm with Ron on this one. If for example GDP units are produced at a ratio of 1:1 for every unit of energy consumed then a graph representing this trend could perhaps have 2 superimposed lines. If efficiency gains then begin to create 2 units of GDP for every unit of energy consumed then the 2 lines on the graph will diverge. There is no decoupling. ..."
          "... Javier's suggestion about debt is not correct. Really, really not correct. Debt is just accounting for various kinds of ownership and obligations. If this were the old Soviet Union, construction would happen based on a central plan, and there would be no debt at all, but there would still be GDP. ..."
          peakoilbarrel.com

          VK, 11/30/2015 at 4:10 pm

          So much for decoupling…

          http://www.theguardian.com/commentisfree/2015/nov/24/consume-conserve-economic-growth-sustainability

          "A paper published earlier this year in Proceedings of the National Academy of Sciences proposes that even the relative decoupling we claim to have achieved is an artefact of false accounting. It points out that governments and economists have measured our impacts in a way that seems irrational.

          Here's how the false accounting works. It takes the raw materials we extract in our own countries, adds them to our imports of stuff from other countries, then subtracts our exports, to end up with something called "domestic material consumption". But by measuring only the products shifted from one nation to another, rather than the raw materials needed to create those products, it greatly underestimates the total use of resources by the rich nations.

          For instance, if ores are mined and processed at home, these raw materials, as well as the machinery and infrastructure used to make finished metal, are included in the domestic material consumption accounts. But if we buy a metal product from abroad, only the weight of the metal is counted. So as mining and manufacturing shift from countries such as the UK and the US to countries like China and India, the rich nations appear to be using fewer resources. A more rational measure, called the material footprint, includes all the raw materials an economy uses, wherever they happen to be extracted. When these are taken into account, the apparent improvements in efficiency disappear."

          BC, 11/30/2015 at 4:37 pm
          VK, precisely. The US has been in a net-exergetic deficit in debt-money-based terms per capita since the mid- to late 1960s to mid-1970s to mid-1980s, having compensated by increasing to an unprecedented level to date debt to wages and GDP.

          Moreover, the BEA-determined industry requirement costs as the basis of estimated gross and real value-added output (what we refer to as GDP), adjusted for our net-exergetic deficit in debt-money terms, the US has been in recession/"slow-motion depression" since Q4 2000-Q1 2001, and the world since 2005-08.

          Senior BEA, BLS, Commerce, White House economic advisors, CIA, NSA, military intelligence, and Pentagon planners all know this in varying degrees as it relates to their imperatives and prerogatives.

          However, the mass public and most political leaders are utterly unaware, or in the case of the latter, have no incentive to know or to share with the public what they know because they will not be able to raise a nickel thereafter for reelection if they do share.

          And so it goes . . .

          Ron Patterson, 11/30/2015 at 5:02 pm
          Thanks VK, I suspected as much.

          He told me that he and his colleagues had conducted a similar analysis, in this case of the UK's energy use and greenhouse gas emissions, "and we find a similar pattern". One of his papers reveals that while the UK's carbon dioxide emissions officially fell by 194m tonnes between 1990 and 2012, this apparent reduction is more than cancelled out by the CO2 we commission through buying stuff from abroad. This rose by 280m tonnes in the same period.

          GDP is about as decoupled from energy about as much as a dog's tail is decoupled from his ass.

          Jimmy, 12/02/2015 at 11:38 am
          I'm with Ron on this one. If for example GDP units are produced at a ratio of 1:1 for every unit of energy consumed then a graph representing this trend could perhaps have 2 superimposed lines. If efficiency gains then begin to create 2 units of GDP for every unit of energy consumed then the 2 lines on the graph will diverge. There is no decoupling.

          Only a divergence due to more units of GDP produced per unit of energy consumed. When somebody can create units of GDP and consume no energy at all then we will have decoupling. Coupling and decoupling are all or none terms/states of being. You're either coupled or your decoupled. Any arguments to the contrary are pedantic and uninformed.

          Ron Patterson, 12/02/2015 at 11:58 am
          Thanks Jimmy, with all the Pollyannas on this site I need all the support I can get.
          Dennis Coyne, 12/02/2015 at 1:56 pm
          Hi Jimmy,

          Look up the meaning of decouple it is reduce or eliminate the effect of one part of a circuit on another. In this context the appropriate meaning is reduce.

          Doesn't really matter, nobody thinks that energy inputs can be eliminated, that would be absurd.

          Dennis Coyne, 12/01/2015 at 8:07 am
          Hi VK,

          The problem is solved by looking at World output and World primary energy use.

          Energy intensity for the World has improved, though during the Chinese rapid expansion from 2000-2010, the progress stopped for a decade as energy was not used very efficiently in China over that period, since 2010 the progress has continued. Energy intensity is energy per unit of GDP produced.
          Chart below for 1965 to 2014 using World Bank(from FRED), UN, and BP data.

          Left vertical axis is in metric tons of oil equivalent (toe) per millions of 2005$ of real GDP (M2005$).

          Javier, 12/01/2015 at 9:23 am
          Hi Dennis,

          That graph shows several things mixed that have co-evolved independently, so not many conclusions can be extracted.

          • -It reflects improvements in energy usage, meaning we are able to extract more economic yield per unit of energy. This is the only real efficiency improvement.
          • -It reflects increase in debt, that is reflected in GDP but does not use energy. If I borrow money GDP increases yet no energy is used.
          • -It reflects increase in tertiary economy at the expense of primary and secondary economies. We pay more for services and less for resources and goods.

          We don't know the contribution of each to that graph (at least I don't), but given the magnitudes involved I would guess that the real efficiency improvement is small. This is supported by how the graph reacts to recessions (not the Chinese expansion as you claim), indicating that the main factor is economic, not energetic.

          Now we know that debt has a limit, and once debt saturation is reached the economy, and specially the tertiary sector would be very badly affected. If that happens we might very well see that graph turn around and energy intensity increase.

          Dennis Coyne, 12/01/2015 at 1:56 pm
          Hi Javier,

          GDP only increases if your money is spent on goods or services. It is output of goods and services. On a World level the debts and liabilities balance, so if I save my money and lend it to you, I spend less and you spend more. You should review your economics. At a World level, the debt has no effect, assuming we don't have ant interstellar debts. There was a World recession from 2000 to 2010? I hadn't heard about that.

          Yes services might have increased, if that is what people want to spend their money on, then the share of services in the economy will increase. I don't have figures on the "non-service economy". Part of this increase reflects women entering the labor pool in greater numbers, some of the work cleaning the house or taking care of the garden are now part of GDP when before they were taken care of by the family. We may not have good data for the World on this effect.

          Javier, 12/01/2015 at 2:21 pm
          Dennis,

          I think I do understand. If I go to the bank and ask for a 200,000 $ mortgage loan, that money is created from thin air, and when I go and pay for the house, GDP jumps by 200,000 $, so yes, increasing debt increases GDP as soon as the debt money is used. Since no oil was used to create the money, it counts as a reduction in oil intensity. Of course if I return the money to the bank the operation is reversed (they do keep the interests), but since on average debt is always expanding, except during crisis periods, oil intensity is always decreasing, except during crisis periods. Debt that is used to buy stocks or companies or to extract oil from the ground is the same.

          Dennis Coyne, 12/01/2015 at 3:16 pm
          Hi Javier,

          The point is that you purchased a $200,000 house. That house was not created from thin air, not my house anyway. :)

          It is not the debt, it is building a house that creates the GDP.

          Rune Likvern, 12/01/2015 at 3:26 pm
          So what comes first; The debt that allows for building the house, or first building the house and then creating the debt?
          Dennis Coyne , 12/01/2015 at 3:47 pm
          Hi Rune,

          In most cases the debt will come first if the home is purchased with financing. It is possible to build a home using savings, in which case there would be no debt.

          So the debt is not a requirement for GDP, just creating a new house, car, or other good or service.

          Would GDP be lower if there were no debt, of course!

          As long as debt grows at reasonable rates (similar to GDP growth at full employment), when there is a recession debt will initially grow faster than GDP and then will slow down until GDP growth catches up and surpasses the debt rate of growth.

          Dennis Coyne, 12/01/2015 at 4:25 pm
          Hi Rune,

          I am curious. Do you think what Javier is saying is correct? Energy intensity has decreased because Debt to GDP ratios have increased? I am pretty sure Javier is not right, but you are very knowledgeable about economics. Perhaps you can explain it to me, if I am mistaken.

          If all GDP was created with no debt (all of it was based on savings and income with no new borrowing) in year 1. And in year 2 50% of income was borrowed from banks to create the same level of GDP, would that mean in year 2 we have 150% of the first year because of the debt?

          I don't think so, but I may be missing something.

          Nick G, 12/02/2015 at 2:14 pm
          Dennis,

          Javier's suggestion about debt is not correct. Really, really not correct. Debt is just accounting for various kinds of ownership and obligations. If this were the old Soviet Union, construction would happen based on a central plan, and there would be no debt at all, but there would still be GDP.

          Let's say there two houses on an island, and 2 residents, 1 in each house. One owns both houses, the other rents from the 1st. Then the renter borrows from the owner, and buys the house he/she lives in. Their monthly payment was rent, now it's a mortgage payment. The renter is now leveraged.

          But, has anything "real" changed? No. Same amount of wealth, same amount of income, with different kinds of ownership, and different obligations (the renter now has to fix his own roof!).

          Dennis Coyne, 12/01/2015 at 4:16 pm
          Hi Javier,

          You should read up on national income accounting. Debt does not really come into play, and more or less debt says absolutely nothing about the energy intensity of GDP. The chart I created is primary energy in metric tons of oil equivalent divided by real GDP in millions of 2005$. Debt plays no role.

          Try the following link for a detailed introduction to national income accounting:

          http://grizzly.la.psu.edu/~bickes/nia.pdf

          Javier, 12/01/2015 at 7:06 pm
          Dennis,

          I still disagree. It is well known that the increase in debt has a positive effect on GDP, while the total outstanding debt can become a drag on GDP if too high. It is difficult to sustain that debt plays no role in GDP in light of the evidence.

          For example China has had a phenomenal rate of growth accompanied by the highest rate of debt growth that the world has seen.

          I think it is easy to understand.

          • Country A finances everything with savings and profits without increasing debt and sees an increase in GDP of 2%.
          • Country B finances half of the goods and services with an increase in debt and sees an increase in GDP of 2%.

          Both countries use the same oil so both report the same oil intensity. However country B has brought half of the wealth used to increase the GDP from the future without bringing any future oil. That wealth will have to be repaid eventually, detracting from future GDP but at that point no oil will be recovered.

          So in reality country B is reporting half of its real oil intensity. With present wealth it would have grown GDP by only 1% yet it has spent the same amount of oil than A.

          Net effect is that debt reduces oil intensity when it is created and it increases oil intensity when it is payed. We have not seen that yet because we have not paid any debt yet. Debt is always increasing.

          Dennis Coyne, 12/01/2015 at 10:17 pm
          Hi Javier,

          Many problems with your example.

          First we need the GDP level of countries A and B, not just their growth rate. If we only talk about the incremental increases in GDP and energy use for each country it makes a little more sense.

          So in reality country B is reporting half of its real oil intensity. With present wealth it would have grown GDP by only 1% yet it has spent the same amount of oil than A.

          What you say above is incorrect.

          For simplicity I will assume if output grows by 2%, that energy use also grows by 2%, I will further assume each country has the same GDP, we will say it is $100 million before the 2% growth in your example.

          If country B does not take on any debt and its GDP grows by 1%, then its energy use will also grow by 1% (not by 2%) as the energy use is proportional to GDP. So the energy intensity would remain the same. There is no reason for it to change, it depends on technology and the structural features of the economy (proportion of agriculture, manufacturing, and services).

          Another basic fact of economics is that the loans taken out by a business are to take advantage of a business opportunity and they will tend to lead to higher growth, so your example is flawed.

          If countries A and B are of similar size and similar levels of development (twins as it were), then if country A and country B both shunned any borrowing they will both grow at the same rate, say 2% and have the same energy intensity (energy use also grows by 2%). Let's now assume both countries are the same except that country A's culture is such that they think debt is bad, but country B does not have the same aversion to debt.
          Country B borrows at 2% interest to take advantage of an investment opportunity which will have a rate of return of 4%, so country B grows faster than country A at 3% and its energy use also grows at 3% (energy intensity remains the same). The extra income earned is used to pay back the debt and the individual businesses come out ahead earning a net profit of 2% after paying back the interest. This is how rational businesses operate, they borrow money to make money.

          Javier, 12/02/2015 at 8:54 am
          Dennis,

          I also have lots of problems with your example, so let's take a step back to look at the big picture.

          That an increase on debt increases GDP is not in doubt. It is not only supported by evidence, but the basis for an entire economic theory that supports fighting recessions with debt-based stimulus.

          So the question is if an increase in debt increases also GDP without oil consumption as to reduce oil-intensity. The answer is a resounding yes. Financial services are proportional to debt increase. Net interest expenses in the financial sector are seen as production and value added and are added to GDP. Any service charged by financial companies also increases GDP, and none of this economic activities uses oil, and very little energy.

          I believe that a significant part of oil intensity reduction has come from the financialization of the economy linked to debt-increase, and therefore oil intensity is a fake measure of oil decoupling. If you look at energy-intensity you see the same phenomenon as with oil. It seems that we are decoupling from energy because we are moving towards a fake economy based on financial instruments. Finanzialization also appears linked to raising inequality as it effect is to increase the wealth only of owners of financial instruments.

          I do not doubt that some oil and energy efficiency is real, after all it is a process that has been going on forever since the first oven was built to cook. But I seriously doubt that it is a process significant enough to solve an energy deficit problem which is what peak oil is going to bring. And to me oil intensity is a fake measure of increases in oil efficiency, that I do not doubt are real but much overstated.

          Gail Tverberg has a lot more to say about decoupling GDP growth from energy growth in her article at TOD for anybody interested in the matter:

          http://www.theoildrum.com/node/8615

          Javier, 12/02/2015 at 9:23 am
          Or to put it more clearly:
          • These two things are related. And decoupling is largely a myth.
          • In blue US energy intensity inverted

          Dennis Coyne, 12/02/2015 at 10:43 am
          Hi Javier,

          Yes the financial sector has increased to a small degree from 4% of GDP to 8% based on the chart you posted (which is only for the United States rather than the World).

          This has probably increased to some degree (more or less than the US is unknown) at the World level as well. This might explain a very small slice of the decrease in energy intensity, but I doubt it accounts for most of the change.

          I agree with you that changes in the structure of the World economy (higher proportion of services) has probably decreased energy intensity, but I doubt that accounts for all of the change. The bottom line is that the World economic system is becoming more service oriented with services accounting for a larger share of GDP. At some point, services may reach some maximum level, in percentage terms, beyond which they cannot go. I don't know where that level is, debt levels will also reach some maximum level (in percentage terms) beyond which they cannot rise (maybe total debt of 300% to 350% of GDP at a World level as a potential maximum).

          When those points are reached growth may be limited by how much more efficiently we can use energy and how quickly we can ramp up alternative energy as fossil fuel output declines. There is much that is unknown about the future.

          Dennis Coyne, 12/02/2015 at 10:51 am
          Hi Javier,

          Note that you keep talking about oil, the chart shows primary energy (all forms of energy used by the economic system.)

          Can you explain why country B in your example uses the same amount of energy whether it grows at 1% or 2%. One would expect that the energy use would be proportional to GDP, as that is what the World data shows.

          Javier, 12/02/2015 at 11:55 am
          Dennis,

          That is not what I said or meant. Country B by increasing GDP 1% through an increase in debt is in essence bringing GDP from the future to the present. That borrowed GDP is using present energy.

          The financial sector has increased from 2% to 8%, a 4x increase. This is not small peanuts. Specially considering that only a minor part of the financial transactions are considered towards GDP. Probably only Luxembourg and perhaps Switzerland and other banking paradises have a bigger share.

          Dennis Coyne, 12/02/2015 at 2:01 pm
          Hi Javier,

          You said:

          So in reality country B is reporting half of its real oil intensity. With present wealth it would have grown GDP by only 1% yet it has spent the same amount of oil than A.

          You say above without the borrowing country B would grow by 1% (why does it grow less than country A?) but it uses the same amount of oil as country A, why if it grows more slowly?

          Dennis Coyne, 12/02/2015 at 5:57 pm
          Hi Javier,

          Look closely at your chart in 1970 (when energy intensity started to decline) it was 4% and the most recent points on the chart are about 8.4%. I used the data from your chart (even though it is for the US rather than the World) and did an exponential trend from 1970 to 2010 for 4% to 8% and then extended to 2014 (8.5%) for financial GDP of World economy (probably not correct, but this is an illustration). Then I found the Energy intensity of the non-financial sector by assuming the financial sector has zero energy inputs (I expect they are low, this is an approximation). The Non-Financial Energy intensity is in the chart below.

          Finally, Aggregate Demand is increased when there is more debt, but consider the Aggregate supply of goods produced to meet that demand. Whether the aggregate demand is because of private or public debt or not does not change the amount of energy needed to produce the supply of goods and services, it only changes how much demand there will be for those goods and services. I really cannot make it any simpler than that. Oh one more thing, do you think the energy needed to build a car (total energy embodied in all processes used to create the car and its components) changes if someone pays cash for the car vs financing the car?

          Rune Likvern, 12/01/2015 at 2:23 pm
          Dennis,

          Bank of England has a different take on this;

          " This article explains how the majority of money in the modern economy is created by commercial banks making loans.

          Money creation in practice differs from some popular misconceptions - banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they 'multiply up' central bank money to create new loans and deposits."

          http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

          Dennis Coyne, 12/01/2015 at 3:37 pm
          Hi Rune,

          Yes that is correct. The banks create money by lending and borrowers destroy money as they pay back their loans. The money supply is controlled by the Central Bank buying and selling bonds.

          The debt is only a problem if it grows too quickly. If the rate of debt growth slows or the rate of GDP growth increases there will not be a problem. There are differing views on how much debt is too much.

          For public debt there is:

          http://www.economist.com/blogs/freeexchange/2015/06/public-debt

          http://www.forbes.com/sites/michaellingenheld/2015/10/22/the-world-needs-more-debt/

          Rune Likvern, 12/01/2015 at 5:45 pm
          Dennis,

          Did you read the document from Bank of England?

          Dennis Coyne, 12/02/2015 at 8:30 am
          Hi Rune,

          Yes I did. Under normal circumstances the supply of money is primarily influenced by the interest rate that is paid by commercial banks for money borrowed from the central bank. When the economy is in a severe recession and this interest rate falls to the "effective lower bound" (about 0.5%), the central bank loses its ability to increase the supply of money through lower interest rates.

          Under these circumstances the central bank will buy assets (government bonds) to increase the money supply, it does not sell assets to reduce the money supply, it simply raises the interest rate it charges the commercial banks.

          Dennis Coyne, 12/02/2015 at 8:18 am
          Hi Rune,

          Thanks for that link, it is a nice review of how central banks influence the supply of money by setting the interest rate which banks must pay on money borrowed from the central bank, which feeds through to interest rates throughout the economy and affects saving and borrowing through market interest rates set by banks.

          I would encourage Javier to read that link as it addresses many misconceptions about money.

          Glenn Stehle, 12/01/2015 at 10:00 am
          Dennis,

          You are comparing apples to oranges. GDP is determined using a price, or market, theory of value. So you are comparing a value determined using a market theory of value to a value determined using an intrinsic theory of value - the toe of energy.

          If you want to compare apples to apples, then you have to compare GDP to the market value of the energy used.

          Dennis Coyne, 12/01/2015 at 1:41 pm
          Hi Glenn,

          If we are concerned the energy constraints will limit real GDP, then the amount of energy consumed per unit of GDP produced is very relevant in my view.

          It is not a comparison, it is a measure of energy intensity and how it has changed over time. See

          https://en.wikipedia.org/wiki/Energy_intensity

          I have simply charted the World Energy Intensity from 1965 to 2014.

          Glenn Stehle, 12/01/2015 at 10:17 pm
          Well again, Dennis, a valid comparison is one which compares dollars and cents to dollars and cents, not dollars and cents to toe.

          There was a time (1970 to 2010) when the EIA published the total amount spent in the United States on energy. I have plotted the ratio of total spent on energy to total nominal GDP for those years. This is a true measure of "energy intensity," as it compares apples to apples, and does not omit the price of energy as your graph does.

          I have added YOY growth in real GDP (calculated using constant 2009 dollars).

          I don't want to draw too many conclusions from the graph, but it paints a far bleaker picture than your graph does. When energy intensity goes over .08 - as it did in 1974 and 2008 - then the economy began having convulsions.

          The period from 1983 to 2006 is what is known as "the Great Moderation." It is also a period of low and generally declining energy intensity. When energy intensity began increasing again, as it did in 1999, surpassing .08 in 2006, then this marked the end of the Great Moderation. Is this mere coincidence?

          Botton line: In my opinion not only is the quantity of energy (measured in toe) important to the performance of the economy, but the price of that energy is also important.

          Using your graph, which makes no allowance for the price of energy, it is easy to see how you have come to believe that the economy is decoupling from energy.

          Dennis Coyne, 12/02/2015 at 8:52 am
          Hi Glenn,

          It is not a comparison of money spent, energy intensity is defined as energy consumed per unit of output (measured in dollars) as there are many different goods and services and their monetary value is measured in constant dollars.

          The difficulty with using price is that there are many different forms of energy (oil, coal, natural gas, nuclear, hydro, solar, wind, geothermal, and biofuels) which are included in the "primary energy" category. Note that your chart shows only one country not the world. I would present a chart for the World if I had it, I am using the data I have for primary energy divided by real GDP. I think it is useful because it is energy contraints we are concerned about, currently some forms of energy (fossil fuels especially) have very low prices so in monetary terms money spent on Energy divided by real GDP would be quite low.

          Energy prices are quite volatile so I like the Energy intensity measure better as it shows energy needed to produce a unit of GDP, which has in fact declined since 1970 by about 30%(or an average annual decrease of about 0.8% per year).

          Glenn Stehle, 12/02/2015 at 12:28 pm
          Dennis,

          I suppose price doesn't matter as long as one can get somebody else to pick up the tab.

          For instance, we can compare a new $40,000 Chevy Bolt ev to a new $20,000 Honda HRV. There's no way the Bolt can compete on price. But if you can get somebody else to pick up the tab for the Bolt? Well then, no sweat!

          As part of its COP21 coverage, CBS did a puff piece on their Evening News last night about how EVs are sweeping Norway.

          http://www.cbsnews.com/videos/how-electric-cars-are-taking-over-norways-roads/

          They interviewed one fellow who said he "had done the math" and will be able to drive his new EV "for free."

          So I did a little bit more digging, and sure 'nuf, it looks like he's right.

          According to the Wall Street Journal, Norway currently has 54,000 EVs on the road. Last year their owners received $540,000 in various forms of rebates, tax breaks and other perks from the Norwegian state. That's a cool $10,000 per car per year. So at that clip, it would only take 4 years to recover the cost of a $40,000 EV. And then after that one can enjoy almost free driving, all on the government's tab.

          http://www.wsj.com/articles/electric-car-perks-put-norway-in-a-pinch-1442601936

          But it looks like there's trouble in paradise. The WSJ says the government give-a-ways are set to end. The day of reckoning is still up in the air, but the latest date for phasing out the government largess is 2020. So the Norwegian government is taking the punch bowl away. The EV crowd, of course, isn't taking this horrible injustice lying down:

          Christina Bu, secretary-general of the lobbying group Norwegian Electric Vehicle Association, said the 25,000-member association has been stalking political parties and government officials to ensure the main incentives remain in place, at least until 2020.

          "If you cut all the incentives overnight, sales will plummet," she said.

          Weaning buyers from such purchase incentives could add new headwinds to sales of vehicles already undercut by cheap fuel prices in some markets. In the U.S., the state of Georgia halted its $5,000 tax credit on July 1. Electric cars were about 2% of purchases in the state in 2014, estimates Washington-based think tank Keybridge Research LLC. It forecasts a 90% decline, or 8,700 fewer sales annually, as a result of the loss.

          Glenn Stehle, 12/02/2015 at 1:06 pm
          Edit

          Last year their owners received $540 million in various forms of rebates, tax breaks and other perks from the Norwegian state.

          Dennis Coyne, 12/02/2015 at 2:06 pm
          Hi Glenn,

          Do you have the price of primary energy from 1965 to 2014? I would be happy to do the chart you would like, but I don't know the appropriate price of energy, which has many different forms and prices throughout the World.

          I agree price matters, as does the amount of energy available to purchase (which is what is in my chart).

          Nick G, 12/02/2015 at 2:32 pm
          Glenn,

          You're looking at something different.

          The original study in question was asking about whether an economy can grow without increasing it's inputs of oil, steel, etc.*

          That's a very different question than whether an economy will be hurt by a sudden increase in the price of a key commodity, like oil. If the price of oil spikes, that can create a shock for the economy (e.g., people wait to see what happens with prices before they buy their next vehicle, and that delay causes a recession), but an increase in prices doesn't mean energy consumption has gone up.

          -----------------
          * (it can, of course, but that's separate issue from whether our societies have chosen to do so).

          Ralph, 12/02/2015 at 8:46 am
          I am far from convinced that GDP growth is a good way of measuring progress in a society. Let's take an example from the UK economy. (btw I am not worried about the genders here, I would happily be a house husband if my wife's earning potential was close to mine).

          Today, nearly 70% of women of working age work. Families need both incomes to meet a reasonable standard of living. As a result, a large majority of UK children grow up in families with both parents working. Many parents end up sending young children to child minders and crčches so that they can work. This employs a lot of people, mostly women. More wealthy families then employ house cleaners and gardeners and handymen etc. to clean, garden and repair their homes that they don't have time to do themselves. Poorer people do without. This employs a lot more people. All the working women and the people employed by the working women pay taxes which means that people end up working more hours to afford to pay someone else to do these jobs than it would take to do the jobs themselves. Unless your own rate of pay is significantly higher than the people you pay to do the jobs, you would be financially better off doing it yourself. The government and the economists are delighted because tax take and GDP rise. All these extra people in useful employment driving around from low skilled job to to low skilled job, consuming extra resources, especially fossil fuels, when they would be a lot less stressed, more free time and financially better off, just doing all these activities for themselves.

          It is a major mistake to professionalise low skilled domestic work. All it does is free up time for the rich and increases government tax take. Society as a whole is worse off.

          Dennis Coyne, 12/02/2015 at 10:14 am
          Hi Ralph,

          I agree GDP is by no means a perfect measure, just a measure that is available at the World level. There are other measures such as the social progress index, but this is not available at the World level. There is also the United Nations Human Development Index(HDI), but again these measures are not published at the World level (or I couldn't find it). Actually I found some World data for the HDI from 1980 to 2013. The measure is not perfect see link below for data:

          http://hdr.undp.org/en/content/table-2-human-development-index-trends-1980-2013
          Discussion of HDI at

          https://en.wikipedia.org/wiki/Human_Development_Index

          Also from UN document:

          Human Development Index (HDI): A composite index measuring average achievement in three basic dimensions of human development-a long and healthy life, knowledge and a decent standard of living. See Technical note 1 (http://hdr.undp.org/en) for details on how the HDI is calculated.

          Chart below with World Primary energy (ktoe) divided by World HDI from 1980 to 2013. Based on the HDI, more energy is needed to improve well being and GDP is not a good measure of human welfare.

          There is also an index for HDI that takes account of inequality, but the index (called IHDI) is only available from 2010 to 2013.

          [Dec 02, 2015] Wolf Richter: Financially Engineered Stocks Drag Down S P 500

          All this neoliberal talk about "maximizing shareholder value" is designed to hide a redistribution mechanism of wealth up. Which is the essence of neoliberalism. It's all about executive pay. "Shareholder value" is nothing then a ruse for getting outsize bonuses but top execs. Stock buybacks is a form of asset-stripping, similar to one practiced by buyout sharks, but practiced by internal management team. Who cares if the company will be destroyed if you have a golden parachute ?
          Notable quotes:
          "... By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street . ..."
          "... IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R D. It's staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. ..."
          "... Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R D and capital expenditures. They're all doing it. ..."
          "... Nearly 60% of the 3,297 publicly traded non-financial US companies Reuters analyzed have engaged in share buybacks since 2010. Last year, the money spent on buybacks and dividends exceeded net income for the first time in a non-recession period. ..."
          "... This year, for the 613 companies that have reported earnings for fiscal 2015, share buybacks hit a record $520 billion. They also paid $365 billion in dividends, for a total of $885 billion, against their combined net income of $847 billion. ..."
          "... Buybacks and dividends amount to 113% of capital spending among companies that have repurchased shares since 2010, up from 60% in 2000 and from 38% in 1990. Corporate investment is normally a big driver in a recovery. Not this time! Hence the lousy recovery. ..."
          "... Financial engineering takes precedence over actual engineering in the minds of CEOs and CFOs. A company buying its own shares creates additional demand for those shares. It's supposed to drive up the share price. The hoopla surrounding buyback announcements drives up prices too. Buybacks also reduce the number of outstanding shares, thus increase the earnings per share, even when net income is declining. ..."
          "... But when companies load up on debt to fund buybacks while slashing investment in productive activities and innovation, it has consequences for revenues down the road. And now that magic trick to increase shareholder value has become a toxic mix. Shares of buyback queens are getting hammered. ..."
          "... Me thinks Wolf is slightly barking up the wrong tree here. What needs to be looked at is how buy backs affect executive pay. "Shareholder value" is more often than not a ruse? ..."
          "... Interesting that you mention ruse, relating to "buy-backs"…from my POV, it seems like they've legalized insider trading or engineered (a) loophole(s). ..."
          "... On a somewhat related perspective on subterfuge. The language of "affordability" has proven to be insidiously clever. Not only does it reinforce and perpetuate the myth of "deserts", but camouflages the means of embezzling the means of distribution. Isn't distribution, really, the only rational purpose of finance, i.e., as a means of distribution as opposed to a means of embezzlement? ..."
          "... buybacks *can* be asset-stripping and often are, but unless you tie capital allocation decisions closer to investment in the business such that they're mutually exclusive, this is specious and a reach. No one invests if they can't see the return. It would be just as easy to say that they're buying back stock because revenue is slipping and they have no other investment opportunities. ..."
          "... Perhaps an analysis of the monopolistic positions of so many American businesses that allow them the wherewithal to underinvest and still buy back huge amounts of stock? If we had a more competitive economy, companies would have less ability to underinvest. Ultimately, I think buybacks are more a result than a cause of dysfunction, but certainly not always bad. ..."
          "... One aspect that Reuters piece mentions, but glosses over with a single paragraph buried in the middle, is the fact that for many companies there are no ( or few) reasons to spend money in other ways. If capex/r d doesn't give you much return, why not buy out the shareholders who are least interested in holding your stock? ..."
          "... Dumping money into R D is always risky, although different industries have different levels, and the "do it in-house" risk must be weighed against the costs of buying up companies with "proven" technologies. Thus, R D cash is hidden inside M A. M A is up 2-3 years in a row. ..."
          November 21, 2015 | naked capitalism

          By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

          Magic trick turns into toxic mix.

          Stocks have been on a tear to nowhere this year. Now investors are praying for a Santa rally to pull them out of the mire. They're counting on desperate amounts of share buybacks that companies fund by loading up on debt. But the magic trick that had performed miracles over the past few years is backfiring.

          And there's a reason.

          IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R&D. It's staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. And its stock is down 38% since March 2013.

          Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R&D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R&D and capital expenditures. They're all doing it.

          "Activist investors" – hedge funds – have been clamoring for it. An investigative report by Reuters, titled The Cannibalized Company, lined some of them up:

          In March, General Motors Co acceded to a $5 billion share buyback to satisfy investor Harry Wilson. He had threatened a proxy fight if the auto maker didn't distribute some of the $25 billion cash hoard it had built up after emerging from bankruptcy just a few years earlier.

          DuPont early this year announced a $4 billion buyback program – on top of a $5 billion program announced a year earlier – to beat back activist investor Nelson Peltz's Trian Fund Management, which was seeking four board seats to get its way.

          In March, Qualcomm Inc., under pressure from hedge fund Jana Partners, agreed to boost its program to purchase $10 billion of its shares over the next 12 months; the company already had an existing $7.8 billion buyback program and a commitment to return three quarters of its free cash flow to shareholders.

          And in July, Qualcomm announced 5,000 layoffs. It's hard to innovate when you're trying to please a hedge fund.

          CEOs with a long-term outlook and a focus on innovation and investment, rather than financial engineering, come under intense pressure.

          "None of it is optional; if you ignore them, you go away," Russ Daniels, a tech executive with 15 years at Apple and 13 years at HP, told Reuters. "It's all just resource allocation," he said. "The situation right now is there are a lot of investors who believe that they can make a better decision about how to apply that resource than the management of the business can."

          Nearly 60% of the 3,297 publicly traded non-financial US companies Reuters analyzed have engaged in share buybacks since 2010. Last year, the money spent on buybacks and dividends exceeded net income for the first time in a non-recession period.

          This year, for the 613 companies that have reported earnings for fiscal 2015, share buybacks hit a record $520 billion. They also paid $365 billion in dividends, for a total of $885 billion, against their combined net income of $847 billion.

          Buybacks and dividends amount to 113% of capital spending among companies that have repurchased shares since 2010, up from 60% in 2000 and from 38% in 1990. Corporate investment is normally a big driver in a recovery. Not this time! Hence the lousy recovery.

          Financial engineering takes precedence over actual engineering in the minds of CEOs and CFOs. A company buying its own shares creates additional demand for those shares. It's supposed to drive up the share price. The hoopla surrounding buyback announcements drives up prices too. Buybacks also reduce the number of outstanding shares, thus increase the earnings per share, even when net income is declining.

          "Serving customers, creating innovative new products, employing workers, taking care of the environment … are NOT the objectives of firms," sais Itzhak Ben-David, a finance professor of Ohio State University, a buyback proponent, according to Reuters. "These are components in the process that have the goal of maximizing shareholders' value."

          But when companies load up on debt to fund buybacks while slashing investment in productive activities and innovation, it has consequences for revenues down the road. And now that magic trick to increase shareholder value has become a toxic mix. Shares of buyback queens are getting hammered.

          Citigroup credit analysts looked into the extent to which this is happening – and why. Christine Hughes, Chief Investment Strategist at OtterWood Capital, summarized the Citi report this way: "This dynamic of borrowing from bondholders to pay shareholders may be coming to an end…."

          Their chart (via OtterWood Capital) shows that about half of the cumulative outperformance of these buyback queens from 2012 through 2014 has been frittered away this year, as their shares, IBM-like, have swooned:

          Mbuna, November 21, 2015 at 7:31 am

          Me thinks Wolf is slightly barking up the wrong tree here. What needs to be looked at is how buy backs affect executive pay. "Shareholder value" is more often than not a ruse?

          ng, November 21, 2015 at 8:58 am

          probably, in some or most cases, but the effect on the stock is the same.

          Alejandro, November 21, 2015 at 9:19 am

          Interesting that you mention ruse, relating to "buy-backs"…from my POV, it seems like they've legalized insider trading or engineered (a) loophole(s).

          On a somewhat related perspective on subterfuge. The language of "affordability" has proven to be insidiously clever. Not only does it reinforce and perpetuate the myth of "deserts", but camouflages the means of embezzling the means of distribution. Isn't distribution, really, the only rational purpose of finance, i.e., as a means of distribution as opposed to a means of embezzlement?

          Jim, November 21, 2015 at 10:42 am

          More nuance and less dogma please. The dogmatic tone really hurts what could otherwise be a fine but more-qualified position.

          "Results of all this financial engineering? Revenues of the S&P 500 companies are falling for the fourth quarter in a row – the worst such spell since the Financial Crisis."

          Eh, no. No question that buybacks *can* be asset-stripping and often are, but unless you tie capital allocation decisions closer to investment in the business such that they're mutually exclusive, this is specious and a reach. No one invests if they can't see the return. It would be just as easy to say that they're buying back stock because revenue is slipping and they have no other investment opportunities.

          Revenues are falling in large part because these largest companies derive an ABSOLUTELY HUGE portion of their business overseas and the dollar has been ridiculously strong in the last 12-15 months. Rates are poised to rise, and the easy Fed-inspired rate arbitrage vis a vis stocks and "risk on" trade are closing. How about a little more context instead of just dogma?

          John Malone made a career out of financial engineering, something like 30% annual returns for the 25 years of his CEO tenure at TCI. Buybacks were a huge part of that.

          Perhaps an analysis of the monopolistic positions of so many American businesses that allow them the wherewithal to underinvest and still buy back huge amounts of stock? If we had a more competitive economy, companies would have less ability to underinvest. Ultimately, I think buybacks are more a result than a cause of dysfunction, but certainly not always bad.

          NeqNeq, November 21, 2015 at 11:44 am

          One aspect that Reuters piece mentions, but glosses over with a single paragraph buried in the middle, is the fact that for many companies there are no ( or few) reasons to spend money in other ways. If capex/r&d doesn't give you much return, why not buy out the shareholders who are least interested in holding your stock?

          Dumping cash into plants only makes sense in the places where the market is growing. For many years that has meant Asia (China). For example, Apple gets 66% (iirc) of revenue from Asia, and that is where they have continued investing in growth. If demand is slowing and costs are rising, and it looks like both are true, why would you put even more money in?

          Dumping money into R&D is always risky, although different industries have different levels, and the "do it in-house" risk must be weighed against the costs of buying up companies with "proven" technologies. Thus, R&D cash is hidden inside M&A. M&A is up 2-3 years in a row.

          [Nov 30, 2015] Secular stagnation and the financial sector

          Notable quotes:
          "... Surely the answer is "risk transfer" ..."
          "... Is what you're saying here is that, by extending a lot of credit, the financial sector allowed households to maintain consumption in the face of a permanent decline in income (at least relative to expectation)? That's an important part of the story, I agree. ..."
          "... the FIRE sector in particular, are parasitic on the economy. ..."
          "... Perhaps financialization isn't so much a thing-in-itself as the mechanism through which wealth concentrates in periods of slow growth? ..."
          "... As in the official theory of efficient markets, the financial sector is actually earning its keep by allocating capital to the most productive investments, and by spreading and managing risk. I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles and busts." ..."
          "... Did Cuba, Venezuela, Argentina and North Korea do better than the financialized economies of the world? Did the hand of the State in Russia, China and other countries secure better outcomes than the global financial sector in countries that allowed it to operate (albeit with heavy regulation)? ..."
          "... The financial system can engage in usury, lending money with no connection to productive investment, by simply creating a parasitic claim on income. There are straightforward ways of doing this: credit cards with high rates of interest or payday lending. There are slightly more complicated approaches: insurance that by design doesn't pay off for the nominal beneficiary. ..."
          "... "The biggest economic policy decision of the last thirty years has been the decision to de-socialise a lot of previously socially insured risks and transfer them back to the household sector (in their various capacities as workers, homeowners and consumers of healthcare). The financial sector was obviously the conduit for this policy decision." ..."
          "... My feeling (based on nothing but intuition) is that the answer is (d). The government is a tool of moneyed interests. I know, it sounds awfully libertarian, but it is what it is. And I can't foresee any non-catastrophic end to it. ..."
          November 29, 2015 | Crooked Timber

          In my last post on private infrastructure finance and secular stagnation, I suggested a bigger argument that

          The financialization of the global economy has produced a hugely costly financial sector, extracting returns that must, in the end, be taken out of the returns to investment of all kinds. The costs were hidden during the pre-crisis bubble era, but are now evident to everyone, including potential investors. So, even massively expansionary monetary policy doesn't produce much in the way of new private investment.
          This isn't an original idea. The Bank of International Settlements put out a paper earlier this year arguing that financial sector growth crowds out real growth. But how does this work and what can be done about it? I'm still organizing my thoughts on this, so what I have are some ideas rather than a fully formed argument.

          First, if the financial sector is unproductive, how can it be so large and profitable in a market economy?

          There are a few possible explanations

          (a) As in the official theory of efficient markets, the financial sector is actually earning its keep by allocating capital to the most productive investments, and by spreading and managing risk. I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles and busts.

          (b) Tax evasion: the global financial sector allows corporations to greatly reduce their tax liabilities. Most of the savings in tax is captured in the financial sector itself, but the amount flowing to corporations is sufficient to offset the high costs of the modern financial sector, relative to (for example) old-style bank finance and simple corporate structures financed by debt and equity

          (c) Volatility: the financialization of the economy has produced greatly increased volatility (in exchange rates, asset prices and so on). The financial sector amplifies and profits from this volatility, partly through regulatory arbitrage, and partly through entrenched and systematic fraud as in the LIBOR and Forex scandals.

          (d) Political capture: The financial sector controls political outcomes in both traditional ways (political donations, highly revolving door jobs for future and former politicians) and through the ideology of market liberalism, which is perfectly designed to support policies supporting the financial sector, while discrediting policies traditionally sought by other parts of the corporate sector, such as protection for manufacturing industry. The shift to private finance for infrastructure, discussed in the previous post is part of this. The construction part of the infrastructure sector (which was always private) has suffered from the reduced flow of projects, but the finance part (previously managed through government bonds) has benefited massively.

          The result of all this is that the financial sector benefits from an evolutionary strategy similar to that of an Australian eucalypt forest. Eucalypts are both highly flammable (they generate lots of combustible oil) and highly fire resistant. So eucalypt forests are subject to frequent fires which kill competing species, and allow the eucalypts to extend their range.

          dsquared 11.29.15 at 1:24 pm

          Surely the answer is "risk transfer". The biggest economic policy decision of the last thirty years has been the decision to de-socialise a lot of previously socially insured risks and transfer them back to the household sector (in their various capacities as workers, homeowners and consumers of healthcare). The financial sector was obviously the conduit for this policy decision. Their role is to provide insurance to the rest of society and this is what they did – in fact, they provided too much of it, with too little capital which is why they went bust, and why their bankruptcy was so disastrous (there's nothing worse than an insurer bankruptcy, because it hits you with a big loss at exactly the worst time). I think c) above is particularly unconvincing, as the biggest stylised feature of the period of financialisation was the Great Moderation – in fact, the financial sector stored up volatility that would otherwise have been experienced by other people, including the intermediation of some genuinely historically massive imbalances associated with the industrialisation of China, and stored it up until it couldn't hold any more and exploded.

          I also don't think LIBOR and FX fit into that pattern at all very well either. Financial systems have two kinds of problem, which is why they often have two kinds of regulators. They have prudential problems and conduct problems. Both LIBOR and FX were old-fashioned profiteering and cartel arrangements, which could happen in any industry (hey let's talk about drug pricing and indeed university tuition some time). In actual fact, as I wrote a while ago, it's only LIBOR that can really be considered a scandal – FX was very much more a case of customers who wanted the benefits of tight regulation but didn't want to pay for them, and were lucky enough to find a political moment in which the time was right for an otherwise very unpromising case.

          In other words, the answer to all your questions is "leverage". That's why financial systems grew so fast, that's why they're associated with poor economic performance, and that's why they tend to show up in periods of secular stagnation – a secular stagnation is almost defined as a period during which people try to maintain their standard of living by borrowing. Of course, if the financial sector had been required to hold enough equity capital in the first place, it would never have grown so big in the first place, and we could all be enjoying the thirteenth year of the post-dot-com bust[1] in relative contentment.

          [1] I am never going to shut up about this. The real estate bubble was a policy-created bubble. It was blown up in real time and intentionally, by a Federal Reserve which wanted to cushion the blow of the tech bust. If the financial sector had refused to finance it, the financial sector would have been trying to run a monetary policy directly opposed to that of the central bank.

          John Quiggin 11.29.15 at 1:55 pm 2

          I agree that risk transfer is a big deal. On the other hand, it's not obvious that the financial sector did a lot to insure households against most of the additional risk, or that the Great Moderation corresponded to a reduction in the volatility faced by households. On the first point, despite massive financial innovation since 1980, the set of financial instruments easily available to households hasn't changed all that much. Most obviously, there's no insurance against bad employment and wage outcomes and home equity insurance hasn't really happened either.

          Is what you're saying here is that, by extending a lot of credit, the financial sector allowed households to maintain consumption in the face of a permanent decline in income (at least relative to expectation)? That's an important part of the story, I agree.

          The secular stagnation framing of the question leads me to think more about why investment hasn't responded to monetary policy rather than directly about households.

          Eggplant 11.29.15 at 2:04 pm, 3

          (e) Principle-agent problem.
          (f) Implicit government backing allowing the underpricing of risk.

          dsquared 11.29.15 at 2:32 pm. 4

          Yeah, that's my point – the massive extension of credit to households was the financial sector's role in the big policy shift. At the end of the day, although we might with the benefit of hindsight agree that "subprime mortgages with no income verification at teaser rates" were a pretty stupid product that should never have been offered, they were a brand new financial product that had never been offered to households before! Even the example you mention – "insurance against bad employment and wage outcomes" – was sort of sold, albeit that what I'm referring to here is Payment Protection Insurance in the UK, which sort of underlines that it wasn't done well or responsibly.

          I guess my argument here is that it's the combination of deregulation and stagnation that was necessary to create the 2000s policy disaster. But if we hadn't had the bad products we got, we'd have had something else go wrong, probably outside the regulated sector. Because the high debt levels were a policy goal (or at least, were the inevitable and forseeable consequence of trying to do demand management without fiscal policy), and as I keep saying in different contexts, you can't get to a stupid debt ratio by only doing sensible things.

          The secular stagnation framing of the question leads me to think more about why investment hasn't responded to monetary policy rather than directly about households.

          Isn't the answer to this just the definition of a Keynesian recession? Investment hasn't responded to monetary policy because there's no interest rate at which it makes sense to produce goods that can't be sold.

          DrDick 11.29.15 at 2:32 pm 5

          Capital generally, and the FIRE sector in particular, are parasitic on the economy. They provide some minimal benefits if kept strongly in check, but quickly become destructive if allowed to grow unchecked, as they have now.

          Eggplant 11.29.15 at 2:37 pm 6

          (g) Rising inequality leading to an ever increasing savings glut, providing the financial industry with a target-rich environment.

          yastreblyansky 11.29.15 at 3:22 pm, 7

          Dumb outsider thought, turning Eggplant @6 upside down: What about r > g? Perhaps financialization isn't so much a thing-in-itself as the mechanism through which wealth concentrates in periods of slow growth?

          T 11.29.15 at 3:31 pm, 8

          "But if we hadn't had the bad products we got, we'd have had something else go wrong, probably outside the regulated sector."

          A more sophisticated version of the widely debunked theory that Fannie and Freddie blew up the housing sector by giving loans to poor people. Rule 1: It's never ever the bankers' fault. Rule 2: see Rule 1. At least d-squared has been consistent…

          Or maybe there has been a systematic continuous effort to use political influence to garner rents by gutting both the regulatory and judicial constraints on their behavior. http://www.nytimes.com/2015/11/30/us/politics/illinois-campaign-money-bruce-rauner.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news

          yastreblyansky 11.29.15 at 3:35 pm, 9

          Or rather through which rent-claimers concentrate wealth (@t) bringing long-term low growth.

          bjk 11.29.15 at 3:43 pm, 10

          Which direction is financialization heading? It looks to be decreasing. The mutual fund industry is in terminal decline, losing market share to ETFs. There are fewer financial advisors today than in 2008, yet the number of millionaires has increased. Stock trading has broken a 40 year trend of increasing volumes. Electronic and exchange trading of bonds and derivatives is increasing, driving down margins. Bots have driven human traders out of jobs (Dark Pools has a good account of this). Banks are earnings low single digit returns in their trading divisions, which suggests they will be shut down if things don't improve. It looks like finance is doing a good job of shrinking itself, with a little help from Elizabeth Warren.

          T 11.29.15 at 4:50 pm, 16

          There were several issues and arguments posed in the OP. I'm addressing this:

          "First, if the financial sector is unproductive, how can it be so large and profitable in a market economy?
          There are a few possible explanations

          (a) As in the official theory of efficient markets, the financial sector is actually earning its keep by allocating capital to the most productive investments, and by spreading and managing risk. I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles and busts."

          D-squared response is of course it's the risk transfer. That flat out contradicts JQ, but d-squared is a master of the straight face. And then he proceeds - "there has been a decision to desocilaize"; "the financial sector was obviously the conduit for this policy decision"; and "the real estate bubble was a policy-created bubble."

          So JQ, here's your answer of FIRE's ascendancy from an insider: You know me and my friends were standing around just doing nothin' and then these policy guys come around. Next thing ya know, we've doubled our share of GDP and put our bosses in the top 0.01%. Who woulda known? Crazy shit, huh? Hey and if anyone asks, tell 'um "risk transfer." And if they press, tell 'um "secular stagnation." In fact, tell 'um frickin' anything. It just wasn't our fault.

          Rakesh Bhandari 11.29.15 at 4:51 pm, 17

          I know that I shall have to read John Kay's Other People's Money at some point. I am wondering what people make of the old the then Marxist Hilferding's concept of promoters' profit as a way to understand some financial sector activity. I posted this here a few years back.

          Here's his example, and I am trying to figure out to the extent that it throws light on the recent activity of Wall Street.

          Start with an industrial firm with a capital of 1,000,000 marks that makes a profit of 150,000 marks with the average profit of 15 percent.

          With an interest rate of 5% straight capitalization of income of 150,000 marks will have an estimated price of 3,000,000 marks (150,000/.05=3,000,000 marks)

          A deduction of 20,000 marks for the various administration costs and directors fees would make the actual payment to shareholders 130,000 rather 150,000 marks

          A risk premium of, say, 2% would be added to a fixed safe rate of interest of 5% in estimating the actual stock price

          So what, then, is the stock price (130,000/.07)? 1,857,143 or roughly 1,900.000 marks

          This 900,000 is free after deducting the initial investment of 1,000,000 marks

          The balance of 900, 000 marks appears as promoters' profit which arises from the conversion of profit-bearing capital into interest bearing capital.

          In 1910, Hilferding called this promoters profit, an economic category sui generis; it is earned by the promoter by selling of stocks or the securitizing of income on the capital market.

          For Hilferding the investment bank, which promotes the conversion of profit-bearing to interest-bearing capital, claims the promoters profit.

          The analysis seems pertinent to the securitization process today, and I would love to hear Henwood's and others' thoughts about this.

          As Roubini and Mihm have pointed out, we have seen the securitization of mortgages, consumer loans, student loans, auto loans, airplane leases, revenues from forests and mines, delinquent tax liens, radio tower loans, boat loans, state revenues, the royalties of rock bands!

          We have seen, in their words, an explosion in the selling of future income of dependable projected revenue streams such as rents or interest payments on mortgage payments as securities.

          That securitization been driven by investors' quest for yield lift given the low rate of interest, itself the result of the global savings glut and Fed policy.

          And it seems that Wall Street, with the connivance of the credit agencies, was able to appropriate value from the purchasers of securities by understating the risk premia.

          The risk premium and promoters' profit are inversely correlated so there is a strong incentive to understate the former. This is what Hilferding did not say, but seems worth emphasizing today.

          Aaron Brown 11.29.15 at 5:43 pm. 18
          I sincerely do not understand your point here. I'm not arguing, just asking for clarification:

          (a) As in the official theory of efficient markets, the financial sector is actually earning its keep by allocating capital to the most productive investments, and by spreading and managing risk. I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles and busts.

          For one thing, I don't see that the two bubbles and one bust of 1996 – 2015 are self-evidently worse than the more numerous bubbles and busts of 1976 – 1995. You might say the 2008 brush with Great Depression outweighs the hyperinflation and multiple deep recessions of the earlier era, but certainly the Internet and housing bubbles were more productive and less threatening than the commodity, Japan, emerging debt and other bubbles. Anyway, it's a close enough comparison that someone could certainly keep a straight face while saying that in the last 20 years financial volatility inflicted less real economic damage than in the preceding 20 years.

          But the bigger issue is no one claims the financial system encourages steady growth. Creative (bubble) destruction (bust) is the rule. It is command economies that outlaw bubbles and busts–and inflation and unemployment–at the cost of unproductive employment, empty shelves, stifled innovation, loss of freedom and other consequences.

          If you want to argue that the financial system did not earn its profits in the last 20 years, it seems to me you have to argue that economic growth was slow, or that more people in the world are in poverty today, or that there was not enough innovation; not that the ride was too volatile. Did Cuba, Venezuela, Argentina and North Korea do better than the financialized economies of the world? Did the hand of the State in Russia, China and other countries secure better outcomes than the global financial sector in countries that allowed it to operate (albeit with heavy regulation)?

          It is certainly possible to argue that we could have had more growth and innovation and poverty reduction; and less volatility; with some third way that's better than both our current financial system and the alternatives practiced in the world today. But that point is not so obvious that any defender of the global financial system must be joking.

          Why do you think the booms and busts of the last 20 years are such a clear and damning indictment of the financial system that the point needs no further elaboration?

          Bruce Wilder 11.29.15 at 6:11 pm, 19

          The financial system can engage in usury, lending money with no connection to productive investment, by simply creating a parasitic claim on income. There are straightforward ways of doing this: credit cards with high rates of interest or payday lending. There are slightly more complicated approaches: insurance that by design doesn't pay off for the nominal beneficiary.

          There are really complicated ways of doing this: derivatives, for example, which blow up (and as an added bonus, undermine the informational efficiency of financial markets).

          I keep thinking of Piketty's r > g: the ever-accumulating pile of money rising like a slow, but unstoppable tide. It has to be invested or "invested" - that is, it can buy the assembly of resources into productive capital assets that represent financial claims on the additional income generated by business innovation and expansion . . . OR . . . it can be used to finance the parasitic and predatory manipulations of an emergent neo-feudalism.

          Where the secular stagnation thesis is not pure apologetic fraud, I would interpret it as saying, there are currently few opportunities to invest in additional productive "real" capital stock. For technological reasons, the new systems require much less capital than the old systems, so when an old telephone company replaces its expensive copper wire with fiber optics and cellphone towers, it may be able to fund a large part of the transition out of current cash-flow, even while maintaining the value of the bonds that once represented investment in a mountain of copper, but are now just rentier claims on an obsolete world.

          In the brave new world, a handful of companies, who have lucked into commercial positions with high rents, throw off a lot of cash. So, the Apples and Intels do not need to be allocated new capital, but their distribution of cash to people who don't need it, is generating a lot of demand for "financial product". The rest of the business world is just trying to manage a slow decline, able to throw off modest amounts of cash, desperate to find sources of political power that might yield reliable rents, but without opportunities to innovate that would actually require net investment in excess of current cashflows from operations.

          So, the financial system is just responding to this enlarged demand for non-productive investment in financial products that generate return from parasitic extraction.

          In the interest of parasitic extraction, the financial system pursues the politics of neoliberal privatization as a means of generating financial products to satisfy demand.

          Does that sound like a plausible narrative?

          Dipper 11.29.15 at 6:30 pm, 20

          re volatility, the thing you really want to worry about is liquidity. Pre-crash banks could warehouse risk and so provide liquidity. One consequence was volatility was recorded because liquid markets allowed prices to be observed.

          Regulators have observed the conflict of interest caused by banks providing a financial service but also participating in the markets with their own money, and have acted to restrict banks from holding risk for proprietary trading (the Volcker rule). This is fine, but there has been a noticeable decrease in liquidity in what were once deep markets. The EURCHF un-pegging in Jan this year is a good example of reduced liquidity resulting in a massive move. There may well be more of this to come.

          Sebastian H 11.29.15 at 6:34 pm, 21
          "The biggest economic policy decision of the last thirty years has been the decision to de-socialise a lot of previously socially insured risks and transfer them back to the household sector (in their various capacities as workers, homeowners and consumers of healthcare). The financial sector was obviously the conduit for this policy decision."

          I can't tell if you are arguing with John or agreeing with him. Is this agreement with his d) [the political capture explanation]? I don't know very much about the deep history of financial regulation, but I'm fairly certain that most voters have never put desocialization of risk in their top 5 concerns. Is it possible that the financial sector was the obvious conduit because they were among the important authors of the ideas?

          MisterMr 11.29.15 at 6:50 pm, 22

          Previously commented here as Random Lurker.

          In my opinion, finance had a passive role in the build up of the crisis.
          Others have said similar things uptread, however this is my opinion:

          1) the wage share of GDP depends largely on political choices; since the late seventies there has been a trend of a falling wage share more or less everywhere, as countries with a lower wage share are more competitive on the world market.
          2) a falling wage share means a rising profit share, and "capitalists" tend to reinvest part of their profits, so a falling wage share caused a worldwide saving glut.
          3) this worldwide saving glut caused an increased financialisation and a bubbling up of the price of some assets, particularly those assets whose supply is inelastic (for example, the value of distribution chains or of famous consumer brands).
          4) this in turn causes an increased volatility of financial markets, and worse financial crises.

          This situation is what we perceive as a secular stagnation, and IMHO depends mostly on a low worldwide wage share.
          Unfortunately, I have no idea of how to reach an higher wage share, and I don't think "the market" has any mechanism to push up said wage share.

          Rakesh Bhandari 11.29.15 at 7:08 pm, 23

          Bruce,
          What you are saying makes sense to me. Steven Pressman has also raised the question of how r is to be maintained with "an abundance of capital and its need for high rates of return." (Understanding Piketty's Capital in the Twenty First Century).

          It's almost as if Piketty in his criticism of the rentier has a rentier's disregard for how the returns are actually to be made. To the extent that he considers production it is through marginal productivity theory. Piketty claims that marginal rate of substitution of capital for labor will remain above unity (and too bad Piketty dismissed the Cambridge Capital critique because Ian Steedman has used Sraffian theory to show the possibilities of high profits in even a fully automated economy).

          Of course as Pressman implies, this "technical" view may blind us to the higher exploitation that may be necessary for returns to continue to remain high as capital becomes more abundant. Pressman also implies that Piketty also does not consider how finance can make higher rates of return by making higher-interest loans to weaker parties while having them absorb most of the risk (this would be your second kind of investment).

          Search for the several paragraphs on the rentier in this section. It is remarkable that no one has yet compared Piketty's criticism of the rentier to this.
          https://www.marxists.org/archive/bukharin/works/1927/leisure-economics/introduction.htm

          felwith 11.29.15 at 8:31 pm, 24

          " I don't know very much about the deep history of financial regulation, but I'm fairly certain that most voters have never put desocialization of risk in their top 5 concerns."

          Of course not, but there are actors here other than "the public" and "the banks". In this case, I'm pretty sure Daniel is referring to the destruction of unionized middle class jobs with pensions and cheap-to-the-worker health insurance, which was carried out by their employers. While I doubt I could pick a bank owner out of a lineup filled out with captains of industry, they aren't actually interchangeable.

          Peter K. 11.29.15 at 9:43 pm, 25

          @1 Dsquared:

          "Of course, if the financial sector had been required to hold enough equity capital in the first place, it would never have grown so big in the first place, and we could all be enjoying the thirteenth year of the post-dot-com bust[1] in relative contentment."

          Secular stagnation to me just means not enough macro (monetary/fiscal) policy to keep up aggregate demand for full employment and target inflation.

          Monetary and fiscal policy is being blocked by politics partly because filthy rich financiers are buying their way into politics:

          http://www.nytimes.com/2015/11/30/us/politics/illinois-campaign-money-bruce-rauner.html

          The question about Dsquare's alternate history I would have is: what is the response of fiscal and monetary policy to the "domestication" of the financial sector via higher capital requirements and leverage regulations, etc.?

          If fiscal and monetary policy keeps the economy at a high-pressure level with full employment and rising wages, I don't see why secular stagnation is a problem.

          But politics is blocking fiscal and monetary policy. Professor Quiggin talks of "massive" monetary policy, but it wasn't massive given the need. (It was massive compared to past recoveries.) It was big enough to avoid deflation despite unprecedented fiscal austerity. It wasn't big enough to hit their inflation target in a timely matter.

          Ze K 11.29.15 at 9:53 pm, 27

          My feeling (based on nothing but intuition) is that the answer is (d). The government is a tool of moneyed interests. I know, it sounds awfully libertarian, but it is what it is. And I can't foresee any non-catastrophic end to it.

          [Nov 26, 2015] Incorporating the Rentier Sectors into a Financial Model

          Notable quotes:
          "... Finance is not The economy ..."
          "... In the real world most credit today is spent to buy assets already in place, not to create new productive capacity. Some 80 percent of bank loans in the English-speaking world are real estate mortgages, and much of the balance is lent against stocks and bonds already issued. ..."
          "... Debt-leveraged buyouts and commercial real estate purchases turn business cash flow (ebitda: earnings before interest, taxes, depreciation and amortization) into interest payments. Likewise, bank or bondholder financing of public debt (especially in the Eurozone, which lacks a central bank to monetize such debt) has turned a rising share of tax revenue into interest payments. ..."
          "... even government tax revenue is diverted to pay debt service ..."
          "... Contemporary evidence for major OECD economies since the 1980s shows that rising capital gains may indeed divert finance away from the real sector's productivity growth (Stockhammer 2004) and more generally that 'financialization' (Epstein 2005) has hurt growth and incomes. Money created for capital gains has a small propensity to be spent by their rentier owners on goods and services, so that an increasing proportion of the economy's money flows are diverted to circulation in the financial sector. Wages do not increase, even as prices for property and financial securities rise – just the well-known trend that we have seen in the Western world since the 1970s, and which persists into the post-2001 Bubble Economy. ..."
          economistsview.typepad.com

          RGC said in reply to JF... November 25, 2015 at 08:34 AM

          Incorporating the Rentier Sectors into a Financial Model

          Wednesday, September 12, 2012

          by Dirk Bezemer and Michael Hudson

          As published in the World Economic Association's World Economic Review Vol #1.

          .......

          2. Finance is not The economy

          In the real world most credit today is spent to buy assets already in place, not to create new productive capacity. Some 80 percent of bank loans in the English-speaking world are real estate mortgages, and much of the balance is lent against stocks and bonds already issued. Banks lend to buyers of real estate, corporate raiders, ambitious financial empire-builders, and to management for debt-leveraged buyouts. A first approximation of this trend is to chart the share of bank lending that goes to the 'Fire, Insurance and Real Estate' sector, aka the nonbank financial sector. Graph 1 shows that its ratio to GDP has quadrupled since the 1950s. The contrast is with lending to the real sector, which has remained about constant relative to GDP. This is how our debt burden has grown.

          Graph 1: Private debt growth is due to lending to the FIRE sector: the US, 1952-2007

          Source: Bezemer (2012) based on US flow of fund data, BEA 'Z' tables.

          What is true for America is true for many other countries: mortgage lending and other household debt have been 'the final stage in an artificially extended Ponzi Bubble' as Keen (2009) shows for Australia. Extending credit to purchase assets already in place bids up their price. Prospective homebuyers need to take on larger mortgages to obtain a home. The effect is to turn property rents into a flow of mortgage interest. These payments divert the revenue of consumers and businesses from being spent on consumption or new capital investment. The effect is deflationary for the economy's product markets, and hence consumer prices and employment, and therefore wages. This is why we had a long period of low cpi inflation but skyrocketing asset price inflation. The two trends are linked.

          Debt-leveraged buyouts and commercial real estate purchases turn business cash flow (ebitda: earnings before interest, taxes, depreciation and amortization) into interest payments. Likewise, bank or bondholder financing of public debt (especially in the Eurozone, which lacks a central bank to monetize such debt) has turned a rising share of tax revenue into interest payments. As creditors recycle their receipts of interest and amortization (and capital gains) into new lending to buyers of real estate, stocks and bonds, a rising share of employee income, real estate rent, business revenue and even government tax revenue is diverted to pay debt service. By leaving less to spend on goods and services, the effect is to reduce new investment and employment.

          Contemporary evidence for major OECD economies since the 1980s shows that rising capital gains may indeed divert finance away from the real sector's productivity growth (Stockhammer 2004) and more generally that 'financialization' (Epstein 2005) has hurt growth and incomes. Money created for capital gains has a small propensity to be spent by their rentier owners on goods and services, so that an increasing proportion of the economy's money flows are diverted to circulation in the financial sector. Wages do not increase, even as prices for property and financial securities rise – just the well-known trend that we have seen in the Western world since the 1970s, and which persists into the post-2001 Bubble Economy.

          It is especially the case since 1991 in the post-Soviet economies, where neoliberal (that is, pro-financial) policy makers have had a free hand to shape tax and financial policy in favor of banks (mainly foreign bank branches). Latvia is cited as a neoliberal success story, but it would be hard to find an example where rentier income and prices have diverged more sharply from wages and the "real" production economy.

          The more credit creation takes the form of inflating asset prices – rather than financing purchases of goods and services or direct investment employing labor – the more deflationary its effects are on the "real" economy of production and consumption. Housing and other asset prices crash, causing negative equity. Yet homeowners and businesses still have to pay off their debts. The national income accounts classify this pay-down as "saving," although the revenue is not available to the debtors doing the "saving" by "deleveraging."

          The moral is that using homes as what Alan Greenspan referred to as "piggy banks", to take out home-equity loans, was not really like drawing down a bank account at all. When a bank account is drawn down there is less money available, but no residual obligation to pay. New income can be spent at the discretion of its recipient. But borrowing against a home implies an obligation to set aside future income to pay the banker – and hence a loss of future discretionary spending.

          3. Towards a model of financialized economies

          Creating a more realistic model of today's financialized economies to trace this phenomenon requires a breakdown of the national income and product accounts (NIPA) to see the economy as a set of distinct sectors interacting with each other. These accounts juxtapose the private and public sectors as far as current spending, saving and taxation is concerned. But the implication is that government budget deficits inflate the private-sector economy as a whole.

          http://michael-hudson.com/2012/09/incorporating-the-rentier-sectors-into-a-financial-model-3/

          pgl said in reply to anne...

          Peter Dorman's excellent rebuttal of John Harwood:

          http://econospeak.blogspot.com/2015/11/tax-policy-and-magic-investment-channel.html

          [Nov 22, 2015] The Political Aftermath of Financial Crises Going to Extremes

          Notable quotes:
          "... The typical political reaction to financial crises is as follows: votes for far-right parties increase strongly, government majorities shrink, the fractionalisation of parliaments rises and the overall number of parties represented in parliament jumps. ..."
          "... In the light of modern history, political radicalization, declining government majorities and increasing street protests appear to be the hallmark of financial crises. As a consequence, regulators and central bankers carry a big responsibility for political stability when overseeing financial markets. Preventing financial crises also means reducing the probability of a political disaster. ..."
          "... If you look at the Republican Party and, especially, Republican candidates, now it is not the question of radicalization, but the question of sanity that arises. They are so completely detached from reality that Marxists look like "hard core" realists in comparison with them. ..."
          "... The whole party looks like an extreme and bizarre cult that intends to take over the country: another analogy with Marxists. Like Marx quipped: History repeats itself, first as tragedy, second as farce. ..."
          "... Democrats are not that different either. With Sanders representing probably the only candidates which can be classified as "center-left" in European terms. For all practical reasons Hillary is a center-right, if not far-right (and as for foreign policy agenda she is definitely far right) candidate. ..."
          "... So the key question is about sanity of the US society under neoliberalism, not some form of "radicalization". ..."
          Nov 22, 2015 | Economist's View

          mrrunangun:

          Given that honesty in politics and government is relative, I wonder if relatively honest politics and relatively honest regulation of financial systems prevents financial crises.

          pgl

          Hillary Clinton hedges on a key issue:

          http://talkingpointsmemo.com/news/hillary-clinton-break-up-big-banks

          She says she would break up the mega banks ... if needed. It is needed - so no hedging on this issue.

          JohnH -> pgl...

          Once again pgl shows how gullible he is...believing what Hillary says not what she has done. What has she done? Well, Wall Street made her a millionaire.

          http://money.cnn.com/2015/10/13/investing/hillary-clinton-wall-street/

          Second, she announced her run for Senator from New York (Wall Street) immediately after Bill did Wall Street the mother of all favors...ending Glass-Steagall. In his naivete, pgl certainly believes that there was no quid pro quo!!!

          Third, lots of people doubt whether she can be trusted to rein in Wall Street.
          http://www.nytimes.com/2015/11/22/us/politics/wall-st-ties-linger-as-image-issue-for-hillary-clinton.html?_r=0

          Of course, pgl believes lots of silly things...like his claim that Obama never proposed and signed off on austerity in 2011...or that he has proposed cutting Social Security...or that trickle down monetary policy hasn't overwhelmingly benefited the 1%.

          I wonder when somebody will finally get to sell him the Brooklyn Bridge [better act now, pgl, get a really cheap loan while you still can!!!]

          JohnH -> JohnH...

          pgl thinks that Obama NEVER proposed cutting Social Security's! What a rube!

          anne:

          http://www.voxeu.org/article/political-aftermath-financial-crises-going-extremes

          November 21, 2015

          The political aftermath of financial crises: Going to extremes
          By Manuel Funke, Moritz Schularick, and Christoph Trebesch

          Implications

          The typical political reaction to financial crises is as follows: votes for far-right parties increase strongly, government majorities shrink, the fractionalisation of parliaments rises and the overall number of parties represented in parliament jumps. These developments likely hinder crisis resolution and contribute to political gridlock. The resulting policy uncertainty may contribute to the much-debated slow economic recoveries from financial crises.

          In the light of modern history, political radicalization, declining government majorities and increasing street protests appear to be the hallmark of financial crises. As a consequence, regulators and central bankers carry a big responsibility for political stability when overseeing financial markets. Preventing financial crises also means reducing the probability of a political disaster.

          anne -> anne...

          What strikes me, is that the political response to the short-lived international financial crisis but longer lived recession was quite restrained in developed countries. Leadership changes struck me as moderate, even moderate in beset Greece as the political stance of Syriza which looked to be confrontational with regard to the other eurozone countries quickly became accepting.

          European developed country governments have been and are remarkably stable. Japan has been stable. There is political division in the United States, but I do not attribute that to the financial crisis or recession but rather to social divisions.

          The essay is just not convincing.

          likbez said...

          "What strikes me, is that the political response to the short-lived international financial crisis but longer lived recession was quite restrained in developed countries"

          If you mean that the goal of the state is providing unconditional welfare for financial oligarchy (which actually is true for neoliberalism), then I would agree.

          But if you use any common sense definition of "restrained" this is a joke. Instead of sending criminals to jail they were awarded with oversized bonuses.

          I think the authors are way too late to the show. There is no much left of the New Deal anyway, so radicalization of the US society was a fait accompli long before crisis of 2008.

          If you look at the Republican Party and, especially, Republican candidates, now it is not the question of radicalization, but the question of sanity that arises. They are so completely detached from reality that Marxists look like "hard core" realists in comparison with them.

          The whole party looks like an extreme and bizarre cult that intends to take over the country: another analogy with Marxists. Like Marx quipped: History repeats itself, first as tragedy, second as farce.

          Democrats are not that different either. With Sanders representing probably the only candidates which can be classified as "center-left" in European terms. For all practical reasons Hillary is a center-right, if not far-right (and as for foreign policy agenda she is definitely far right) candidate.

          So the key question is about sanity of the US society under neoliberalism, not some form of "radicalization".

          [Nov 21, 2015] Wolf Richter: Financially Engineered Stocks Drag Down S P 500

          All this neoliberal talk about "maximizing shareholder value" and hidden redistribution mechanism of wealth up. It;s all about executive pay. "Shareholder value" is nothing then a ruse for getting outsize bonuses but top execs. Who cares if the company will be destroyed if you have a golden parachute ?
          Notable quotes:
          "... IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R D. It's staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. ..."
          "... Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R D and capital expenditures. They're all doing it. ..."
          "... Nearly 60% of the 3,297 publicly traded non-financial US companies Reuters analyzed have engaged in share buybacks since 2010. Last year, the money spent on buybacks and dividends exceeded net income for the first time in a non-recession period. ..."
          "... This year, for the 613 companies that have reported earnings for fiscal 2015, share buybacks hit a record $520 billion. They also paid $365 billion in dividends, for a total of $885 billion, against their combined net income of $847 billion. ..."
          "... Buybacks and dividends amount to 113% of capital spending among companies that have repurchased shares since 2010, up from 60% in 2000 and from 38% in 1990. Corporate investment is normally a big driver in a recovery. Not this time! Hence the lousy recovery. ..."
          "... Financial engineering takes precedence over actual engineering in the minds of CEOs and CFOs. A company buying its own shares creates additional demand for those shares. It's supposed to drive up the share price. The hoopla surrounding buyback announcements drives up prices too. Buybacks also reduce the number of outstanding shares, thus increase the earnings per share, even when net income is declining. ..."
          "... But when companies load up on debt to fund buybacks while slashing investment in productive activities and innovation, it has consequences for revenues down the road. And now that magic trick to increase shareholder value has become a toxic mix. Shares of buyback queens are getting hammered. ..."
          "... Interesting that you mention ruse, relating to "buy-backs"…from my POV, it seems like they've legalized insider trading or engineered (a) loophole(s). ..."
          "... On a somewhat related perspective on subterfuge. The language of "affordability" has proven to be insidiously clever. Not only does it reinforce and perpetuate the myth of "deserts", but camouflages the means of embezzling the means of distribution. Isn't distribution, really, the only rational purpose of finance, i.e., as a means of distribution as opposed to a means of embezzlement? ..."
          "... "Results of all this financial engineering? Revenues of the S P 500 companies are falling for the fourth quarter in a row – the worst such spell since the Financial Crisis." ..."
          November 21, 2015 | naked capitalism

          By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

          Magic trick turns into toxic mix.

          Stocks have been on a tear to nowhere this year. Now investors are praying for a Santa rally to pull them out of the mire. They're counting on desperate amounts of share buybacks that companies fund by loading up on debt. But the magic trick that had performed miracles over the past few years is backfiring.

          And there's a reason.

          IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R&D. It's staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. And its stock is down 38% since March 2013.

          Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R&D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R&D and capital expenditures. They're all doing it.

          "Activist investors" – hedge funds – have been clamoring for it. An investigative report by Reuters, titled The Cannibalized Company, lined some of them up:

          In March, General Motors Co acceded to a $5 billion share buyback to satisfy investor Harry Wilson. He had threatened a proxy fight if the auto maker didn't distribute some of the $25 billion cash hoard it had built up after emerging from bankruptcy just a few years earlier.

          DuPont early this year announced a $4 billion buyback program – on top of a $5 billion program announced a year earlier – to beat back activist investor Nelson Peltz's Trian Fund Management, which was seeking four board seats to get its way.

          In March, Qualcomm Inc., under pressure from hedge fund Jana Partners, agreed to boost its program to purchase $10 billion of its shares over the next 12 months; the company already had an existing $7.8 billion buyback program and a commitment to return three quarters of its free cash flow to shareholders.

          And in July, Qualcomm announced 5,000 layoffs. It's hard to innovate when you're trying to please a hedge fund.

          CEOs with a long-term outlook and a focus on innovation and investment, rather than financial engineering, come under intense pressure.

          "None of it is optional; if you ignore them, you go away," Russ Daniels, a tech executive with 15 years at Apple and 13 years at HP, told Reuters. "It's all just resource allocation," he said. "The situation right now is there are a lot of investors who believe that they can make a better decision about how to apply that resource than the management of the business can."

          Nearly 60% of the 3,297 publicly traded non-financial US companies Reuters analyzed have engaged in share buybacks since 2010. Last year, the money spent on buybacks and dividends exceeded net income for the first time in a non-recession period.

          This year, for the 613 companies that have reported earnings for fiscal 2015, share buybacks hit a record $520 billion. They also paid $365 billion in dividends, for a total of $885 billion, against their combined net income of $847 billion.

          Buybacks and dividends amount to 113% of capital spending among companies that have repurchased shares since 2010, up from 60% in 2000 and from 38% in 1990. Corporate investment is normally a big driver in a recovery. Not this time! Hence the lousy recovery.

          Financial engineering takes precedence over actual engineering in the minds of CEOs and CFOs. A company buying its own shares creates additional demand for those shares. It's supposed to drive up the share price. The hoopla surrounding buyback announcements drives up prices too. Buybacks also reduce the number of outstanding shares, thus increase the earnings per share, even when net income is declining.

          "Serving customers, creating innovative new products, employing workers, taking care of the environment … are NOT the objectives of firms," sais Itzhak Ben-David, a finance professor of Ohio State University, a buyback proponent, according to Reuters. "These are components in the process that have the goal of maximizing shareholders' value."

          But when companies load up on debt to fund buybacks while slashing investment in productive activities and innovation, it has consequences for revenues down the road. And now that magic trick to increase shareholder value has become a toxic mix. Shares of buyback queens are getting hammered.

          Citigroup credit analysts looked into the extent to which this is happening – and why. Christine Hughes, Chief Investment Strategist at OtterWood Capital, summarized the Citi report this way: "This dynamic of borrowing from bondholders to pay shareholders may be coming to an end…."

          Their chart (via OtterWood Capital) shows that about half of the cumulative outperformance of these buyback queens from 2012 through 2014 has been frittered away this year, as their shares, IBM-like, have swooned...

          ... ... ...

          Selected Skeptical Comments

          Mbuna, November 21, 2015 at 7:31 am

          Me thinks Wolf is slightly barking up the wrong tree here. What needs to be looked at is how buy backs affect executive pay. "Shareholder value" is more often than not a ruse?

          ng, November 21, 2015 at 8:58 am

          probably, in some or most cases, but the effect on the stock is the same.

          Alejandro, November 21, 2015 at 9:19 am

          Interesting that you mention ruse, relating to "buy-backs"…from my POV, it seems like they've legalized insider trading or engineered (a) loophole(s).

          On a somewhat related perspective on subterfuge. The language of "affordability" has proven to be insidiously clever. Not only does it reinforce and perpetuate the myth of "deserts", but camouflages the means of embezzling the means of distribution. Isn't distribution, really, the only rational purpose of finance, i.e., as a means of distribution as opposed to a means of embezzlement?

          Jim, November 21, 2015 at 10:42 am

          More nuance and less dogma please. The dogmatic tone really hurts what could otherwise be a fine but more-qualified position.

          "Results of all this financial engineering? Revenues of the S&P 500 companies are falling for the fourth quarter in a row – the worst such spell since the Financial Crisis."

          Eh, no. No question that buybacks *can* be asset-stripping and often are, but unless you tie capital allocation decisions closer to investment in the business such that they're mutually exclusive, this is specious and a reach. No one invests if they can't see the return. It would be just as easy to say that they're buying back stock because revenue is slipping and they have no other investment opportunities.

          Revenues are falling in large part because these largest companies derive an ABSOLUTELY HUGE portion of their business overseas and the dollar has been ridiculously strong in the last 12-15 months. Rates are poised to rise, and the easy Fed-inspired rate arbitrage vis a vis stocks and "risk on" trade are closing. How about a little more context instead of just dogma?

          John Malone made a career out of financial engineering, something like 30% annual returns for the 25 years of his CEO tenure at TCI. Buybacks were a huge part of that.

          Perhaps an analysis of the monopolistic positions of so many American businesses that allow them the wherewithal to underinvest and still buy back huge amounts of stock? If we had a more competitive economy, companies would have less ability to underinvest. Ultimately, I think buybacks are more a result than a cause of dysfunction, but certainly not always bad.

          [Nov 21, 2015] On the Lack of Courage in Regulators

          Notable quotes:
          "... Can courage trump careerism? I believe that for the forseeable future the answer is "No". People are highly incentivized to take the path of least resistance and simply go along to get along. ..."
          "... It would be wrong to excuse the inaction of the Obama DOJ and SEC crews as being the result of some larger "corrosion of our collective values." The capos in those crews are the people doing the corroding, and not one of them was forced to (not) do what they did. Notice that every last one of the initial bunch is presently being paid, by Wall Street, to the tune of millions of dollars per year. They opted to cover up crimes and take a pay-off in exchange. And they are owed punishment. ..."
          Nov 21, 2015 | naked capitalism
          I'm embedding the text of a short but must-read speech by Robert Jenkins, a former banker, hedge fund manager, and regulator (Bank of England) who is now a Senior Fellow at Better Markets. If nothing else, be sure to look at the partial list of bank misconduct and activities currently under investigation.

          Jenkins points out that regulatory reform has fallen short on multiple fronts, and perhaps the most important is courage. Readers may understandably object to him giving lip service to the idea that Bernanke acted courageously during the crisis (serving the needs of banks via unconventional means is not tantamount to courage), but he is a Serious Person, and making a case against Bernanke would detract from his bigger message about the lack of guts post-crisis.

          Now there have been exceptions, like Benjamin Lawsky, Sheila Bair, Gary Gensler, Kara Stein, and in a more insider capacity, Danny Tarullo. Contrast their examples with the typical cronyism and lame rationalizations for inaction, particularly by the Department of Justice and the SEC. It's not obvious how to reverse the corrosion of our collective values. But it is important to remember than norms can shift much faster than most people think possible, with, for instance, the 1950s followed by the radicalism and shifts in social values of the 1960s, which conservative elements are still fighting to roll back.

          Michael G

          A link to a text version of the speech for those with uncooperative computers
          http://www.ianfraser.org/why-well-all-end-up-paying-for-the-feeble-response-to-the-banking-crisis/
          Worth reading

          James Levy

          We do not live in an economy or a polity that breeds or rewards the kind of public-mindedness and civic virtue that gives you courage. The author thinks the system needs courageous people, but posits no conception of where they would come from and how they would thrive in the current system (news flash: they won't). So this is a classic "I see the problem clearly but can't see that the solution is impossible under the current system" piece.

          TMock

          Agreed.

          For those who desire real solutions, try this…

          The Universal Principles of Sustainable Development

          http://www.triplepundit.com/2011/02/universal-principles-sustainable-development/

          Norb

          In Tavis Smiley's book, My Journey with Maya Angelou, he recounts an ongoing discussion the two of them entertained throughout the years concerning which trait, Love or Courage, was more important in realizing a full life. Angelou argued that acting courageously was the most important. Smiley saw love as the moving force. While important and moving, the discussion has the dead-end quality of not being able to move past the current system of injustice. I say this because in the end, both support incremental change to the existing system as the means to bring about social justice. The powerful elite have perfected the manipulation of incremental change to render it powerless.

          When trying to change a social system, courage is needed. Courage to form a vision of the future that is based on public-mindedness and civic virtues that bring justice into the world. Our current leaders are delivering the exact opposite of civic justice. Its time to call them out on their duplicity, and ignore their vision of the future.

          The courage that is needed today is not the courage to stand up to the criminals running things and somehow make them change. It is the courage to make them irrelevant. Change will come from the bottom up, one person at a time.

          cnchal

          And when one shows up, look what happens.

          The disturbing fact is that laws have been broken but law breaking has not touched senior management.

          If they knew, then they were complicit. If they did not, then they were incompetent. Alternatively, if the deserving dozens have indeed been banned from the field let the list be known – that we might see some of that "professional ostracism" of which Governor Carney speaks. One person who did lose his position and quite publicly at that was Martin Wheatley, the UK's courageous conduct enforcer.

          Meanwhile the chairman of Europe's largest bank, Douglas Flint at HSBC, remains in situ – despite having been on the board since 1995; despite having signed off on the acquisition of Household Finance; and despite having had oversight of tax entangled subsidiaries in Switzerland and money laundering units in Mexico. Oh, and you'll love this: the recently retired CEO of Standard Chartered is reportedly an advisor to Her Majesty's Government. Standard Chartered was among the first to be investigated for violations of rogue regime sanctions. The bank was fined heavily and may be so again.

          Courageous people get fired, which leads to no courageous people left.

          GlassHammer

          Can courage trump careerism? I believe that for the forseeable future the answer is "No". People are highly incentivized to take the path of least resistance and simply go along to get along.

          susan the other

          By extreme necessity (created by total dysfunction) we will probably wind up with planned and coordinated economies that do not rely on speculation & credit to come up with the next great idea. Those ideas will be forced to come from the top down. And the problems of unregulated capitalism frantically chumming for inspiration and extreme profits will shrink back down from a world-eating monster to just a fox or two.

          Oliver Budde

          It would be wrong to excuse the inaction of the Obama DOJ and SEC crews as being the result of some larger "corrosion of our collective values." The capos in those crews are the people doing the corroding, and not one of them was forced to (not) do what they did. Notice that every last one of the initial bunch is presently being paid, by Wall Street, to the tune of millions of dollars per year. They opted to cover up crimes and take a pay-off in exchange. And they are owed punishment.

          Malcolm MacLeod, MD

          Oliver: I believe that you hit the nail on the head, and
          I wholeheartedly agree.

          [Nov 21, 2015] Ilargi The Great Fall Of China Started At Least 4 Years Ago

          Notable quotes:
          "... The biggest market in the world today is derivatives, money making money without a useful product or service in sight. With the market in derivatives being ten times larger than global GDP we can see that making useful products and providing useful services is nearly irrelevant even today. ..."
          "... "When Capitalism reaches its zenith, everyone will be an investor and no one will be doing anything." ..."
          "... This problem of debt vs income seems to reflect the ongoing financialization (extraction, not to be confused with financing) of the global economy rather than a focus on capital development of people and the social and productive infrastructure. ..."
          "... The "new model" was inefficient (too many fingers in the pie, all of them extracting value), highly risky (often Ponzi finance from the beginning with reverse amortization), and critically dependent on rising home prices. Even leaving aside the pervasive fraud, the model was diametrically opposed to the public interest, that is, the promotion of the capital development of the economy. It left behind whole neighborhoods of abandoned homes as well as new home developments that could not be sold. ..."
          "... In my understanding, the Great Depression was an implosion of the credit system after a period of over investment in productive capacity. The investors failing to pay the workers enough to buy the extra goods produced. The projected returns never materialised to pay back the debt… Boom! ..."
          "... China still has implicit state control of the banking sector, they may still have the political will to make any bad debt disappear with the puff of a fountain pen. That option is always available to a sovereign. ..."
          "... They specialized in mass production the way agribusiness has here, where the production is not where the consumption is. It's as if all the pig farmers of North Carolina and corn growers in Iowa woke up one morning and found out that the people of the Eastern Seaboard had all been put on a starvation diet. The economic results in the grain belt would not be pretty. Ditto China. ..."
          "... Except that China ain't Iowa, they can create a middle class as big as Europe and US combined. ..."
          "... It's just anathema for the ruling class to give the little guys a break. ..."
          "... The global glut of oil and other resources can't just be attributed to rising production in "tight oil". Somehow the Powers that be are hiding a great deal of economic contraction. If the world economy were growing it would need oil, copper, lead, zinc, wood and wood pulp, gold, and other metals as inputs. What I want to know is the extent of the cover-up, and what the global economy really looks like. ..."
          "... We are not competent to forecast the future yet. Even the weather surprises us. Its also the case that people who do have relevant data are quite likely to convert that into profit rather than share it. ..."
          "... It's the collapse of bonded warehouse copper/aluminum/etc. lending frauds and all that rehypothecation. I don't think it's just a problem in end demand. It's a problem in the derivatives/futures market. ..."
          "... Here is a very good case study for why people are always wrong about economy and markets. What happen to all the currency manipulators like Paul Krugman? ..."
          Nov 20, 2015 | naked capitalism
          Keith, November 20, 2015 at 7:41 am

          We shouldn't be too surprised at falling commodity prices.

          Using raw materials to make real things is all very 20th Century, financial engineering is the stuff of the 21st Century.

          When Capitalism reaches its zenith, everyone will be an investor and no one will be doing anything.

          Central Bank inflated asset bubbles will provide for all.

          The biggest market in the world today is derivatives, money making money without a useful product or service in sight. With the market in derivatives being ten times larger than global GDP we can see that making useful products and providing useful services is nearly irrelevant even today.

          We are nearly there.

          fresno dan, November 20, 2015 at 10:59 am

          "When Capitalism reaches its zenith, everyone will be an investor and no one will be doing anything."

          +1000
          Ah, that glorious day when we're all rich, rich, RICHer than Midas from interest, dividends, and rents!!!
          Just to amuse myself, I intend to be a dog poop scooper – and pick up some pocket change of 1 million dollars a poop…

          MyLessThanPrimeBeef, November 20, 2015 at 12:37 pm

          Money making money.

          Be careful.

          It's like 'light seeking light doth light of light beguile.'

          Money seeking money and money will be of money beguiled.

          skippy, November 20, 2015 at 8:29 am

          Who cares about Brent when transport is going poof….

          financial matters, November 20, 2015 at 8:45 am

          This problem of debt vs income seems to reflect the ongoing financialization (extraction, not to be confused with financing) of the global economy rather than a focus on capital development of people and the social and productive infrastructure.

          I liked how Wray and Mazzucato linked the two in their Mack the Turtle analogy.

          "Underlying all of this financialization was the homeowner's income-something like Dr. Seuss's King Yertle the Turtle-with layer upon layer of financial instruments, all of which were supported by Mack the turtle's mortgage payments. The system collapsed because Mack fell delinquent on payments he could not possibly have met: the house was overpriced (and the mortgage could have been for more than 100% of the price!), the mortgage terms were too unfavorable, the fees collected by all the links in the home mortgage finance food chain were too large, Mack had to take a cut of pay and hours as the economy slowed, and the late fees piled up (fraudulently, in many cases as mortgage servicers "lost" payments).

          The "new model" was inefficient (too many fingers in the pie, all of them extracting value), highly risky (often Ponzi finance from the beginning with reverse amortization), and critically dependent on rising home prices. Even leaving aside the pervasive fraud, the model was diametrically opposed to the public interest, that is, the promotion of the capital development of the economy. It left behind whole neighborhoods of abandoned homes as well as new home developments that could not be sold."

          Mission Oriented Finance

          Carlos, November 20, 2015 at 9:34 am

          Interesting, the supposition here is that China is heading for a depression similar to the Great Depression.

          In my understanding, the Great Depression was an implosion of the credit system after a period of over investment in productive capacity. The investors failing to pay the workers enough to buy the extra goods produced. The projected returns never materialised to pay back the debt… Boom!

          China could well be headed down that road, there isn't enough money getting into the pockets of ordinary Chinese that's for sure. Elites everywhere just can't bring themselves to give a break for those at the bottom.

          China still has implicit state control of the banking sector, they may still have the political will to make any bad debt disappear with the puff of a fountain pen. That option is always available to a sovereign.

          Then again they may just realize in time, someone needs to be paid to buy all the junk.

          James Levy, November 20, 2015 at 12:51 pm

          They were counting on us and the Europeans, but we've let them down. The race to the bottom erased the global middle class that could buy Chinese consumer products.

          They specialized in mass production the way agribusiness has here, where the production is not where the consumption is. It's as if all the pig farmers of North Carolina and corn growers in Iowa woke up one morning and found out that the people of the Eastern Seaboard had all been put on a starvation diet. The economic results in the grain belt would not be pretty. Ditto China.

          Carlos, November 21, 2015 at 1:54 am

          So the corn growers need to eat more corn, that's my logic.

          Except that China ain't Iowa, they can create a middle class as big as Europe and US combined.

          It's just anathema for the ruling class to give the little guys a break.

          James Levy, November 20, 2015 at 12:56 pm

          The global glut of oil and other resources can't just be attributed to rising production in "tight oil". Somehow the Powers that be are hiding a great deal of economic contraction. If the world economy were growing it would need oil, copper, lead, zinc, wood and wood pulp, gold, and other metals as inputs. What I want to know is the extent of the cover-up, and what the global economy really looks like.

          susan the other, November 20, 2015 at 2:22 pm

          Where were you in 2011? I was here reading NC. One of the Links posted was a graph of the abrupt shutdown of China's economy – It was a cliffscape.

          Very long vertical drop off. So dramatic I could hardly believe it and I said I was having trouble catching my breath. Another commenter said it looked like a tsunami. Of exported deflation as it turns out.

          Things have been extreme since 2007 when the banksters began to fall; 2008 when Lehman crashed (just after the Beijing Olympics, how convenient for China…) and credit shut down. China was doin' just fine until then. In spite of the irrational mess in global capitalist eonomix.

          The only way to remedy it was to shut it down I guess. That's really not very fine-tuned for a system the whole world relies on, is it?

          ewmayer, November 20, 2015 at 6:09 pm

          Related, this Pollyanna-ish laff-riot op-ed from Ross Gittins, the economics editor of the Sydney Morning Herald:

          Don't buy the China doom and gloom stories just yet

          Proceeds from the laughable assumption that official China economic numbers 'may not be as reliable as we'd like' rather than being 'persistently and hugely faked,' (especially during slowdowns) and ignores that the housing-market slowdown and huge unsold-RE-overhang will also necessarily be accompanied by a price crash, hence a huge amount of toxic debt being exposed – really basic boom/bust dynamics.

          And no demographic boom coming to the rescue, either. (But he does repeatedly invoke the magic 'service economy boom' mantra mentioned by Ilargi.) Thankfully most of the commenters rightly take the author to task.

          MyLessThanPrimeBeef, November 20, 2015 at 6:32 pm

          Not too long ago, some here were still not buying the doom and gloom stories.

          I don't have if they have been persuaded otherwise since.

          RBHoughton, November 20, 2015 at 7:50 pm

          Couple of thoughts:

          Firstly, its only China's buying that stops oil falling even further Sr Ilargi.

          Secondly its a Peoples' Republic – employment must be maintained.

          We are not competent to forecast the future yet. Even the weather surprises us. Its also the case that people who do have relevant data are quite likely to convert that into profit rather than share it.

          Don't worry, be happy. It will be OK.

          ewmayer, November 21, 2015 at 2:29 am

          Tangential Friday night funny: What's in a name?

          Received a small airmail parcel today containing some replacement attachments for my Dremel moto-tool … package was addressed from Shenzen, specifically the "Fuming Manufacturing Park".

          Wade Riddick, November 21, 2015 at 4:57 am

          It's the collapse of bonded warehouse copper/aluminum/etc. lending frauds and all that rehypothecation. I don't think it's just a problem in end demand. It's a problem in the derivatives/futures market.

          Ggg, November 21, 2015 at 6:53 am

          Here is a very good case study for why people are always wrong about economy and markets. What happen to all the currency manipulators like Paul Krugman?

          [Nov 18, 2015] Can Anything Stop Companies From Loading Up on Debt UBS Says No.

          Notable quotes:
          "... When it comes to the hubris of corporate chief financial officers, who have been more than happy leveraging up balance sheets in order to reward shareholders, the analysts didn't mince words. We find that corporate CFOs historically are inherently backward-looking when setting corporate financing decisions, relying on past extrapolations of economic activity, even when current market pricing suggests future investment returns may be lower, they wrote. ..."
          "... That leaves downgrades by credit-rating agencies as one catalyst that could spark a turn in the cycle; downgrades of corporate credit have already exceeded upgrades this year at some of the bond graders. ..."
          "... Might the rating agencies spoil the party? they asked. In the end we believe strong economic interests will overwhelm rationale considerations. Rating agencies remain heavily dependent on new issuance activity, face significant competitive pressures (as issuers will select two of three ratings) and appear unconcerned with where we are in the credit cycle (e.g., see Moody's latest conference call). ..."
          "... With UBS having taken all those potential catalysts firmly off the table, that leaves just fundamentals to worry about. Who, for the past few years, has been worrying about those? [Sarcasm? - Editor] ..."
          finance.yahoo.com

          It's no secret that companies have been taking advantage of years of low interest rates to sell cheap debt to eager investors, locking in lower funding costs that have allowed them to go on a spree of share buybacks and mergers and acquisitions.

          With fresh evidence that investors are becoming more discerning when it comes to corporate credit as they approach the first interest rate rise in the U.S. in almost a decade, it's worth asking whether anything might stop the trend of companies assuming more and more debt on their balance sheets.

          ... ... ...

          For a start, they note that higher funding costs are unlikely to dissuade companies from continuing to tap the debt market since, even after a rate hike, financing costs will remain near historic lows. "The predominant reason is the Fed[eral Reserve] is anchoring low interest rates," the analysts wrote.

          When it comes to the hubris of corporate chief financial officers, who have been more than happy leveraging up balance sheets in order to reward shareholders, the analysts didn't mince words. "We find that corporate CFOs historically are inherently backward-looking when setting corporate financing decisions, relying on past extrapolations of economic activity, even when current market pricing suggests future investment returns may be lower," they wrote. "Several management teams have been on the road indicating higher funding costs of up to 100 to 200 basis points would not impede attractive M&A deals, in their view."

          Higher market volatility has often been cited as one factor that could knock the corporate credit market off its seat...

          That leaves downgrades by credit-rating agencies as one catalyst that could spark a turn in the cycle; downgrades of corporate credit have already exceeded upgrades this year at some of the bond graders. Here, Mish and Caprio offered some stunningly blunt words. "Might the rating agencies spoil the party?" they asked. "In the end we believe strong economic interests will overwhelm rationale considerations. Rating agencies remain heavily dependent on new issuance activity, face significant competitive pressures (as issuers will select two of three ratings) and appear unconcerned with where we are in the credit cycle (e.g., see Moody's latest conference call)."

          With UBS having taken all those potential catalysts firmly off the table, that leaves just fundamentals to worry about. Who, for the past few years, has been worrying about those? [Sarcasm? - Editor]

          "Bottom line, we struggle to envision an end to the releveraging phenomenon-absent a substantial correction in corporate earnings and/or broader risk assets," concluded the UBS analysts.

          [Nov 15, 2015] Election 2016 Democratic debate transcript Clinton, Sanders, OMalley in Iowa

          Hillary tried to play the gender card and the 9/11 card in an attempt to escape to accusation (actually a provable fact) that she is a Wall Street sheel. "Why has Wall Street been the major campaign contributor to Hillary Clinton?" Sanders asked loudly, concluding that big contributors only give because "They expect to get something. Everybody knows it."
          ...Clinton asserted that under her bank-regulation plan, if Wall Street institutions don't play by the rules "I will break them up."
          Sanders minced her defense into peaces: "Wall Street play by the rules? Who are we kidding?! The business model for Wall Street is fraud," Sanders fired back.
          A short time later, the moderators got a tweet calling her out for "invoking 9/11" to justify taking donations from Wall Street. One tweeter said they'd never seen a candidate "invoke 9/11 to champion Wall Street. What does that have to do with taking big donations," Clinton was asked.
          Sanders said that there's no getting around the fact that Wall Street has become a dominant political power and its "business model is greed and fraud, and for the sake of our economy major banks must be broken up."
          Bernie compared himself to Ike, scoring one of the few real laugh lines of the night. CBS News moderator Nancy Cordes asked Sanders how he's going to pay for expensive programs such as his tuition-free college plan. By taxing the wealthy and big corporations, he says. Asked how much of a tax hike he's planning to stick them with, he responded, "We haven't come up with an exact number yet … But it will not be as high as the number under Dwight D. Eisenhower which was 90%," Sanders said of the Republican president.
          "I'm not that much of a socialist compared to Eisenhower," Sanders concluded, to guffaws from the crowd.
          CBS News

          JOHN DICKERSON:

          Senator Sanders, let me just follow this line of thinking. You've criticized then Senator Clinton's vote. Do you have anything to criticize in the way she performed as secretary of state?

          BERNIE SANDERS:

          I think we have a disagreement. And-- the disagreement is that not only did I vote against the war in Iraq, if you look at history, John, you will find that regime change-- whether it was in the early '50s in Iran, whether it was toppling Salvador Allende in Chile or whether it was overthrowing the government Guatemala way back when-- these invasions, these-- these toppling of governments, regime changes have unintended consequences. I would say that on this issue I'm a little bit more conservative than the secretary.

          JOHN DICKERSON:

          Here, let me go--

          MARTIN O'MALLEY:

          John, may I-- may I interject here? Secretary Clinton also said that we left the h-- it was not just the invasion of Iraq which Secretary Clinton voted for and has since said was a big mistake, and indeed it was. But it was also the cascading effects that followed that.

          It was also the disbanding of-- many elements of the Iraqi army that are now showing up as part of ISIS. It was-- country after country without making the investment in human intelligence to understand who the new leaders were and the new forces were that are coming up. We need to be much more far f-- thinking in this new 21st century era of-- of nation state failures and conflict. It's not just about getting rid of a single dictator. It is about understanding the secondary and third consequences that fall next.

          JOHN DICKERSON:

          Governor O'Malley, I wanna ask you a question and you can add whatever you'd like to. But let me ask you, is the world too dangerous a place for a governor who has no foreign policy experience?

          MARTIN O'MALLEY:

          John, the world is a very dangerous place. But the world is not too dangerous of a place for the United States of America provided we act according to our principles, provided we act intelligently. I mean, let's talk about this arc of-- of instability that Secretary Clinton talked about.

          Libya is now a mess. Syria is a mess. Iraq is a mess. Afghanistan is a mess. As Americans we have shown ourselves-- to have the greatest military on the face of the planet. But we are not so very good at anticipating threats and appreciating just how difficult it is to build up stable democracies and make the investments in sustainable development that we must as the nation if we are to attack the root causes of-- of the source of-- of instability.

          And I wanted to add one other thing, John, and I think it's important for all of us on this stage. I was in Burlington, Iowa and a mom of a service member of ours who served two duties in Iraq said, "Governor O'Malley, please, when you're with your other candidates and colleagues on-- on stage, please don't use the term boots on Iraq-- on the ground. Please don't use the term boots on the ground. My son is not a pair of boots on the ground."

          These are American soldiers and we fail them when we fail to take into account what happens the day after a dictator falls. And when we fall to act with a whole of government approach with sustainable development, diplomacy and our economic power in-- alignment with our principles.

          BERNIE SANDERS:

          But when you talk about the long-term consequences of war let's talk about the men and women who came home from war. The 500,000 who came home with P.T.S.D. and traumatic brain injury. And I would hope that in the midst of all of this discussion this country makes certain that we do not turn our backs on the men and women who put their lives on the line to defend us. And that we stand with them as they have stood with us.

          JOHN DICKERSON:

          Senator Sanders, you've-- you've said that the donations to Secretary Clinton are compromising. So what did you think of her answer?

          BERNIE SANDERS:

          Not good enough. (LAUGH) Here's the story. I mean, you know, let's not be naive about it. Why do-- why over her political career has Wall Street a major-- the major-- campaign contributor to Hillary Clinton? You know, maybe they're dumb and they don't know what they're gonna get. But I don't think so.

          Here is the major issue when we talk about Wall Street, it ain't complicated. You got six financial institutions today that have assets of 56 per-- equivalent to 50-- six percent of the GDP in America. They issue two thirds of the credit cards and one third of the mortgages. If Teddy Roosevelt, the good republican, were alive today you know what he'd say? "Break them up. Reestablish (APPLAUSE) (UNINTEL) like Teddy Roosevelt (UNINTEL) that is leadership. So I am the only candidate up here that doesn't have a super PAC. I'm not asking Wall Street or the billionaires for money. I will break up these banks, support community banks and credit unions-- credit unions. That's the future of banking in America.

          JOHN DICKERSON:

          Quick follow-up because you-- you-- (APPLAUSE) Secretary Clinton, you'll get a chance to respond. You said they know what they're going to get. What are they gonna get?

          BERNIE SANDERS:

          I have never heard a candidate, never, who's received huge amounts of money from oil, from coal, from Wall Street, from the military industrial complex, not one candidate, go, "OH, these-- these campaign contributions will not influence me. I'm gonna be independent." Now, why do they make millions of dollars of campaign contributions? They expect to get something. Everybody knows that. Once again, I am running a campaign differently than any other candidate. We are relying on small campaign donors, $750,000 and $30 apiece. That's who I'm indebted to.

          BERNIE SANDERS:

          Here's-- she touches on two broad issues. It's not just Wall Street. It's campaigns, a corrupt campaign finance system. And it is easy to talk the talk about ending-- Citizens United. But what I think we need to do is show by example that we are prepared to not rely on large corporations and Wall Street for campaign contributions.

          And that's what I'm doing. In terms of Wall Street I respectfully disagree with you, Madame Secretary in the sense that the issue is when you have such incredible power and such incredible wealth, when you have Wall Street spending five billion dollars over a ten year period to get re-- to get deregulated the only answer that I know is break them up, reestablish Glass Steagall.

          JOHN DICKERSON:

          Senator, we have to get Senator O'Malley in. But no-- along with your answer how many Wall Street-- veterans would you have in your administration?

          MARTIN O'MALLEY:

          Well, I'll tell you what, I've said this before, I-- I don't-- I believe that we actually need some new economic thinking in the White House. And I would not have Robert Rubin or Larry Summers with all due respect, Secretary Clinton, to you and to them, back on my council of economic advisors.

          HILLARY CLINTON:

          Anyone (UNINTEL PHRASE).

          MARTIN O'MALLEY:

          If they were architects, sure, we'll-- we'll have-- we'll have an inclusive group. But I won't be taking my orders from Wall Street. And-- look, let me say this-- I put out a proposal-- I was on the front line when people lost their homes, when people lost their jobs.

          I was on the front lines as the governor-- fighting against-- fighting that battle. Our economy was wrecked by the big banks of Wall Street. And Secretary Clinton-- when you put out your proposal (LAUGH) on Wall Street it was greeted by many as quote/ unquote weak tea. It is weak tea. It is not what the people expect of our country. We expect that our president will protect the main street economy from excesses on Wall Street. And that's why Bernie's right. We need to reinstate a modern version of Glass Steagall and we should have done it already. (APPLAUSE)

          KATHIE OBRADOVICH:

          And I will also go after executives who are responsible for the decisions that have such bad consequences for our country. (APPLAUSE)

          BERNIE SANDERS:

          Look, I don't know-- with all due respect to the secretary, Wall Street played by the rules. Who are we kidding? The business model of Wall Street is fraud. That's what it is. And we-- we have-- (APPLAUSE) and let me make this promise, one of the problems we have had I think all-- all Americans understand it is whether it's republican administration or democratic administration we have seen Wall Street and Goldman Sachs dominate administrations. Here's my promise Wall Street representatives will not be in my cabinet. (APPLAUSE)

          BERNIE SANDERS:

          But let's-- let me hear it-- if there's any difference between the secretary and myself. I have voted time and again to-- for-- for the background checks. And I wanna see it improved and expanded. I wanna see them do away with the gun show loophole. In 1988 I lost an election because I said we should not have assault weapons on the streets of America.

          We have to do away with the strong man proposal. We need radical changes in mental health in America. So somebody who's suicidal or homicidal can get the emergency care they need. But we have-- I don't know that there's any disagreement here.

          MARTIN O'MALLEY:

          John, this is another one of those examples. Look, we have-- we have a lot of work to do. And we're the only nation on the planet that buries as many of our people from gun violence as we do in my own state after they-- the children in that Connecticut classroom were gunned down, we passed comprehensive-- gun safety legislation, background checks, ban on assault weapons.

          And senator, I think we do need to repeal that immunity that you granted to the gun industry. But Secretary Clinton, you've been on three sides of this. When you ran in 2000 you said that we needed federal robust regulations. Then in 2008 you were portraying yourself as Annie Oakley and saying that we don't need those regulation on the federal level. And now you're coming back around here. So John, there's a big difference between leading by polls and leading with principle. We got it done in my state by leading with principle. And that's what we need to do as a party, comprehensive gun--

          MARTIN O'MALLEY:

          John, there is not-- a serious economist who would disagree that the six big banks of Wall Street have taken on so much power and that all of us are still on the hook to bail them out on their bad debts. That's not capitalism, Secretary Clinton-- Clinton, that's crummy capitalism.

          That's a wonderful business model if you place that bet-- the taxpayers bail you out. But if you place good ones you pocket it. Look, I don't believe that the model-- there's lots of good people that work in finance, Secretary Sanders. But Secretary Clinton, we need to step up. And we need to protect main street from Wall Street. And you can't do that by-- by campaigning as the candidate of Wall Street. I am not the candidate of Wall Street. And I encourage--

          BERNIE SANDERS:

          No, it's not throwing-- it is an extraordinary investment for this country. In Germany, many other countries do it already. In fact, if you remember, 50, 60 years ago, University of California, City University of New York were virtually tuition-free. Here it's a new (?) story.

          It's not just that college graduates should be $50,000 or $100,000 in debt. More importantly, I want kids in Burlington, Vermont, or Baltimore, Maryland, who are in the six grade or the eighth grade who don't have a lot of money, whose parents that-- like my parents, may never have gone to college. You know what I want, Kevin? I want those kids to know that if they study hard, they do their homework, regardless of the income of their families, they will in fact be able to great a college education. Because we're gonna make public colleges and universities tuition-free. This is revolutionary for education in America. It will give hope for millions of young people.

          BERNIE SANDERS:

          It's not gonna happen tomorrow. And it's probably not gonna happen until you have real campaign finance reform and get rid of all these super PACs and the power of the insurance companies and the drug companies. But at the end of the day, Nancy, here is a question. In this great country of ours, with so much intelligence, with so much capabilities, why do we remain the only (UNINTEL) country on earth that does not guarantee healthcare to all people as a right?

          Why do we continue to get ripped off by the drug companies who can charge us any prices they want? Why is it that we are spending per capita far, far more than Canada, which is a hundred miles away from my door, that guarantees healthcare to all people? It will not happen tomorrow. But when millions of people stand up and are prepared to take on the insurance companies and the drug companies, it will happen and I will lead that effort. Medicare for all, single-payer system is the way we should go. (APPLAUSE)

          BERNIE SANDERS:

          Well-- I had the honor of being chairman of the U.S. Senate Committee on Veteran Affairs for two years. And in that capacity, I met with just an extraordinary group of people from World War II, from Korea, Vietnam, all of the wars. People who came back from Iraq and Afghanistan without legs, without arms. And I've been determined to do everything that I could to make VA healthcare the best in the world, to expand benefits to the men and women who put their lives on the line to defend (UNINTEL).

          And we brought together legislation, supported by the American Legion, the VFW, the DAV, Vietnam Vets, all of the veterans' organizations, which was comprehensive, clearly the best (UNINTEL) for veterans' legislation brought forth in decades. I could only get two Republican votes on that. And after 56 votes, we didn't get 60. So what I have to do then is go back and start working on a bill that wasn't the bill that I wanted.

          To (UNINTEL) people like John McCain, to (UNINTEL) people like Jeff Miller, the Republican chairman of the House, and work on a bill. It wasn't the bill that I wanted. But yet, it turns out to be one of the most significant pieces of veterans' legislation passed in recent history. You know, the crisis was, I lost what I wanted. But I have to stand up and come back and get the best that we could.

          JOHN DICKERSON:

          All right, Senator Sanders. We end-- (APPLAUSE) we've ended the evening on crisis, which underscores and reminds us again of what happened last night. Now let's move to closing statements, Governor O'Malley?

          MARTIN O'MALLEY:

          John, thank you. And to all of the people of Iowa, for the role that you've performed in this presidential selection process, if you believe that our country's problems and the threats that we face in this world can only be met with new thinking, new and fresh approaches, then I ask you to join my campaign. Go onto MartinOMalley.com. No hour is too short, no dollar too small.

          If you-- we will not solve our nation's problems by resorting to the divisive ideologies of our past or by returning to polarizing figures from our past. We are at the threshold of a new era of American progress. That it's going to require that we act as Americans, based on our principles. Here at home, making an economy that works for all of us.

          And also, acting according to our principles and constructing a new foreign policy of engagement and collaboration and doing a much better job of identifying threats before they back us into military corners. There is new-- no challenge too great for the United States to confront, provided we have the ability and the courage to put forward new leadership that can move us to those better and safer and more prosperous (UNINTEL). I need your help. Thank you very, very much. (APPLAUSE)

          BERNIE SANDERS:

          This country today has more income and wealth inequality than any major country on earth. We have a corrupt campaign finance system, dominated by super PACs. We're the only major country on earth that doesn't guarantee healthcare to all people. We have the highest rate of childhood poverty. And we're the only in the world, (UNINTEL) the only country that doesn't guarantee paid family and medical leave. That's not the America that I think we should be.

          But in order to bring about the changes that we need, we need a political revolution. Millions of people are gonna have to stand up, turn off the TVs, get involved in the political process, and tell the big monied interests that we are taking back our country. Please go to BernieSanders.com, please become part of the political revolution. Thank you. (CHEERING) (APPLAUSE)

          [Nov 14, 2015] Students across U.S. march over debt, free public college

          Neoliberal college is not about education. It is about getting wealthy a head start to enforce and strengthen separation between the elite and the rest. Other can only complain... But that e fact is the many large companies invite for interview for open positions only of Ivy Leagues graduates. Other do not need to apply. So it is mostly about "Class A" and "Class B" citizens. Talent and hard work can buy buy a ticket for vertical mobility (see some stories below), but that was true in any society. Actually mobility in the USA is below average, despite MSM non-stop brainwashing of the USA citizens about "the land of opportunities", the "American Dream", etc. And exorbitant salaries of University brass is a norm now. you can't change that without changing the neoliberal system as a whole. they are no longer bound by academic ethics. Like Wall Streeters, want to get the most of the life, no matter by what means (the end justifies the means mentality). They are masters of the universe. Others (aka suckers) can go to hell.
          Notable quotes:
          "... Dealing with swiftly mounting student loan debt has been a focus of candidates vying for the White House in 2016. Democratic hopeful Bernie Sanders has vowed to make tuition free at public universities and colleges, and has pledged to cut interest rates for student loans. ..."
          "... I can see having a low, federally-subsidized interest rate on these loans....which I seem to recall having on some of my loans, but anyone wanting anything for free can take a hike, IMHO. ..."
          "... Ever visit a university in a country that has free college education for its' citizens? It's pretty austere. These kids need to think past the clever sound bytes and really consider the effect of what they are asking for. ..."
          "... What really needs to be addressed is the skyrocketing cost of college education PERIOD! At the rate it's going up pretty soon only the children of billionaires will be able to afford to go to college. ..."
          "... College tuition cannot be allowed to just continue to escalate. ..."
          "... If a high school grad can't explain in detail how much cash is needed, and how spending all that cash and time for education is going to provide a positive return on investment, he or she should not be going to college. This should be near the top of things that teens learn in high school. ..."
          "... I get really cynical about all graduates claiming they had no idea how much their loans were going to cost them. ..."
          "... If you didn't bother to read your loan docs before signing, or research likely monthly payments for your loan, that's your fault! ..."
          "... College costs went up far faster than inflation, often because colleges built fancy sports and living facilities...because they figured out these same millennials pick colleges based on those things. ..."
          "... The standard tours take students through fancy facilities that have nothing to do with quality of education. Add declining teaching loads that have decreased from 12 class hours to 3 class hours per week for a professor in the past 25 years and the rise in overhead for non-academic administration overhead positions like chief diversity and inclusion officer and you have expensive college. ..."
          "... These 'loans' are now almost all, Pell Grant underwritten. Cannot Bankrupt on, co-signers and students can lose their Social Security money if defaulting. 1.5 trillion$ of these loans have been packaged, like Home Loans, derivative. What happens to peoples retirement accounts when their Funds have investments in them, what happens to the Primary Dealers when the derivatives bubble bursts? ..."
          "... Where it is free, but only to the select, the performers, most American Students would not qualify in other countries for advanced Ed. ..."
          Nov 14, 2015 | news.yahoo.com

          Students held rallies on college campuses across the United States on Thursday to protest ballooning student loan debt for higher education and rally for tuition-free public colleges and a minimum wage hike for campus workers.

          The demonstrations, dubbed the Million Student March, were planned just two days after thousands of fast-food workers took to the streets in a nationwide day of action pushing for a $15-an-hour minimum wage and union rights for the industry.

          About 50 students from Boston-area colleges gathered at Northeastern University carrying signs that read "Degrees not receipts" and "Is this a school or a corporation?"

          "The student debt crisis is awful. Change starts when people demand it in the street. Not in the White House," said Elan Axelbank, 20, a third year student at Northeastern, who said he was a co-founder of the national action.

          ... ... ...

          "I want to graduate without debt," said Ashley Allison, a 22-year-old student at Boston's Bunker Hill Community College, at the Northeastern rally. "Community college has been kind to me, but if I want to go on, I have to take on debt."

          Dealing with swiftly mounting student loan debt has been a focus of candidates vying for the White House in 2016. Democratic hopeful Bernie Sanders has vowed to make tuition free at public universities and colleges, and has pledged to cut interest rates for student loans.

          ... ... ...

          Andrew Jackson

          Free taxpayer supported public education means more college administrators earning $200,000 or more, more faculty earning $100,000 or more working 8 months a year and more $300 textbooks. Higher education costs are a direct correlation to Federal Student Loans subsiding college bureaucracies, exorbitant salaries for college administrators and faculty.

          terrance

          What fantasy world do these people live in. There is nothing for free and if you borrow tens of thousands of dollars you can't expect later that someone else will pick up your tab. Pucker up bucky, it is your responsibility.

          Furthermore, a lot of this money didn't go to education. I have read where people went back to school so they could borrow money to pay their rent, or even their car payments. As for 15 dollars an hour to sling burgers, grow up.

          sjc

          Having been out of college for a few years, I am curious. I went to a State University. Tuition was high, I had to take loans, I drove a cheap 10 yr old vehicle, but it didn't kill me. My total debt was about the price of a decent new car back then.

          Today, the average student loan debt after graduation is just under $30,000. Around the price of a new car. And these kids are trying to tell us that this is too much of a burden??? Look around any campus these days, and you will see lots of $30,000 cars in the parking lots.

          I can see having a low, federally-subsidized interest rate on these loans....which I seem to recall having on some of my loans, but anyone wanting anything for free can take a hike, IMHO.

          Meed

          Careful what you wish for, kiddies. It's simple math and simple economics (things I learned in school while studying instead of protesting). Every university has a maximum number of students it can support, based on the number and capacity of dorms, classrooms, faculty, etc.

          The tuition rates have always closely matched the amount of easily-accessed loans available - the easier the access to loans, the higher tuition is. The simple reason is that the universities raise tuition rates to manage the demand for their limited resources, and can always raise rates when there is more demand than there are openings for incoming students.

          Thanks to the windfall from that high tuition, today's universities have student unions, recreation facilities, gyms, pools, and lots of amenities to attract students. Imagine what they will offer when they can't jack up the tuition. Ever visit a university in a country that has "free" college education for its' citizens? It's pretty austere. These kids need to think past the clever sound bytes and really consider the effect of what they are asking for.

          matthew

          Oddly enough, a majority of these students attend colleges who has sport teams sponsored by Nike, Under Armour, Adidas, or Reebok. So, should theses companies atop providing the uniforms and equipment free of charge and donate the money to make more scholarships available? Then the student athletes can purchase their own gear on their own dime. Where one group attains, another must lose. Let this be debated on college campuses and watch the students divide themselves. We will find out what is most important to them.

          JB

          What really needs to be addressed is the skyrocketing cost of college education PERIOD! At the rate it's going up pretty soon only the children of billionaires will be able to afford to go to college.

          Some junk yard dog investigative journalist needs to dig into the rising cost of college education and identify the cause. Once the cause are understood then something can be done to make college more affordable. College tuition cannot be allowed to just continue to escalate.

          just sayin'

          Seriously how do we let our children out of high school without enough information to decide if going to college is actually a good investment? If a high school grad can't explain in detail how much cash is needed, and how spending all that cash and time for education is going to provide a positive return on investment, he or she should not be going to college. This should be near the top of things that teens learn in high school.

          pcs

          I get really cynical about all graduates claiming they had no idea how much their loans were going to cost them. I mean, they had enough math skills to be accepted, then graduate, from college. If you didn't bother to read your loan docs before signing, or research likely monthly payments for your loan, that's your fault!

          E

          College costs went up far faster than inflation, often because colleges built fancy sports and living facilities...because they figured out these same millennials pick colleges based on those things. If you tour colleges, and I toured many in the past few years with my kids, you don't see a classroom or lab unless you ask.

          The standard tours take students through fancy facilities that have nothing to do with quality of education. Add declining teaching loads that have decreased from 12 class hours to 3 class hours per week for a professor in the past 25 years and the rise in overhead for non-academic administration overhead positions like "chief diversity and inclusion officer" and you have expensive college.

          If students want a cheap education, go to the junior college for general ed classes then transfer to a four-year school. It is not glamorous but it yields a quality education without a fortune in debt.

          Rich

          Getting an education is obviously the biggest scam in history!!!! Look at who controls education. Look at all the Universities presidents last names then you will know what they are. I can't say it here on Yahoo because they will take my comments out for speaking the truth. These presidents make millions of $$$$$ a year off of students and parents who are slaves and work hard to pay those tuitions. Not only that but look at the owners last names of the Loan

          50 CAL

          Universities are money munching machines with no regard for how the students will repay the loans. Universities annually raise tuition rates(much of which is unnecessary) with no regard of how these young minds full of mush are going to repay the crushing debt, nor do they care. Locally one university just opened a 15 million dollar athletic center, which brings up the question, why did they need this? With that kind of cash to throw around, what wasn't at least some used to keep tuitions affordable?

          Mike D

          These 'loans' are now almost all, Pell Grant underwritten. Cannot Bankrupt on, co-signers and students can lose their Social Security money if defaulting. 1.5 trillion$ of these loans have been packaged, like Home Loans, derivative.

          What happens to peoples retirement accounts when their Funds have investments in them, what happens to the Primary Dealers when the derivatives bubble bursts?

          How are these loans to be made 'free' if existing loans bear interest? If the student of 'free education' defaults, doesn't graduate, will he owe money-will his parent, or will the 'free school' simply become a dumping ground for the youth without direction, simply housed in college's dorm rooms?
          Lots of questions and two things to keep in mind, the Banks and Teaching institutes love the idea of 'free', the students are believing there might be a free ride.. ignoring schools and Banks don't, won't and never do anything for free.

          This is not going to turn out well for consumers. Sure, Household payments of Education may drop, but the Institution of Education cannot keep even its slim success rate it has now. I don't know how educators managed to turn education into a purely self gratifying industry, giving anything to purchasers they wished for that Education loan, but never ever ever, has underwriting by the Central improved the quality of business. Complete underwriting of the important system of education at the Fed level will be a disaster.

          There will be almost zero accountability for institutes and students, we will have a more expensive system that turns out the worst grads.

          Don't try believing that other countries abilities with free Ed can be duplicated here.. not without serious socialism, a condition where qualifying for Ed advancement is determined by the Central.

          Where it is free, but only to the select, the performers, most American Students would not qualify in other countries for advanced Ed. Blanket quals are almost a condition here, American Students are in for a serious surprise. They will not be so able to buy/loan their way to college and have to excel to get into college.

          The joke is on the American student.

          Jim

          i was one of seven children- i worked my way through four years of undergrad and three years of grad school with my parents only being able to pay health insurance and car insurance- i worked shelving books, busing tables, delivering pizzas and for the last five years as a parimutuel clerk at dog and horsetracks- i never got to go on spring break, do a semester at sea or take classes in europe- i graduated debt free from public universities- have no sympathy for a bunch of whiny brats who have to drive better cars than their professors and believe they are entitled to special treatment- get a job and quit acting like a bunch of welfare queens who feel they deserve entitlements

          Linda

          My son is in college. Because grandpa saved his money over the years, he volunteered to pay for college costs. We hope to continue the tradition with our grandchildren and carefully save our money as well. We don't live high or purchase new. He will graduate zero dollars in debt.

          My son's college roommate comes from a very wealthy family. They own a plane - two houses - dad works on Wall Street - mom is a Doctor. He has to pay for his own education and gets loans for everything. His parents simply don't have the cash to pay for his education.

          It's priorities people! If something is worth it, you'll make it happen.

          [Nov 13, 2015] Goldman Decline in Oil Prices boosted GDP by 0.2% in 2015

          Notable quotes:
          "... cheaper oil has boosted GDP growth in 2015 by 0.2 pp. Looking ahead, we think that about 0.1 pp of oil growth stimulus is left in the tank, which should lift growth over the next 18 months. ..."
          "... Judging by the recent earnings reports from retailers, one has to question the Oil Stimulus theory. ..."
          "... Can't wait until Goldman tells us that higher oil prices lead to higher GDP. ..."
          "... Total real personal income expenditure is at the pre-97 trend. Markets keep on wanting 97-06 consumption levels. They simply don't get it. ..."
          "... This is not worthy of a post. It is just sucking up to Goldman, of all disreputable firms to quote. Ridonculous. Really. ..."
          "... Credo: Economic Beliefs in a World in Crisis ..."
          Calculated Risk

          A few excerpts from a Goldman Sachs research piece by economist Daan Struyven: Shale, States and the Shrinking Oil Stimulus

          ... ... ...

          Our state-level analysis suggests that a 50% decline in oil prices is associated with an eventual rise in aggregate output of 0.4% and 400,000 to 500,000 extra jobs. These estimates are broadly consistent with our most recent research, but below the impact implied by many earlier studies. Taking together our new state-level estimates as well as our earlier work and a few back-of-the-envelope calculations, our best estimate would be that cheaper oil has boosted GDP growth in 2015 by 0.2 pp. Looking ahead, we think that about 0.1 pp of oil growth stimulus is left in the tank, which should lift growth over the next 18 months.

          sm_landlord

          Judging by the recent earnings reports from retailers, one has to question the Oil Stimulus theory.
          http://www.moneyandmarkets.com/retail-rout-take-two-heck-going-742471

          Sporkfed

          Can't wait until Goldman tells us that higher oil prices lead to higher GDP.

          JackSnap

          Total real personal income expenditure is at the pre-97 trend. Markets keep on wanting 97-06 consumption levels. They simply don't get it.

          gdd9000

          This is not worthy of a post. It is just sucking up to Goldman, of all disreputable firms to quote. Ridonculous. Really.

          The book: 'Credo: Economic Beliefs in a World in Crisis' is written by Brian Davey and published by Feasta, 2015. ISBN 9780-9540-5103-7. Ł20.

          [Nov 12, 2015] Oil price collapsing, could set new low

          www.cnbc.com

          West Texas Intermediate crude futures was down 2.75 percent at $41.75 per barrel. WTI set an intraday low of $37.75 on Aug. 24. Brent crude was down nearly 3 percent Thursday at $45.23 per barrel.

          [Nov 12, 2015] These 425 Goldman Bankers Just Hit The Jackpot

          Zero Hedge

          It's that time of year.... when the bank-that-does-God's-work chooses who to bless with mass affluence. This year 425 Goldman Sachs' employees were annointed "Managing Directors" which according to Emolumnet.com means an average annual comp of approximately $1 million.

          [Nov 12, 2015] Oil Industry Needs Half a Trillion Dollars to Endure Price Slump

          Notable quotes:
          "... I agree. Excellent point on the frack log, but at some point with the reduced rate of drilling the frack log will dwindle. Let's take the Bakken where we have the best numbers, Enno estimates around 800 DUC wells (rough guess from memory), to make things simple let's assume no more wells are drilled because prices are so low. If 80 wells per month are completed the DUCs are gone in July 2016. Now the no wells drilled is probably not realistic. If 40 wells per month are drilled (though at these oil prices I still don't understand why) the 800 DUCs would last for 20 months rather than only 10 months, so your story makes sense at least for the Bakken. ..."
          "... One thing to be careful with the fracklog, is that not all of these will be good wells. ..."
          "... I agree that high cost will be likely to reduce demand. The optimistic forecasts assume there will be low cost supply judging by the price scenarios. For AEO 2013 Brent remains under $110/b (2013$) until 2031 and only reaches $141/b (2013$) in 2040. ..."
          "... "Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion in bonds and loans are due for repayment over the next five years. ..."
          "... U.S. drillers account for 20 percent of the debt due in 2015, ..."
          peakoilbarrel.com

          ChiefEngineer , 11/09/2015 at 2:46 pm

          Saudi Arabia will not stop pumping to boost oil prices

          http://www.cnbc.com/2015/11/09/

          "Mr Falih, who is also health minister, forecast the market would come into balance in the new year, and then demand would start to suck up inventories and storage on oil tankers. "Hopefully, however, there will be enough investment to meet the needs beyond 2017."

          Other officials also estimated that it would probably take one to two years for the market to clear up the oil market glut, allowing prices to recover towards $70-$80 a barrel."

          Greenbub, 11/09/2015 at 2:54 pm

          Chief, that link went dead, this might be right:
          http://www.cnbc.com/2015/11/09/reuters-america-update-1-saudi-arabia-sees-robust-oil-fundamentals-as-rival-output-falls.html

          Ron Patterson, 11/09/2015 at 4:40 pm

          From your link, bold mine:

          "Non-OPEC supply is expected to fall in 2016, only one year after the deep cuts in investment," he said.

          "Beyond 2016, the fall in non-OPEC supply is likely to accelerate, as the cancellation and postponement of projects will start feeding into future supplies, and the impact of previous record investments on oil output starts to fade away."

          I thought just about everyone was expecting a rebound in production by 2017?

          AlexS, 11/09/2015 at 7:50 pm
          Ron, Dennis

          The EIA. IEA. OPEC and most others expect non-OPEC production, excluding the U.S. and Canada to decline in 2016 and the next few years due to the decline in investments and postponement / canceling of new projects. Production in Canada is still projected to continue to grow, but at a much slower rate than previously expected.

          Finally, U.S. C+C production is expected to rebound in the second half of 2016 due to slightly higher oil prices ($55-57/bbl WTI). Also, U.S. NGL production proved much more resilient, than C+C, despite very low NGL prices.

          Non-OPEC ex U.S. and Canada total liquids supply (mb/d)
          Source: EIA STEO October 2015

          Dennis Coyne, 11/10/2015 at 9:10 am

          Hi AlexS,

          Thanks. I don't think oil prices at $56/b is enough to increase the drilling in the LTO plays to the extent that output will increase, it may stop the decline and result in a plateau, it's hard to know.

          On the "liquids" forecast, the NGL is not adjusted for energy content as it should be, each barrel of NGL has only 70% of the energy content of an average C+C barrel and the every 10 barrels of NGL should be counted as 7 barrels so that the liquids are reported in barrels of oil equivalent (or better yet report the output in gigajoules (1E9) or exajoules(1E18)). The same conversion should be done for ethanol as well.

          AlexS, 11/10/2015 at 9:54 am

          Dennis,

          Note that not only the EIA, but also the IEA, OPEC, energy consultancies and investment banks are projecting a recovery in US oil production in the later part of next year.

          That said, I agree with you that $56 WTI projected by the EIA may not be sufficient to trigger a fast rebound in drilling activity. However there is also a backlog of drilled but uncompleted wells that could be completed and put into operation with slightly higher oil prices.

          Most shale companies have announced further cuts in investment budgets in 2016, so I think it is difficult to expect significant growth in the U.S. onshore oil production in 2H16.

          If and when oil prices reach $65-70/bbl, I think LTO may start to recover (probably in 2017 ?). I think that annual growth rates will never reach 1mb/d+ seen in 2012-14, but 0.5 mb/d annual average growth is quite possible for several years with oil prices exceeding $70.

          Dennis Coyne, 11/10/2015 at 1:33 pm

          Hi AlexS,

          I agree. Excellent point on the frack log, but at some point with the reduced rate of drilling the frack log will dwindle. Let's take the Bakken where we have the best numbers, Enno estimates around 800 DUC wells (rough guess from memory), to make things simple let's assume no more wells are drilled because prices are so low. If 80 wells per month are completed the DUCs are gone in July 2016. Now the no wells drilled is probably not realistic. If 40 wells per month are drilled (though at these oil prices I still don't understand why) the 800 DUCs would last for 20 months rather than only 10 months, so your story makes sense at least for the Bakken.

          I have no idea what the frack log looks like for the Eagle Ford. If its similar to the Bakken and they complete 130 new wells per month, with about 61 oil rigs currently turning in the EF they can drill 80 wells per month, so they would need 50 wells each month from the frack log. If there are 800 DUCs, then that would last for 16 months.

          The economics are better in the Eagle Ford because the wells are cheaper and transport costs are lower, but the EUR of the wells is also lower (230 kb vs 336 kb), the well profile has a thinner tail than the Bakken wells. I am not too confident about the EIA's DPR predictions for the Eagle Ford, output will decrease, but perhaps they(EIA) assume the frack log is zero and that only 75 new wells will be added to the Eagle Ford each month. If my guess of 150 new wells per month on average from Sept to Dec 2015 is correct, then decline from August to Dec 204 will only be about 100 kb/d and 255 kb/d from March to Dec 2015 (155 kb/d from March to August 2015).

          Toolpush, 11/11/2015 at 12:45 pm

          Dennis,

          One thing to be careful with the fracklog, is that not all of these will be good wells. It is fair enough that companies like EOG will have some good DUCs, (should there be a "k" in that?) in their fracklogs. But as the fracklog is worked through, I am sure there will be a some very ugly DUCklings, that nobody wants to admit to.
          How many fall into this category, will be anybodies guess, but not all DUC, will turn out to be beautiful swans?

          Dennis Coyne, 11/10/2015 at 1:57 pm

          Hi AlexS,

          On the predictions of the EIA and IEA, they also expect total oil supply to be quite high in 2040. For example the EIA in their International Energy Outlook reference case they have C+C output at 99 Mb/d in 2040.

          Their short term forecasts are probably better than that, but my expectation for 2040 C+C output is 62 Mb/d (which many believe is seriously optimistic, though you have never expressed an opinion as far as I remember).

          So I take many of these forecasts with a grain of salt, they are often more optimistic than me, others are far more pessimistic, the middle ground is sometimes more realistic.

          AlexS, 11/10/2015 at 9:08 pm
          Dennis,

          You said above that estimated URR of all global C+C (ex oil sands in Canada and Venezuela) is 2500 Gb. And about 1250 Gb of C+C had been produced at the end of 2014. So the remaining resources are 1250 Gb.

          BP estimates total global proved oil reserves as of 2014 at 1700 Gb, or 1313 excluding Canadian oil sands and Venezuela's extra heavy oil. Their estimate in 2000 was 1301 Gb and 1126 Gb. Hence, despite cumulative production of 419 Gb in 2001-2014, proved reserves increased by 187 Gb, or 400 Gb including oil sands and Venezuela's Orinoco oil. Note that BP's estimate is for proved (not P+P) reserves, but it includes C+C+NGLs. My very rough guess is that NGLs account for between 5% and 10% of the total.

          You may be skeptical about BP's estimates, but the fact is that proved reserves or 2P resources are not a constant number; they are increasing due to new discoveries and technological advances.

          BTW, the EIA's estimate of global C+C production increasing from 79 mb/d in 2014 to 99 mb/d in 2040 implies a cumulative output of 836 Gb, about 2/3 of your estimate of remaining 2P resources of C+C or BP's estimate of the current proved reserves. Given future discoveries and improvements in technology, I think that further growth of global oil production to about 100 mb/d by 2040 should not be constrained by resource scarcity.

          What can really make the EIA's and IEA's estimates too optimistic is not the depleting resource base, but the high cost of future supply, political factors and/or lower than expected demand.

          Dennis Coyne, 11/11/2015 at 11:05 am
          Hi AlexS,

          Thanks.

          You are quite optimistic. Note that I add 300 Gb to the 2500 Gb Hubbert Linearization estimate to account for reserve growth and discoveries.

          The oil reserves reported in the BP Statistical review are 1312 Gb. Jean Laherrere estimates that about 300 Gb of OPEC reserves are "political" to keep quotas at appropriate levels with respect to "true" reserve levels. So the actual 2P reserves are likely to be 1010 Gb. Some of the cumulative C+C output is extra heavy oil so the cumulative C+C-XH output is 1240 Gb so we have a total cumulative discovery (cumulative output plus 2P reserves) of 2250 Gb through 2014.

          My medium scenario with a URR of 2800 Gb of C+C-XH plus 600 Gb of XH oil (3400 Gb total C+C) assumes 550 Gb of discoveries plus reserve growth.

          What do you expect for a URR for C+C?

          Keep in mind that at some point oil prices rise to a level that substitutes for much of present oil use will become competitive, so oil prices above $175/b (in 2015$) are unlikely to be sustained in my view.

          In a wider format below I will present a scenario with what extraction rates would be needed for my medium scenario to reach 99 Mb/d in 2040.

          Dennis Coyne, 11/11/2015 at 4:20 pm
          Hi Alex S,

          I agree that high cost will be likely to reduce demand. The optimistic forecasts assume there will be low cost supply judging by the price scenarios. For AEO 2013 Brent remains under $110/b (2013$) until 2031 and only reaches $141/b (2013$) in 2040.

          Depleting resources will raise production cost to more than these prices and demand will be reduced due to high oil prices. There will be an interaction between depletion and the economics of supply and demand. It will be depletion that raises costs, which will raise prices and reduce demand.

          AlexS, 11/11/2015 at 4:41 pm
          It will be depletion of low-cost reserves that raises marginal costs and prices. High-cost reserves may be abundant, but prices will rise.
          AlexS, 11/09/2015 at 7:55 pm
          corrected chart:

          TechGuy, 11/10/2015 at 10:19 am
          Oil Industry Needs Half a Trillion Dollars to Endure Price Slump
          http://www.bloomberg.com/news/articles/2015-08-26/oil-industry-needs-to-find-half-a-trillion-dollars-to-survive

          "Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion in bonds and loans are due for repayment over the next five years.

          U.S. drillers account for 20 percent of the debt due in 2015, Chinese companies rank second with 12 percent and U.K. producers represent 9 percent."

          [These are just the bonds that have yields higher than 10%]

          [Its very unlikely that prices will recover in time to save many of the drillers, and even if prices recover, even $75 oil will not help since they need $90 to break even to service the debt. Also not sure who is going to buy maturing debt so it can be rolled over. Even if prices slowly recover, there is likely to be fewer people willing to loan money drillers.]

          Watcher, 11/10/2015 at 5:18 pm
          Don't bet on it. Probably be even better if the price declines more. Apocalypse will not be permitted.

          [Nov 12, 2015] MEXICO'S CANTARELL OIL FIELD POSTS RECORD LOW OIL PRODUCTION

          Notable quotes:
          "... "The Cantarell oil field - an aging supergiant oil field in Mexico - saw its lowest production in over 30 years with an output of 206,000 barrels per day in October, said PEMEX Exploration and Production (PEP) on Thursday. In its latest weekly report, Pemex said that Cantarell was producing 256,000 bpd at the beginning of 2015, its lowest level since 2004, sparking fears that Mexico's most productive field was running out of oil." ..."
          "... Wow, thats an average decline rate of about 18% per year (since 2003). ..."
          peakoilbarrel.com

          Doug Leighton 11/08/2015 at 10:27 am

          MEXICO'S CANTARELL OIL FIELD POSTS RECORD LOW OIL PRODUCTION

          "The Cantarell oil field - an aging supergiant oil field in Mexico - saw its lowest production in over 30 years with an output of 206,000 barrels per day in October, said PEMEX Exploration and Production (PEP) on Thursday. In its latest weekly report, Pemex said that Cantarell was producing 256,000 bpd at the beginning of 2015, its lowest level since 2004, sparking fears that Mexico's most productive field was running out of oil."

          Meanwhile Ku-Maloob-Zaap remains on a production plateau of about 850,000 bpd which is expected to continue until 2017.

          http://www.shanghaidaily.com/article/article_xinhua.aspx?id=308285

          FreddyW, 11/08/2015 at 11:45 am
          Wow, thats an average decline rate of about 18% per year (since 2003).
          Doug Leighton, 11/08/2015 at 12:01 pm
          Yeh, so much for the long fat tail theory. Mind you, there are extenuating circumstances (Aren't there always?). I.E., PEMEX started shifting resources away from Cantarell a year or so back.

          [Nov 12, 2015] OPEC countries, Russia and International Oil Companies are all losing billions

          Notable quotes:
          "... It's perhaps more so high yield paper issuance ..."
          "... We imagined that a mini Apocalypse loomed, derived from shutting down oil production via loan shutoff simply because it was not profitable. How absurd, in retrospect. Profitable. Profitable was a lot more powerful a requirement pre 2009 than post 2009. Now, it's almost laughable. No one is going to allow horrible outcomes just because numbers on a screen are red. ..."
          peakoilbarrel.com
          Euan Mearns, 11/08/2015 at 10:32 am

          Oil Production Vital Statistics October 2015

          The "big news" this month is that the banks granted over leveraged, loss making shale oil drillers a stay of execution by continuing to provide credit lines. Consequently, there was no major move in US oil drilling or production though both are trending down. Elsewhere, the story is one of production plateaus and stabilisation of rig counts. The modest production rises and falls detailed below are simply noise on these production baselines.

          Against this backdrop of no news, the oil price traded sideways in October. OPEC countries, Russia and International Oil Companies are all losing billions and look set to continue doing so throughout 2016 as over-supply now looks set to continue until early 2017. The situation is one of stalemate as opposed to checkmate.

          Watcher, 11/08/2015 at 12:28 pm

          I think I would modify this a bit.

          "Banks". It's perhaps more so high yield paper issuance, and we have seen at least one story indicating a bank (JP Morgan) orchestrated placement of the issuance in order to service debt JPM had actually loaned. So this would mean banks are selling debt to the public (with their powerful sales force), and doing so to protect their own loan portfolios. One might also wonder about their managed accounts (client money entrusted to in-house advisors) and if those accounts were put into this HY paper.

          There was that JPM quote in response to a question about the risks to their loan portfolio. "We have offloaded that risk to investors."

          To a certain extent it all says that I forgot my own mantra: Nothing relevant to money is going to be allowed to destroy civilization, because it can be created from nothingness.

          We imagined that a mini Apocalypse loomed, derived from shutting down oil production via loan shutoff simply because it was not profitable. How absurd, in retrospect. Profitable. Profitable was a lot more powerful a requirement pre 2009 than post 2009. Now, it's almost laughable. No one is going to allow horrible outcomes just because numbers on a screen are red.

          [Nov 12, 2015] Excerpts from several articles in Bloomberg and Reuters

          Notable quotes:
          "... Oil demand is expected to be 94 million barrels a day this year, rising 1.5 percent from last year, with about 2 million barrels a day of spare capacity, mainly held in Saudi Arabia, the prince said. Growth in Asia's demand may slow "by efforts to efficiency enhancement and oil substitution," he said. ..."
          "... "But the petroleum industry should not lose sight of the fact that scale matters," with billions of people moving up into the middle class, the prince said. The size of the world's middle class will expand from 1.8 billion to 3.2 billion in 2020, and to 4.9 billion in 2030, with the bulk of this expansion occurring in Asia, he said. ..."
          "... The oil market will rebalance in 2016 or 2017, as demand grows between 1.2 million barrels per day and 1.5 million barrel per days through 2020, Yergin, vice chairman of consultants IHS, said in a speech in Abu Dhabi. Demand will rise by about 17 million barrels a day to almost 110 million barrels a day by 2040, with 70 percent of the growth to come from Asia, the head of the Organization of Petroleum Exporting Countries said at an event in Doha. ..."
          "... "The next few quarters are going to continue to be tough as Iranian oil comes back into the market," Yergin said Monday. "We really see 2016 as the year of transition." ..."
          "... "We have a vested interest to keep prices as stable as possible, but we cannot do that by reducing production," Mazrouei said. "We expect the market will recover by itself because high-cost production will continue to decline." ..."
          "... "We're near the bottom at $40, and there's a potential upside that's much higher." ..."
          peakoilbarrel.com

          AlexS, 11/09/2015 at 10:48 am

          Excerpts from several articles in Bloomberg and Reuters:

          Saudi Vice Oil Minister Sees Price Surge After Cutbacks

          http://www.bloomberg.com/news/articles/2015-11-09/oil-investment-cuts-at-200-billion-as-saudi-prince-sees-rally

          The scale of the global oil and gas industry's spending cuts are making another surge in energy prices possible by diminishing future supply, Saudi Vice Minister of Petroleum & Mineral Resources Prince Abdulaziz bin Salman said.

          Investments have been cut by $200 billion this year and will drop another 3 percent to 8 percent next year, marking the first time since the mid 1980s that industry cut the spending for two consecutive years, Prince Abdulaziz said in a copy of his speech for delivery to energy ministers in Doha Monday. Nearly 5 million barrels a day of projects have been deferred or canceled, he said in the remarks.

          Just like high oil prices can't last, a prolonged period of low prices is "also unsustainable, as it will induce large investment cuts and reduce the resilience of the oil industry, undermining the future security of supply and setting the scene for another sharp price rise," the prince said in the remarks. "As a responsible and reliable producer with long-term horizon, the kingdom is committed to continue to invest in its oil and gas sector, despite the drop in the oil price."

          Oil demand is expected to be 94 million barrels a day this year, rising 1.5 percent from last year, with about 2 million barrels a day of spare capacity, mainly held in Saudi Arabia, the prince said. Growth in Asia's demand may slow "by efforts to efficiency enhancement and oil substitution," he said.

          "But the petroleum industry should not lose sight of the fact that scale matters," with billions of people moving up into the middle class, the prince said. The size of the world's middle class will expand from 1.8 billion to 3.2 billion in 2020, and to 4.9 billion in 2030, with the bulk of this expansion occurring in Asia, he said.

          "Rather than being a commodity in decline, as some would like to portray, supply and demand patterns indicate that the long-term fundamentals of the oil complex remain robust."

          -------------------------

          OPEC's Badri says oil market to be more balanced in 2016

          Nov 9, 2015
          http://www.reuters.com/article/2015/11/09/us-asia-energy-opec-idUSKCN0SY0TN20151109

          The oil market is expected to become more balanced in 2016 as demand continues to grow, OPEC Secretary-General Abdullah al-Badri said on Monday ahead of the producer group's policy meeting next month.

          "The expectation is that the market will return to more balance in 2016," he said in a speech at an Asian ministerial energy roundtable in the Qatari capital Doha.

          "We see global oil demand maintaining its recent healthy growth. We see less non-OPEC supply. And we see an increase in the demand for OPEC crude," Badri said, according to the text of the speech published on the OPEC website.

          Most of the oil supply increases in recent years have come from high-cost production, Badri said, in a clear reference to supply sources such as U.S. shale oil.

          "The market is now taking on board this new reality and gradually resetting itself, as we can see with falling non-OPEC supply growth and stronger demand," he said.

          ----------------------------
          Yergin Joins OPEC in Seeing Market Balanced as Soon as 2016

          http://www.bloomberg.com/news/articles/2015-11-09/yergin-joins-opec-in-seeing-oil-market-balanced-as-soon-as-2016

          Global demand for crude will bring more balance to the oil market as soon as next year, according to Pulitzer Prize-winning author and energy consultant Daniel Yergin and OPEC Secretary General Abdalla El-Badri.

          The oil market will rebalance in 2016 or 2017, as demand grows between 1.2 million barrels per day and 1.5 million barrel per days through 2020, Yergin, vice chairman of consultants IHS, said in a speech in Abu Dhabi. Demand will rise by about 17 million barrels a day to almost 110 million barrels a day by 2040, with 70 percent of the growth to come from Asia, the head of the Organization of Petroleum Exporting Countries said at an event in Doha.

          "The next few quarters are going to continue to be tough as Iranian oil comes back into the market," Yergin said Monday. "We really see 2016 as the year of transition."

          Current market volatility was caused by oversupply, mostly from high-cost producers, and oil stocks are above the five-year average, El-Badri said. Energy industry investment in exploration and production fell 20 percent, or by about $130 billion from 2014 to 2015, he said.

          "The expectation is that the market will return to more balance in 2016," El-Badri said Monday. "We see global oil demand maintaining its recent healthy growth. We see less non-OPEC supply. And we see an increase in the demand for OPEC crude."

          Oil prices are unsustainable at current levels and will rise gradually as international companies defer projects and production plans, United Arab Emirates Energy Minister Suhail Al Mazrouei told reporters .

          "We have a vested interest to keep prices as stable as possible, but we cannot do that by reducing production," Mazrouei said. "We expect the market will recover by itself because high-cost production will continue to decline."

          The U.S. is now the new swing producer of oil, with much room for efficiency gains, Yergin said. If U.S. law would allow it, the nation could be a major oil exporter by the end of decade, he said. Canada's oil sands production will add more than 800,000 barrels a day by the decade's end, and Iran will add 400,000 to 600,000 barrels a day to world markets within a few months of sanctions ending.

          "The market will have to deal with a very significant overhang of inventories," Yergin said. "There's more volatility in this process."
          --------------------–
          Speculators Share Andy Hall's Optimism That Oil Prices at Bottom

          http://www.bloomberg.com/news/articles/2015-11-09/speculators-share-andy-hall-s-optimism-that-oil-prices-at-bottom

          Andy Hall and Daniel Yergin think oil prices are bottoming out. Hedge funds agree.
          Money managers' net-long position in West Texas Intermediate crude rose 20 percent in the week ended Nov. 3, the most in seven months, according to data from the U.S. Commodity Futures Trading Commission. Bets on rising prices increased to the highest level since June.
          U.S. onshore oil production fell for the fifth month in a row in August and supplies grew at the slowest pace since September in the week ended Oct. 30. Inventory data don't indicate a surplus in the crude market and prices are set to rise, said Hall, one of the world's best-known oil traders. Global supply and demand will begin to move into balance by late 2016 or 2017, according to Yergin.

          "The fundamentals are starting to play out," said David Pursell, a managing director at investment bank Tudor Pickering Holt & Co. in Houston. "You've got greater recognition that U.S. supply is falling and maybe falling faster. Inventories are building, but the pace of that build is more manageable."

          Onshore production excluding Alaska fell to 7.25 million barrels a day in August, down 334,000 barrels a day from March, according to Energy Information Administration data. U.S. oil inventories grew by 2.8 million barrels a day the week ended Oct. 30, the smallest gain since Sept. 18.

          U.S. output will retreat by about 10 percent in the 12 months ending April, according to Yergin, vice chairman at IHS Inc.." Prices may rise to $70 to $80 a barrel by the end of the decade, he said in an interview.

          Hall, the crude trader, said Saudi Arabia is producing close to capacity while Iraq is struggling to maintain output, while U.S. rig counts will continue to decline.

          "We think the degree of negativity is unwarranted," Hall, who runs $2.6 billion hedge fund Astenbeck Capital Management, said Nov. 4.

          "The economy is on the rebound, China is coming out of a bear market, people are saying let's get long oil," said Carl Larry, head of oil and gas for Frost & Sullivan LP.

          "We're near the bottom at $40, and there's a potential upside that's much higher."

          [Nov 12, 2015] At the current price level some shale companies may stop completing wells and may stop drilling

          Notable quotes:
          "... I focus on the oil price necessary to be cash flow neutral and maintain production. That price is different for every company and constantly changes, but overall it remains much higher than current oil and natural gas prices. Shale companies have been hiding behind this for quite awhile, but recently management is beginning to talk about maintaining production and cash flow neutrality. Apparently some one important has signaled to them that the cash burn has to stop. I do not think $55 WTI or even $65 WTI will result in a return to 2011-2014 like drilling, which is what will be needed to cause US oil production to reverse its decline. The shale companies cannot return rigs at these price levels without burning more cash, on the whole. ..."
          "... At the current price level some companies may stop completing wells and may stop drilling. There are a fair number of drilled uncompleted wells in the Bakken (Enno has two estimates 450 and 900, I am not sure which he favors, let's call it 675). These wells are a sunk cost and are likely to be completed to keep up cash flow levels. Even if all drilling stops (which is unlikely) if 75 wells are completed from the frack log each month, there are 9 months supply of DUCs, if 40 wells per month are drilled the supply would be enough for 19 months of completions at 75 wells completed each month. My scenario assumes well productivity (the estimated ultimate recovery over the first 60 months) of new wells remains at 2013 to 2014 levels. So far the actual data shows no change in new well EUR (it actually increased slightly in 2013 and 2014 from earlier levels and has remained steady in 2015). Perhaps Enno or Freddy W have a 3 month or 6 month cumulative chart for the Bakken Three Forks. I have an old chart but they may have something more recent. Chart below is from data in April or May 2015. ..."
          "... I just want to add that yes production has stayed relatively flat over the years. But water content has increased significantly. Fracking has become more costly also with more fracking fluids and so on. They have on the other hand become more efficient in what they are doing, but I think overall that costs have gone up. ..."
          "... "The short investment cycle of US tight oil and its ability to respond quickly to price signals are changing the way that the oil market operates. The plunge in prices means US tight oil production is now stumbling: if prices out to 2020 remain under $60/bbl, without a rapid evolution in drilling efficiency and technology learning, tight oil production in the United States will likely see a substantial decline in output. However, with tighter markets leading to higher mid-term prices in the New Policies Scenario ($80/bbl in 2020) US tight oil ultimately resumes its upward march, growing by 1.5 mb/d by 2020 to over 5 mb/d." ..."
          "... Plunging oil prices may suggest that the world is awash with cheap oil but, in reality, what the world is really awash with is lots of expensive oil, much of it being produced at a loss. ..."
          "... In any event, I bet the extra 1/2 to 1 million barrels (if truly produced) are the most expensive barrels they have. So one wonders how much more income is really earned by the extra barrels. ..."
          "... Oil and gas debt held by US banks is over $270 billion, but that would include conventional production. ..."
          "... Looking at Iraq and Iran more closely. I think those two are greater threats to KSA market share than US shale at this point in time. As US shale continues to drop, looks like Iran and Iraq are set to grow, with total costs likely lower than even KSA. ..."
          "... Oil Industry Needs Half a Trillion Dollars to Endure Price Slump. Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, (2015) about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion in bonds and loans are due for repayment over the next five years. ..."
          "... A lot of money borrowed by US upstream, and they are in tremendous trouble if prices stay below $60 WTI though 2016, and do not substantially recover in 2017 ..."
          peakoilbarrel.com
          shallow sand, 11/11/2015 at 9:52 am
          Heinrich. Your point about CAPEX v operating expense is on the money.

          I focus on the oil price necessary to be cash flow neutral and maintain production. That price is different for every company and constantly changes, but overall it remains much higher than current oil and natural gas prices. Shale companies have been hiding behind this for quite awhile, but recently management is beginning to talk about maintaining production and cash flow neutrality. Apparently some one important has signaled to them that the cash burn has to stop. I do not think $55 WTI or even $65 WTI will result in a return to 2011-2014 like drilling, which is what will be needed to cause US oil production to reverse its decline. The shale companies cannot return rigs at these price levels without burning more cash, on the whole.

          Heinrich Leopold, 11/11/2015 at 4:49 pm
          shallow sand,

          Thank you for your reply. My point is also that many shale companies have published low operating expenses over years by moving most of their expenses into the category 'capex'. By the recent impairments they have moved a big chunk of their capex into the category expenses. So, basically they are saying to investors: sorry folks you have invested your money, but actually it is not invested anymore we have spent the money already on producing gas and oil and you will see a big part of your money never again. This is in my view a very unfair way to pretend to have low operating costs.

          Dennis Coyne, 11/11/2015 at 12:34 pm
          Hi Heinrich,

          Enno Peters posts charts each month showing the well productivity. It has not decreased.

          At the current price level some companies may stop completing wells and may stop drilling. There are a fair number of drilled uncompleted wells in the Bakken (Enno has two estimates 450 and 900, I am not sure which he favors, let's call it 675). These wells are a sunk cost and are likely to be completed to keep up cash flow levels. Even if all drilling stops (which is unlikely) if 75 wells are completed from the frack log each month, there are 9 months supply of DUCs, if 40 wells per month are drilled the supply would be enough for 19 months of completions at 75 wells completed each month. My scenario assumes well productivity (the estimated ultimate recovery over the first 60 months) of new wells remains at 2013 to 2014 levels. So far the actual data shows no change in new well EUR (it actually increased slightly in 2013 and 2014 from earlier levels and has remained steady in 2015). Perhaps Enno or Freddy W have a 3 month or 6 month cumulative chart for the Bakken Three Forks. I have an old chart but they may have something more recent. Chart below is from data in April or May 2015.

          FreddyW, 11/11/2015 at 4:36 pm
          Hi,

          I just want to add that yes production has stayed relatively flat over the years. But water content has increased significantly. Fracking has become more costly also with more fracking fluids and so on. They have on the other hand become more efficient in what they are doing, but I think overall that costs have gone up.

          Newer wells produce more in the beginning, but has higher decline rates for at least the first year. My guess is that the earlier wells will eventually have recovered more oil than the later ones.

          New data will probably come out on Friday. Maybe I have something to show after that.

          AlexS says:
          11/10/2015 at 2:24 pm

          IEA World Energy Outlook 2015 on U.S. tight oil:

          "The short investment cycle of US tight oil and its ability to respond quickly to price signals are changing the way that the oil market operates. The plunge in prices means US tight oil production is now stumbling: if prices out to 2020 remain under $60/bbl, without a rapid evolution in drilling efficiency and technology learning, tight oil production in the United States will likely see a substantial decline in output. However, with tighter markets leading to higher mid-term prices in the New Policies Scenario ($80/bbl in 2020) US tight oil ultimately resumes its upward march, growing by 1.5 mb/d by 2020 to over 5 mb/d."

          "The short investment cycle of tight oil and its ability to respond quickly to price signals is changing the way that the oil market operates, but the intensity with which the tight oil resource is developed in the United States eventually pushes up costs. US tight oil production stumbles in the short term but resumes its upward march as prices recover, helped by continued improvements in technology and efficiency improvements. But tight oil's rise is ultimately constrained by the rising costs of production, as operators deplete the "sweet spots" and move to less productive acreage. US tight oil output reaches a plateau in the early-2020s, just above 5 mb/d, before starting a gradual decline."

          Change in production (2015-2020) of US tight oil for a range of 2020 oil prices
          mb/d

          shallow sand says:
          11/10/2015 at 5:57 pm

          Anecdotal re US conventional.

          Company near us, 2012-14 drilled and completed many conventional wells. 2015 drilled no wells and completed the few remaining ones in first quarter.

          Decline from Q3 2014 to Q3 2015 14.5%. Had grown production annually 2012-14.

          Wonder how many conventional oil wells were completed 2011-14? New conventional wells may have a high decline too.

          I know dwarfed by shale, but it all adds up.

          AlexS says:
          11/11/2015 at 8:13 am

          In its short term energy outlook, the EIA sharply revised its U.S. C+C production estimates for 2H15 and forecast for 2016.

          Estimate for this year's growth was increased to 580 kb/d from a 540 kb/d in previous month STEO, due to stronger than expected performance in onshore production. The biggest upwards revisions were made for August 2015: +187 kb/d, September: +160 kb/d and October: + 108 kb/d. The new production forecast for 2015 is 9.29 mb/d vs. 9.25 mb/d in October STEO.

          Despite these revisions, the EIA still notes that "monthly crude oil production started to decrease in the second quarter of 2015, led by Lower 48 onshore production. From March 2015 through October 2015, Lower 48 onshore output has fallen from more than 7.6 million b/d to about 7.1 million b/d. EIA estimates total crude oil production has declined almost 0.5 million b/d since April, averaging 9.1 million b/d in October", down 43 kb/d from September.

          The EIA expects declines to continue through September 2016, when total production is forecast to average 8.54 mb/d. This level of production would be almost 1.1 mb/d less than the 2015 peak reached in April.

          Doug Leighton says:
          11/11/2015 at 9:35 am

          WHY THE OIL SANDS NO LONGER MAKE ECONOMIC SENSE

          "Plunging oil prices may suggest that the world is awash with cheap oil but, in reality, what the world is really awash with is lots of expensive oil, much of it being produced at a loss. OPEC, home to the world's lowest-cost oil, is pretty much producing what it always has. The market glut is from increased output from high-cost producers like the oil sands. Their existential dilemma in today's market is that it is they, not OPEC, who must cut production to clear the glut.

          http://www.theglobeandmail.com/report-on-business/rob-commentary/oil-sands-no-longer-make-economic-sense/article27170104/

          shallow sand says:
          11/11/2015 at 10:08 am

          I wish I knew more about production costs for the four Gulf OPEC members plus Iran and Iraq.

          I also wish I knew how much of KSA's increase in oil production, for example, which began in March, 2015, was oil from storage as opposed to produced.

          In any event, I bet the extra 1/2 to 1 million barrels (if truly produced) are the most expensive barrels they have. So one wonders how much more income is really earned by the extra barrels.

          AlexS says:
          11/11/2015 at 12:58 pm

          shallow sand,

          KSA's production was increasing from March and peaked in June. Since then, it has slightly declined.
          I don't think they will (and can, and intend to) increase it further.

          Saudi Arabia's oil production
          Source: JODI, OPEC (direct communications)

          shallow sand says:
          11/11/2015 at 1:48 pm

          AlexS. Thanks. Surprisingly, KSA has really not increased oil production that much, especially in relation to the United States.

          Euan's post above indicates there is negligible spare capacity and it is almost all heavy oil with no refining capacity available for it. Given KSA interest in shale tech, would appear 10.6 may be their conventional peak.

          Russia has been able to continue to slowly increase production. Do you think Russia is nearing conventional peak? Any recent news on Russian LTO efforts?

          Will interesting to see how this plays out.

          AlexS says:
          11/11/2015 at 2:06 pm

          shallow sand,

          The IEA estimates Saudi capacity at 12.26 mb/d and sustainable spare capacity at 2.06 mb/d (in September). However these numbers can be overstated and actual capacity may not exceed 11-11.5 mb/d.

          Euan is right that most spare capacity consists of heavy oil with high sulphur content.

          3 other Gulf states have very small spare capacity of around 100 kb/d.

          Hence production increases in 2016 can be expected only from Iran and Iraq. Libya is a big unknown, which potentially can add up to 1 mb/d

          I think Russia could further increase production in the near term, but not by much. In the medium to long term it will try to maintain production at current levels, so it's probably not a peak, but a plateau.

          Russian LTO is a long-term story, similarly to the Arctic projects. No significant additions are expected until next decade.

          Among other non-OPEC, non-US sources, some growth may be expected from Canada and Brazil, but in both cases it will be slower than previously expected due to lower oil prices.

          With the declining US output and continued (albeit slower) growth in demand, the market will begin rebalancing next year.

          In 1H15, that will mean lower excess supply vs demand, and from 2H15 demand will likely exceed supply.
          This scenario implies that additional supplies from Iran do not exceed 500-700 kb/d, Libya remains in doldrums, and there is no dramatic slowdown in global economic growth.

          shallow sand says:
          11/11/2015 at 5:50 pm

          AlexS. Thanks for the post. I agree with you that Iran and Iraq appear to be able to add much more production than Saudi Arabia, Kuwait, UAE and Qatar combined.

          Iraq in particular has many areas to be developed, subject primarily to political instability.

          For example, Rumalia oil field production has ramped up significantly and it appears there is much room to run at a very low price.

          dmg555 says:
          11/11/2015 at 10:10 am

          Does anyone here have a source for how much money was loaned to the tight oil fracking industry?

          Watcher says:
          11/11/2015 at 12:19 pm

          You will find this number is fuzzy, as is true for all long term debt everywhere, because issuance rolls over on maturity and that may not be tracked.

          shallow sand says:
          11/11/2015 at 1:45 pm

          Oil and gas debt held by US banks is over $270 billion, but that would include conventional production.

          I have read in excess of $1/2 trillion, a number off the top of my head.

          John S says:
          11/11/2015 at 3:22 pm

          Shallow: I think you will find the press release at the link below from FDIC interesting:

          https://www.fdic.gov/news/news/press/2015/pr15089.html

          Here is an excerpt:

          "Oil and gas commitments to the exploration and production sector and the services sector totaled $276.5 billion, or 7.1 percent, of the SNC portfolio. Classified commitments-a credit rated as substandard, doubtful, or loss-among oil and gas borrowers totaled $34.2 billion, or 15.0 percent, of total classified commitments, compared with $6.9 billion, or 3.6 percent, in 2014."

          I went looking for this because a local bank is seeking to increase is liquidity via a preferred stock offering. It is trying to raise a multi-million $ amount. The offered terms are a 5% dividend, 5 year term, and share repurchase at redemption date. The bank is 30 + years old.

          I am told another local bank is doing a similar offering.

          Hmmm…..liquidity issues and off balance sheet financing. Where has that been tried before in the oil patch?

          Watcher says:
          11/11/2015 at 4:23 pm

          Banks do preferred offerings all the time.

          Quick example, go to finance.google.com and enter stock symbol bac. and that's a period after the c and look at all the preferred offerings/issues.

          Quick lesson for the partially washed. Preferred stock is equity that usually has no voting rights for corporate governance determination. Speaking practically it's usually priced about $25/share and pays a higher yield than any common dividend. Preferreds get their dividend first. If there isn't enough profit to pay preferred divvies and common, common has to get zero.

          There are cumulative preferreds and convertible preferreds. Cumulative means if a quarter's dividend is missed, ya gotta make up that quarter's missed payout before you can pay to common shares. Convertible means can convert to XXX shares of common. blahblah

          Anyway, a bank issuing preferred stock is not eyebrow raising in any environment. That is, excluding issuance bought by Buffet in 2009. Anything at all done that year was eyebrow raising.

          shallow sand says:
          11/11/2015 at 5:55 pm

          John S. Thanks for the link! That is the release I was referring to earlier.

          WTI below $43. Wow. Have to think the substandard or worse oil and gas backed loans are only going to grow.

          Looking at Iraq and Iran more closely. I think those two are greater threats to KSA market share than US shale at this point in time. As US shale continues to drop, looks like Iran and Iraq are set to grow, with total costs likely lower than even KSA.

          Watcher says:
          11/11/2015 at 6:46 pm

          KSA has said repeatedly shale is no threat to them and they are no threat to shale. Shale oil can't export. It CAN'T compete. And almost all US imports are coming from Canada and Mexico and Ven and Nigeria. Only about 1 mbpd from KSA.

          They're right - besides which shale oil isn't the medium / heavy oil out of KSA. It's not even the same product to envision as competing.

          oldfarmermac says:
          11/11/2015 at 8:34 pm

          Watcher, you occasionally make some sense, sorta kinda.

          But you know better, or at least you ought to know better, than to say shale oil doesn't matter because it cannot be exported.

          Oil is a fungible commodity traded in a brutally competitive world market.

          A million barrels a day of domestic yankee production above and beyond "the usual" is a million barrels somebody formerly exported to us Yankees looking for a new home in some other importing country.

          Taking a million barrels a day off our Yankee production would have approximately the same effect on the world market as if Saudi Arabia were to cut back by a million barrels a day.

          But your remarks about oil supposedly going into storage recently seem to be very reasonable.

          SURELY TO SKY DADDY the tank farms of the world must be getting pretty damned close to overflowing by now, and every rusty old tanker that will hold a few thousand barrels is probably full as well, sitting anchored someplace.

          Doug Leighton says:
          11/11/2015 at 1:49 pm

          OIL GLUT DEEPENS WITH 100M BARRELS AT SEA

          "Patrick Rodgers, the chief executive of Euronav, one of the world's biggest listed tanker companies, said oil glut was so severe traders were asking ships to go slow to help them manage storage levels."

          http://www.ft.com/cms/s/0/f763a6da-8859-11e5-9f8c-a8d619fa707c.html#axzz3rD5Ye7ss

          ezrydermike says:
          11/11/2015 at 2:25 pm

          wti futures 11-11-2015

          Watcher says:
          11/11/2015 at 6:50 pm

          And btw all you supply and demand worshippers . . . just who is buying oil to store, when storage has throughput? You aren't buying to store it for future higher price. You buy it to store it to flow it outward incrementally to consumption, with new oil coming in to refill the tanks. FIFO. That's how Cushing works. If price rose, the oil getting sold from storage just went in there last week or 2 weeks ago. It didn't get there in January. There's no big profit.

          dmg555 says:
          11/11/2015 at 3:13 pm

          From the Financial Times on Energy Debt

          http://www.bloomberg.com/news/articles/2015-11-11/opec-challenges-shale-afresh-as-iraq-crude-floods-gulf-of-mexico

          Oil Industry Needs Half a Trillion Dollars to Endure Price Slump. Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, (2015) about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion in bonds and loans are due for repayment over the next five years.

          Watcher and Shallow: Your numbers on total debt look a bit low, but I'm only siting the Financial Times.

          shallow sand says:
          11/11/2015 at 6:01 pm

          dmg555. I was just throwing out things off the top of my head, which is probably not the best thing to do.

          A lot of money borrowed by US upstream, and they are in tremendous trouble if prices stay below $60 WTI though 2016, and do not substantially recover in 2017.

          [Nov 12, 2015] Monthly legacy shale production declines accelerates

          Notable quotes:
          "... Much steeper oil production declines in the Eagle Ford and Niobrara are apparently due to much higher and accelerating decline rates of the existing wells compared to the Bakken and Permian basin. ..."
          peakoilbarrel.com
          AlexS, 11/09/2015 at 7:02 pm
          Combined oil production from 7 shale plays is expected to decline by 558 kb/d, from 5507 kb/d in April to 4949 (these numbers include ~800-900 kb/d of conventional production, mainly from the Permian basin).

          New combined estimates for 7 plays were revised down by about 25-35 kb/d from March to May, and by 40-50 kb/d from June to December.

          AlexS, 11/09/2015 at 9:05 pm
          Much steeper oil production declines in the Eagle Ford and Niobrara are apparently due to much higher and accelerating decline rates of the existing wells compared to the Bakken and Permian basin.

          Monthly legacy production declines as % of total production by 4 key LTO plays
          Source: EIA DPR

          [Nov 12, 2015] Oil Majors Don't Share OPEC's Optimism On Oil Prices In 2016

          Notable quotes:
          "... Saudi was selling 9 m/bbl/day when oil was at $100+, now they are selling 10.5 mbbl/day at $43. The math on that is staggering. ..."
          "... So why are they overproducing, selling more of their finite resource at a low price instead of over the longer term at more than double its current price. ..."
          "... If the real reason of this stunt is to cause severe pain for Russia, Iran, Venezuala and others, well the oil doesn't go away. Someone will still own it and someone will still drill and pump when prices are more favorable. ..."
          Zero Hedge

          OPEC's meeting in Vienna is less than a month away, and oil producers – countries and companies alike – have been raising their concerns at an energy conference in the United Arab Emirates over the cartel's strategy to keep prices low.

          The issue arose on Monday when Mohammed bin Hamad al-Rumhy, the oil minister of Oman – not a member of OPEC – told the annual Abu Dhabi International Petroleum Exhibition and Conference that oil production is at "irresponsible" levels, leaving little latitude for variations in production.

          "This is [a] man-made crisis in our industry we have created," al-Rhumy said. "And I think all we're doing is irresponsible."

          Al-Rhumy added, "This is a commodity that if you have 1 million barrels a day extra in the market, you just destroy the market. We are hurting, we are feeling the pain, and we're taking it like a God-driven crisis. Sorry, I don't buy this, I think we've created it ourselves."

          The next day, al-Rhumy's concerns, if not his criticism, were shared by executives of leading international oil companies: ExxonMobil of the United States, BP of Britain and Total of France. All said they expect the current glut of oil, and the resultant depression in oil prices, to last longer than anyone expected – months longer, if not years longer.

          "I'm not sure we will exit from low prices before many months," Total CEO Patrick Pouyanne said.

          Lamar McKay, the director of exploration and production for BP, said he expects oil prices will stay low for some time, and Michael Townshend, the company's director for Middle East operations, said he expects the price of a barrel of oil will rise no higher than about $60 for three more years.

          These gloomy forecasts contrasted with the OPEC view. The group's secretary general, Abdullah al-Badri, told the conference on Tuesday that 2016 is likely to be a year for positive momentum in oil markets. And on Monday, UAE Oil Minister Suhail al-Mazrouei, said a decision by OPEC to cut production to shore up oil prices would only play into the hands of its competitors.

          As a result, al-Mazrouei said, he doesn't expect OPEC to change its strategy when it meets Dec. 4. "When you are the least expensive oil, you should be the base producer," he said.

          At its meeting in November 2014, OPEC adopted Saudi Oil Minister Ali al-Naimi's strategy of keeping production at 30 million barrels a day, despite the fall in oil prices caused by a rapid increase in production by non-members, especially the United States, which had ramped up production of shale oil.

          The goal was to wage a price war that would keep oil prices so low that such producers, who rely on relatively expensive hydraulic fracturing, or fracking, can't afford to drill for oil. The break-even point for fracking is around $60 per barrel, and oil now averages about $50 per barrel, leading to a noticeable drop in U.S. drilling.

          In the meantime, OPEC nations are exceeding their production limit of 30 million barrels per day by more than 1.5 million barrels, so it's no wonder oil prices are so low.

          Concerns about low oil prices were raised before last year's OPEC meeting, particularly by Venezuela.

          Saudi Arabia had already said it opposed production cuts. Venezuela's president, Nicolas Maduro, said he was hoping to work out ways to bolster oil prices in meeting both with members of OPEC and producers who weren't part of the 12-member cartel.

          That came to naught, however, and the Saudi plan became OPEC policy. Despite current dissatisfaction from some oil producers, there's no reason to expect the cartel to change course if it believes its strategy is working.

          Selected Skeptical Comments

          Hard Assets

          I have posted this comment on 7 million forums and discussion boards and I have yet to get a reasonable answer.

          If an oil producer, big or small, has X barrels of oil in the ground, a finite number, why would they (especially OPEC countries who can 'control' the price) overproduce to sell today at $43 instead of $110+ ??

          How does driving down the price get one more 'market share' ? When oil was $100/bbl, all things being equal, it was $100 across the globe. At $43, its $43 across the globe. Again, all things being equal, how does that impact market share ?

          Sure, at a point in the future, when competitors fold you gain market share. Does this fall into the "market can stay illogical longer than one can remain solvent" category ?

          Completely short sighted vision in my book. WTF was the intention of OPEC in the first place?

          Saudi was selling 9 m/bbl/day when oil was at $100+, now they are selling 10.5 mbbl/day at $43. The math on that is staggering.

          Back to the finite X reserves. No doubt Saudi and every oil producer will pump and drill and do everything they can to get down to the last drop. Then it's over, literally pack up your tent and call it a day.

          So why are they overproducing, selling more of their finite resource at a low price instead of over the longer term at more than double its current price.

          If the real reason of this stunt is to cause severe pain for Russia, Iran, Venezuala and others, well the oil doesn't go away. Someone will still own it and someone will still drill and pump when prices are more favorable.

          So WTF is really going on here ?

          Benjamin123

          I sort of answered below.

          They dont care. Those countries do not feel any pain. Countries are not even real, only people or animals feel pain and those oil ministers are rich either way.

          Gregor Samsa

          Easy answer: cashflow. These companies / countries need any revenue they can get. Turning off the lights and going home is simply not an answer.

          A secondary answer is that many oil plays, such as tarsands and fracking literally cannot be shut down once started (at least not without incurring extra costs in the millions).

          erk

          US oil production is still up around 9 mill barrels according to EIA. Once their unsustainable shale oil output drops a million BBL or two, then OPEC are back to business as usual.

          Youri Carma

          It's not about OPEC anymore.

          [Nov 11, 2015] Four US Firms With $4.8 Billion In Debt Warned This Week They May Default Any Minute

          Zero Hedge

          agent default

          It's not just the oil. The oil is convenient to point at because the US can pretend that they got SA to cause the drop in order to stick it to Russia. Makes the US look really smug. Meanwhile the truth is, copper down, zinc down, iron ore down, you name it down.

          Baltic Dry almost crashing, soft commodities gone to hell. I guess SA can also influence these markets as well.

          [Nov 11, 2015] Questions for Monetary Policy

          Notable quotes:
          "... Looking at the recent moves in exchange rates based on a simple switch in expectation of whether or not the Fed would raise rates in December or wait one or two meetings its seems obvious that the markets are not very good at anticipation. So I would not put much money on the ability of the markets to anticipate the trajectory and endpoint of raising rates - or the ability of anybody to guess where the exchange rates will go next. ..."
          "... The drop in hours worked data in the productivity report is very confusing. ..."
          "... I think lower oil prices has lead to a stronger consumption boost than initially thought. ..."
          economistsview.typepad.com
          James Bullard, president of the St. Louis Fed, says there are five questions for monetary policy:

          The five questions

          • What are the chances of a hard landing in China?
          • Have U.S. financial market stress indicators worsened substantially?
          • Has the U.S. labor market returned to normal?
          • What will the headline inflation rate be once the effects of the oil price shock dissipate?
          • Will the U.S. dollar continue to gain value against rival currencies?

          I would add:

          • Will wage gains translate into inflation (or something along those lines)?

          Anything else?

          sanjait said in reply to Anonymous...

          Markets move based on expectations of both economic fundamentals and the Fed's reaction function. So both can create surprises.

          In this case, a relatively stronger than expected US economy could push the dollar up quite a bit. The central bank would be expected to dampen but not eliminate this effect, even without changing their perceived reaction function.

          DeDude said in reply to Anonymous... , November 10, 2015 at 02:35 PM

          Looking at the recent moves in exchange rates based on a simple switch in expectation of whether or not the Fed would raise rates in December or wait one or two meetings its seems obvious that the markets are not very good at anticipation. So I would not put much money on the ability of the markets to anticipate the trajectory and endpoint of raising rates - or the ability of anybody to guess where the exchange rates will go next.

          What we can say is that the strengthening of the US$ that has happened recently will hurt the economy - whether it will hurt enough to slow the Fed is anybodies guess. Whether those guesses have already been baked into the exchange rates is impossible to predict.

          Bert Schlitz said...

          On Angry Bear, there is a post about 3rd quarter hours and Spencer's remark:

          "The drop in hours worked data in the productivity report is very confusing.

          The employment shows several measures of hours worked and they increased in the third quarter from 0.5% to 1,08 for aggregate weekly payrolls.

          Something is really change.

          The productivity report also had unit labor cost rising more than prices,
          This implies falling profits, what the S&P 500 shows."

          Basically wages accelerated rapidly in the 3rd quarter. The BLS didn't start catching up to it until October. My guess the hours drop and employment picks up trying to hold down costs. However, this will probably only level off things off for a few quarters, which would be good enough to profits catch back up until the labor market becomes so tight, they simply have no choice but to raise prices and hours worked surge again. Classic mid-cycle behavior (which Lambert should have noticed).

          This is what triggered the 3rd quarter selloff and inventory correction. That foreign stuff was for show. I think lower oil prices has lead to a stronger consumption boost than initially thought.

          am said...

          Clicked on this link for the answers but it is 34 blank pages, so i'll go for:
          1. No, they'll just devalue when need be to soften the landing. I think they will do another one before the end of the year.
          2. No idea.
          3. Near it if you believe the Atlanta Fed. They have a detailed analysis on their blog.
          4. 2.2 if you believe the St Louis Fed, end of December for the oil price decline washout from the system. So inflation will creep up by the end of the year.
          5. Yes and more so if they raise the rate.
          6. No. because it will just be oil led not wages (see 4).
          Anything else: the weather with apologies to PeterK.

          anne said...

          I am really having increasing trouble understanding, how is it that having a Democratic President means making sure appointments from the State or Defense Department to the Federal Reserve are highly conservative and even Republican. Republicans will not even need to elect a President to have conservatives strewn about the government:

          http://www.latimes.com/business/la-fi-neel-kashkari-federal-reserve-minneapolis-20151110-story.html

          November 10, 2015

          After failed GOP bid to be California's governor, Neel Kashkari will head Minneapolis Fed
          By Jim Puzzanghera - Los Angeles Times

          anne said in reply to anne...

          Neel Kashkari is another Goldman Sachs kid, what would you expect?

          anne said in reply to anne...

          http://www.nytimes.com/2015/11/11/business/ex-treasury-official-kashkari-named-minneapolis-fed-president.html

          November 10, 2015

          Neel Kashkari, Ex-Treasury Official, Named Minneapolis Fed President
          By BINYAMIN APPELBAUM

          Neel Kashkari is the third new president of a regional reserve bank named this year, and all three previously worked at Goldman Sachs.

          [ Really, well, creepy comes to mind. ]

          [Nov 11, 2015] Valentin Katasonov - Banks Rule the World, but Who Rules the Banks (II)

          Notable quotes:
          "... do not just own shares in American banks, they own mainly voting shares. It these financial companies that exercise the real control over the US banking system. ..."
          Strategic Culture Foundation
          Financial holding companies like the Vanguard Group, State Street Corporation, FMR (Fidelity), BlackRock, Northern Trust, Capital World Investors, Massachusetts Financial Services, Price (T. Rowe) Associates Inc., Dodge & Cox Inc., Invesco Ltd., Franklin Resources, Inc., АХА, Capital Group Companies, Pacific Investment Management Co. (PIMCO) and several others do not just own shares in American banks, they own mainly voting shares. It these financial companies that exercise the real control over the US banking system.

          Some analysts believe that just four financial companies make up the main body of shareholders of Wall Street banks. The other shareholder companies either do not fall into the key shareholder category, or they are controlled by the same 'big four' either directly or through a chain of intermediaries. Table 4 provides a summary of the main shareholders of the leading US banks.

          Table 4.

          Leading institutional shareholders of the main US banks

          Name of shareholder company Controlled assets, valuation (trillions of dollars; date of evaluation in brackets) Number of employees
          Vanguard Group 3 (autumn 2014) 12,000
          State Street Corporation 2.35 (mid-2013) 29,500
          FMR (Fidelity) 4.9 (April 2014) 41,000
          Black Rock 4.57 (end of 2013) 11,400

          Evaluations of the amount of assets under the control of financial companies that are shareholders of the main US banks are rather arbitrary and are revised periodically. In some cases, the evaluations only include the companies' main assets, while in others they also include assets that have been transferred over to the companies' control. In any event, the size of their controlled assets is impressive. In the autumn of 2013, the Industrial and Commercial Bank of China (ICBC) was at the top of the list of the world's banks ranked by asset size with assets totaling $3.1 trillion. At that point in time, the Bank of America had the most assets in the US banking system ($2.1 trillion). Just behind were US banks like Citigroup ($1.9 trillion) and Wells Fargo ($1.5 trillion).

          [Nov 11, 2015] 2 simple charts illustrate why low oil prices are so depressing

          Nov 9, 2015 | Business Insider
          The energy sector's capital expenditure, or capex, on spending for fixed infrastructure that secures future business activity, has slumped 8% this year according to Goldman Sachs.

          Energy capex growth is set to fall another 20% next year, wrote the firm's strategists led by David Kostin to clients on Friday.

          There's usually a lag between energy-sector capital spending and oil prices, with prices leading. That means even if oil prices defy most forecasts and rise sharply from current levels, capex will likely still fall.

          [Nov 11, 2015] IEA World Energy Outlook New Hope For Civilization

          Notable quotes:
          "... In The Economic Growth Engine Warr and Ayres have some interesting historical data on how most improvements in, say, fuel efficiency come not from actual technological innovation but a straightforward process of making vehicles lighter, suggesting that there's a hard cap on how far such work can go. ..."
          "... The report states, "The plunge in oil prices has set in motion the forces that will lead the market to rebalance, via higher demand and lower growth in supply. This may take some time, as oil consumers are not reacting as quickly to changes in price as they have in the past." Here we see the inability to perceive the unfolding consequences of peak oil playing out in a neoliberal world run for the benefit of the 1%. It's as if "The market" will "rebalance" because it is eternal and, well, since it's eternal it just has to rebalance. ..."
          "... A few generations from now our descendants will wonder, "What took them so long to figure out that we'd reached the limits to growth?" The answer, of course, is that growth is the core of the myth holding the American psyche together. If it's false, what's the meaning of "life, the universe, everything?" ..."
          Nov 11, 2015 | naked capitalism

          Sandwichman, November 11, 2015 at 2:39 am

          Green smoke. "These projected figures are a figment of our imagination. We hope you like them." (New Yorker cartoon from the 1980s

          vteodorescu, November 11, 2015 at 5:31 am

          The path to low carbon is nuclear. Anything else is a palliative. Technical fact: wind and solar have to be backed up with equal capacity of baseload generation, usually gas, to keep the grid balanced, to compensate the highly variable supply wind and solar produce. They are largely politically driven and a sop to the misinformed intelligentsia.

          Energy scarcity is another tool to keep the huddled masses huddled.

          Disclaimer: I am an organic farmer in the northeast of Brazil. I do not work for or have any financial interest in the nuclear industry.

          TheCatSaid, November 11, 2015 at 6:54 am

          These crystal-ball gazing exercises leave out the high likelihood like pandemics. Losing a significant % of population will impact demand but also supply (just imagine what losing key engineers and scientists could impact on development of better technologies, or on production facilities).

          likbez -> TheCatSaid, November 11, 2015 at 9:34 pm

          If I remember correctly in 1956 Hubbert correctly predicted the peak of the USA production in 1970. From Wikipedia
          ==== quote ===
          Hubbert, in his 1956 paper,[3] presented two scenarios for US crude oil production:
          most likely estimate: a logistic curve with a logistic growth rate equal to 6%, an ultimate resource equal to 150 Giga-barrels (Gb) and a peak in 1965. The size of the ultimate resource was taken from a synthesis of estimates by well-known oil geologists and the US Geological Survey, which Hubbert judged to be the most likely case.

          upper-bound estimate: a logistic curve with a logistic growth rate equal to 6% and ultimate resource equal to 200 Giga-barrels and a peak in 1970.

          Hubbert's upper-bound estimate, which he regarded as optimistic, accurately predicted that US oil production would peak in 1970, although the actual peak was 17% higher than Hubbert's curve.

          Production declined, as Hubbert had predicted, and stayed within 10 percent of Hubbert's predicted value from 1974 through 1994; since then, actual production has been significantly greater than the Hubbert curve.

          Nicholas Cole, November 11, 2015 at 8:51 am

          Is the title of this article supposed to be funny?

          To echo Paper Mac, I'd like to know more about their assumptions re: energy efficiency investments and improvements.

          In The Economic Growth Engine Warr and Ayres have some interesting historical data on how most improvements in, say, fuel efficiency come not from actual technological innovation but a straightforward process of making vehicles lighter, suggesting that there's a hard cap on how far such work can go.

          DanB, November 11, 2015 at 9:35 am

          The report states, "The plunge in oil prices has set in motion the forces that will lead the market to rebalance, via higher demand and lower growth in supply. This may take some time, as oil consumers are not reacting as quickly to changes in price as they have in the past." Here we see the inability to perceive the unfolding consequences of peak oil playing out in a neoliberal world run for the benefit of the 1%. It's as if "The market" will "rebalance" because it is eternal and, well, since it's eternal it just has to rebalance.

          The counter explanation that the price of oil fell because people are going broke while the cost of extracting oil is climbing cannot be conceived, let alone entertained.

          And the peak oil scenario is actually hidden in plain sight in classical economics: if a resource becomes scarce what happens? Price increases and then encourages more exploration and recovery of the resource. If that does not work then price incentivizes the introduction of substitutes. And if that doe not work you get demand destruction, because the market always clears -- even if people go hungry the market clears.

          A few generations from now our descendants will wonder, "What took them so long to figure out that we'd reached the limits to growth?" The answer, of course, is that growth is the core of the myth holding the American psyche together. If it's false, what's the meaning of "life, the universe, everything?"

          IDG, November 11, 2015 at 9:50 am

          Humans are awfully bad at predicting things, specially under radical uncertainty conditions (so basically this situation); yet we see this sort of rubbish published on daily basis. Call me back when we can predict what will happen in a year reliably, until then… 20y-30y projections are a joke, for all I know humanity could have self-exterminated itself in a nuclear war by then (one century with nuclear weapons around and no nuclear-conflict having happened yet looks like defying probability to me!).

          But I guess economists need employment too after all, how would such useless profession be justified if wouldn't swallow rubbish like this.


          [Nov 11, 2015] Friction is Now Between Global Financial Elite and the Rest of Us

          Notable quotes:
          "... But the standard explanation, as well as the standard debate, overlooks the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs ..."
          "... This means that the fracture in politics will move from left to right to the anti-establishment versus establishment. ..."
          "... In most cases, international agreements are negotiated by elites that have more in common with each other than with working people in the countries that they represent. ..."
          "... when we negotiate economic agreements with these poorer countries, we are negotiating with people from the same class. That is, people whose interests are like ours – on the side of capital ..."
          "... Accordingly, the fundamental purpose of the neo-liberal polices of the past 20 years has been to discipline labor in order to free capital from having to bargain with workers over the gains from rising productivity. ..."
          "... Moreover, unregulated globalization in one stroke puts government's domestic policies decisively on the side of capital. In an economy that is growing based on its domestic market, rising wages help everyone because they increase purchasing power and consumer demand – which is the major driver of economic growth in a modern economy. But in an economy whose growth depends on foreign markets, rising domestic wages are a problem, because they add to the burden of competing internationally. ..."
          "... Both the international financial institutions and the WTO have powers to enforce protection of investors' rights among nations, the former through the denial of financing, the latter through trade sanctions. But the institution charged with protecting workers' rights – the International Labor Organization (ILO) – has no enforcement power. ..."
          Economist's View

          Friction is now between global financial elite and the rest of us, The Guardian:

          ... ... ...

          But the standard explanation, as well as the standard debate, overlooks the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs. ...

          Dan Kervick said...

          "This means that the fracture in politics will move from left to right to the anti-establishment versus establishment."

          I think this is probably right, but the established parties are doing their best to prevent it. Each of them has an interest in continuing to divide people along various cultural, religious and ethnic identity lines in order to prevent them from achieving any kind of effective solidarity along class lines.

          Anyway, I fear we may be headed toward a turbulent and very unpleasant future.

          Kenneth D said...

          "Rethinking the Global Political Economy" By Jeff Faux April 24, 2002

          In most cases, international agreements are negotiated by elites that have more in common with each other than with working people in the countries that they represent. As a retired U.S. State Department official put it to me bluntly a few years ago, "What you don't understand," he said, "is that when we negotiate economic agreements with these poorer countries, we are negotiating with people from the same class. That is, people whose interests are like ours – on the side of capital."

          Accordingly, the fundamental purpose of the neo-liberal polices of the past 20 years has been to discipline labor in order to free capital from having to bargain with workers over the gains from rising productivity.

          But labor is typically at a disadvantage because it usually bargains under conditions of excess supply of unemployed workers. Moreover, the forced liberalization of finance and trade provides enormous bargaining leverage to capital, because it can now threaten to leave the economy altogether.

          Moreover, unregulated globalization in one stroke puts government's domestic policies decisively on the side of capital. In an economy that is growing based on its domestic market, rising wages help everyone because they increase purchasing power and consumer demand – which is the major driver of economic growth in a modern economy. But in an economy whose growth depends on foreign markets, rising domestic wages are a problem, because they add to the burden of competing internationally.

          Both the international financial institutions and the WTO have powers to enforce protection of investors' rights among nations, the former through the denial of financing, the latter through trade sanctions. But the institution charged with protecting workers' rights – the International Labor Organization (ILO) – has no enforcement power.

          [Nov 09, 2015] Supervising Culture and Behavior at Financial Institutions

          Notable quotes:
          "... Organizational culture and behavior is a critical factor in the success of any business. The intense emphasis most American businesses place on numbers to the exclusion of almost any other consideration is a major contributor to the vast amount of corporate control fraud we have witnessed in the past decade or so. ..."
          "... One of the fundamental tenets of Reaganism/Libertarianism is that "The Ends Justify the Means." The financial sector is not the only institution in our civilization that is failing due to this mind-set. The best form of regulation is simply holding up a mirror to a firm or agency and asking questions such as, "In this organization, when is it OK to lie?" ..."
          Nov 09, 2015 | naked capitalism

          John Zelnicker, November 7, 2015 at 9:49 am

          Fascinating research. Thanks for posting this, Yves.

          Organizational culture and behavior is a critical factor in the success of any business. The intense emphasis most American businesses place on numbers to the exclusion of almost any other consideration is a major contributor to the vast amount of corporate control fraud we have witnessed in the past decade or so.

          Unfortunately, I don't see any of these executive psychopaths putting themselves through the self-assessment that is one of the necessary steps mentioned in the study. At least, not voluntarily.

          Sluggeaux, November 7, 2015 at 11:39 am

          Important.

          One of the fundamental tenets of Reaganism/Libertarianism is that "The Ends Justify the Means." The financial sector is not the only institution in our civilization that is failing due to this mind-set. The best form of regulation is simply holding up a mirror to a firm or agency and asking questions such as, "In this organization, when is it OK to lie?"

          [Nov 09, 2015] Peak Oil Open Thread

          Notable quotes:
          "... Yergin predicts a 10 percent drop in US oil production, April 2015 to April 2016. That's a 960,000 bpd drop and will take us to 8,638,000 bpd in April 2016 if he is correct. ..."
          "... U.S. crude output, which surged to the most in more than three decades this year and triggered a price collapse, will retreat by about 10 percent in the 12-months ending April, according to Yergin, vice chairman at IHS Inc. ..."
          "... How big a drop do you expect? I think Yergin may be right in this case. The drop in output in the US, along with increased demand at low oil prices will eventually balance the oil market, prices will rise and output will level off and may increase slightly if oil prices get above $75/by the end of 2016. ..."
          "... I have no idea when oil prices will get to $75/b, but my WAG is mid 2017 at the latest when World output will be struggling to increase. ..."
          Peak Oil Barrel

          Yergin predicts a 10 percent drop in US oil production, April 2015 to April 2016. That's a 960,000 bpd drop and will take us to 8,638,000 bpd in April 2016 if he is correct.

          Yergin Sees Oil Price Near Bottom as U.S. Output Set to Fall

          U.S. crude output, which surged to the most in more than three decades this year and triggered a price collapse, will retreat by about 10 percent in the 12-months ending April, according to Yergin, vice chairman at IHS Inc.


          Guy Minton, 11/04/2015 at 8:59 pm

          Actually, Yergin's estimate drop to 8,600,000 is in line with EIA's projection. Both are too conservative, my guess the drop will eventually surprise most.

          Dennis Coyne, 11/05/2015 at 8:30 am

          Hi Guy,

          How about some numbers?

          How big a drop do you expect? I think Yergin may be right in this case. The drop in output in the US, along with increased demand at low oil prices will eventually balance the oil market, prices will rise and output will level off and may increase slightly if oil prices get above $75/by the end of 2016.

          I have no idea when oil prices will get to $75/b, but my WAG is mid 2017 at the latest when World output will be struggling to increase. That assumes no major World recessions (like 2008/9) between now and 2017, if the pessimists' forecast of an impending crash due to a stock market and debt bubble are correct, then output could fall much more than forecast by Yergin due to sustained low oil prices due to lack of demand for oil due to low income growth (or negative income growth).

          [Nov 06, 2015] The Oil Glut Outside Of The U.S. Is Surprisingly Small

          One plausible estimate from the discussion: "Unless I see something better to go on, I will go with Core Labs estimates of -10% production in 2016."
          Notable quotes:
          "... Right now, many investors seem fearful of where energy prices are going but I dont think the situation looks all that bad. While it is possible that events such as Iran exporting large amounts of crude (estimates of which are likely overstated) and Chinas economy collapsing could cause a drop in demand in relation to supply, any scenario outside of these transpiring shows a growingly bullish outlook for oil moving forward. ..."
          "... So where is the glut? Probablly only in heads of people that follow the mantras of US mass media machine. ..."
          "... It seems a lot of the addition to builds in liquids are from propane. If you look recently at the EIA weekly reports Gasoline , distillate, jet fuel imports to the US have all risen by a large amount compared to last year. ..."
          "... In March 2013, the inventory was 393 MM. In March 2015 it was 475 MM. Most of the additional inventory was held in tank farms and underground storage supporting pipeline. ..."
          "... It will tell you that US production is only 10% of world production and US spending 20% of world oil. So US is far biggest importer of oil on the world. ..."
          "... ...And importers by definition newer have a glut... Obviously imported oil is cheaper and more suitable than domestic. So WTI producers cant find buyers, hence the glut of US oil. ..."
          "... The adjustment number is running about 3 MM per week for the last 4 weeks. It is almost always in the positive direction that tells me the error bias is the same. ..."
          "... I will stop commenting on weekly EIA numbers because a smart petroleum engineer Gary Long (who compiles these numbers) said that you are dumb if you used his numbers for trades. ..."
          "... If you're using the weekly production numbers to do trades on Wall Street, you're dumb,' said Gary Long, a petroleum engineer who compiles numbers for the EIA. 'This is not going to work out for you. Don't do that. We've actually had people call us and be very angry with us because they've lost a lot of money. ..."
          "... At 10%, this implies oil production of 8.649 million barrels per day compared to the 9.610 million per day we peaked at. At 20%, we are looking at just 7.688 million barrels per day. This second scenario might be on the optimistic side but it would be incredibly bullish for crude if it does materialize. :) ..."
          "... Very likely that oil prices will react to the upside by Q1 or Q2 2016 at the latest...otherwise the world could face a global inventory shortfall of -200 to -300 million barrels by the end of 2016. ..."
          "... Global recessions are like the queen of spades in a game of hearts. If someone gives you the queen of spades in 2016, and you are not shooting the moon (short oil), but are long oil in some way, you LOSE... ..."
          "... Iraq will lead the decline in Middle east. From peak in June, I believe this a 400000-500000 barrels/day in export. The region is in turmoil. ..."
          seekingalpha.com

          Canada, the North Sea, and (maybe) Russia will see production drop over the next year due to decreased investment in drilling activities

          ... ... ...

          According to the IEA, production levels of light tight oil (LTO as they call it) generally fall by 72% within their first 12 months and by about 82% in the first two years.

          ... ... ...

          Right now, many investors seem fearful of where energy prices are going but I don't think the situation looks all that bad. While it is possible that events such as Iran exporting large amounts of crude (estimates of which are likely overstated) and China's economy collapsing could cause a drop in demand in relation to supply, any scenario outside of these transpiring shows a growingly bullish outlook for oil moving forward.

          This is especially true when you consider that the glut that's being experienced isn't all that large at the moment.

          mapodga

          Very good overview. Just excellent.

          So where is the glut? Probablly only in heads of people that follow the mantras of US mass media machine.

          If one accident in ME happen all hell can break out.

          bently

          Very concise but informative coverage of important points! I might add that there is likely to be bullish moves in the energy sector much sooner than people may expect, for the smart money takes their positions based on anticipation of things to come rather than after they are realized -- you know, the buy on the rumor and sell on the news strategy.

          We seem to be seeing the start of that now. But the momentum will build slowly; nothing happens overnight - usually.

          Robert P. Balan

          Mr. Jones,

          You wrote:

          "Using data presented in a previous article of mine, I figured that, at the time this data was gathered, about 96.4 million barrels worth of this glut was attributable to the U.S. This suggests that the OECD, excluding the U.S., has a glut of just 62.9 million barrels, which amounts to roughly 2.4 days of excess supply for the group."

          This chart will provide a scale of just how disruptive the impact of US shale oil production was to the global oil balance, triggering the backlash from the OPEC.

          http://tinyurl.com/p36...

          Also, you wrote:

          "The last piece that investors in the oil space should look at relates to China. I have been bearish on the country for quite some time but one goal they will likely continue to reach for (unless they see a complete economic collapse) is filling up their SPR (Strategic Petroleum Reserve). In the image below, you can see their schedule and estimated storage capacity for the development of storage facilities."

          You may have watch for indications of impending domestic currency CNY devaluations. The official oil imports data out of China tends to pick-up about 1 quarter before the CNY devaluation occurs. Talk of front-running . . . the Chinese have mastered the art.

          See this chart here:

          product.datastream.com


          Trixwd

          (From Oct OPEC report) OECD commercial oil stocks rose further in August to stand at 2,933 mb. At this level, inventories were around 194 mb higher than the five-year average. Crude and products showed a surplus of around 167 mb and 27 mb, respectively.

          In terms of days of forward cover, OECD commercial stocks stood at 63.3 days in August, some 4.5 days higher than the five-year average. http://tinyurl.com/pua ...

          mapodga

          So OPEC inventory is 8% above normal. Being so after 1 year of glut we can conclude there isn't any glut.

          Trixwd

          With more US domestic production being used you would expect a new higher normal for oil inventories because that production is in the US already, and not coming on tanker s(Temp storage) in the form of higher imports.In times of high demand you would also expect higher inventories in distillates , gasoline, jet fuel.

          It seems a lot of the addition to builds in liquids are from propane. If you look recently at the EIA weekly reports Gasoline , distillate, jet fuel imports to the US have all risen by a large amount compared to last year.

          Trixwd

          (Also more on China which is a significant bump to import Quota). China has more than doubled its non-state crude oil import quota for 2016 to 87.6 million tonnes, or 1.75 million barrels per day (bpd), as Beijing seeks to boost competition and attract private investment in its oil industry.

          The 2016 quota issued by the Ministry of Commerce on Friday compared to this year's figure of 37.6 million tonnes. http://tinyurl.com/owr ...

          Kxviswan

          I researched into how the inventory build in US was taking place and posted it in Investor Village. Part of the inventory elevation is a) because of tank farm builds to support tight oil increase and b) the way EIA does oil accounting. Oil in ocean is not counted until it clears customs. I am willing to concede that 30-50 MM barrels might be due to these two reasons and this may a new norm inventory levels. See below.

          I pursued this topic further and found out that Kinnear is partly right and mostly wrong.

          I found a website (see attached) that shows how the crude inventory is divided. Open the excel spreadsheet and you will get the answers.

          The inventory is not held in pipelines but in additional tank farms and underground storage that were built to handle additional flow through pipelines.

          The refiners are holding utmost 10 MM barrels.

          In March 2013, the inventory was 393 MM. In March 2015 it was 475 MM. Most of the additional inventory was held in tank farms and underground storage supporting pipeline.

          Also there is much more capacity to store additional oil.

          http://tinyurl.com/nqd ...

          Ben Ten

          Kxwisan -

          See below the link for an article from September 18th basically discussing the same ideas regarding US inventories you mention above in a different way.

          Check out my comments also in the article's reply section if you are interested.

          We will find out how much of this new inventory sticks - and how much gets burned off. If the oil market gets tight and prices are rising before the US inventory drops much then that will tell us something...

          http://tinyurl.com/pkb ...

          mapodga

          :-)
          It will tell you that US production is only 10% of world production and US spending 20% of world oil. So US is far biggest importer of oil on the world.

          And importers by definition never have a glut. Exporter league is that which define price of oil and when they will put their lines in order then US inventory won't count about anything.

          CarlSag

          "...And importers by definition newer have a glut..." Obviously imported oil is cheaper and more suitable than domestic. So WTI producers can't find buyers, hence the glut of US oil.

          Trixwd

          Kxviswan do you know when the EIA put's out the weekly report they have an adjustment added to crude oil inventory, which i think was around 450,000b/d. Do you have any idea where this oil comes from, it does say the adjustment number(formerly unaccounted for oil).

          But with out that adjustment number taking oil exports + refinery inputs - imports + production it would not show much extra oil left as a weekly build except for that adjustment number being added.

          Kxviswan

          Yes, I have some ideas on this. I have a Chemical Engineering background [and can tell you that] it is very difficult to do a material balance on a weekly basis. The amount of information you need to collect is indeed enormous.

          The adjustment number is running about 3 MM per week for the last 4 weeks. It is almost always in the positive direction that tells me the error bias is the same.

          What I found further that Genscape numbers are different than EIA numbers but their subscription is high- in the 10000 dollar range.

          A lot of people trust EIA numbers as "gospel". Here is what I found and posted on BRY board from Gary Long of EIA. What Gary Long said about EIA weekly numbers

          I will stop commenting on weekly EIA numbers because a smart petroleum engineer Gary Long (who compiles these numbers) said that you are dumb if you used his numbers for trades.

          Eloquently said. I would like to buy a drink or two for Gary.

          "' If you're using the weekly production numbers to do trades on Wall Street, you're dumb,' said Gary Long, a petroleum engineer who compiles numbers for the EIA. 'This is not going to work out for you. Don't do that. We've actually had people call us and be very angry with us because they've lost a lot of money. '"

          Kxviswan

          About propane build in US. I asked this question on BRY board and I got a very intelligent reply. US alone will use 35000 barrels/day for propylene production. This is a new technology that I am very familiar with called PDH or propane dehydrogenation. The others are slated for export. EPD is a major supplier. This is an on-purpose build.

          The message for Daniel is that since April, US is in supply-demand equilibrium because you need to subtract on-purpose build of propane.

          jeezuz30

          Nice summary and viewpoints,

          "Given that the number of oil rigs in the U.S. alone have dropped from 1,595 this time last year to just 594 (with the drop really starting around October and November) I suspect that the drop in output will get a bit more steep in the months ahead"

          I would be careful with that projection and general misconception. With the slowdown of rigs we get an increased performance as the few rigs left are highly competitive with the others as they don't want to be next ones idled. So we have a huge increase in efficiency (12000' laterals now being drilled in 3 days, completed in 4 or so).

          Only a year or two ago, this number was closer to 6 days to drill (and with a lot of the less efficient rigs that did get laid down, some as high as 12-14 days).

          So yes we only have half the rigs or less, but these are (were) probably the high performers and only getting faster and doing more with less.

          Not to mention all the gains that have been made on the production side (look at EOG and cemented liners and the increased production from improved fracking techinques).

          Daniel Jones , contributor

          Author's reply " That is all very true. I don't think a massive drop in rig count will have a similar drop in output but I'd imagine a 50% to 60% drop would result in at least a 10% drop in output, maybe even a 20% drop.

          At 10%, this implies oil production of 8.649 million barrels per day compared to the 9.610 million per day we peaked at. At 20%, we are looking at just 7.688 million barrels per day. This second scenario might be on the optimistic side but it would be incredibly bullish for crude if it does materialize. :)

          Kxviswan

          For what it is worth, Core Lab is projecting 10% drop next year- taking into account rig drop.

          22023171

          Wrong they are projecting a 3.1% decline from existing reservoirs being substantially offset by new production but not entirely net net they are forecasting a modest decline in global production.

          Kxviswan

          ...CLB has lot better models and back in June, Dave Demshur predicted that US production will fall by 500000 barrels/day by 2015. This completely went against the grain that EIA was predicting.

          In third quarter conference call, Core Lab has upped it to 700000 barrels/day.

          GOM picked up 209000 barrels/day in two months that is masking lower 48 states decline.

          EIA predicted a 169000 barrels/day drop in September. Ron Patterson predicted a similar drop in October. We will wait a month and see what happens.

          BRY board members are reporting that rigs will be idled between Thanksgiving and New Year.

          I am using 90000 barrels/day/month [drop] in my estimates based on drilling activity report of EIA.


          Ben Ten

          Kvxviswan -

          I am seeing the same thing...from the above reasoning and estimates.

          It looks to me like the current global surplus in crude oil production is now close to zero - probably in November or December it shifts to a small DEFICIT - difficult to notice at first...

          There are maybe 200 million barrels stored away in excess inventories (relative to "normal" inventories) all over the world - most in the US - these are inventories that are viewed by owners to some extent as temporary and they will use them up as prices rise.

          Unless prices rise in 2016...the data and thinking above speaks to me that global crude oil production will drop by -2.0 million barrels/day by the end of 2016...and demand rises by +1.5 million barrels/day by the end.

          So the deficit will start ramping up already in Q1, as long as prices stay low...hitting maybe -1.0 mmbpd at the end...then in Q2 we are looking at approaching -2.0 mmbpd by the end...and at this rate the global industry is burning through the 200 million barrel inventory cushion fast enough to finish it off in less than a quarter.

          And then it comes down to the turn around speed of US shale oil...when do they raise the rig count...by how much...what is the delay...

          I will be paying attention when the EIA STEO comes out on November 10th, and considering the monthly production for US shale for October.

          Conclusions

          1) Very likely that oil prices will react to the upside by Q1 or Q2 2016 at the latest...otherwise the world could face a global inventory shortfall of -200 to -300 million barrels by the end of 2016.

          2) Likely that US shale will NOT have the power alone to drive prices from WTI of $60-70 back down below $50 in 2016 or even 2017.

          3) Global recessions are like the queen of spades in a game of hearts. If someone gives you the queen of spades in 2016, and you are not shooting the moon (short oil), but are long oil in some way, you LOSE...

          Kxviswan

          I read today that Iraq export has dropped quite a bit to 2.7 MM barrels/day. Here again, Core Labs predicted that Iraq will lead the decline in Middle east. From peak in June, I believe this a 400000-500000 barrels/day in export. The region is in turmoil.

          Iraqi government has no money to pay the contractors and they have sent a letter to majors. 20% of the funds is ear-marked for defense!

          Core Lab said in July that Middle East production is not sustainable and it has zero spare capacity. The June production rate has not been matched yet!

          ... ... ...

          [Nov 06, 2015] US production might be down by something from 1.5 up to 3 mill bbl/d by end of next year

          Notable quotes:
          "... monthly low is forecast for June 2016 at 8.77 mb/d. ..."
          "... It is interesting that the time lag between capex and production response for conventional production stands around 18 months. Therefore production in the Golf of Mexico is still rising (up 200,000 bbl/d in the last two months alone). This mitigates somehow the decline of shale production. This explains e.g. also the resilience of Russian production, which will in my opinion still rise over the next half year. ..."
          "... However, if the oil price stays below $50 per barrel, production will keep falling at roughly 1% per month, which is the average decline of the FED oil and gas production index since April 2015. ..."
          "... This scenario implies an at least 1.5 mill bbl/d decline until the end of next year – provided the oil price stays at the current level. My personal view is that US production will be down by more than 3 mill bbl/d by end of next year as there are strong signs of depletion of sweet spots, which accelerate the underlying decline. ..."
          "... The projected decline in U.S. production comes primarily from shale plays, and to a much less degree from Alaska and other conventional fields, while production in the GoM is expected to increase. ..."
          "... If, as you say, U.S. production drops by 3 mb/d by year-end 2016, that would mean a decline in LTO production by almost 2/3. That is impossible even if shale operators completely stop drilling new wells. According to the estimates I've seen, with no new wells, LTO production in the Bakken and the Eagle Ford would decline by between 30 and 40% within a 12-months period. ..."
          "... 3mill bbl/d is a lot and it is the top end of my estimate, yet also conventional production will decline by end of next year. It is just my gut feeling and I guess it has to do something with depletion of sweet spots. ..."
          peakoilbarrel.com

          AlexS, 11/05/2015 at 1:13 pm

          article in Bloomberg:

          Cheap Crude Hasn't Crippled the U.S. Shale Boom, Shale drillers defy OPEC and double down on drilling.

          http://www.bloomberg.com/news/articles/2015-11-05/cheap-crude-hasn-t-crippled-the-u-s-shale-boom

          shallow sand, 11/05/2015 at 9:16 pm
          AlexS. The title of the article does not exactly match the content. Good, short read.

          The article states US will average 9.2 million bopd this year, 8.8 next year. This ignores that US climbed to 9.6 and will end below 12/14. The 2016 number assumes a rebound in the second half of the year. I am not sure about that.

          If OPEC can keep a lid on oil prices through the end of 2016, I wonder what US production will average in 2017?

          AlexS, 11/06/2015 at 5:54 am
          shallow sand,

          The EIA estimates annual average U.S. C+C production at 9.25 mb/d this year (+540 kb/d y-o-y) and 8.86 mb/d in 2016 (-390 kb/d y-o-y).
          Monthly peak of 9.60 mb/d was in April 2015, monthly low is forecast for June 2016 at 8.77 mb/d.
          Thus, projected decline in monthly average between 4/15 and 6/16 is 830 kb/d.

          Projected decline for Lower 48 onshore between 3/15 and 6/16 is 910 kb/d.

          • The EIA expects U.S. production to rebound in 2H16, from 8.77mb/d in June to 9.02 mb/d in December.
          • The EIA assumes WTI to average $55.3 in 2H16 vs. $51.7 in 1H16 and $45.9 in 2H15.

          So they think that $55 is sufficient to trigger an increase in drilling/completion activity.

          Heinrich Leopold, 11/06/2015 at 3:20 am

          AlexS, Shallow Sand,

          Again I think there is a time lag of six months between lower capex and and actual production response. As shale companies have kept capex until recently quite high at the price of huge losses (http://wolfstreet.com/2015/11/05/giant-sucking-sound-of-capital-destruction-in-us-oil-gas-impairments/), they have finally responded with much lower capex in 3q15. This implies that the production decline will start in earnest during the first quarter 2016.

          It is interesting that the time lag between capex and production response for conventional production stands around 18 months. Therefore production in the Golf of Mexico is still rising (up 200,000 bbl/d in the last two months alone). This mitigates somehow the decline of shale production. This explains e.g. also the resilience of Russian production, which will in my opinion still rise over the next half year.

          Future production of oil will strongly depend on the oil price. If the oil price rises to over $80 per barrel in December (through a possible OPEC cut), US production will still be down until mid next year and then rise again. This is the scenario the above forecast implies.

          However, if the oil price stays below $50 per barrel, production will keep falling at roughly 1% per month, which is the average decline of the FED oil and gas production index since April 2015.

          This scenario implies an at least 1.5 mill bbl/d decline until the end of next year – provided the oil price stays at the current level. My personal view is that US production will be down by more than 3 mill bbl/d by end of next year as there are strong signs of depletion of sweet spots, which accelerate the underlying decline.

          AlexS, 11/06/2015 at 7:12 am
          Heinrich,

          According to the EIA, U.S. LTO production at the peak earlier this year was about 4.6 mb/d (it is now 200-300 kb/d lower). The projected decline in U.S. production comes primarily from shale plays, and to a much less degree from Alaska and other conventional fields, while production in the GoM is expected to increase.

          If, as you say, U.S. production drops by 3 mb/d by year-end 2016, that would mean a decline in LTO production by almost 2/3. That is impossible even if shale operators completely stop drilling new wells. According to the estimates I've seen, with no new wells, LTO production in the Bakken and the Eagle Ford would decline by between 30 and 40% within a 12-months period.

          Heinrich Leopold, 11/06/2015 at 7:28 am
          AlexS,

          3mill bbl/d is a lot and it is the top end of my estimate, yet also conventional production will decline by end of next year. It is just my gut feeling and I guess it has to do something with depletion of sweet spots.

          [Nov 06, 2015] Exxon Mobil Investigated for Possible Climate Change Lies by New York Attorney General

          Notable quotes:
          "... in another recent report , Exxon Mobil essentially ruled out the possibility that governments would adopt climate policies stringent enough to force it to leave its reserves in the ground, saying that rising population and global energy demand would prevent that. "Meeting these needs will require all economic energy sources, especially oil and natural gas," it said. ..."
          "... You legally aren't allowed to knowingly and purposely hide or distort data you are aware of which may materially affect your shareholders. ..."
          "... The issue is based on oil companies selectively releasing data and research in exclusive support of their conclusions, while suppressing or distorting material that didnt fit the narrative. ..."
          "... if I want to know about climate change, I dont seek reliable information from oil and gas companies, supermarket tabloids, or members of Congress. ..."
          "... These are the United States of America, where corporations have (and use) the power to lie constantly to their detractors and their customers alike. For me to expect anything else would suggest a lack of basic skepticism on my part where the products and activities of the corporate world are concerned. ..."
          www.nytimes.com

          The New York Times

          The people said the inquiry would include a period of at least a decade during which Exxon Mobil funded outside groups that sought to undermine climate science, even as its in-house scientists were outlining the potential consequences - and uncertainties - to company executives.

          ... ... ...

          "This could open up years of litigation and settlements in the same way that tobacco litigation did, also spearheaded by attorneys general," said Brandon L. Garrett, a professor at the University of Virginia School of Law. "In some ways, the theory is similar - that the public was misled about something dangerous to health. Whether the same smoking guns will emerge, we don't know yet."

          In the 1950s and '60s, tobacco companies financed internal research showing tobacco to be harmful and addictive, but mounted a public campaign that said otherwise and helped fund scientific research later shown to be dubious. In 2006, the companies were found guilty of "a massive 50-year scheme to defraud the public."

          ... ... ...

          in another recent report, Exxon Mobil essentially ruled out the possibility that governments would adopt climate policies stringent enough to force it to leave its reserves in the ground, saying that rising population and global energy demand would prevent that. "Meeting these needs will require all economic energy sources, especially oil and natural gas," it said.

          Jeff, Atlanta

          This sounds like a fishing expedition on reports published 40 years ago that Exxon wasn't even obligated to do. On top of this, the allegations aren't even that Exxon lied or misled in the reports but financial impact of alleged lies (i.e. similar to misstating earnings). Also, aren't scientific climate reports the entire purpose of the IPCC, not private companies like Exxon? Sounds like a grandstanding opportunity for the NY AG.

          Michael, is a trusted commenter North Carolina

          I would like to think that Schneiderman has undertaken this investigation purely out of concern for our planet, and not primarily as a way to heighten his personal profile, and he may well have. That said, it is unrealistic to think that it will drive Exxon Mobil or any other major energy company out of business. But, given that the political climate in DC is such that there is zero chance for leadership on implementing a tax on carbon, which to me represents the single most powerful way to address climate change, this may be the next best thing. Hefty fines, if large enough, will inevitably find their way to the pump, and to the utility bill, and may finally alter our behavior, our collective behavior. Whether it might come in time to save the planet is the question.


          Andy W, Chicago, Il

          You legally aren't allowed to knowingly and purposely hide or distort data you are aware of which may materially affect your shareholders. The problem isn't that Exxon executives put forward biased opinions about the existence or extent of environmental impacts. The issue is based on oil companies selectively releasing data and research in exclusive support of their conclusions, while suppressing or distorting material that didn't fit the narrative.

          Their legal and ethical obligation was to release all of the data and let the public and regulators judge if their conclusions were correct. In any sworn testimony provided through the years, executives were also obligated not to suppress or distort any requested information in their possession. That is the legal basis for any legal inquiry, your basic tobacco industry style cover-up.

          David Nicholas, Centennial, Colorado

          I am an Exxon Mobil shareholder. I am also a scientist who holds degrees from reputable universities, and if I want to know about climate change, I don't seek reliable information from oil and gas companies, supermarket tabloids, or members of Congress. These are often sources of misinformation where, as a moderately well educated and pragmatic adult, I expect to be provided with utter nonsense.

          These are the United States of America, where corporations have (and use) the power to lie constantly to their detractors and their customers alike. For me to expect anything else would suggest a lack of basic skepticism on my part where the products and activities of the corporate world are concerned.

          Companies like Exxon Mobil exist to make money in any way they can, for themselves and for stockholders like me. Do I condemn their unethical practices? Certainly, but I'm not foolish enough to think I can change them. I cash my dividend checks along with all the other stockholders -- and I vote for representation in Washington, D.C. that knows enough about the science of global climate change to do something meaningful about our role in it. So far, most of the elected officials in Washington, D.C. have been a dismal disappointment; they're the best politicians money can buy.

          [Nov 06, 2015] At 45 dollaris a well that produces 300K barrels over lifetime of 20 years will earn 250,000 dollars for the producer each year on a six million dollar investment, or 4.2 percent.

          Edited for clarity.
          Notable quotes:
          "... If an oil company spends six million dollars to complete an oil well that produces 300,000 barrels of oil over a twenty year period and the average price of oil is $45, an income of $13,500,000 is what you will have in twenty years. ..."
          "... Net $7.5 million realized in twenty years, $375,000 average annual income for the life of the well. Subtract 18% for royalties, 10% to pay for extraction taxes, costs to operate, hauling it to market. All-in-all 1/3 needs to subtracted on average. In our case this is $125,000 ..."
          "... That means a whopping annual profit of $250,000 for the producer each from a six million dollar investment , or a return on the original investment of 4.2%. Not to mention the taxes to be paid at filing time or an accident that can happen during the lifetime of the well. ..."
          peakoilbarrel.com

          R Walter, 11/05/2015 at 6:35 am

          When you want to have some gross income from the production and sale of any commodity, it is desirable to earn more then two dollars for every dollar of expense. A general rule of thumb for the life of the well the total costs can't be more then 1/2 of total earnings. Otherwise you are losing money.

          If an oil company spends six million dollars to complete an oil well that produces 300,000 barrels of oil over a twenty year period and the average price of oil is $45, an income of $13,500,000 is what you will have in twenty years.

          Net $7.5 million realized in twenty years, $375,000 average annual income for the life of the well. Subtract 18% for royalties, 10% to pay for extraction taxes, costs to operate, hauling it to market. All-in-all 1/3 needs to subtracted on average. In our case this is $125,000

          That means a whopping annual profit of $250,000 for the producer each from a six million dollar investment, or a return on the original investment of 4.2%. Not to mention the taxes to be paid at filing time or an accident that can happen during the lifetime of the well.

          You might as well invest your six million in a CD, and earn 2% return, sit at home to watch TV and drink coffee. The oil in the ground is making money just sitting there like you are. If you are going to be a fool, might as well be one while watching TV, not drilling for oil all day long and be making pennies. You'll be doing the world a favor. You'll be dancing, not drinking booze all day long and crying over all of the losses.

          I know the numbers are not in any way near what they really will be, but you have the idea.

          ... ... ...

          [Nov 06, 2015] Its not that humans can't adapt to the changes, its all of the rest of the flora and fauna and biosphere is dying off at exponential rates that will kill us

          Jef, 11/05/2015 at 10:24 am

          Its not that humans can't adapt to the changes, its all of the rest of the flora and fauna and biosphere in general all of which humans rely 100% on to exist which is dying off at exponential rates that will kill us.
          Doug Leighton, 11/05/2015 at 10:37 am
          You've got it wrong. We HAVE to kill off flora and fauna to make room for more humans. Getting rid of buffalo was a master stroke but now there's the other stuff to exterminate. Think about how many people we can fit into Africa by getting rid of that useless wildlife. And, all the bio-fuel we can generate with land wasted by jungle in the Amazon. The key is HUMAN CARRYING CAPACITY. That's what really matters guy.
          BC, 11/05/2015 at 12:59 pm

          Who needs these large animals on our planet anyway? We are the dominant predator species, including prey on one another; these animals simply have failed to evolve and adapt with a neo-cortex, superior technology, will to power, and the imperative to grow numbers and resource consumption per capita perpetually.

          Human apes are superior, and the 7 billion of us and counting is unambiguous proof of our superiority.

          Doug Leighton, 11/05/2015 at 1:27 pm
          Exactly, we're like rats: better at what we do than anyone else. And like rats we deserve to inherit the earth. But I do wonder what happens when all that's left is us and rats? Maybe they eat us.
          MarbleZeppelin, 11/05/2015 at 6:48 pm
          Or the rats will carry a new plague that eradicates the human population. Problem solved.

          MarbleZeppelin, 11/05/2015 at 6:46 pm

          Doesn't it seem very odd that we define progress as some new machine and superiority as the ability to kill off everything?

          [Nov 06, 2015] Debt and energy

          Notable quotes:
          "... I've seen my children's generation living a lifestyle kings and queens couldn't have dreamt of (in the not too distant past): their own furnished homes upon marriage, multiple new-ish cars, international travel, etc. This was a blip in history, one that was financed by – debt. ..."
          "... The question here is: why would oil patch debt cause a systemic crisis? The 2007 real estate crisis was a crisis because it threatened to bankrupt very, very large banks. The Great Depression was caused by bank failures, and the failure of Lehman Brothers scared everyone with the possibility of a re-run of 1929. So, is there a threat that the oil patch will bring down Chase, or Bank of America?? I don't see any evidence of that – that's what needs to be looked at. ..."
          "... I suspect any mainstream economist, including Krugman, would think Gail is crazy to suggest that excess debt is causing the current commodity deflation. The straightforward explanation, AFAIK, is that commodity deflation is a long-term (secular) phenomenon, that was temporarily interrupted by a construction bubble in China. ..."
          "... The thing is as the total debt levels grows and it becomes apparent that the debtor is not capable of repaying the debt, trust is lost in the debtor (and its currency) and it gets harder to run a deficit, which means austerity measures are introduced. ..."
          "... "Would an economy with 25% unemployment be good for them?" Dennis Coyne ..."
          "... "There is nothing crappy or fake about the current economy," ~ ChiefEngineer ..."
          "... "1. thrifty management; frugality in the expenditure or consumption of money, materials, etc." ~ dictionary.com ..."
          "... "Do you need a job Caelan ?" ~ ChiefEngineer ..."

          Doug Leighton, 11/05/2015 at 11:41 am

          "This is the same as borrowing even more from the future to maintain today's over consumptive life styles and leaving their children and grand children with the bill." And, that says it all, thanks Rune.
          Dennis Coyne, 11/05/2015 at 12:14 pm
          Hi Doug,

          Imagine your children were just graduating from college. Would an economy with 25% unemployment be good for them? That's what we get when we are too concerned over high public debt as the Hoover administration clearly was. You should read Keynes (it is a short book),
          The General Theory of Employment, Interest, and Money

          https://en.wikipedia.org/wiki/The_General_Theory_of_Employment,_Interest_and_Money

          Or read Krugman's End This Depression Now, for an alternative view on debt from Gail's.

          Doug Leighton, 11/05/2015 at 12:36 pm
          I've seen my children's generation living a lifestyle kings and queens couldn't have dreamt of (in the not too distant past): their own furnished homes upon marriage, multiple new-ish cars, international travel, etc. This was a blip in history, one that was financed by – debt.
          Dennis Coyne, 11/05/2015 at 5:36 pm
          Hi Doug,

          My daughter just graduated from University. You avoided the question, if your daughter had just graduated do you think a World with a 25% unemployment rate would be better, or one with a 6% unemployment rate?

          Low government debt and balanced budgets (Herbert Hoover thinking) gets you low employment. Keynesian policies done properly get you higher employment.

          Debt is important, of that there is no doubt.
          When the economy is doing poorly it is usually because of too little debt rather than too much debt.

          Greece is a notable exception and there are other cases where countries have taken on too much debt, in Greece's case the lack of control over its own monetary policy is a big problem. If they had the ability to increase their money supply to get some moderate inflation (5% or so), they could have eased their debt burden and gradually got there spending and taxation to sustainable levels. The Euro was not a good idea for this reason, that is why the United Kingdom did not join in the monetary union, a smart economic and political move.

          Ron Patterson, 11/05/2015 at 1:16 pm

          Dennis, there are two types of debt, public and private. If you read Gail's article, you will see that it deals exclusively with private debt and not public debt. Keynes theories deals primarily with public debt, efforts by the government to prime the economy with public money.

          I don't think Krugman would disagree that strongly with Gail. I read some of the reviews of his book, End This Depression Now! It appears to me that they are talking about two entirely different subjects.

          But back to Keynes, do you really believe that the economic theories of John Maynard Keynes, written in 1936 have more than a remote connection to today's financing in the oil patch.

          The US government public debt today is totally different from the public debt during the Hoover administration. It is more than just silly to compare the US economy today with that of the Hoover administration. But even doing so would would have only marginal connection to the oil patch.

          Nick G, 11/05/2015 at 2:22 pm
          Ron,

          The question here is: why would oil patch debt cause a systemic crisis? The 2007 real estate crisis was a crisis because it threatened to bankrupt very, very large banks. The Great Depression was caused by bank failures, and the failure of Lehman Brothers scared everyone with the possibility of a re-run of 1929. So, is there a threat that the oil patch will bring down Chase, or Bank of America?? I don't see any evidence of that – that's what needs to be looked at.
          -------–

          I suspect any mainstream economist, including Krugman, would think Gail is crazy to suggest that excess debt is causing the current commodity deflation. The straightforward explanation, AFAIK, is that commodity deflation is a long-term (secular) phenomenon, that was temporarily interrupted by a construction bubble in China.

          Rune Likvern, 11/05/2015 at 3:07 pm

          BIS (Bank for International Settlements) apparently gives some attention to the oil and gas sector total debt.

          "First, the oil–debt nexus illustrates the evolving risks in the financial system. Rapidly rising leverage creates risk exposures in the non-financial corporate sector that may be transferred across the global financial system. Similarly, rising leverage puts a greater premium on the liquidity of the markets for the assets that back debt. Both developments underscore the need to better understand the functioning, behaviour and interaction of markets and intermediaries.
          Second, the build-up of debt in the oil sector provides an example of how high debt levels can induce new linkages between individual markets and the wider economy. Such interaction needs to be taken into account in assessments of the economic implications of falling oil prices."

          https://www.bis.org/publ/qtrpdf/r_qt1503f.pdf

          Dennis Coyne, 11/05/2015 at 5:44 pm

          Hi Ron,

          Doug was talking about public debt, I used to read Gail's stuff at the Oil Drum, on economics she is not very good in my opinion.

          One thing she may be missing is that when oil companies go bankrupt, they may sell off their assets to bigger companies with deeper pockets. When oil prices recover, these financially stronger companies will be able to get financing to drill profitable wells.

          I won't comment further, there will be much less of a lag in new drilling once oil prices get above $75/b than Gail believes.

          Rune Likvern, 11/05/2015 at 3:32 pm

          There is something called a balanced budget (I am aware that there are pockets on this planet that this principles do not apply).

          To run a deficit means spending more than what is received as income. This may work temporarily if that puts the economy back on an organic growth trajectory.

          According to data (Warning these are predatory data!) the Office of Management and Budget (OMB)
          https://www.whitehouse.gov/omb/budget/Historicals

          The US has since 1945 accumulated a total debt of around $12Trillion from (total) fiscal deficits (OMB) and has not run a surplus since 2001 and OMBs estimates now is for deficits through 2020.

          So solving the debt problem created by one generation by arguing that youth unemployment needs to be kept in check by adding more debt for them to service later is [insert appropriate description here].

          The thing is as the total debt levels grows and it becomes apparent that the debtor is not capable of repaying the debt, trust is lost in the debtor (and its currency) and it gets harder to run a deficit, which means austerity measures are introduced.

          "Overall, unemployment in Spain stands at 22.4 percent."
          http://www.reuters.com/article/2015/10/04/us-spain-apprentices-idUSKCN0RY09N20151004

          Watcher, 11/05/2015 at 4:11 pm

          and it gets harder to run a deficit, which means austerity measures are introduced.

          Not if you have a central bank that finances the deficit via purchase of gov't securities.

          Rather a lot of that going on right now.

          Everywhere with a CB.

          ChiefEngineer, 11/05/2015 at 5:38 pm

          Rune says:

          "The thing is as the total debt levels grows and it becomes apparent that the debtor is not capable of repaying the debt, trust is lost in the debtor (and its currency) and it gets harder to run a deficit, which means austerity measures are introduced."

          If this is true, why do so many right wing conservatives have their panties in a wad about the United States ? The US is the strongest economy in the world and the dollar is at record strength. Why won't Republicans return to the tax policies of the year 2000 if debt is that important to them? The year of a record surplus.

          History shows Conservatives only care about debt when a Progressive is in the White House. I never heard a word about debt from the Republicans during the Bushy and Raygun years. Remember, Dick Cheney said deficits don't matter.

          http://www.ontheissues.org/Celeb/Dick_Cheney_Budget_+_Economy.htm

          Dennis Coyne, 11/05/2015 at 5:58 pm

          Hi Rune,

          Yes when unemployment is low, a balanced budget makes perfect sense to me.

          I am not in favor of unending deficits (though I probably don't sound like it). It would be better for the government to pay down debt when the economy is doing well (lets say 5.5% unemployment rate or lower).

          When the unemployment rate is high (I was talking about unemployment in general rather than youth unemployment rates), government deficits make perfect sense, even if too much private debt initially caused the recession. Sometimes solving a problem caused by too much private debt, requires increasing public debt to get the economy growing. The economic growth should decrease the deficit as increased income will increase tax revenue and reduce government spending on unemployment benefits and government aid to low income citizens.

          Caelan MacIntyre: On Dennis' Fake Stuff, 11/05/2015 at 6:25 pm

          "Would an economy with 25% unemployment be good for them?" Dennis Coyne

          Would it be a real economy or an uneconomy, helped run by an ungovernment?

          If the latter, then I would answer, yes, if with 100% unemployment. (Because they would be employed in a real economy with a real government)

          …Dennis, why is it that you seem to like crappy stuff like fake governments and fake economies?

          ChiefEngineer, 11/05/2015 at 7:01 pm

          There is nothing crappy or fake about the current economy, unless your on the outside looking in.

          Do you need a job Caelan ?

          Caelan MacIntyre, 11/05/2015 at 7:25 pm

          "There is nothing crappy or fake about the current economy," ~ ChiefEngineer

          The economy is uneconomical, so, yes, it's crappy.
          …Well, ok, its much worse than crappy. Happy?

          Economy:
          "1. thrifty management; frugality in the expenditure or consumption of money, materials, etc." ~ dictionary.com

          "Do you need a job Caelan ?" ~ ChiefEngineer

          You mean like one that manufactures a need for a relatively useless, overpriced and/or otherwise crappy junk sweatshopped product that breaks more often and sooner than ever before and cannot be fixed or fixed easily or cheaply by the owner?

          ChiefEngineer, 11/05/2015 at 8:28 pm

          That crappy economy produced that crappy computer which keeps posting your crappy comments. All because of the crappy education you got from the fake school from a crappy fake government.

          Caelan, I hope your having a real nice day

          Caelan MacIntyre, 11/06/2015 at 7:56 am

          Ya all this fake/virtual communication in place of the real, all the while those with an education (in what?) run around and help to perpetuate the above, the aforementioned and this kind of uneconomy that pushes the planet ever closer to the precipice.
          Back to the ol' drawing board, ChiefEngineer.

          Dennis Coyne, 11/06/2015 at 9:57 am

          Hi Caelan,

          I deal with what is rather than what might be, as far as governments. Your imaginary utopia is likely to remain just that.

          I imagine everyone would vote for optional taxation, what could possibly go wrong? :)

          Fred Magyar, 11/05/2015 at 7:28 pm

          My daughter just graduated from University.
          You avoided the question, if your daughter had just graduated do you think a World with a 25% unemployment rate would be better, or one with a 6% unemployment rate?

          I think you are living far far in the past. I have a son who is still at a University, My brother's daughter also just graduated. so I think I can relate to your concerns. However I think what is happening now, is going to change how society views employment at a fundamental level. The idea of a career might not even apply at all anymore for the current crop of graduates.

          https://goo.gl/EbR8lY

          "We are in the middle of an economic transition, from the old industrial economy to the new collaborative economy" – Peers Inc.

          New sharing practices, facilitated by information technology and pervasive networking, are disrupting the status quo in business, education and society. As co-founder of Zipcar, Robin Chase has been a pioneer and leading thinker in this movement since its emergence. Now, with Peers Inc, Robin aims to "combine the best of people power with the best of corporate power" to help realise the wider benefits when decentralisation, localisation and specialisation meet scale and resources.

          On top of examples and success stories from this 'new collaborative economy', what could this mean for the economy as a whole? Are we in the midst of a transition from capitalism to something new and different? Are the rules of our current economic model being rewritten? If so, what are the new rules of the game and how do we play by them?

          Dennis Coyne, 11/06/2015 at 10:06 am

          Hi Fred,

          The transition may be good for many, my point is that many University graduates are having a tough time finding work that utilizes what they have learned at University.

          This is potentially much more of a problem for young people than excess government debt. In addition, the idle labor and capital is wasteful, there is work to be done to transition away from fossil fuel we should get to it. The ensuing economic growth will reduce government deficits so that the debt incurred to jump start the economy will be reduced if the government surplus that results is not given away in lower tax rates (as Republican presidents since 1980 have tended to do.)

          BC, 11/05/2015 at 12:32 pm

          Speaking of money velocity, it's acceleration is contracting at the fastest rate since 2008, 2001, and the early 1980s:

          https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2mPb

          https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2n98

          And a bear market for the broad equity market is underway (especially value and small-cap stocks, which typically is followed by the large-cap stocks "catching down" thereafter):

          https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2n96

          So-called "health" care spending has been growing at twice the rate of final sales, which is characteristic of recessionary conditions:

          https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2qs5

          https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2qrZ

          Subprime auto loans are driving (bad pun) auto sales to bubbly heights vs. real wages, but the rate of growth of auto sales is decelerating:

          https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2oZu

          https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2qsp

          Without subprime auto loans, vehicle sales would be 13M vs. 17-18.

          Subprime debt and ACA-induced spending (subsidies to insurers) for "health" care is what is preventing the US economy from decelerating from around stall speed to recession since late 2014. But "health" care spending has become a net drag on the rest of the economy.

          The recession-like contraction in the acceleration of money velocity to private GDP implies that the market is tightening financial conditions (credit/debt-money acceleration) before the Fed can begin raising rates and tightening reserves.

          Therefore, rather than raising rates, the Fed (and ECB, BOJ, BOE, and PBoC) is more likely to resume QEternity to fund increasing deficits/GDP to prevent nominal GDP from contracting from the post-2007 trend rate per capita of below 2% (slowest since the Great Depression, 1890s, and 1830s-40s).

          Moreover, don't be surprised if the Fed is compelled to resort to negative interest rate policy (NIRP) because of debt and price deflation hereafter, including for the service sector ("health" care, "education", law, personal services, etc.).

          Petro, 11/06/2015 at 12:08 am

          Mr. Likvern,

          Normally I would think twice before commenting/correcting you, but this time I noticed you used "Credit" and "Debt" as equivalent terms, therefore I will try:
          although many economists and finance people erroneously use those terms as equivalent – they are NOT!
          Simply/shortly said: credit is a "worthiness" notion -economically not useful in practical terms.
          In order for it to be "useful" economically (i.e generate economic activity/GDP), it has to become debt.
          Signatory parties with COLLATERAL who are pledging/willing to circulate it (i.e. spend it) are necessary for credit to become debt.
          Although this " concept" is altered by Glass_Stegal repeal and interest paying central bank reserves (i.e. FED) which erased the line between commercial and investment banking (today they are one and the same), it still holds generally true throughout economy.
          Be well,

          Petro

          P.S.: an essential mistake most economic/finance luminaries make is: "money is backed by debt".
          Today money is debt – debt is money!
          If one does not clear that concept up, one is certain to stay in the fog when it comes to money/debt/credit…

          [Nov 06, 2015] Iraq needs 1.3 mb/d additional oil exports and $70 oil to balance budget

          Notable quotes:
          "... Iraq needs 1.3 mb/d additional oil exports and $70 oil to balance budget ..."
          peakoilbarrel.com

          Matt Mushalik, 11/04/2015 at 10:36 pm

          After my article on Saudi fiscal breakeven oil prices I did a similar exercise for Iraq:

          30/10/2015
          Iraq needs 1.3 mb/d additional oil exports and $70 oil to balance budget
          http://crudeoilpeak.info/iraq-needs-1-3-mbd-additional-oil-exports-and-us-70-oil-to-balance-budget

          [Nov 06, 2015] Total oil and gas industry loss of $25 bn during last quarter indicates deeply uneconomic production

          Notable quotes:
          "... Chesapeake CHK published its 3q15 results. Loss $5.4 bn on revenue of $880 mill. ..."
          "... Total oil and gas industry loss of $25 bn during last quarter indicates deeply uneconomic production. ..."
          "... If oil prices do not take off, CLR will have no choice and make the impairment. The longer oil prices stay low, the more dramatic the situation. What strikes me is that OXY left the Bakken at a huge loss. Fidelity Oil Gas closed…. There must be something going on here. There is probably more to asset impairments other than price (depletion of sweet spots, monster decline of monster wells?) I think we will see more when the next Bakken production numbers are out. ..."
          "... 63 Billion USD went poof in the Enron Collapse. ..."
          "... Impairments are a non-cash item. My preliminary analysis of companies' 3Q results suggests that operating cashflows remained close to 2Q levels, while capex was sharply reduced. As a result, cash burn was also considerably lower than in previous two quarters, and some companies were cash positive. ..."
          "... Banks traditionally lend money only on PDP reserves, or if PUD is included, there is a large discount applied, per Office of the Comptroller of the Currency regulations. Also, it should be noted SEC reserve valuations and bank reserve valuations are not necessarily the same. SEC uses the average of the price of WTI and Henry Hub on the first day of each month, with no escalation in the event of contango, nor deceleration in the event of futures backwardization. ..."
          peakoilbarrel.com

          Heinrich Leopold, 11/06/2015 at 3:06 am

          Shale Gas Economics,

          Chesapeake CHK published its 3q15 results. Loss $5.4 bn on revenue of $880 mill. Total loss for the first nine months $16bn. See also http://wolfstreet.com/2015/11/05/giant-sucking-sound-of-capital-destruction-in-us-oil-gas-impairments/.

          Total oil and gas industry loss of $25 bn during last quarter indicates deeply uneconomic production. As no economic system could carry on to produce at such losses, companies have already responded. Chesapeake has cut rig count to 18 from 69. Gross wells completed are down to 84 (from 309) and gross wells spud are down to 81 from 296. Activity is reduced threefold!!! As there is a time lag of six to nine months from lower capex to actual production, I expect a significant fall of natgas production for the first quarter 2016. As CHK is one of the leading producers in the US, this will also impact total US production.

          MarbleZeppelin, 11/06/2015 at 6:56 am
          Reminds me of some old cars I have had, keep pouring money into them and get poor performance all the way to the next time they suck your wallet dry. Answer, dump the old one, get a newer more efficient car.

          So if oil is not working out for us, dump it. Get our energy elsewhere. Time to stop throwing money at it, it's in a death spiral.

          AlexS, 11/06/2015 at 7:17 am

          Heinrich,

          Thanks for the link. The article has a link to the original research by Evaluate Energy on U.S. oil & gas companies' 3Q results. Recommended reading
          http://blog.evaluateenergy.com/us-oil-gas-company-earnings-take-a-huge-hit-in-q3-2015-impairments

          Heinrich Leopold, 11/06/2015 at 7:37 am
          AlexS,
          Thank you for the link. As prices – especially natgas – are now even lower than in 3q15, this becomes even bigger this quarter. I get the feeling that this is very big and I am wondering what the consequences will be.
          shallow sand, 11/06/2015 at 7:57 am
          Wont their be even more impairments in Q4 as companies like CLR, who have held off, will be forced to write down assets?
          Heinrich Leopold, 11/06/2015 at 8:26 am
          shallow sand,

          If oil prices do not take off, CLR will have no choice and make the impairment. The longer oil prices stay low, the more dramatic the situation. What strikes me is that OXY left the Bakken at a huge loss. Fidelity Oil&Gas closed…. There must be something going on here. There is probably more to asset impairments other than price (depletion of sweet spots, monster decline of monster wells?) I think we will see more when the next Bakken production numbers are out.

          Enno Peters, 11/06/2015 at 8:34 am
          It doesn't matter if prices will take off now, the impairment still has to be made. Only December may make a very small difference:

          "The United States Securities and Exchange Commission (SEC) calculates the economics of proved reserves using the unweighted, trailing 12-month average of the closing prices from the first day of each month. Year-end 2014 impairment tests were evaluated using a $94.99/barrel of oil prices and a $4.31 per MCF gas price, with 2014's low year-end prices buoyed by strong prices from the first 10 months of the year."

          http://press.ihs.com/press-release/ep-impairments/gloomy-price-outlook-signals-continued-impairments-likely-throughout-20

          HR, 11/06/2015 at 10:36 am
          I saw wolf richters article this mornings as well. Those are some ugly numbers mainly because of the write downs. I think I already know the answer, but without the write downs are any of these guys even cash neutral much less making money?

          Wasn't it Harold Hamm that said by spring production will fall off a cliff?

          Heinrich Leopold, 11/06/2015 at 2:23 pm
          HR,

          It would be interesting to know if the write downs are just related to price or is there any write down on the quantity of reserves?

          AlexS, 11/06/2015 at 11:44 am

          Heinrich Leopold said:

          "What strikes me is that OXY left the Bakken at a huge loss"

          Occidental was planning to sell its Bakken assets long before the drop in oil prices. But the actual price was far from what they were initially expecting. Occidental Reportedly Sells Bakken Assets To Lime Rock

          October 15, 2015
          http://www.ugcenter.com/occidental-reportedly-sells-bakken-assets-lime-rock-823211

          As recently as last fall, Wall Street had expected Oxy's Bakken assets to sell for more than $3 billion. The sharp drop in the deal's value represents the most-significant pullback in valuation yet in the second-largest U.S. oil producing state.
          =================================

          Occidental Petroleum cuts spending, scales back in the Bakken

          By Patrick C. Miller | February 03, 2015
          http://www.thebakken.com/articles/1005/occidental-petroleum-cuts-spending-scales-back-in-the-bakken

          Occidental Petroleum Corp. will scale back operations in the Williston Basin and is reducing its 2015 capital cost budget by 33 percent in response to low oil prices.
          "Our capital program will focus on our core assets in the Permian Basin and parts of the Middle East," said Stephen Chazen, president and CEO. "We have minimized our development activities in the Williston Basin, domestic gas properties, Bahrain, and the Joslyn oil sands project, as these have subpar returns in this current product price environment."
          ========================================
          Oxy Says Permian Operations Still Solidly Profitable

          FRI, JAN 30, 2015
          http://www.energyintel.com/pages/eig_article.aspx?DocId=875317

          … while Hess regards the Bakken as a crown jewel in its portfolio, it is far less important to Oxy, which lacks the core acreage positions and sheer scale that Hess enjoys there.
          In fact, Oxy is cutting spending in the Bakken to "virtually nil" this year, matching similar cuts across its gas-weighted Midcontinent holdings, Chazen said.
          ===========================================
          Oxy sale of Bakken assets would make strategic sense -analysts

          Reuters, Oct 7, 2014
          http://www.reuters.com/article/2014/10/07/occidentalpetroleum-bakken-idUSL2N0S22HI20141007

          Any sale of Occidental Petroleum Corp's roughly 330,000 acres in North Dakota's oil-rich Bakken shale formation would make strategic sense for the company, which is likely eager to strike a deal, two analysts said on Tuesday.
          Oxy is looking to sell its Bakken holdings, which are largely undeveloped, for as much as $3 billion, according to a report from Bloomberg News.
          Even with the recent dip in crude oil prices, the divestment "makes sense to us, strategically," Raymond James analysts Pavel Molchanov and Kevin Smith said in a note to clients on Tuesday.
          "This is substantially undeveloped acreage, and Occidental has long cited it as a likely monetization candidate, so it's been puzzling why the company kept it this long," the analysts said.
          Oxy is spending about $510 million this year on its North Dakota holdings, and any buyer would have to invest significant capital to boost production. Currently, Oxy is the 18th-largest oil producer in North Dakota with about 17,000 barrels per day as of July, trailing peers of the same size and even much-smaller rivals.
          Oxy said last October that it would pursue "strategic alternatives" for some of its North American assets, including those in North Dakota. In a statement to Reuters on Tuesday, the company reiterated that position.
          ===============================================

          Occidental said to seek buyer for $3 billion Bakken oil business

          10/07/2014
          http://www.worldoil.com/Occidental-said-to-seek-buyer-for-3-billion-bakken-oil-business.html

          HOUSTON (Bloomberg) - Occidental Petroleum is seeking to sell oil assets in North Dakota for as much as $3 billion, people with knowledge of the matter said.
          Occidental is working with investment bank Tudor Pickering Holt & Co. to sell about 335,000 net drilling acres in the Williston Basin, said the people, who asked not to be identified because they were discussing private information. The holdings include a part of North Dakota's Bakken formation, an area that has been less successful for Occidental because of higher costs, though it's one of the fastest-growing oil-producing regions in the U.S.
          Melissa Schoeb, an Occidental spokeswoman, said the Houston-based company reported plans last year to "pursue strategic alternatives" for some assets, including in the Williston Basin.
          Occidental, CEO, Stephen I. Chazen has embraced a restructuring plan that includes selling part of Occidental's Middle East business and spinning off the company's California operations. Chazen told investors in July that he might accelerate plans to sell assets in what the company calls its "midcontinent" operations in the Piceance and Williston basins.
          ==============================================

          Will Oxy's Divorce Spur The Break Up Of Big Oil?

          2/19/2014
          http://www.forbes.com/sites/christopherhelman/2014/02/19/will-oxys-divorce-encourage-the-break-up-of-big-oil/

          … Occidental Petroleum has decided to slim down as well.
          Oxy's plan, announced last Friday, will be dramatic. Its California assets will be rolled into a separate publicly traded company … . Analyst Tim Rezvan with Sterne Agee expects Oxy to sell down its Middle Eastern and Bakken assets as well as its oil trading division in order to focus on Texas.
          =============================================
          Occidental Petroleum starts breakup plan in Middle East, North Africa

          Bloomberg, 10/18/2013

          The company said today it will pursue "strategic alternatives" for Mid-continent assets, including some in the oil-bearing Bakken shale of North Dakota as well as in the Hugoton gas field in Kansas and the Piceance gas fields in the Rocky Mountains.

          Longtimber, 11/06/2015 at 11:35 am

          OMG – 33 Billion poof ball for Q3, Top 10 From link above. http://blog.evaluateenergy.com/us-oil-gas-company-earnings-take-a-huge-hit-in-q3-2015-impairments
          63 Billion USD went poof in the Enron Collapse.
          http://usatoday30.usatoday.com/money/energy/2002-01-22-enron-numbers.htm..
          Sportsfans- this is serious, and the train is still on the tracks.

          Ron Patterson, 11/06/2015 at 11:50 am
          I think this one was more impressive. These are "energy companies".

          Evaluate Energy has analysed the preliminary Q3 earnings statements of 48 U.S. companies and compared it with their earnings in previous periods. The 48 companies had a combined total net loss of US$25.5 billion, which is a staggering 70% and 58% larger than these companies' significant combined net losses of US$14.9 billion and US$16.6 billion in Q1 and Q2 2015 respectively.

           photo Net Income_zpsoxne1mv2.gif

          AlexS, 11/06/2015 at 12:23 pm

          In fact, the sharp increase in combined net losses was largely due to the increase in asset impairments. "Impairments are clearly the main reason for this continued downward trend".

          Impairments are a non-cash item. My preliminary analysis of companies' 3Q results suggests that operating cashflows remained close to 2Q levels, while capex was sharply reduced. As a result, cash burn was also considerably lower than in previous two quarters, and some companies were cash positive.

          However lower capex will likely results in lower 1h16 production volumes.

          shallow sand, 11/06/2015 at 12:38 pm

          AlexS. I agree with you.

          Do you have any statistics on gas/ oil ratio trend? Seems to me oil production is declining faster than gas and NGLs production for the oil weighted companies.

          I think Enno has posted that associated gas is not falling to the extent oil is, and this masks oil decline in the company headline reports. Have to look at each report/10Q.

          An example of this is SD, who saw Mid-Continent BOE production fall 10%, but oil fell 18%.

          Heinrich Leopold, 11/06/2015 at 2:05 pm

          AlexS,

          Asset impairments relate to revisions of reserves and resources. However, the main question is now did the revisions relate to oil and gas prices only or is there also a revision of the quantity of reserves due to faster than expected decline? Is there any way to find this out?

          AlexS, 11/06/2015 at 2:50 pm
          Heinrich,

          I think impairments mainly reflect the reduction in the value of the reserves (due to lower prices), rather than volumes. There was no mention of faster decline rates

          shallow sand, 11/06/2015 at 3:52 pm
          I think it should be noted in the SEC reserve reports there are the following categories:

          PDP – Proved Developed Producing
          PDNP – Proved Developed Non-Producing
          PUD- Proved Undeveloped

          Although admittedly simplistic, and I stand to be corrected, PDP are active wells, PDNP are inactive wells and PUD are where there are no wells, but the locations have been "proved" by offsetting wells, and there are plans to drill and complete the location within 5 years.

          All categories will be hit by WTI and Henry Hub prices being half of 2014, but also there should be a hit due to a number of PUD locations being no longer economically viable.

          Banks traditionally lend money only on PDP reserves, or if PUD is included, there is a large discount applied, per Office of the Comptroller of the Currency regulations. Also, it should be noted SEC reserve valuations and bank reserve valuations are not necessarily the same. SEC uses the average of the price of WTI and Henry Hub on the first day of each month, with no escalation in the event of contango, nor deceleration in the event of futures backwardization.

          Banks, on the other hand, use a price deck, which should closely mirror the WTI and Henry Hub strips, subject to maybe a little of the banks' own forecasts on future prices.

          As I have noted many times, total debt levels for all US companies operating in the Bakken, except for XOM, EOG and Abraxas will be greater than 65% of SEC PDP PV10 at 2015 year end, if my calculations are close. Prior to the shale boom, would have meant no further monies advanced using reserves as collateral, assuming bank price decks are close to the current strips.

          Yes, this will include, companywide, the likes of COP, MRO, HES, QEP, CLR and WLL.

          Another exception would be Statoil (not US), I did not include them, as I could not get a handle on their debt/PDP PV10. I did also not analyze Canadian firms operating in the Bakken. However, most Canadian shale firms have large amounts of long term debt, similar to US shale firms.

          Rune Likvern, 11/06/2015 at 6:17 pm

          Just dropping by and remembered an article (Linn Energy) from yesterday;

          "Non-cash impairment of long-lived assets of approximately $2.3 billion for the third quarter 2015, primarily driven by lower commodity prices and the Company's estimates of proved reserves; and"
          http://www.bloomberg.com/research/markets/news/article.asp?docKey=600-201511050650PRIMZONEFULLFEED6022751-1

          More later if time allows……….

          [Nov 06, 2015] Giant Sucking Sound of Capital Destruction in US Oil Gas

          Notable quotes:
          "... Of the 48 companies, 38 recognized impairment charges totaling $32.8 billion in Q3 alone, a 79% jump from Q2, when impairments hit $18.4 billion. Since Q4 2014, these 48 companies recognized impairments of $84.6 billion; 39% of that in Q3. ..."
          "... In Q4 2014, many investors thought the oil bust was a blip, that this was just a correction of sorts in oil prices and that they'd rebound in early 2015. But in 2015, oil and natural gas both have plunged to new cycle lows. And yet, over and over again, sharp sucker rallies gave rise to hopes that it would all be over pronto, that the price would settle safely above $80 a barrel, or at least above $65 a barrel, where some of the oil companies could survive. ..."
          "... he game has boiled down to who can slash operating costs and capital expenditures fast enough without losing too much production, who has enough cash to burn through while this lasts, and who can still get new money at survivable rates. And that game is accompanied, as in Q3, by the giant sucking sound of capital destruction. ..."
          "... Banks, when reporting earnings, are saying a few choice things about their oil gas loans ..."
          "... Its a legitimate industry with high costs. It came online before its time. Fast forward 10 years and conventional depletion+Chinese/Indian demand will let it flourish again. ..."
          "... If it was a scheme, it was a rather elaborate one, involving tens of billions of dollars and tens of thousands of workers. Also, they maintained the facade for years before winding it down. ..."
          "... Dunno, it's certainly a cluster-f*ck, but I think the dumb bastards actually believed the recoverable reserves numbers in the beginning. ..."
          "... Thank The Saudis for crashing the price of energy, perhaps with a little assistance on the broader political front to crush Russia? How is that going? ..."
          "... You simply cannot build up an industry on leveraged debt when there is no future of sustainable demand. ..."
          "... Yep, the Fed created this monster, but the oil patch is the obvious problem. things are just as bad or worse in all the other economic sectors. Of course when all the defaults start, it will be a complete surprise to all the financial Frankensteins who created the monster... ..."
          www.zerohedge.com

          Wolf Richter www.wolfstreet.com

          Chesapeake Energy is a good example. The second largest natural gas producer in the US, after Exxon, reported its debacle yesterday.

          Revenues plunged 49% from the quarter a year ago, when the oil bust had already set in. The company has been slashing costs and capital expenditures. In June, it eliminated its dividend. And yesterday, it recognized $5.4 billion in impairment charges, bringing impairments for the nine months to a staggering $15.4 billion.

          Impairment charges are a sudden accounting recognition of accumulated capital destruction. These impairments pushed its losses from operations to $5.4 billion in Q3 and to $16 billion for the nine months.

          Chesapeake currently gets 72% of its production from natural gas, 17% from oil, and 11% from natural gas liquids. The oil bust has been going on since the summer of 2014. The US natural gas bust has been going on since 2009! Two natural gas producers have already gone bankrupt this year: Quicksilver Resources and Samson Resources.

          Its annual free cash flow has been negative since 1994, even during good times, with only two tiny exceptions (Bloomberg chart). After living off borrowed money, it's now trying to hang on by selling assets and lowering its mountain of debt. But it still owes $16 billion, much of which QE-besotted, ZIRP-blinded, yield-hungry investors had handed it over the years, based on hype and false hopes.

          Its shares last traded at $7.50, down 75% from peak hype in June 2014. Its 4.875% notes due 2022 and its 5.75% notes due 2023, according to S&P Capital IQ LCD yesterday, traded for 66 cents on the dollar.

          In terms of capital destruction, Chesapeake is in good company, and not even the leader. A new report by Evaluate Energy, which covers Oil & Gas companies around the globe, examined the financial statements of the 48 US oil & gas companies that have reported earnings for the third quarter so far. The amounts and the speed of deterioration are just stunning.

          Turns out, what started in Q4 last year is getting worse relentlessly. And now it's getting serious: plunging revenues, squeezed operating margins, whopping impairment charges, and horrendous losses are combining into a very toxic mix.

          Evaluate Energy determined that net income of those 48 companies was a gigantic loss for the three quarters combined of $57 billion.

          On a quarterly basis, the losses in Q3 jumped 58% from Q2 and 70% from Q1 to $25.5 billion. This fiasco, which has been spiraling down at a breath-taking pace, looks like this:

          US-oil-gas-earnings-quarterly-2014-Q3-2015

          The biggest factor in these losses, as in Chesapeake's case, was the impairments. For this study, Evaluate Energy only counted impairments of property and equipment, not of financial assets such as "goodwill." Including charge-offs of goodwill, it would have been even worse (an example is Whiting Petroleum, which we'll get to in a moment).

          Of the 48 companies, 38 recognized impairment charges totaling $32.8 billion in Q3 alone, a 79% jump from Q2, when impairments hit $18.4 billion. Since Q4 2014, these 48 companies recognized impairments of $84.6 billion; 39% of that in Q3.

          Devon Energy was king of the hill, with $5.9 billion in impairments in Q3, after having recognized impairments every quarter this year, for a total of about $15.5 billion.

          Our natural-gas hero Chesapeake is in second place, if only barely, with $5.4 billion in impairments this quarter, and $15.5 billion for the nine months.

          Of note, Occidental Petroleum, with impairments of $3.3 billion in Q3, Murphy Oil, Whiting Petroleum, and Carrizo Oil & Gas all recognized over 90% of their respective impairments this year in this misbegotten third quarter. They were in no hurry to grant their investors a peek at reality.

          However, Whiting's impairments of $1.7 billion do not include an additional $870 million in write-offs of goodwill in connection with its once highly ballyhooed acquisition of Kodiak Oil & Gas, which closed in December last year.

          In Q4 2014, many investors thought the oil bust was a blip, that this was just a correction of sorts in oil prices and that they'd rebound in early 2015. But in 2015, oil and natural gas both have plunged to new cycle lows. And yet, over and over again, sharp sucker rallies gave rise to hopes that it would all be over pronto, that the price would settle safely above $80 a barrel, or at least above $65 a barrel, where some of the oil companies could survive.

          But now that oil in storage is practically coming out of our ears, globally, the meme has become "lower for longer," and the game has boiled down to who can slash operating costs and capital expenditures fast enough without losing too much production, who has enough cash to burn through while this lasts, and who can still get new money at survivable rates. And that game is accompanied, as in Q3, by the giant sucking sound of capital destruction.

          Banks, when reporting earnings, are saying a few choice things about their oil & gas loans, which boil down to this: it's bloody out there, but we made our money and rolled off the risks to others in a trade that has become blood-soaked.

          Read… Who on Wall Street is Now Eating the Oil & Gas Losses?

          NotApplicable

          Which plays right into the hands of those manipulating Brzezinski's "Grand Chessboard," as energy choke-points grow ever more valuable to those who ultimately control them.

          Frumundacheeze

          You were a complete inbecile if you ever believed the US fracking industry was anything more than a false pretense for pump and dump schemes. If you did, you didn't do your homework, or you bought into the hype.
          Benjamin123

          Its a legitimate industry with high costs. It came online before its time. Fast forward 10 years and conventional depletion+Chinese/Indian demand will let it flourish again.

          The conventional oil industry was also in trouble in the early 90s when oil slipped under $7. Oh, that was also a pump and dump.

          Casey Jones

          I was in North Dakota recently and was shocked, appalled and utterly devastated by the environmental damage up there, not to mention all the cheap ass construction of lousy housing and fact food outlets. The place is wrecked. Fracking is a cruel joke.

          divingengineer

          I guess that makes me a complete imbecile. The industry seems a little complex to reduce to a pump and dump.

          If it was a scheme, it was a rather elaborate one, involving tens of billions of dollars and tens of thousands of workers. Also, they maintained the facade for years before winding it down.

          Dunno, it's certainly a cluster-f*ck, but I think the dumb bastards actually believed the recoverable reserves numbers in the beginning.

          philipat

          Thank The Saudis for crashing the price of energy, perhaps with a little assistance on the broader political front to crush Russia? How is that going?

          NotApplicable

          I still say that this narrative is more of an after the fact blame-game, as prices would've crashed regardless of what the Saud's are doing. You simply cannot build up an industry on leveraged debt when there is no future of sustainable demand. Mises laid all of this out nearly a century ago.

          new game

          thank the fed with zirp and qe stimulas. without it and market discipline none of this would be happening. fascism, what is the future now. the fed is the enemy from within that is destroying freedom...

          KnuckleDragger-X

          Yep, the Fed created this monster, but the oil patch is the obvious problem. things are just as bad or worse in all the other economic sectors. Of course when all the defaults start, it will be a complete surprise to all the financial Frankensteins who created the monster...

          [Nov 06, 2015] Who on Wall Street is Now Eating the Oil Gas Losses

          Notable quotes:
          "... Banks have been sloughing off the risk: They lent money to scrappy junk-rated companies that powered the shale revolution. These loans were backed by oil and gas reserves. ..."
          "... fresh money is already lining up again. They're trying to profit from the blood in the street. Blackstone raised almost $5 billion for a new energy fund and is waiting to pounce. Carlyle is trying to raise $2.5 billion for its new energy fund. Someday someone will get the timing right and come out ahead. ..."
          "... Next year is going to be brutal, explained the CEO of oil-field services giant Schlumberger. But then, there are dreams of "a potential spike in oil prices." Read… The Dismal Thing Schlumberger Just Said about US Oil ..."
          Nov 06, 2015 | Wolf Street

          Banks have been sloughing off the risk: They lent money to scrappy junk-rated companies that powered the shale revolution. These loans were backed by oil and gas reserves.

          ... ... ...

          Magnetar Capital, with $14 billion under management, sports an energy fund that is down 12% this year through September on "billions of dollars" it had invested in struggling oil-and-gas companies. But optimism reigns. It recovered a little in October and plans to plow more money into energy.

          ... ... ...

          Brigade Capital Management, which sunk $16 billion into junk-rated energy companies, is "having its worst stretch since 2008." It fell over 7% this summer and is in the hole for the year. But it remained gung-ho about energy investments.

          ... ... ...

          But fresh money is already lining up again. They're trying to profit from the blood in the street. Blackstone raised almost $5 billion for a new energy fund and is waiting to pounce. Carlyle is trying to raise $2.5 billion for its new energy fund. Someday someone will get the timing right and come out ahead.

          Next year is going to be brutal, explained the CEO of oil-field services giant Schlumberger. But then, there are dreams of "a potential spike in oil prices." Read… The Dismal Thing Schlumberger Just Said about US Oil

          [Nov 04, 2015] Fifty Shades of Tax Dodging: How EU Helps Support Unjust Global Tax Systems

          www.nakedcapitalism.com

          Yves here. Tax is a major way to create incentives. New York City increased taxes dramatically on cigarettes, and has tough sanctions for trying to smuggle meaningful amounts of lower-taxed smokes in. Rates of smoking did indeed fall as intended.

          Thus the debate about whether corporations should pay more taxes is not "naive" as the plutocrats would have you believe; in fact, they wouldn't be making such a big deal over it if it were. In the 1950s, a much larger percentage of total tax collections fell on corporations than individuals. And the political message was clear: the capitalist classes needed to bear a fair share of the total tax burden. Similarly, what has been the result of the preservation of a loophole that allows the labor of hedge fund and private equity fund employees to be taxed at preferential capital gains rates? A flood of "talent" into those professions at the expense of productive enterprise.

          And the result of having lower taxes on companies has been a record-high corporate profit share of GDP, with none of the supposed benefits of giving businesses a break. Contrary to their PR, large companies have been net saving, which means liquidating, since the early 2000s. The trend has become more obvious in recent years as companies have borrowed money to buy back their own stock.

          Originally published at the Tax Justice Network

          In the past year, scandal after scandal has exposed companies using loopholes in the tax system to avoid taxation. Now more than ever, it is becoming clear that citizens around the world are paying a high price for the crisis in the global tax system, and the discussion about multinational corporations and their tax tricks remains at the top of the agenda. There is also a growing awareness that the world's poorest countries are even harder impacted than the richest countries. In effect, the poorest countries are paying the price for a global tax system they did not create.

          A large number of the scandals that emerged over the past year have strong links to the EU and its Member States. Many eyes have therefore turned to the EU leaders, who claim that the problem is being solved and the public need not worry. But what is really going on? What is the role of the EU in the unjust global tax system, and are EU leaders really solving the problem?

          This report – the third in a series of reports – scrutinises the role of the EU in the global tax crisis, analyses developments and suggests concrete solutions. It is written by civil society organisations (CSOs) in 14 countries across the EU. Experts in each CSO have examined their national governments' commitments and actions in terms of combating tax dodging and ensuring transparency.

          Each country is directly compared with its fellow EU Member States on four critical issues: the fairness of their tax treaties with developing countries; their willingness to put an end to anonymous shell companies and trusts; their support for increasing the transparency of economic activities and tax payments of multinational corporations; and their attitude towards letting the poorest countries have a seat at the table when global tax standards are negotiated. For the first time, this report not only rates the performance of EU Member States, but also turns the spotlight on the European Commission and Parliament too.

          This report covers national policies and governments' positions on existing and upcoming EU level laws, as well as global reform proposals.

          Overall, the report finds that:

          • Although tweaks have been made and some loopholes have been closed, the complex and dysfunctional EU system of corporate tax rulings, treaties, letterbox companies and special corporate tax regimes still remains in place. On some matters, such as the controversial patent boxes, the damaging policies seem to be spreading in Europe. Defence mechanisms against 'harmful tax practices' that have been introduced by governments, only seem partially effective and are not available to most developing countries. They are also undermined by a strong political commitment to continue so-called 'tax competition' between governments trying to attract multinational corporations with lucrative tax reduction opportunities – also known as the 'race to the bottom on corporate taxation'. The result is an EU tax system that still allows a wide range of options for tax dodging by multinational corporations.

          • On the question of what multinational corporations pay in taxes and where they do business, EU citizens, parliamentarians and journalists are still left in the dark, as are developing countries. The political promises to introduce 'transparency' turned out to mean that tax administrations in developed countries, through cumbersome and highly secretive processes, will exchange information about multinational corporations that the public is not allowed to see. On a more positive note, some light is now being shed on the question of who actually owns the companies operating in our societies, as more and more countries introduce public or partially public registers of beneficial owners. Unfortunately, this positive development is being somewhat challenged by the emergence of new types of mechanisms to conceal ownership, such as new types of trusts.

          • Leaked information has become the key source of public information about tax dodging by multinational corporations. But it comes at a high price for the people involved, as whistleblowers and even a journalist who revealed tax dodging by multinational corporations are now being prosecuted and could face years in prison. The stories of these 'Tax Justice Heroes' are a harsh illustration of the wider social cost of the secretive and opaque corporate tax system that currently prevails.

          • More than 100 developing countries still remain excluded from decision-making processes when global tax standards and rules are being decided. In 2015, developing countries made the fight for global tax democracy their key battle during the Financing for Development conference (FfD) in Addis Ababa. But the EU took a hard line against this demand and played a key role in blocking the proposal for a truly global tax body.

          Not one single EU Member State challenged this approach and, as a result, decision-making on global tax standards and rules remains within a closed 'club of rich countries'.

          A direct comparison of the 15 EU countries covered in this report finds that:

          • France, once a leader in the demand for public access to information about what multinational corporations pay in tax, is no longer pushing the demand for corporate transparency. Contrary to the promises of creating 'transparency', a growing number of EU countries are now proposing strict confidentiality to conceal what multinational corporations pay in taxes.
          • Denmark and Slovenia are playing a leading role when it comes to transparency around the true owners of companies. They have not only announced that they are introducing public registers of company ownership, but have also decided to restrict, or in the case of Slovenia, avoided the temptation of introducing, opaque structures such as trusts, which can offer alternative options for hiding ownership. However, a number of EU countries, including in particular Luxembourg and Germany, still offer a diverse menu of options for concealing ownership and laundering money.
          • Among the 15 countries covered in this report, Spain remains by far the most aggressive tax treaty negotiator, and has managed to lower developing country tax rates by an average 5.4 percentage points through its tax treaties with developing countries.
          • The UK and France played the leading role in blocking developing countries' demand for a seat at the table when global tax standards and rules are being decided.

          To read a summary of the report, please click here.

          A summary of the report is here.

          The full report is here or here.

          Stephen Rhodes, November 3, 2015 at 11:00 am

          Or try this, kids:

          Class Actions vs. Individual Prosecutions
          Jed S. Rakoff NOVEMBER 19, 2015 NYRB
          Entrepreneurial Litigation: Its Rise, Fall, and Future
          by John C. Coffee Jr.
          Harvard University Press, 307 pp., $45.00

          http://www.nybooks.com/articles/archives/2015/nov/19/cure-corporate-wrongdoing-class-actions/

          [Nov 04, 2015] Oil Market Needs Another Month to Decide If the Rebound Is for Real

          Notable quotes:
          "... Production in the U.S. will drop 1 million barrels a day from the peak by early 2016, Vitol SA Chief Executive Officer Ian Taylor said at a conference in London. ..."
          "... "Prices have not gone down below $40 a barrel for the last three months so maybe it is at the bottom," Omair said. ..."
          finance.yahoo.com

          Oil prices will increase if global economic growth improves, and high-cost production is cut, Omair said. "If the situation is as it is then the only parameter will be the withdrawal of the high-cost production." Brent rose 0.4 percent to $50.72 a barrel at 12:31 p.m. on the London-based ICE Futures Europe exchange.

          The number of rigs drilling for oil in the U.S. slumped to a five-year low last week as producers curbed investment because of low prices. Brent has slumped 38 percent in the past year, falling to as low as $42.23 a barrel in August.

          More from Bloomberg.com: That Time I Tried to Buy an Actual Barrel of Crude Oil

          U.S. crude output will retreat by about 10 percent in the 12 months ending April, according to Daniel Yergin, vice chairman of IHS Inc. Prices are near a bottom and global supplies look set to close the gap with demand amid declining output, he said in Tokyo on Oct. 30. Production in the U.S. will drop 1 million barrels a day from the peak by early 2016, Vitol SA Chief Executive Officer Ian Taylor said at a conference in London.

          Oil failed to sustain a gain above $50 a barrel last month as OPEC pumped above its quota for the past 17 months. "Prices have not gone down below $40 a barrel for the last three months so maybe it is at the bottom," Omair said.

          [Nov 02, 2015] Foreign Banks Such as Deutsche Using Variant of Lehman Repo 105 Balance-Sheet Tarting Up Strategy

          Notable quotes:
          "... Lehman was engaging in blatant misreporting, treating these "repos" (in which a bank still shows them on its balance sheet as sold with the obligation to repurchase) as sales ..."
          "... "It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations…." ..."
          "... Although I hope the bank's newly appointed CEO is able to implement measures to rectify these problems, if DB "goes Lehman", I suspect it will occur much as Lehman did: quite suddenly. ..."
          "... The 5% "fee" referred to in the fourth paragraph of the FT excerpt above is not the interest rate charged on the loan but instead is the over-collateralization amount provided by Lehman in exchange for a short-term cash loan. A normal repo loan is over-collateralized at perhaps 2%. Lehman's and its outside auditors Ernst Young's 'genius' was in discovering some language in 2001 or so in the then recently amended FAS 157 accounting guidance (all such guidance has been revised and renumbered in the meantime) which suggested indirectly that if the rate of over-collateralization was bumped up enough, you could pretend you sold the collateral instead of pledging it as collateral. So instead of pledging the normal 102% of the loan amount in collateral, Lehman asked lenders to please take more than that: 105%, hence "Repo 105." ..."
          "... Most of Lehman's lenders wouldn't touch the scam because it was so obvious, but a few non-U.S. banks were happy to oblige Lehman. One was Deutsche Bank, to the tune of many billions of dollars over the years. Not that that had anything to do with ex-Deutsche General Counsel for the Americas Rob Khuzami's decision, once he became Obama's Enforcement Head at the SEC beginning in 2009, to give Lehman, EY, Deutsche and the other lenders a pass on all that. ..."
          "... In no way did the drafters of the accounting guidance ever say, here's a way to scam the market, have at it. But then again those drafters are a committee of CPAs from all the big firms and elsewhere, including several from EY. So who knows how deliberate the set up was. ..."
          "... Deutsche Bank has hugely profited from the end of the Deutschland AG at which head it once was. Thanks to chancellour Schroeder and his finance minister Eichle (the successor after Lafontaine was kicked who went on to found the left party) Deutsche and the other big German banks got to sell their industry portfolios without paying a penny of tax. It is common knowledge among industry watchers that this money ended up as bonuses for the "masters of the universe" at the Anglo-Saxon part of the bank which basically took over the whole bank. First invisibly and then all to visible when Jain became CEO. German industry is now owned by Blackrock and the like. Homi soit qui mal y pense ..."
          "... Geithner's amorality and dereliction of duty has been apparent since his testimony in Starr v USA. Somehow these big names are protected by the supine media. ..."
          "... Couldn't the NY State Superintendent of Financial Services pull Deutsche's U.S. Banking License? I thought this is what Ben Lawsky was intimating in this (nearly) one year old interview on Bloomberg, in which he (hints at?) the pulling of Deutsche's license, even though he was not at the time talking about Repo 105 ..."
          Nov 02, 2015 | naked capitalism
          Deep Thought

          Lehman was engaging in blatant misreporting, treating these "repos" (in which a bank still shows them on its balance sheet as sold with the obligation to repurchase) as sales

          Thank you for writing this bit. All the explanations I've read of Repo 105 seemed to be missing the step where liabilities were actually reduced – because what's the difference between an asset and an obligation/contract to buy said asset in X hours time?

          So I'm glad a more financially astute mind than mind wrote down what I'd suspected, that real liabilities weren't actually reduced by Repo 105 and it's just window dressing to fool the regulators. I'd hazard that it actually makes the situation worse, because it's pretty expensive window dressing and that's real cash that has to head out the door once a quarter.

          tawal

          Turning all the brokerages into bank holding companies, where now they all have a calendar year end and can't temporarily hide their trash on each other's books, but can all hide it on the Fed's unaudited balance sheet.

          Why isn't Deutsche Bank doing this too, and are UBS, Barclays and HSBC the next to fail?

          fresno dan

          "It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations…."

          Upon finding this out, tire squeal, sirens wail, lights flash, and grim faced men rush to take into custody little Timmy Geithner and serve warrants a the New York FED….

          LOL – of course not. Most government officials, of BOTH parties, would say Timmy Geithner and his ilk performed fantastically….
          After all, he worked hard to prop it up…. If you remove the corruption, the double and self dealing, price fixing, fraud, ad infinitum, and how could the system continue as constituted? And the people at the top of the system thinks it works very well indeed.

          Chauncey Gardiner

          This issue is unsurprising to me. Many signs over the past couple years of deeply troubling matters at this TBTF: CEO resignations, NY Fed criticisms of systems and financial reporting (as Yves pointed out), participation in market manipulations, billions in writedowns, suicide death of bank's regulatory lawyer, massive derivatives exposures, central bank calls for increased capital, etc.

          Although I hope the bank's newly appointed CEO is able to implement measures to rectify these problems, if DB "goes Lehman", I suspect it will occur much as Lehman did: quite suddenly.

          Recalling Ernest Hemingway in "The Sun Also Rises":
          "How did you go bankrupt?" Bill asked.
          "Two ways," Mike said. "Gradually and then suddenly."

          JustAnObserver

          • Deutche Bank = Germany's RBS (Royal Bank of Scotland) ?
          • All the Eurozone's nightmares since 2010 have been down to a desperate attempt to postpone DB's "Minsky Moment" ?

          I did see a report that DB is withdrawing from a number of countries but Wall Street wasn't on that list. Interestingly the list includes all the Scandinavian countries as well as the usual suspects – Mexico, Turkey, Saudi, etc.

          Oliver Budde

          The 5% "fee" referred to in the fourth paragraph of the FT excerpt above is not the interest rate charged on the loan but instead is the over-collateralization amount provided by Lehman in exchange for a short-term cash loan. A normal repo loan is over-collateralized at perhaps 2%. Lehman's and its outside auditors Ernst & Young's 'genius' was in discovering some language in 2001 or so in the then recently amended FAS 157 accounting guidance (all such guidance has been revised and renumbered in the meantime) which suggested indirectly that if the rate of over-collateralization was bumped up enough, you could pretend you sold the collateral instead of pledging it as collateral. So instead of pledging the normal 102% of the loan amount in collateral, Lehman asked lenders to please take more than that: 105%, hence "Repo 105."

          Most of Lehman's lenders wouldn't touch the scam because it was so obvious, but a few non-U.S. banks were happy to oblige Lehman. One was Deutsche Bank, to the tune of many billions of dollars over the years. Not that that had anything to do with ex-Deutsche General Counsel for the Americas Rob Khuzami's decision, once he became Obama's Enforcement Head at the SEC beginning in 2009, to give Lehman, EY, Deutsche and the other lenders a pass on all that.

          The few banks who did dare to help out Lehman of course charged higher than market rates for those loans, even though they held an extra 3% in collateral, which was always made up of high quality Treasury bonds and the like. Those lenders charged more anyway, because they knew what Lehman was up to and knew they could wring out some extra cash in exchange for 'aiding' Lehman in its needs. Lehman gladly paid the higher interest.

          In no way did the drafters of the accounting guidance ever say, here's a way to scam the market, have at it. But then again those drafters are a committee of CPAs from all the big firms and elsewhere, including several from EY. So who knows how deliberate the set up was.

          The scam began in 2001 or so and while it may not have been what blew up Lehman in 2008, it did importantly mislead a lot of people in 2007 and 2008, when its use was ramped up dramatically. And it put extra bonus money into the Lehman executives' pockets, year in and year out. No wonder others seek to emulate it.

          Tom

          Deutsche Bank has hugely profited from the end of the Deutschland AG at which head it once was. Thanks to chancellour Schroeder and his finance minister Eichle (the successor after Lafontaine was kicked who went on to found the left party) Deutsche and the other big German banks got to sell their industry portfolios without paying a penny of tax. It is common knowledge among industry watchers that this money ended up as bonuses for the "masters of the universe" at the Anglo-Saxon part of the bank which basically took over the whole bank. First invisibly and then all to visible when Jain became CEO. German industry is now owned by Blackrock and the like. Homi soit qui mal y pense

          RBHoughton

          Geithner's amorality and dereliction of duty has been apparent since his testimony in Starr v USA. Somehow these big names are protected by the supine media.

          Thank Heavens for NC – one of the most important of a handful of sites that fearlessly report. Fingers crossed we can build a new media industry around this nexus of quality.

          Pearl

          Yves,

          Couldn't the NY State Superintendent of Financial Services pull Deutsche's U.S. Banking License? I thought this is what Ben Lawsky was intimating in this (nearly) one year old interview on Bloomberg, in which he (hints at?) the pulling of Deutsche's license, even though he was not at the time talking about Repo 105:

          http://www.bloomberg.com/news/videos/2014-12-11/banks-are-taking-cybersecurity-seriously-lawsky-says-video

          I know it may not be likely that Deutsche's U.S. banking license would get pulled, but it is possible, isn't it?

          (btw, here is what Lawsky is doing now:)

          http://nypost.com/2015/05/20/ny-financial-watchdog-ben-lawsky-leaving-to-start-firm/

          If enough folks became vocal (enough) about the issue–couldn't we make a difference this time? ("We," as in ordinary housewives from Roswell, GA and humble bloggers such as the illustrious Yves Smith?".) ;-)

          I think you are waaaay more famous than you think you are, Yves. Indeed, you are universally one of the most well-respected and straight-shooting authors/academics/authorities on such subjects. And I think Mr. Lawsky would take your call or reply to an email if written by you.

          I spoke with his staff (yes, me–a housewife from Roswell, GA) when he was at DFS during my "Ocwiteration Perseveration" days of yore, and his staff was unusually generous with their time and they seemed genuinely appreciative to get info and feedback from just regular folks.

          I think Mr. Lawsky himself would be thrilled to hear from someone like you. And I think the two of you would be an extremely formidable team.

          I just don't want to give up on this. It's too important. At the very least, I will forward to him this post of yours.

          Thanks again for everything you do, Yves.

          [Nov 02, 2015] Low Oil Prices Could Persist Through 2016

          This game became really interesting if prices will remain low for oil all 2016. That's another 200 billion stimulus for the US economy. People are genetically biased against change, because change means potential danger. People are also genetically biased against acknowledging this bias, because they wish to see themselves as being able to cope with both change and danger. Put together, this means that when changes come, people are largely unprepared or underprepared. This little bit of psychology 101 may seem redundant, but it is indispensable if we are talking about the current oil price slump...
          Notable quotes:
          "... The average estimate from the banks for oil prices is for Brent to average just $58 per barrel in 2016, and WTI to trade for $54 per barrel. But just a few months ago, the same survey showed that the banks expected oil prices to average $70 per barrel in 2016. ..."
          "... U.S. oil output is down to around 9.1 million barrels per day from a peak of 9.6 million barrels per day reached in April 2015. ..."
          "... ... ... ... ..."
          "... However, while the Permian will slow oil market balancing, it won't be able to compensate for the loss of production elsewhere. Overall, U.S. production is in decline. Most of the loss in U.S. output has come from the Eagle Ford in South Texas, which has shed over 227,000 barrels per day in output since April. ..."
          Nov 02, 2015 | OilPrice.com

          A group of investment banks are becoming increasingly gloomy about the direction of oil prices in the near-term. A Wall Street Journal survey of 13 investment banks found a growing degree of pessimism about the oil markets.

          The average estimate from the banks for oil prices is for Brent to average just $58 per barrel in 2016, and WTI to trade for $54 per barrel. But just a few months ago, the same survey showed that the banks expected oil prices to average $70 per barrel in 2016.

          The growing pessimism is in part due to the potential slowdown in demand, particularly from China. At the same time, Russia and OPEC nations continue to produce at elevated levels. Only U.S. production appears to be declining in any substantial way. U.S. oil output is down to around 9.1 million barrels per day from a peak of 9.6 million barrels per day reached in April 2015.

          ... ... ...

          ... producing in places like the Permian Basin is still very much profitable today, even with prices at $50 per barrel or lower. While North Dakota, Louisiana, or Colorado have seen drilling grind to a halt, drilling in the Permian Basin in West Texas is still going strong. In fact, many oil companies are scrapping drilling in other parts of their portfolio and expanding their footprint in the Permian. As a result, production from the Permian is still rising. The Permian stands out because of the abundance of oil and gas in place, making each well more lucrative than a similar well in another basin.

          However, while the Permian will slow oil market balancing, it won't be able to compensate for the loss of production elsewhere. Overall, U.S. production is in decline. Most of the loss in U.S. output has come from the Eagle Ford in South Texas, which has shed over 227,000 barrels per day in output since April.

          [Nov 02, 2015] It's Difficult to Make Predictions, Especially About the Future OIl Prices

          Initially Statoil was looking for $60 in 2016, $70 in 2017 and $80 in 2018, for planning purposes.
          Notable quotes:
          "... Mark Hanson, an analyst for Morningstar in Chicago, said the days of huge price cuts are nearly over."I don't think there is going to be meaningful reduction from here," he said. "To use a baseball analogy, you are probably in the seventh or eighth inning." ..."
          "... Given that many US oil companies were cash flow negative prior to the price collapse, do you think that US oil companies will be able to increase production in the future without being cash flow negative? ..."
          "... As there is a time lag of six to nine months between initial capex decision and actual production, it is in my view premature to have a final say about current emerging capital efficiency. The production numbers we have now are the harvest of the capex in the last quarter of 2014. ..."
          "... Range Resources had for example 400 mill capex in 4q14, which came down to just 188 mill in 3q15, when production went up 20% year over year. This is in my opinion not extremely capital efficient , yet is a harbiger of much lower production in the months ahead. ..."
          "... "We think that the price level now is too low," Eirik Waerness, chief economist and vice-president at Statoil ASA, said in an interview in Singapore on Thursday. "Some people will stop exploring for oil. With oil prices around $50, you get a stimulus for demand growth. That will tighten the market." Crude is expected to climb to $80 a barrel in 2018 and increase gradually after that as existing supplies get used up, he said. ..."
          "... the way this usually works the government will react and change taxes. As increased taxation takes effect production starts to drop. Evidently the Russian government is reluctant to change the current rates to signal it has a reliable tax system which allows investments to proceed with a very long term outlook. But I expect they'll be putting on the squeeze if they haven't done so. ..."
          peakoilbarrel.com

          R Walter , 11/01/2015 at 8:10 am

          Using Mr. Peabody's Wayback Machine, I found this quote:

          "We will never see eighty five dollar oil again except maybe as the whiplash negative feedback response to a sudden spike as happened the last time prices spiked very high. Think five hundred car pile up on a freeway after that happens with everybody flying and then traffic stopped or almost stopped with nobody buying but a lot of people contracted to take delivery- and the gasoline and diesel piling up at the retail end. Prices may collapse temporarily into the eighties or even lower but only for a few weeks or months." – Old Farmer Mac

          http://peakoilbarrel.com/enno-peters-post/

          Oil is at 45, so the price can fall and it did. 147 to 135, 125, 115, 105, 95, 85, 75, 65, 55, 45, then as low as 39, back to 45 and holding. Nowhere near 85, let alone 100. 45 dollars is a dead man walking.

          Wendell Lawson, the character played by Burt Reynolds in the movie 'The End', was swimming out to sea to make his final exit, deciding he wanted to live, he turned back and began to swim to shore.

          "90 percent, Lord, I'll give you 90 percent if you get me out of this." As he swam closer, the pledge began to decrease, it falls to 80 percent, then to 70 percent, by the time he got back to shore, the Lord was not getting much. When Sonny Lawson finally got there, Marlon Borunki, played by Dom Deluise, started to shoot rounds from a pistol at Sonny. He was helping out Wendell to kill himself.

          It was funny.

          The kind of help the oil industry is getting.

          Dennis Coyne , 11/01/2015 at 11:34 am
          I thought output would decrease at these prices much faster than they have. Until output drops prices will remain under 85 per barrel. Lots of people are wrong on oil prices. Only very wide guesses will be correct such as 5 to 200 per barrel.
          Fernando Leanme , 11/02/2015 at 3:52 am
          40 to 150 over the next 30 months.
          Dennis Coyne , 11/02/2015 at 8:08 am
          Hi Fernando,

          That is probably wide enough to get it right. I have seen some really bold price predictions from others such as, the oil price will be a positive number.

          I have lost confidence in my ability to predict future oil prices so $15/b to $200/b over the next 60 months(in 2015$) is about the best I could do. There are others who will only go so far as to say that oil prices will be "low" or "high" in the future which means very little with no number attached.

          old Farmer Mac , 11/02/2015 at 6:46 pm
          I made a fool out of myself that time sure enough by forgetting to add my usual weasel words such as barring miracle breakthroughs, the economy being in assisted living mode etc.

          It ( warning attempted humor) is all the fault of them there pinko commie environmental types that hang out in forums such as this one misleading me into believing that oil comes out of holes in the ground and does not grow back, that the population is growing and wanting more oil, etc etc.

          Seriously I forgot to consider the possibility that bankers would continue to loan money to tight oil losers at zero percent, that Russia and Saudi Arabia would be at war with the price of oil being the only real weapon the Saudis can bring to bear etc.

          The industry moves a lot slower than I thought, no question. It is taking a LOT longer than I would have thought for high cost producers to cut back their money losing production. Everybody with a barrel to sell seems to be really desperate for cash and willing to run in the hole to put their hands on it. Sooner or later enough production is going to be curtailed to put the price back into black ink territory for high cost producers.

          MarbleZeppelin , 11/01/2015 at 8:23 am
          Referring to Ovi's graph above.
          There is a 4.6% drop in production from March to August which gives a monthly loss of 0.92%.
          Alternatively from January to March there was a 5,6% gain in production. That gives a gain of 2.8% per month.
          Overall the graph shows a 1.4% gain in production or 0.14% gain in production per month.
          The graph does indicate the ability to increase production generally faster than it declines.
          The range is quite wide and the timescale short so it is not feasible to determine the typical range of variation or extrapolate future production.
          The only conclusion that can be made from this graph requires other sources of information, such as the current economic situation in the oil fields. One might conclude that this particular downturn in production is due to economic constraints involving low cash flow and loan contractual terms. The economic constraints lead to the need for a further analysis of situational parameters in the economic environment, such as involvements with other energy sources, demand analysis, efficiency changes as well as psychological changes in the social/political structure.
          AlexS , 11/01/2015 at 5:15 pm
          Big U.S. shale oil savings fast becoming a thing of the past

          http://www.reuters.com/article/2015/10/30/oil-results-costs-idUSL1N12M2KI20151030

          Huge cost savings are waning for U.S. shale oil companies, marking an end to the drastic price cuts on equipment and services over the past 16 months that helped them survive the worst industry downturn in six years.

          Companies including Anadarko Petroleum Corp, ConocoPhillips and Occidental Petroleum Corp have saved millions on drilling and fracking wells in Texas, Colorado and North Dakota since the oil price slide started by demanding that oilfield service companies slash prices by 20 percent to 30 percent or more.

          Those savings, coupled with big gains in rig productivity that allowed more oil to be pumped with less equipment, created a lifeline for companies coping with a more than 50 percent drop in crude prices. But productivity gains have stalled in the last few months and deflation may be slowing as well, just as producers try to withstand a lower-for-longer price outlook.

          ConocoPhillips has seen its onshore drilling and completion costs fall. More savings are expected, but not as much.

          "If prices stay low and activity levels stay low I think you will see more pressure on deflation, but not another magnitude of the leg down we've seen so far," Jeff Sheets, Conoco's chief financial officer, told Reuters on Thursday.

          The U.S. rig count has fallen by more than half from a year ago when nearly 1,600 rigs were working, so companies that lease rigs or do hydraulic fracturing have offered double-digit discounts to get work contracts.

          When asked if cost deflation is likely to continue, Darrell Hollek, head of U.S. onshore exploration and production at Anadarko, told analysts on Wednesday the company continues to see decreases in prices, but those declines are not "as significant as what we saw earlier in the year."

          In West Texas, Occidental said the cost for a 4,500-foot well has fallen 45 percent from a year earlier to $6.3 million now. The company said on a call with analysts it expects costs to come down more, but did not say by how much.

          RigData, which tracks oilfield activity, forecast cost declines for U.S. onshore wells of $1.2 million on average in 2015, a drop that is unlikely to be repeated next year, Trey Cowan, senior industry analyst with RigData, said.

          Currently, operators are drilling wells in so-called sweet spots that produce the most oil and gas. After they go through that inventory and move on to less prolific spots, it will cost more to drill, said Cowan.

          The chief executive of Baker Hughes, Martin Craighead, on the third-quarter conference call of the oilfield services giant, downplayed more cuts when an analyst asked if his company could offer additional cost reductions of 15 percent to 30 percent.

          "You are just not going to get out there and take your hats off to any customer," Craighead said. "They are going to obviously try to get as much as they can and there will be a point where it just doesn't make any sense."

          Mark Hanson, an analyst for Morningstar in Chicago, said the days of huge price cuts are nearly over."I don't think there is going to be meaningful reduction from here," he said. "To use a baseball analogy, you are probably in the seventh or eighth inning."

          shallow sand , 11/01/2015 at 7:15 pm
          AlexS. Thanks for the post!

          Given that many US oil companies were cash flow negative prior to the price collapse, do you think that US oil companies will be able to increase production in the future without being cash flow negative?

          It seems to me that if oil prices shoot back up at some point, service rates will also.

          Our lowest two OPEX years since 2006 will be 2009 and 2015. The highest 2008 and 2013.

          I really question whether US oil companies will ever be able to be "growth" companies anytime soon.

          Heinrich Leopold , 11/02/2015 at 3:40 am
          AlexS,

          As there is a time lag of six to nine months between initial capex decision and actual production, it is in my view premature to have a final say about current emerging capital efficiency. The production numbers we have now are the harvest of the capex in the last quarter of 2014.

          It will be interesting how the production numbers will develop over the next few months. Range Resources had for example 400 mill capex in 4q14, which came down to just 188 mill in 3q15, when production went up 20% year over year. This is in my opinion not extremely capital efficient , yet is a harbiger of much lower production in the months ahead.

          HR , 11/02/2015 at 9:30 am
          Heinrich, I am using the same logic as you. I guess the question is how long before reduced capex turns into lower production.
          shallow sand , 11/02/2015 at 7:44 am
          Statoil sees no oil price recovery till 2018. Any guesses on what that scenario does to US oil production?
          Dennis Coyne , 11/02/2015 at 8:19 am
          Hi Shallow sand,

          What does price recovery mean?

          Is that an oil price below $60/b until 2018?

          If so, I would expect US C+C output will fall to 6 Mb/d by 2018, possibly more, however, the oil price prediction will likely be incorrect as the fall in oil supply will lead to an earlier price recovery in 2016 or 2017 at the latest. By price recovery I mean an oil price above $75/b in 2015$.

          shallow sand , 11/02/2015 at 10:09 am
          Dennis. It is difficult to tell from the CNBC article, but looks to me that initially Statoil was looking for $60 in 2016, $70 in 2017 and $80 in 2018, for planning purposes. Now, possibly, they are looking at below $60 to 2018.

          I still feel that OPEC will cut at some point, the question is when. Read an analyst who thought they should 12/4, but would not to save face, as US production has not fallen much and Russian production has not fallen at all (see AlexS post herein). So very possible there will not be a production cut until US production falls significantly, maybe not till late 2016

          AlexS , 11/02/2015 at 10:55 am
          shallow sand,

          Statoil expects $80 by 2018. Here is a Bloomberg article:

          'Too Low' Crude Prices Seen Rising to $80 in 2018 by Statoil

          http://www.bloomberg.com/news/articles/2015-10-29/-too-low-crude-prices-seen-rising-to-80-in-2018-by-statoil

          • Supply growth seen falling amid industry cost-cutting
          • Current high oil inventories preventing price recovery

          Crude prices that have almost halved in the past year are unsustainable at current levels as cuts to investments and postponement of projects will lead to a decline in supply growth, according to Norway's biggest oil company.

          "We think that the price level now is too low," Eirik Waerness, chief economist and vice-president at Statoil ASA, said in an interview in Singapore on Thursday. "Some people will stop exploring for oil. With oil prices around $50, you get a stimulus for demand growth. That will tighten the market." Crude is expected to climb to $80 a barrel in 2018 and increase gradually after that as existing supplies get used up, he said.

          Oil slumped more than 44 percent in the past year as U.S. stockpiles expanded at a time when OPEC producers bolstered output to retain market share, exacerbating a global supply glut that the International Energy Agency estimates will remain until at least the middle of 2016. Producers hurt by the collapse in prices have had to fire workers, cancel projects and sell oil fields to conserve cash. Statoil on Wednesday announced cuts to planned investments in 2015 by $1 billion to $16.5 billion.
          "The question is how much of the current change in the industry will lead to long-term cost reductions," said Waerness. When "demand becomes larger than supply, and we will start drawing down storages. The market will suddenly realize that there's very little spare capacity out there."

          "The underlying trend is that it's going to come up, but it's going to take a while," Waerness said, referring to prices. "One of the reasons why it takes a while is because the storage is too high, and therefore the price mechanism doesn't really work."

          AlexS , 11/02/2015 at 8:43 am
          Russian Crude Output Hits Post-Soviet Record Defying Price Slump

          http://www.bloomberg.com/news/articles/2015-11-02/russian-crude-output-hits-post-soviet-record-defying-price-slump

          • October output averaged 10.776 million barrels a day
          • Oil exports increased 10% compared with October last year

          Russian oil production broke a post-Soviet record in October for the fourth time this year as earlier investments boosted output and producers prove resilient to lower crude prices.

          Production of crude and gas condensate, which is similar to a light oil, averaged 10.776 million barrels a day during the month, according to data from the Energy Ministry's CDU-TEK unit. That is an increase of 1.3 percent from a year earlier and up 0.3 percent from the previous month.

          "Russian oil production is still reflecting oil prices above $100 a barrel due to long lead times in the investment cycle," Alexander Nazarov, an oil and gas analyst at Gazprombank JSC, said by e-mail from Moscow. "The reason behind growth this year dates back to 2010-2014, when a number of projects were financed."

          ---------------
          My comment:
          – Using 7.3 barrels per ton conversion rate, Russian C+C production was 10,731 kb/d.
          – The industry only reduced production m-o-m in 2015 in April and July, indicating stable performance.
          – The companies' upstream margins are supported by weaker rouble and progressive tax system with a very steep scale.
          – There are no signs of reduced investment/drilling activity in the sector in rouble or volume terms.

          Russian C+C production (mb/d) (7.3 bbl/ton conversion rate)
          Source: Russia's Energy Ministry

          Dennis Coyne , 11/02/2015 at 8:55 am
          Hi AlexS,

          Thanks. Has there been any slow down in new oil field developments in Russia due to the lower oil price environment? I wonder if lower capital investment today may result in a fall in Russian output (or possibly an end to the recent growth in output) a few years down the road. Is your expectation a continued plateau in output between 10.6 and 10.7 Mb/d, even if oil prices remain under $60/b (2015$) until 2018?

          Fernando Leanme , 11/02/2015 at 9:42 am
          Dennis, the way this usually works the government will react and change taxes. As increased taxation takes effect production starts to drop. Evidently the Russian government is reluctant to change the current rates to signal it has a reliable tax system which allows investments to proceed with a very long term outlook. But I expect they'll be putting on the squeeze if they haven't done so.
          AlexS , 11/02/2015 at 3:46 pm
          Dennis,

          Development capex increased in local currency terms in 2015.

          From the IEA OMR: "Record high output follows a boom in development drilling, up 8.9% y-o-y for the first 8 months of 2015 compared with the same period a year earlier, as well as a greater share of horizontal wells and a continued focus on brownfield maintenance."

          The IEA now expects Russian oil production to decline by 85 kb/d in 2016. But in July they were expecting a decline of 120 kb/d.

          Similarly, the IEA had projected a decline of 140 kb/d for 2015 (January 2015 OMR), and now they forecast an increase of 110 kb/d (October 2015 OMR).

          As regards longer-term prospects, new projects, which are expected to come onstream in the next 5 years, are on schedule. Only some Arctic offshore projects were postponed, but they were not expected to start production before 2020-2025.

          The Energy Ministry's long term projections anticipate more or less flat production until 2035. I think production can be maintained close to current levels in the next 5-6 years. Longer term prospects depend on the development of the new resource base in the Arctic offshore and unconventional resources, such as tight oil

          Green People's Media , 11/02/2015 at 1:50 pm
          Ron, have you (or your readers) seen this one yet? As a regular follower of Peak Oil Barrel I have to count myself a "BP Skeptic" with regard t o this headline "BP sees technology nearly doubling world energy resources by 2050."

          It's the ancient "technology will save us" mantra re-applied. Wondering if you or any readers have any wisdom or insights on this article. Where is BP getting the claim of a doubling of "global reserves?" (Not daily production in MM Bbl/day, just "reserves," mind you.

          http://finance.yahoo.com/news/bp-sees-technology-nearly-doubling-world-energy-resources-143523912–finance.html

          Doug Leighton , 11/02/2015 at 3:32 pm
          Well it was BP who developed (and deployed) wide azimuth towed streamer technology which totally revolutionized marine seismic acquisition and decades before that they invented hydraulic fracturing (in the 1940s, I think) plus they pioneered ways of refining so-called dirty oil so God knows what kind of stuff they've got up their sleeve. Actually, credit where it's due, wasn't it BP who gave birth of the offshore oil/gas industry with exploitation of the North Sea via development of the Forties platform, what, 50 odd years ago.
          Fred Magyar , 11/02/2015 at 4:53 pm
          Yes, I read that article and almost posted it myself. There is so much contradictory information in that article that I think one would really need to read BP's actual press release. It's quite the mish mosh.

          Just this little tid bit should underscore what I mean:

          When taking into account all accessible forms of energy including nuclear, wind and solar, there are enough resources to meet 20 times what the world will need over that period, David Eyton, BP Group Head of Technology said.

          "Energy resources are plentiful. Concerns over running out of oil and gas have disappeared," Eyton said at the launch of BP's inaugural Technology Outlook.

          Oil and gas companies have invested heavily in squeezing the maximum from existing reservoirs by using chemicals, super computers and robotics. The halving of oil prices since last June has further dampened their appetite to explore for new resources, with more than $200 billion worth of mega projects scrapped in recent months.

          By applying these technologies, the global proved fossil fuel resources could increase from 2.9 trillion barrels of oil equivalent (boe) to 4.8 trillion boe by 2050, nearly double the projected 2.5 trillion boe required to meet global demand until 2050, BP said.

          With new exploration and technology, the resources could leap to a staggering 7.5 trillion boe, Eyton said.

          So basically BP is counting on alternative energy sources, electric vehicles, carbon taxes and reduced demand on top of new discoveries for which they no longer have financial incentives, to all come together to increase resources… Yeah, right!

          The article stinks!

          Watcher , 11/02/2015 at 5:53 pm
          If profit is not relevant to the exercise, a great deal more oil can come out of the ground than we have believed.

          [Nov 02, 2015] Peak Oil Review - Nov 2

          Notable quotes:
          "... Goldman Sachs continues to talk about the possibility of a major price drop in the next year as global capacity to store more crude and oil products runs out. There have been a number of analyses concluding that this will never happen, however, as there is still much storage space available. ..."
          "... It is generally believed that US shale oil production will drop further in the coming year but that it will be offset by increased production overseas. ..."
          "... Tehran will officially notify OPEC next month that it plans to increase production by 500,000 b/d and that it expects other OPEC members to cut production by enough to keep the cartel's production below the agreed-upon 30 million b/d ceiling. OPEC has been producing about 1.7 million b/d above this ceiling lately. ..."
          www.resilience.org

          originally published by ASPO-USA | TODAY

          ... ... ...

          Goldman Sachs continues to talk about the possibility of a major price drop in the next year as global capacity to store more crude and oil products runs out. There have been a number of analyses concluding that this will never happen, however, as there is still much storage space available. People with greater insight into this issue point out the problem is much too complex to be determined with a simple recitation of EIA tank capacity. Serious storage problems could still arise due to the spare storage capacity being in the wrong place or being of the wrong type for the liquid needing to be stored. The EIA says it really cannot calculate the amount of "swing space" necessary to keep operations flowing smoothly. There have already been reports of shortages of distillate storage in the New York area.

          It is generally believed that US shale oil production will drop further in the coming year but that it will be offset by increased production overseas. Iran announced this week that it is preparing to increase its production by 500,000 b/d, which should be enough to offset a large part of the decline in US production we have seen in recent months. This assumes that Tehran can sell its additional barrels which may be difficult without substantial price discounts. The future of the Chinese and US economies remains the major unknown. Chinese crude imports have held up pretty well this year despite its economic slowdown. Much of this is due to low prices which have allowed Beijing to fill its newly built strategic stockpile tanks and to feed new refining capacity. These new refineries are simply dumping more oil products on the world markets rather than increasing domestic oil consumption.

          Like the Chinese economy, that of the US seems to be slowing of late. While there has been much publicity about growing gasoline consumption in the US, this is obviously due to low prices which now average about $2.18 a gallon. The weak earnings reports from the oil industry and announcement that GDP growth fell to 1.5 percent in the third quarter from 3.9 percent in the second quarter raises questions about how long US demand for oil products will hold up. There are already tentative indications that the recent growth in gasoline consumption is starting to slip despite the falling prices.
          ... ... ...

          Iran: Tehran will officially notify OPEC next month that it plans to increase production by 500,000 b/d and that it expects other OPEC members to cut production by enough to keep the cartel's production below the agreed-upon 30 million b/d ceiling. OPEC has been producing about 1.7 million b/d above this ceiling lately.

          Iran has proposed establishing an oil and gas swap with Russia as it has had in place with Turkmenistan, Kazakhstan, and Azerbaijan for over a decade. Under this arrangement, the Iranians would receive gas and oil along their northern border for domestic consumption and then ship a similar quantity from its Gulf ports to Russia's customers. This presumably would save on transportation costs and difficulties in moving oil and gas produced in Central Asia to world markets.

          In the wake of the nuclear agreement Tehran has been feeling its oats by announcing plans to become the largest oil and gas producer. At a conference last week, the Iranians said they will need about $250 billion in new investment in the next ten years. Given the massive cutbacks by nearly all the international oil companies in recent months, the possibility of foreign investment on such a scale is remote.

          [Nov 02, 2015] Interesting to see the large publicly traded companies are selling legacy assets

          Notable quotes:
          "... Edit: I found the answer. Per a 2013 National Geographic article, all Bakken and TFS wells require water flushing such that when the field is fully developed with 40-45K wells, the field will require in excess of 10 billion barrels of fresh water annually. ..."
          "... Throw on top that the companies have added to product gathering and salt water disposal costs by selling of this infrastructure to raise cash, I believe long term ND oil production will be among the hugest cost in the lower 48 on strictly an operating basis. ..."
          "... shallow sand, For big oil companies, selling and buying assets is a constant process. They are "optimizing asset portfolio" ..."
          "... Sunk-cost fallacy occurs when people make decisions about a current situation based on what they have previously invested in the situation. For example, spending $100 on a concert and on the day you find that it's cold and rainy. You feel that if you don't go you would've wasted the money and the time you spent in line to get that ticket and feel obligated to follow through even if you don't want to. It's is cold and rainy in the oil industry right now. ..."
          "... Yes, but if the $30,000/acre price Aubrey McClendon paid is typical, it looks like oil gas asset prices in the Permian Basin are hotter than ever. And this despite the drop in oil prices. ..."
          "... Just imagine, McClendon paid over $30,000 per net acre for leasehold working interest, with oil at $45. ..."
          peakoilbarrel.com

          shallow sand, 10/31/2015 at 9:56 am

          Interesting to see the large publicly traded companies are selling legacy assets.

          In particular, Chevron is selling its interest in the Seminole San Andreas Unit in Gaines Co., TX. The unit is generating them over $400K per month. It is a CO2 flood still producing over 20K BOE per day gross, and is operated by Hess.

          Shell is selling a large block of lower 48 royalty interests located in 10 states, generating over $250K per month.

          Chevron is also selling another legacy block of conventional wells operated by them in the Permian Basin, which currently generates over $300K per month.

          What is also interesting is of all is these are all listed for sale on the Internet auction. IMO they are selling these assets at a really poor time. Are even the super majors in need of cash to the extent they would sell premium onshore lower 48 assets at the low end of the market? Maybe they do not see a rebound anytime soon? Yikes. However, the same things happened in 1998 and many buyers hit it big with prices from late 1999-2014.

          Also looked at conventional wells for sale in Dunn Co. ND. They are under water with oil at the well around $30. I note that the wells produce super saturated salt water and require fresh water flushes to operate. Watcher has mentioned this before. These wells are in the Duperow formation. Do middle Bakken and TFS require large amounts of fresh water also?

          Edit: I found the answer. Per a 2013 National Geographic article, all Bakken and TFS wells require water flushing such that when the field is fully developed with 40-45K wells, the field will require in excess of 10 billion barrels of fresh water annually.

          Looking at the production and lease operating statements for the older conventional wells I examined, I estimate 10+ year old middle bakken and TFS wells will need over $50 WTI just to break even on an operating basis, not including any work over expense.

          North Dakota wells are at a distinct disadvantage due to the salt issue.

          Throw on top that the companies have added to product gathering and salt water disposal costs by selling of this infrastructure to raise cash, I believe long term ND oil production will be among the hugest cost in the lower 48 on strictly an operating basis.

          Doug Leighton,10/31/2015 at 10:09 am
          Perhaps selling off assets looks better than borrowing money from a bank to pay dividends to your shareholders? Watcher would probably know the answer to this.
          AlexS,10/31/2015 at 10:34 am
          shallow sand, For big oil companies, selling and buying assets is a constant process. They are "optimizing asset portfolio"
          Glenn Stehle,10/31/2015 at 10:46 am
          shallow sand said:

          IMO they are selling these assets at a really poor time.

          It's hard to tell, since everything hinges on what happens in the future. One thing is for sure, and that is that Permian Basin O&G assets are, despite the low oil and gas prices, still selling for several times what they sold for in the pre-shale days.

          Take Concho Resources purchase of Marbob in 2010, for instance:

          Based on the acquisition price, Concho's purchase is equivalent to $19.84 per BOE of proved reserves and $104,167 per flowing barrel.

          http://www.b2i.us/profiles/investor/NewsPrint.asp?b=1977&ID=40931&m=rl

          Concho picked up 150,000 net acres in the deal. That's a little bit north of $8,000 an acre. At the time of the sale, the old timers thought Marbob's founder and president, Johnny Gray, had cut a fat hog. But if you compare $8,000 an acre to the more than $30,000 per acre Aubrey McClendon just paid, it looks like Gray sold too soon. One could find other comps, but I think the price of Permian Basin O&G assets over the past 15 years has been consistently upwards.

          Ves, 10/31/2015 at 12:26 pm
          Shallow,

          Analyzing why the companies are selling legacy properties that make some money at this moment can lead you to the trap called "sunk cost fallacy". "Sunk cost fallacy" is exactly the same for big oil companies as for individuals.

          Sunk-cost fallacy occurs when people make decisions about a current situation based on what they have previously invested in the situation. For example, spending $100 on a concert and on the day you find that it's cold and rainy. You feel that if you don't go you would've wasted the money and the time you spent in line to get that ticket and feel obligated to follow through even if you don't want to. It's is cold and rainy in the oil industry right now.

          shallow sand, 10/31/2015 at 2:45 pm

          Glenn. I got an email from Raymond James which detailed Q3 sales. Permian basin were substantially higher per flowing barrel than the rest of the US lower 48.

          AlexS. I do agree companies are always selling assets, but interesting to see larger higher quality assets on the public block. Either no solid offers privately, or maybe companies are finding online sales are the best way to go.

          Glenn Stehle, 11/02/2015 at 10:32 am
          Yes, but if the $30,000/acre price Aubrey McClendon paid is typical, it looks like oil & gas asset prices in the Permian Basin are hotter than ever. And this despite the drop in oil prices.

          Diamondback Energy, for instance, in September 2013 paid $440 million for 12,500 acres of net mineral rights in the shale play in Midland County. That's $35,000/acre, but for mineral interest, and back when oil was selling for well over $100/barrel.

          http://ir.diamondbackenergy.com/releasedetail.cfm?releaseid=788419

          Just imagine, McClendon paid over $30,000 per net acre for leasehold working interest, with oil at $45.

          [Nov 02, 2015] A lessening of interest in cars

          Notable quotes:
          "... North American car sales appear to be flat and Europe's sales look like they have declined. Only Asia seems to show significant increases. ..."
          "... Here in the US there are at least twice as many registered cars as there are licensed drivers. So there is little necessity to buy new. ..."
          peakoilbarrel.com

          Glenn Stehle,11/01/2015 at 6:39 am

          Fred Magyar said:

          "Like we all need a car to be free!"

          Well, a lot of young people are no longer buying into that world view.

          Well somebody's still "buying into that world view."

          http://www.statista.com/statistics/200002/international-car-sales-since-1990/

          Boomer II,11/01/2015 at 12:27 pm

          North American car sales appear to be flat and Europe's sales look like they have declined. Only Asia seems to show significant increases.

          Considering that populations have grown in most places in the world, I would say this chart does indicate a lessening of interest in cars.

          MarbleZeppelin,11/02/2015 at 8:30 am

          Boomer said "Considering that populations have grown in most places in the world, I would say this chart does indicate a lessening of interest in cars."

          Maybe it is not so much interest as need or economics. Much of the new population is in the cities where cars are not generally essential. Also many people are way too poor to afford a car even if they needed one, a bicycle or scooter is about their peak ability to afford.

          Here in the US there are at least twice as many registered cars as there are licensed drivers. So there is little necessity to buy new.

          [Nov 02, 2015] US Oil Production by State

          Oct 30, 2015 | Peak Oil Barrel

          The EIA's Petroleum Supply Monthly is just out with production numbers, through August, for each state and offshore territories. The EIA's Monthly Energy Review is also out. This publication has US production data through September but not for individual states.

          US Total C+C

          The Petroleum Supply Monthly June 15 production numbers were revised down considerably this month. And you can see they had a drop of 169,000 bpd in September. I think there will likely be an even larger drop in October. At any rate US production is finally starting to drop significantly.

          The Gulf of Mexico is the one place that is bucking the trend. The GOM was up 146,000 bpd in July and up another 63,000 bpd in August for a total of 209,000 bpd for the two months.

          Texas was down for the fifth straight month. North Dakota has been moving sideways but is now below their September 2014 level. Alaska is slightly above their August 2014 level but their average annual production will drop by between 25 and 50 thousand bpd this year. Oklahoma has dropped 59,000 bpd since March. New Mexico which holds part of the Permian recovered slightly in August. Montana which, holds part of the Bakken, has been in a downward trend since March. Wyoming had been bucking the trend but now looks like it has succumbed to low oil prices also.

          Longtimber, 10/30/2015 at 5:03 pm

          Cold winter in Alaska? Meanwhile on the other side of the pond, Mr Yergin thinks Frackers may invade the Old World.
          "Europe has shale gas potential, but political obstacles prevent its development, he said. IHS research indicates that by the mid- 2030s Germany could be getting 35 of its natural gas from domestic shale gas produced from non-sensitive areas, equivalent to current import levels from Norway or Russia."

          YERGIN: ENERGY HAS ENTERED 'NEW ERA OF SHALE' WITH BIG BENEFITS FOR PETROCHEMICALS

          http://www.ogfj.com/articles/2015/10/yergin-energy-has-entered-new-era-of-shale-with-big-benefits-for-petrochemicals.html


          shallow sand, 10/30/2015 at 8:44 pm

          Ron. Thanks for the post!

          Some interesting things, to me anyway.

          After reading several company earnings releases and conference calls, it appears that all want to develop US shale over anything else they own. Unless foreign companies pick up the slack, it appears US majors' lack of foreign investment might result in some steep declines.

          Second interesting tidbit. Read a Seeking Alpha article about ConocoPhillips today that indicated they lost $3 for every BOE they produced company wide on a GAAP basis, with the US lower 48 incurring the highest BOE losses at $9. These figures were for the third quarter, 2015.

          Finally, read that Whiting is in process of selling its water disposal infrastructure. I touched on this earlier. I was unaware this is a common industry practice. To me, selling these assets at this time is a sign of desperation. IMO this permanently devalues the producing assets with an unnecesaary expense burden. If anyone has some data on how much of this infrastructure has been sold off by the shale companies, let me know. Likewise, as I am not familiar with this practice, and especially if you think I am off base, please chime in. I can't imagine us ever wanting to do such a thing. I note both clueless and John S posted this is quite common.

          To me, selling these assets is like selling off the plumbing, wiring, furnace and air conditioner in your house and having to rent them forever.

          gwalke, 11/02/2015 at 7:45 am

          Beyond the infrastructure sale, Whiting's 3Q2015 results seemed like a real disaster to me, though many analysts thought it was a good quarter.

          The three things that stood out to me were:

          • They announced 38% production increase – so they told investors that in response to prices falling 60%, they produced more oil (?!);
          • They announced that they have increased the sand per frack job, and intend to increase it further – telling investors that they are risking the long-term recovery factors of their wells for short-term production rate gains;
          • They announced they will update their EUR curves on the basis of the IP of these new "enhanced completions", and even used 24hr IP to discuss how amazing their 7 million lb of sand fracks are – essentially telling investors that they are juicing their IP in order to hoodwink them about well profitability.
          BC, 10/30/2015 at 9:28 pm

          TX, ND, WY, and LA are in recession.

          CO, OK, AK, and WV might have been/be in recession, or close enough.

          VK, 10/31/2015 at 5:47 am
          Down the slippery slope of descent and ruin. For 80% of Americans life has been getting harder and harder.

          http://www.paulcraigroberts.org/2015/10/29/us-on-road-to-third-world-paul-craig-roberts/

          The evidence is everywhere. In September the US Bureau of the Census released its report on US household income by quintile. Every quintile, as well as the top 5%, has experienced a decline in real household income since their peaks. The bottom quintile (lower 20 percent) has had a 17.1% decline in real income from the 1999 peak (from $14,092 to $11,676). The 4th quintile has had a 10.8% fall in real income since 2000 (from $34,863 to $31,087). The middle quintile has had a 6.9% decline in real income since 2000 (from $58,058 to $54,041). The 2nd quintile has had a 2.8% fall in real income since 2007 (from $90,331 to $87,834). The top quintile has had a decline in real income since 2006 of 1.7% (from $197,466 to $194,053). The top 5% has experienced a 4.8% reduction in real income since 2006 (from $349,215 to $332,347). Only the top One Percent or less (mainly the 0.1%) has experienced growth in income and wealth.

          The Census Bureau uses official measures of inflation to arrive at real income. These measures are understated. If more accurate measures of inflation are used (such as those available from shadowstats.com), the declines in real household income are larger and have been declining for a longer period. Some measures show real median annual household income below levels of the late 1960s and early 1970s.

          [Nov 01, 2015] Chevron Takes Drastic Measures, Lays Off Another 7000 Employees

          "... And even though Chevron said in July that its cost-cutting initiatives would be "completed by mid-November of 2015" it decided to surprise everyone moments ago when on its earnings call it announced it would not only slash its capex by another 25%, but will shortly distribute another 7,000 pink slips. The reason: another terrible quarter in which the $2 billion in earnings were a 73% plunge from a year earlier. ..."
          OilPrice.com

          Back in January, in the aftermath of the first plunge in commodity prices, and oil in particular, oil major Chevron had the unsavory distinction of being the first US oil giant to admit cash flow "constraints" when it was forced to scrap its buyback. And since oil's dead cat bounce fizzled just around the summer before resuming is slide, it was inevitable that Chevron would proceed with trimming even more cash outflows.

          It did so for the first time in July, when as we reported at the time, Chevron would layoff 1,500 jobs globally, saying that "the cost reductions due to cuts in the corporate center are expected to total $1 billion with additional cost savings expected across the company."

          And even though Chevron said in July that its cost-cutting initiatives would be "completed by mid-November of 2015" it decided to surprise everyone moments ago when on its earnings call it announced it would not only slash its capex by another 25%, but will shortly distribute another 7,000 pink slips. The reason: another terrible quarter in which the $2 billion in earnings were a 73% plunge from a year earlier.

          [Oct 31, 2015] No Real Chance of Another Financial Crisis - Silly

          Notable quotes:
          "... The difficulty we have in the economics profession, I fear, is a great deal of herd instinct and concern about what others may say. And when the Fed runs their policy pennants up the flagpole, only someone truly secure in their thinking, or forsworn to some strong ideological interpretation of reality or bias if we are truly honest, dare not salute it. ..."
          "... But it makes the point which I have made over and again, that all of the economic models are faulty and merely a caricature of reality. And therefore policy ought not to be dictated by models, but by policy objectives and a strong bias to results, rather than the dictates of process or methods. In this FDR had it exactly right. If we find something does not stimulate the broader economy or effect the desired policy objective, like tax cuts for the rich, using that approach over and over again is certainly not going to be effective. ..."
          "... Economics are a form of social and political science. And with the political and social process corrupted by big money, what can we expect from would be philosopher kings. ..."
          "... The interconnectedness of the global system with its massive and underregulated TBTF Banks, the widespread and often fraudulent mispricing of risk, all make cause for a financial system to be fragile. In this thinking Nassim Taleb is far ahead of the common economic thought as a real systems thinker. The Fed is not a systemic thinking organization because they are owned by the financial status quo, and real systemic reform rarely comes from within. ..."
          "... So Mr. Baker, rather than looking for the bubble, lets say we have a fragile system still disordered and mispricing risk, with a few very large banks engaging in reckless speculation, mispricing risk for short term profits, manipulating markets, and distorting the processes designed to maintain a balance in the economy. Rather than hold out for a new bubble as your criterion, perhaps we may also consider that the patient is still on full life support after the last bubble and crisis. Why do we need to find a new source of malady when the old one is still having its way? ..."
          "... A new crisis does not have to happen. This is the vain comfort in these sorts of black swan events, being hard to predict. But they can be more likely given the right conditions, and I fear little will be done about this one until even those who are quite personally comfortable with things as they are begin to feel the pain, ..."
          "... neither Irwin nor anyone else has even identified a serious candidate. Until someone can at least give us their candidate bubble, we need not take the financial crisis story seriously. ..."
          "... If we take this collapse story off the table, then we need to reframe the negative scenario. It is not a sudden plunge in output, but rather a period of slow growth and weak job creation. This seems like a much more plausible story... ..."
          jessescrossroadscafe.blogspot.com

          I like Dean Baker quite well, and often link to his columns. On most things we are pretty much on the same page.

          And to his credit he was one of the few 'mainstream' economists to actually see the housing bubble developing, and call it out. Some may claim to have done so, and can even cite a sentence or two where they may have mentioned it, like Paul Krugman for example. But very few spoke about doing something about it while it was in progress. The Fed was aware according to their own minutes, and ignored it.

          The difficulty we have in the economics profession, I fear, is a great deal of herd instinct and concern about what others may say. And when the Fed runs their policy pennants up the flagpole, only someone truly secure in their thinking, or forsworn to some strong ideological interpretation of reality or bias if we are truly honest, dare not salute it.

          Am I such a person? Do I actually see a fragile financial system that is still corrupt and highly levered, grossly mispricing risks? Or am I just seeing things the way in which I wish to see them?

          That difficulty arises because economics is no science. It involves judgment and principles, and weighs the facts far too heavily based upon 'reputation' and 'status.' And of course I have none of those and wish none.

          But it makes the point which I have made over and again, that all of the economic models are faulty and merely a caricature of reality. And therefore policy ought not to be dictated by models, but by policy objectives and a strong bias to results, rather than the dictates of process or methods. In this FDR had it exactly right. If we find something does not stimulate the broader economy or effect the desired policy objective, like tax cuts for the rich, using that approach over and over again is certainly not going to be effective.

          Economics are a form of social and political science. And with the political and social process corrupted by big money, what can we expect from would be 'philosopher kings.'

          The housing bubble was no 'cause' of the latest financial crisis. More properly it was the tinder and the trigger event. The S&L crisis was just as great, if not greater. Why then did it not bring the global financial system to its knees?

          The interconnectedness of the global system with its massive and underregulated TBTF Banks, the widespread and often fraudulent mispricing of risk, all make cause for a financial system to be 'fragile.' In this thinking Nassim Taleb is far ahead of the common economic thought as a real 'systems thinker.' The Fed is not a systemic thinking organization because they are owned by the financial status quo, and real systemic reform rarely comes from within.

          I see the same fragility which existed from 1999 to 2008 still in the system, only grown larger, global, and more profoundly influencing the political processes.

          The only question is what 'trigger event' might set it spinning, and how great of a magnitude will it have to be in order to do so. The more fragile the system, the less that is required to knock it off its underpinnings.

          And a crisis is not a binary event. There is the 'trigger' and the dawning perception of risks, and the initial responses of the political, social, and regulatory powers.

          There is no point in debating this, because the regulators and powerful groups like the Fed are caught in a credibility trap, which prevents them from seeing things as they are, and saying so.

          So Mr. Baker, rather than looking for the bubble, let's say we have a fragile system still disordered and mispricing risk, with a few very large banks engaging in reckless speculation, mispricing risk for short term profits, manipulating markets, and distorting the processes designed to maintain a balance in the economy. Rather than hold out for a 'new bubble' as your criterion, perhaps we may also consider that the patient is still on full life support after the last bubble and crisis. Why do we need to find a new source of malady when the old one is still having its way?

          I think if one exercises clear and open judgement, they can see that we have stirred up the same pot of witches brew that has made the system fragile and vulnerable to an exogenous shock, and has kept it so.

          A new crisis does not have to happen. This is the vain comfort in these sorts of 'black swan' events, being hard to predict. But they can be more likely given the right conditions, and I fear little will be done about this one until even those who are quite personally comfortable with things as they are begin to feel the pain,

          The problem is not a 'bubble.' The problem is pervasive corruption, fraud, and lack of meaningful reform. The 'candidate' is the financial system itself, with its outsized hedge funds and the TBTF Banks with their serial crime sprees and accommodative regulators in particular.

          And if one cannot see that in this rotten system with its brazenly narrow rewarding of a select few with the bulk of new income, then there is little more that can be said.

          Neil Irwin, a writer for the NYT Upshot section, had an interesting debate with himself about the likely future course of the economy. He got the picture mostly right in my view, with a few important qualifications.

          "First, his negative scenario is another recession and possibly a financial crisis. I know a lot of folks are saying this stuff, but it's frankly a little silly. The basis of the last financial crisis was a massive amount of debt issued against a hugely over-valued asset (housing). A financial crisis that actually rocks the economy needs this sort of basis.

          If a lot of people are speculating in the stock of Uber or other wonder companies, and reality wipes them out, this is just a story of some speculators being wiped out. It is not going to shake the economy as a whole. (San Francisco's economy could take a serious hit.)

          Anyhow, financial crises don't just happen, there has to be a real basis for them. To me the housing bubble was pretty obvious given the unprecedented and unexplained run-up in prices in the largest market in the world. Perhaps there is another bubble out there like this, but neither Irwin nor anyone else has even identified a serious candidate. Until someone can at least give us their candidate bubble, we need not take the financial crisis story seriously.

          If we take this collapse story off the table, then we need to reframe the negative scenario. It is not a sudden plunge in output, but rather a period of slow growth and weak job creation. This seems like a much more plausible story...

          Anyhow, a story of slow job growth and ongoing wage stagnation would look like a pretty bad story to most of the country. It may not be as dramatic as a financial crisis that brings the world banking system to its knees, but it is far more likely and therefore something that we should be very worried about."

          Dean Baker, Debating the Economy with Neil Irwin, 31 October 2015

          [Oct 28, 2015] The Full Details Of How Goldman Criminally Obtained Confidential Information From The New York Fed

          Zero Hedge
          Two days ago we reported that the saga of Rohit Bansal, Goldman's "leaker" at the Fed is coming to a close with the announcement of a criminal case filed against Goldman's deep throat who had previously spent 7 years at the NY Fed, and was about to spend some time in prison, and who had been providing Goldman with confidential information sourced from his contact at the NY Fed for months, as a result of which Goldman would be charged a penalty.

          Moments ago the NY DFS announced that the best connected hedge fund in the world would pay $50 million to the New York State Department of Financial Services and "accept a three-year voluntary abstention from accepting new consulting engagements that require the Department to authorize the disclosure of confidential information under New York Banking Law"

          Goldman Sachs would also admit that a Goldman employee engaged in the criminal theft of Department confidential supervisory information; Goldman Sachs management failed to effectively supervise its employee to prevent this theft from occurring; and Goldman failed to implement and maintain adequate policies and procedures relating to post-employment restrictions for former government employees.

          Below are the unbelievable, details of just how Goldman was getting material information from the NY Fed, from the FDS:

          Violation of Post-employment Restrictions

          On July 21, 2014, an individual began work at Goldman, Sachs & Co. as an Associate in the Financial Institutions Group ("FIG") of the Investment Banking Division ("IBD"). The Associate reported to a Managing Director and a Partner at Goldman.

          Prior to his employment at Goldman, from approximately August 2007 to March 2014, the Associate was a bank examiner at the U.S. Federal Reserve Bank of New York ("the New York Fed"). His most recent position at the New York Fed was as the Central Point of Contact ("CPC") – the primary supervisory contact for a particular financial institution – for an entity regulated by the Department (the "Regulated Entity").

          In March 2014, the Associate was required to resign from his position at the New York Fed for, among other reasons, taking his work blackberry overseas without obtaining prior authorization to do so and for attempting to falsify records to make it look like he had obtained such authorization, and for engaging in unauthorized communications with the Federal Reserve Board.

          The Associate was hired in large part for the regulatory experience and knowledge he had gained while working at the New York Fed. Prior to hiring him, the Partner and other senior personnel interviewed and called the Associate several times, and the Partner took him out to lunch and dinner.

          Prior to starting at Goldman, in May 2014, the Associate informed the Partner of potential restrictions on his work, due to his previous employment at the New York Fed, and specifically as the CPC for the Regulated Entity. The Partner advised the Associate to consult the New York Fed to obtain clarification regarding any applicable restrictions.

          Accordingly, the Associate inquired with the New York Fed Ethics Office and was given a "Notice of Post-Employment Restriction," which he completed and signed with respect to his supervisory work for the Regulated Entity. The Associate provided this form to Goldman. This Notice of Post-Employment Restriction read that the Associate was prohibited "from knowingly accepting compensation as an employee, officer, director, or consultant from [the Regulated Entity]" until February 1, 2015.

          On May 14, 2014, the Associate forwarded this notice of restriction to the Partner, the Managing Director, and an attorney in Goldman's Legal Department. In his email, the Associate also included guidance from the New York Fed, stating, in short, that a person falls under the post-employment restriction if that person "directly works on matters for, or on behalf of," the relevant financial institution.

          Despite receiving this notice and guidance, Goldman placed the Associate on Regulated Entity matters from the outset of his employment. As further detailed below, the Associate also schemed to steal confidential regulatory and government documents related to that same Regulated Entity in advising that client.

          Unauthorized Possession and Dissemination of Confidential Information

          During his employment at Goldman, the Associate wrongfully obtained confidential information, including approximately 35 documents, on approximately 20 occasions, from a former co-worker at the New York Fed (the "New York Fed Employee"). These documents constituted confidential regulatory or supervisory information – many marked as "internal," "restricted," or "confidential" – belonging to the Department, the New York Fed or the Federal Deposit Insurance Corporation (the "FDIC"). The Associate's main conduit for receiving information from the New York Fed was his former coworker, the New York Fed Employee, who has since been terminated for this conduct. While still employed at the New York Fed, the New York Fed Employee would email documents to the Associate's personal email address, and the Associate would subsequently forward those emails to his own Goldman work email address.

          On numerous occasions, the Associate provided this confidential information to various senior personnel at Goldman, including the Partner and the Managing Director, as well as a Vice President and another associate who perform quantitative analysis for Goldman. In several instances where the Associate forwarded confidential information to other Goldman personnel, the Associate wrote in the body of the email that the documents were highly confidential or directed the recipients, "Please don't distribute." At least nine documents that the Associate provided to Goldman constituted confidential supervisory information under New York Banking Law § 36(10). Pursuant to the statute, such confidential supervisory information shall not be disclosed unless authorized by the Department. The documents included draft and final versions of memoranda regarding and examinations of the Regulated Entity, as well as correspondence related to those examinations.

          At least 17 confidential documents that the Associate had improperly received from the New York Fed – seven of which constituted confidential supervisory information under New York Banking Law § 36(10) – were found in hard copy on the desk of the Managing Director. Additional hard copy documents were found on the desks of the Vice President and the other associate, including at least one document constituting confidential supervisory information under New York Banking Law § 36(10).

          On August 18, 2014, the Associate shared three documents pertaining to enterprise risk management with the Managing Director, writing, "Below is the ERM request list, work program and assessment framework we used for ERM targets. Again this is highly confidential as its not public and has not been issued a[s] guidance yet. Not sure where it is at anymore due to internal politics. I worked on this framework and guidance within the context of a system working group with the Fed system. We ran several pilots to test it was well. Please don't distribute." The Managing Director replied, "I won't. Will review on plane tomorrow to DC." The documents were marked as "Internal-FR" or "Restricted-FR."

          Part of Goldman's work for the Regulated Entity included advisory services with respect to a potential transaction. A certain component of the Regulated Entity's examination rating was relevant to the transaction. The Regulated Entity's examinations were conducted jointly by the FDIC, DFS and the New York Fed. As described below, the Associate used confidential information regarding the Regulated Entity's examination rating – obtained both from his prior employment at the New York Fed and from his contacts there – and conveyed this information to the Managing Director, who then conveyed the information to the Regulated Entity on September 23, 2014, in advance of it being conveyed by the regulators.

          On August 16, 2014, the Associate emailed the Managing Director regarding the regulators' perspective on the Regulated Entity's forthcoming examination rating, writing "You need to speak to [the CEO of the Regulated Entity] about scheduling a meeting with all 3 agencies ASAP. He needs to meet with them and display and discuss all the improvements and corrections they have made during the last examination cycle."

          On September 23, 2014, the Associate attended the birthday dinner of the New York Fed Employee at Peter Luger Steakhouse, along with several other New York Fed employees. Immediately after the dinner, the Associate emailed the Managing Director, divulging confidential information concerning the Regulated Entity, specifically, the relevant component of the upcoming examination rating. The Associate wrote, "…the exit meeting is tomorrow and looks like no [change] to the [relevant] rating. I heard there won't be any split rating… [The Regulated Entity] should have listened to you with the advice…hopefully [the CEO] will now know you didn't have phony info."

          In this email, the Associate also provided advice to relay to the Regulated Entity's management, stating that they should "keep their cool, not get defensive and not say too much unless the regulators have a blatant fact wrong" as it "will go off better for them in the long run. Believe it or not the regulator's [sic] look for reaction and level of mgmt respectiveness [sic] during these exit meetings." The Managing Director replied "Let's discuss . . . I'm seeing [the CEO of the Regulated Entity] tmw afternoon alone."

          Later that night, the Associate followed up with another email to the Managing Director, writing, "I feel awful not being there to wrap up 2013. I would have been able to pull all this through. I was a real advocate for all the work they have done." He also offered to join a meeting with the CEO of the Regulated Entity if the Managing Director wanted.

          On September 26, 2014, Goldman had an internal call regarding the calculation of certain asset ratios, during which there was disagreement over the appropriate method. During the call, the Associate circulated an internal New York Fed document – which the Associate had recently obtained from the New York Fed Employee – relating to the calculation, to the call participants, writing, "Pls keep confidential?" Following the group call, the Partner called the Associate to discuss the document, including where he had obtained it, and the Associate told him that he had obtained it from the New York Fed. The Partner then called the Global Head of IBD Compliance to report the matter and forwarded the document.

          Compliance Failures, Failure to Supervise and Violation of Internal Policies

          After receiving notice of the Associate's prohibition on working on matters for the Regulated Entity, Goldman, including the Partner and the Legal Department, failed to take any steps to screen the Associate from such prohibited work. Instead, Goldman affirmatively placed the Associate on matters for the Regulated Entity beginning on his first day, and added the Associate to the official Goldman database as a member of the Regulated Entity "Team" – a team led by the Partner.

          Goldman failed to provide training to personnel regarding what constituted confidential supervisory information and how it should be safeguarded. While Goldman policies provided that confidential information received from clients should only be shared on a "need to know" basis, Goldman did not distinguish between this broader category of confidential information and the type of confidential supervisory information belonging to a regulator or other government agency, which is protected by law, such as confidential supervisory information under New York Banking Law § 36(10). Indeed, Goldman policies failed to adequately address Department confidential supervisory information.

          As noted above, the Associate also violated Goldman's internal policy on "Use of Materials from Previous Employers," which states that work that personnel have done for previous employers, and confidential information gained while working there, should not be brought into Goldman or used or disclosed to others at Goldman without the express permission of the previous employer.

          * * *

          The Managing Director is safe, as are all other Goldman employees: nobody aside for Bansal who was merely trying to impress his superiors, has anything to worry about.

          Anyone else found to have obtained at least "35 confidential documents" from the Fed on at least "20 occassions" would be sent straight to jail with a prison sentence anywhere between several decades and life.

          Goldman's punishment? 0.6% of its 2014 Net Income.

          Duc888

          How could this happen? Seriously. Aren't the FED and GS separate entities?

          Oh, wait.....

          LetThemEatRand

          The fact that these documents were sent via email only tells me how widespread this is. Most of these guys are probably smart enough to put a paper copy in their briefcase and deliver it to Goldman the old fashioned way bankers do things (over drinks and coke at a strip bar).

          But when "everyone is doing it," a guy may get careless and start using email, figuring what the fuck.

          Urban Redneck

          Did Goldman's Marketing Department write that release for their FRBNY subsidiary??? They deserve the $50 million fine for being an embarrassment to scheming bankers everywhere. This is a company that has destroyed companies, entire economies, and countless (not so little) investors by placing their own financial interests above their clients and regularly using inside information and access to do so. Then Goldman is "caught" when they turn themselves in (not that they had a lot of choice given the amateur hour performance) for actually "helping" one of their clients (for once)... This whole thing stinks, in more ways than one.

          Sudden Debt

          What a joke!!!

          GS and JPM ARE THE FED!!!

          and that "fine"... THAT'S THEIR DONUT BUDGET!!

          J J Pettigrew

          Bagels....please!

          Elliott Eldrich

          "Feel sorry for the poor schmuck, cuffed and heading to a sallyport, to be booked, and serve 6 months in jail, for stealing a carton of ciggs..."

          Little crimes are punished with great fervor, while the biggest criminals get their wrists slapped. This is outrageous, and I just have to ask how much more we are supposed to bear before breaking?

          Lord Ariok

          I Love my Country and Hate Our Government. But If our government isn't "Gangster" well believe it there will be another "Government" that is even more "Gangster" then ours to take the number 1 spot in the Syndicate. The way I see it if we have to do this in order to compete with China's Level of Corruption. Damn Chinese Efficiency. ~ Lord Ariok

          venturen

          they have Bill Dudley...they were worried that this underling would do something. Heck Goldman gives the orders not the other way around

          Bay of Pigs

          The William Dudley is the main man at the FED (and the BIS), not Yellin or Fischer.

          "Prior to joining the Bank in 2007, Mr. Dudley was a partner and managing director at Goldman, Sachs & Company and was the firm's chief U.S. economist for a decade. Prior to joining Goldman Sachs in 1986, he was a vice president at the former Morgan Guaranty Trust Company. Mr. Dudley was an economist at the Federal Reserve Board from 1981 to 1983.

          In 2012, Mr. Dudley was appointed chairman of the Committee on the Global Financial System of the Bank for International Settlements (BIS). Previously, Mr. Dudley served as chairman of the former Committee on Payment and Settlement Systems of the BIS from 2009 to 2012. He is a member of the board of directors of the BIS and chairman of the Economic Club of New York."

          http://www.newyorkfed.org/aboutthefed/orgchart/dudley.html

          [Oct 27, 2015] OECD Chief Economist: Its Time To Temper The Frothiness In Markets

          www.zerohedge.com
          "... if you look at what is supporting equity prices - how much of that support is coming from real economic activity versus from using stock buybacks, using cash on balance sheet for stock buybacks, or mergers and acquisitions, to reduced competition in the marketplace.

          These are the sort of stories that if there were a small increase in interest rates, you would temper some of that frothiness.

          Eliminating the incentive to engage in that kind of activity seems to me to be a good idea... There would be a proportion of the population that would have less capital gains - but they've been enjoying very big capital gains, and it is a narrow segment of the population."

          [Oct 23, 2015] US. Shale Drillers Running Out Of Options, Fast

          Notable quotes:
          "... The collapse of oil prices has forced drillers to become more efficient, adding more wells per well pad, drilling longer laterals, adding more sand per frac job, etc. That allowed companies to continue to post gains in output despite using fewer and fewer rigs. ..."
          "... However, the efficiency gains may have been illusory, or at best, incremental progress instead of revolutionary change. Rather than huge innovations in drilling performance, companies were likely just trimming down on staff, squeezing suppliers, and drilling in the best spots – perhaps all sensible stuff for companies dealing with shrinking revenues, but nothing to suggest that drilling has leaped to a new level of efficiency. Reuters outlined this phenomenon in detail in a great October 21 article. ..."
          "... Production gains from new rigs – which have increased steadily over the past three years – have run into a wall in the major U.S. shale basins. Drillers are starting to run out of ways to squeeze more oil out of wells from their rigs. Take a look at the below charts, which show drilling productivity flat lining in the Bakken, the Eagle Ford, and the Permian. ..."
          oilprice.com

          Much has been made about the impressive gains in efficiency and productivity in the shale patch, as new drilling techniques squeeze ever more oil and gas out of new wells. But the limits to such an approach are becoming increasingly visible. The U.S. shale revolution is running out of steam.

          The collapse of oil prices has forced drillers to become more efficient, adding more wells per well pad, drilling longer laterals, adding more sand per frac job, etc. That allowed companies to continue to post gains in output despite using fewer and fewer rigs.

          However, the efficiency gains may have been illusory, or at best, incremental progress instead of revolutionary change. Rather than huge innovations in drilling performance, companies were likely just trimming down on staff, squeezing suppliers, and drilling in the best spots – perhaps all sensible stuff for companies dealing with shrinking revenues, but nothing to suggest that drilling has leaped to a new level of efficiency. Reuters outlined this phenomenon in detail in a great October 21 article.

          For evidence that the productivity gains have run their course, take a look at the latest Drilling Productivity Report from the EIA. Production gains from new rigs – which have increased steadily over the past three years – have run into a wall in the major U.S. shale basins. Drillers are starting to run out of ways to squeeze more oil out of wells from their rigs. Take a look at the below charts, which show drilling productivity flat lining in the Bakken, the Eagle Ford, and the Permian.

          [Oct 23, 2015] Saudi Arabia Russia, Iran Forge Energy Partnerships

          Oct 23, 2015 | Zero Hedge

          No, the "atmosphere is not well," because again, the Saudis are out to achieve "ancillary diplomatic benefits" (i.e. geopolitical advantages) by keeping crude prices low, and those benefits include squeezing the Russians and perhaps limiting the revenue Tehran can bring in when Iran returns to the market.

          As you can see, all of this is inextricably linked and it looks as though Russia and Iran may be on the verge of attempting to challenge the Saudis for domination of the oil market (don't forget Moscow surpassed Riyadh as the number one supplier to China for the second time this year in September).

          Is a "new oil order" in the works? We shall see.

          pot_and_kettle

          Can someone point out when Syria didn't sign off on the Qatar - Turkey pipeline and when the pipeline was first proposed? This is news to me and seems like the watershed event for what the zio-US fomented in that part of the world.

          Sergeiab

          http://ftmdaily.com/what-jerry-thinks/whysyria/

          4shzl

          Next step: open that eastern front on the Arabian Peninsula.

          Freddie

          Persia has been around thousands of years.

          A person may not like the Russians or Iranaians but they "ain't" going anywhere. They are also pretty tough on the battlefield (see Hezbollah). They also stood up for Syrian and the Syrian people including Syrian Christians.

          Persians are a lot smarter than Saudis too.

          alphahammer

          Yea lets take a look. Good of you to point that out.

          ---

          China Not So In Love With Russia After All

          JUN 17, 2015

          Shunned by the West, Russia may want to promote its new Chinese love affair to the world these days, but Czar Romeo shouldn't get his hopes up.

          Russia's second biggest lender, VTB Bank, said that most Chinese banks have foregone doing business with them. The reason? Western sanctions against VTB. China lenders don't want to get caught up in the drama and - having more business with the U.S. and Europe than with Russia - have opted to play it safe.

          "China's ambiguous position regarding Russian banks in the wake of US and EU sanctions is a key issue holding back progress toward greater bilateral cooperation," VTB Bank First Deputy Chairman Yuri Soloviev write in an op-ed published by the FinanceAsia news agency on Tuesday.

          Freddie

          Anything that smacks the shit out of the Saudis or Qatar makes me happy. What they did to Syria with the help of the USA, Turkey, UK, Israel and others is sickening.

          [Oct 23, 2015] Is Russia The King Of Arctic Oil By Default

          This is a very expensive oil that Russians now selling at loss. Financial capitalism in action.
          Notable quotes:
          "... Gazprom Neft began production at the Prirazlomnoye field in 2013 and reached commercial figures last year, with a total output of roughly 5,000 barrels per day (bpd). ..."
          "... No more than 10 percent of the equipment applied at the Prirazlomnaya installation is believed to be Russian-made, and this level of disparity is commonplace at both Russia's onshore and offshore fields. ..."
          Oct 23, 2015 | Zero Hedge
          ... ... ...

          A cursory search of 'Arctic' and 'oil' elicits little in the way of positivity. Certainly, Shell's failure in the Chukchi Sea is notable. Combined with the Obama administration's waffling distaste for future offshore Arctic development, it marks what should be a period of relative dormancy in U.S. waters. Still, it's not indicative of the sector globally, which is seeing progress, albeit at a glacial pace.

          The shining example of such development to date is Gazprom Neft's Prirazlomnaya platform. Located nearly 40 miles offshore in the Pechora Sea, the rig is the world's first Arctic oil project involving a stationary platform – though the general concept itself has been employed before (see: BP's Northstar Island).

          Gazprom Neft began production at the Prirazlomnoye field in 2013 and reached commercial figures last year, with a total output of roughly 5,000 barrels per day (bpd). With production well number two (of 19) now online, output should reach somewhere between 10,000-15,000 bpd by year's end.

          To be fair, several important tests lie ahead for Prirazlomnaya and Russia's Arctic shelf development in general. Chief among them is rapidly addressing its import dependence – one of the primary targets of U.S. and EU sanctions. No more than 10 percent of the equipment applied at the Prirazlomnaya installation is believed to be Russian-made, and this level of disparity is commonplace at both Russia's onshore and offshore fields.

          Attention, domestic and international, has been given to the courting of China, India, and other backers – both financial and technological – but all eyes should be on the Russian solution, which will seek to demonstrate its efficacy by 2020.

          At the Prirazlomnoye field, the Russian institute Omskneftekhimproekt has begun work on the modernization of the rig's drilling installations, technological equipment, and safety and telecommunications systems. The primary objectives are to boost production capacity (to ~120,000 bpd) toward 2020 and lay the building blocks for the future development of Russian-sourced platforms.

          The work by Omskneftekhimproekt mirrors that of several institutes, companies, and universities across the country, rallying around the call for import substitution. However, just how much can actually be accomplished is the billion dollar question.

          [Oct 23, 2015] Economic effects of shocks to oil supply and demand

          Notable quotes:
          "... Monthly EIA US Crude + Condensate (C+C) data (the short term energy report) show a decline in US production from 9.6 million bpd in May to 9.0 million bpd in September. The annualized exponential rate of decline, based on May to September data, would be about 20%/year. If this (net) rate of decline were to continue for another year, US C+C production would be down to about 7.4 million bpd in September, 2016. ..."
          "... Regarding one of life's little ironies, we keep hearing that oil exports from a net oil importer, the US (with recent four week running average net crude oil imports of 6.8 million bpd), will have a meaningful impact on global oil markets, just as the US is currently showing a 20%/year annualized rate of decline in C+C production, implying that US net oil imports will be increasing in the months ahead, if the production decline continues. ..."
          "... If it took trillions of dollars in global upstream capex to keep us on an "Undulating Plateau," in actual global crude oil production (45 and lower API gravity crude, i.e., the quantity of the stuff corresponding to WTI Brent oil prices), what happens to global crude oil production going forward given the ongoing cutbacks in global upstream capex? ..."
          "... Haynesville didn't drop because "they ran out of sweet spot" but because the price dropped. There is actually more resource available, now, if we go back to previous prices…because of improvements in drilling and completion efficacy. ..."
          "... But for what it's worth (perhaps not much), I think that this is a tremendous buying opportunity, in regard to oil and gas investments. I don't have any idea what Warren Buffet is doing right now, but I would not be surprised to learn that he is aggressively investing in oil and gas. ..."
          "... In other words, the available data seem quite supportive of my premise that actual global crude oil production (45 API and lower gravity crude oil) effectively peaked in 2005, while global natural gas production and associated liquids, condensate and NGL, have (so far) continued to increase. ..."
          Oct 17, 2015 | Econbrowser
          Jeffrey J. Brown October 17, 2015 at 5:15 am

          Monthly EIA US Crude + Condensate (C+C) data (the short term energy report) show a decline in US production from 9.6 million bpd in May to 9.0 million bpd in September. The annualized exponential rate of decline, based on May to September data, would be about 20%/year. If this (net) rate of decline were to continue for another year, US C+C production would be down to about 7.4 million bpd in September, 2016.

          Louisiana is an interesting case history. As drilling activity declined in the Hayneville Shale Gas Play, gas production from the play production initially continued to increase (as operators worked through the backlog of drilling but uncompleted wells), but production from the play ultimately showed a sharp decline, with annual marketed natural gas production falling at a rate of 20%/year from 2012 to 2014. Measured from the monthly peak in December, 2011, it took about two and a half years for the exponential rate of decline in Louisiana's monthly marketed gas production (from both shale gas + conventional production) to fall below 20%/year. The three year 12/11 to 12/14 rate of decline was 18.5%/year.

          Regarding one of life's little ironies, we keep hearing that oil exports from a net oil importer, the US (with recent four week running average net crude oil imports of 6.8 million bpd), will have a meaningful impact on global oil markets, just as the US is currently showing a 20%/year annualized rate of decline in C+C production, implying that US net oil imports will be increasing in the months ahead, if the production decline continues.

          And the question that I have periodically posed, to-wit:

          If it took trillions of dollars in global upstream capex to keep us on an "Undulating Plateau," in actual global crude oil production (45 and lower API gravity crude, i.e., the quantity of the stuff corresponding to WTI & Brent oil prices), what happens to global crude oil production going forward given the ongoing cutbacks in global upstream capex?

          Jeffrey J. Brown October 17, 2015 at 8:37 am

          Re: US Crude and/or Condensate Exports

          As noted above, it's more than a little ironic that there are so many claims that oil exports from a net oil importer, the US, will have a material impact on global oil markets, even as US Crude + Condensate (C+C) production is declining.

          In any case, I just noticed something very interesting in the EIA Annual Energy Review data tables, which provide monthly and/or annual data back to 1950:

          http://www.eia.gov/totalenergy/data/monthly/pdf/sec3_3.pdf

          Note that US total liquids net imports were up year over year, from 4.9 million bpd in August, 2014 (2014 annual average of 5.1) to 5.6 million bpd in August, 2015, a 14% year over year increase in net total liquids imports.

          Anonymous October 17, 2015 at 12:12 pm

          Saw some analyst meeting (Genscape maybe) where the person projected rigs continuing to drop through 1Q16, ending up 200 more down (or about 400 remaining). This was based on prices staying in this ~$47-50 band, with commensurate strip. [A drop down to ~$40, with commensurate strip would lead to an additional 200 rigs going away.]

          I think the Haynesville is a nice example to show the "lag" effect when rigs drop. And really, we can already use the US oil production as an example of this already. Another easy example is 2009 in the Bakken.

          I would be leery of thinking too much that the Haynesville is some sort of example of Hubbert peak because a lot of the drop is price caused, not exhaustion. [In a classic Hubbert peak case for global oil or national gas, you would have the normal curve AND would have Hotelling price increase. In this case, it's not even constant price…it's reaction to a price crash.] Haynesville didn't drop because "they ran out of sweet spot" but because the price dropped. There is actually more resource available, now, if we go back to previous prices…because of improvements in drilling and completion efficacy. [This is Adelman's point of how you don't just eat away at lower cost oil and move to higher…yes, you may be doing that. But in addition, knowledge can grow the pool of available low cost oil or reduce the price of getting out what you already know about. Both effects can occur and they fight each other and you have to get into the specifics to see which is winning.]

          In addition, concentrating on the Haynesville, when the Marcellus and Utica have occurred is missing the main story from an economic impact perspective. After all, volume is up and price is down for natural gas. So for all the H or the B dropped, the M and U more than made up for it. "The App" is the key place to look at in US natural gas.

          In addition, FWIW, H did drop very beautifully in a Hubbert-like manner from the peak of 7, BUT for the last 18 mont