Friday, February 11, 2011

Congress warned over states' bankruptcies

US lawmakers were warned yesterday that allowing states to declare bankruptcy would upend the $2.8 trillion (£1.7 trillion) municipal bond market, making it much harder and more expensive to fund local government, and potentially destablising the economic recovery.

A House of Representatives committee was examining the extent of the financial distress in state and local governments, which has become a major topic of concern on Wall Street and among individual investors, and examining ways to prevent the need for a federal bailout of any of the lower rungs of government.

"The perfect storm is brewing; already state and municipal governments are coming to Washington, hat-in-hand, expecting a federal bailout like everybody else," Republican Congressman Patrick McHenry said. "But the era of the bailout is over."

The White House has floated a plan to allow federal aid to states to help to fund unemployment benefits, so that the states do not have to raise taxes on business. However, the plan ran into immediate opposition on Capitol Hill.

The House Oversight and Government Reform Committee yesterday included testimony from the Manhattan Institute for Policy Research and the Centre on Budget and Policy Priorities – two lobby groups from opposite sides of the political spectrum but with the same view on the question of allowing states to go bankrupt.

"Congress is right to worry about how to avoid bailing out states and their investors," said the Manhattan Institute's Nicole Gelinas. "State bankruptcy is not the answer." She said the suggestion that states could default on their debts would scare investors on an even larger scale than the suggestion that smaller local government authorities will default.

Data from the Investment Company Institute yesterday revealed that investors had pulled money out of the sector for the 13th consecutive week. Net outflows of $1.17bn brought the total withdrawn from the sector since early November to $34.7bn.

$1.4 MILLION PER PAGE: How Ireland Paid Merrill Lynch For "Advice" That Bankrupted A Nation

Ireland's Finance Minister, Brian Lenihan learned banking and finance at the kitchen table, two days after Lehman failed. All he knew when he first sat down was that Alan Greenspan was God.

The incompetence of central bankers and finance ministers over the past few years has been breath-taking, but Ireland's Minister for Finance, Brian Lenihan, takes the golden biscuit for sheer ineptitude.

From David McWilliams' recent book, Follow The Money: The Tale of the Merchant of Ennis, we learn that Lenihan, a lawyer by training, received his first lessons in banking and finance at McWilliams' kitchen table - on the 17th of September 2008.

Before that, McWilliams tells us, Lenihan had learned everything he knew about finance from a biography of Alan Greenspan(!) that he had picked up over the summer. We learn that Lenihan had no idea that Irish banks were in trouble until after the failure of Lehman Brothers just two days before.

Less than two weeks after that late-night cram session at McWilliams' kitchen table, Ireland announced to the world that it would fully guarantee its banks liabilities -- for both depositors and bondholders.

We now know that this hasty decision would lead to national bankruptcy and the specter of sovereign default. But at the time, Lenihan -- not unlike a number of other clueless politicians scattered throughout the formerly industrialized world -- was only following the advice being offered by the "experts" who surrounded him. Shockingly, among those "experts" were none other than a team of advisors from Merrill Lynch.

Turns out that a week after the Finance Minister's introduction to basic finance, the Irish government paid Merrill Lynch $10M for a seven-page report that told them:

  • "All of the Irish banks are profitable and well capitalised.”

No wonder Irish eyes are crying - what was billed as a costless way to avoid a banking panic ended up bankrupting the nation.


Here's more detail...

The strange case of the disappearing Merrill Lynch research note

Source - UK Guardian

US investment bank Merrill Lynch had a critical role in the banking collapse in Ireland and censored an analyst's report that predicted the crash back in 2008, it was claimed today.

The US bank retracted a report by one of its research analysts in March 2008 that was negative about the banks after the Irish banks called Merrill Lynch and threatened to take their business elsewhere. It toned the research note down and months later its author, Philip Ingram, left the bank, according to a much-anticipated cover-story in the new edition of Vanity Fair.

Further Reading...

See the rest of the photos...

"There Are No Buyers Of Portuguese Debt..."

Soaring Debt Pushes Portugal Towards Bailout

Source - Financial Times

Portugal’s cost of borrowing hit a euro-era high on Wednesday amid growing concerns that Lisbon will have to turn to bail-out funds to revive its stagnating economy. Portuguese 10-year bond yields jumped to 7.35% - the highest since the launch of the euro in January 1999 and a level regarded as unsustainable for Lisbon’s struggling economy. A leading investor said:

  • “Portuguese debt costs are in danger of rising further and further as there are no buyers of the country’s debt.”

Significantly, the European Central Bank has been the only major buyer of Portuguese debt in recent months. However, the latest ECB figures show that the bank has not bought any government bonds in the past two weeks, which explains the drift higher in Portuguese yields.

Strategists say a summit of European leaders in March will determine whether Lisbon will have to follow Greece and Ireland in seeking emergency support. One fund manager said: “We are at a key moment in the eurozone crisis and Portugal is on the frontline. We will know soon whether Lisbon will have to accept a bail-out or not. That is the next test for the eurozone.”

Continue reading...


Fleckenstein understands the insanity...

  • "The only difference between the U.S. and Greece is a printing press."

"If Justice Does Not Fail, They'll Send Your Ass To Jail..."

Bernanke's Fiscal Suicide - By Leah and Gregg Somerville.

  • "Yes, the bankers they're still rich..."
  • "Ben, you crooked academic snob, you've created not a single job..."
  • "If justice does not fail, they'll send your ass to jail..."


Obama Song - Let Him Off The Hook

Anti-war song by stockbroker Gregg Somerville and family.

Here's more from Gregg including sub-prime blues and the bailout rap...

Ratigan On The Roots Of The Foreclosure Crisis: "It Was Wild West On Wall Street"

How It All Began

On fire as usual, Ratigan speaks with the mayor of Victorville, California, a real estate wasteland where new homes were razed without ever having occupants. Another data point from housing bubble ground zero.


Housing crunch becomes literal in Victorville

A bank cuts its losses on a failed 16-unit project by having the homes demolished.

Curtis Forrester moved into a brand-new house in Victorville last week, but there was little time to enjoy the Jacuzzi and designer kitchen. He was there only to see it destroyed.

Just a few days after his arrival, the two-story residence and three other luxurious model homes were crushed and hauled off for scrap, the latest fallout from Southern California's real estate crash.

The homes were part of a planned 16-unit project in this community 100 miles north of Los Angeles. The Texas bank that owns the failed development decided to demolish the houses, a cheaper alternative to completing and selling them.

Forrester was hired to keep thieves away and help sell off the fixtures. "All my life I've been building things," said the 59-year-old construction worker. "It's kind of fun tearing them down."

The Victorville demolition is one of the most dramatic ends to a bad bet made during the housing boom, but abandoned developments have become an all-too-common sight in California. Nearly 250 residential developments totaling 9,389 homes have been halted across the state, according to one research firm.

The developer of the Victorville project had hoped to sell the houses for more than $300,000 as they were being built last year, Forrester said. But reality quickly diverged from that vision. Home prices have tanked faster in San Bernardino County than any other Southern California county during the downturn. In March, the median home sale price for the county was $160,000, down 43% in a year, according to the San Diego-based research firm MDA DataQuick.

Officials of Guaranty Bank of Austin, Texas, which took over the development last year, were unavailable for comment. But Victorville city spokeswoman Yvonne Hester said the bank decided not to throw good money after bad.

"It just didn't pencil out for them," she said. "They'd have to spend a lot of money to turn around and sell the houses. They just made a financial decision to just demolish them."


If Stocks Are Right, The Economy's in Trouble

Let's assume for the moment that equity investors know what they're doing and can correctly anticipate the future (admittedly, both are very big assumptions).

Based on the following graph, which compares the ISM's manufacturing index (a proxy for the U.S. economy as a whole) to the swings in share prices that occurred six months earlier, it's a good bet that the already tepid recovery is poised to end.


To be sure, this relationship is not infallible (note the false signals that were given off during the late-1990s dot-com bubble), but for those who cling religiously to the notion that the stock market is the best economic indicator we have, I hope they are steeling themselves for rockier times ahead.

U.S. Footing $100M Bill for U.N. Security Upgrade

Months after top New York City officials expressed intense behind-the-scenes frustration at the security vulnerabilities at the United Nations headquarters in Manhattan, the U.N. is now planning to spend $100 million — donated by the U.S. — on the upgrade.

That has created a new controversy: critics want to know why the U.S. is footing the entire bill, and why that money is not being credited against U.S. dues for the following year.

“If the U.S. overpays the U.N., those funds should be returned in full to the U.S. Treasury,” declared Ileana Ros-Lehtinen, R-Fla., who heads the House Foreign Affairs Committee. “To allow the U.N. to redirect those U.S. taxpayer dollars for unrelated projects is unjustifiable.” Moreover, she says, “by allowing the U.N. to reap the U.S. surplus as a slush fund for construction, the State Department wants to stick U.S. taxpayers with 100 percent of the cost, instead of the 22 percent that the U.S. would be responsible for under normal procedures.”

Ros-Lehtinen is leading a charge in the House of Representatives Wednesday, with a bill that demands the U.N. refund not only the $100 million but the entire $179 million overpayment collected from the U.S. for the United Nations Tax Equalization Fund (TEF), an obscure financial device used to reimburse U.S. citizens who work for the U.N. for U.S. income taxes they pay. (The U.S. is the only major country to levy income taxes on U.N. salaries.)

Ros-Lehtinen calls the refund demand “a small step toward restoring sanity to our U.N. policy and government spending.”

Prominent Chinese Economist Advises Country To Sell Its $500 Billion In GSE Holdings Before QE2 Ends

Add one more pill to the daily Oxycodone consumption by the Chair Central Planner. In what is about to become the latest headache for Bernanke, popular Chinese economist Lu Zhengwei, a senior economist at China's Industrial Bank Co., has advised that China should promptly sell its GSE holdings on concerns that continued "blank check" writing by Congress to the GSEs will be "almost impossible" as well as fears that as soon as QE2 ends, the entire US bond complex will see a major sell off. In other words welcome to the world of game theory defection: he who sells first, loses the least.

From Dow Jones:

A popular Chinese economist on Thursday said China should be aware of risks in its holdings of debt issued by U.S. government-controlled mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC), and suggested that China sell the securities soon.

The report by Lu Zhengwei, a senior economist at China's Industrial Bank Co., doesn't represent the views of China's leadership, but it does highlight persistent concerns about the security of Fannie Mae and Freddie Mac securities among Chinese civilians and some influential thinkers.

Lu's warning comes just ahead of a report from the Obama administration, which could come as soon as Friday, that will outline options to gradually phase-out the two companies, reducing the government's footprint in the U.S. mortgage industry.

Although an outright default is unlikely, Lu said that the end of the Federal Reserve's program of quantitative easing could cause the price of the securities to fall. He suggested China sell its Fannie and Freddie holdings before the U.S.'s quantitative easing ends in June.

If China were to sell its GSE debt how big would be the damage? Pretty big: $500 billion worth of big.

Lu estimated in the report that "Chinese organizations" hold around $500 billion of debt backed by the two companies. In a telephone interview with Dow Jones Newswires, Lu said "Chinese organizations" was a reference to holdings by the Chinese government in their foreign exchange reserves. Lu said he based this estimate on Chinese media reports, as the Chinese government has never confirmed the size of its holdings in the two agencies.

According to the U.S Treasury's report on foreign holdings of U.S. securities, China held $454 billion of long-term U.S. agency debt as of June 30, 2009. That includes $358 billion of "asset backed securities???backed primarily by home mortgages," and $96 billion of other long-term agency debt.

The bulk of those holdings are likely in Fannie and Freddie bonds and securities, though it also includes debt from other U.S. government agencies such as the Government National Mortgage Association.

And as all those who follow the shady dealing of the "Direct Bidders" and the UK-based buyers, the number is likely far, far greater:

The U.S. Treasury data may understate the true extent of China's holdings, as they don't include purchases made through special units based in Hong Kong and in other locations outside China.

As Zero Hedge has been reporting with every single TIC report, China has continued to sell its agency debt, as well as lowering its US Treasury holdings.

According to separate figures from the U.S. Treasury, China has been steadily selling its holdings of agency securities since mid-2008. It sold a net $24.67 billion worth of agency securities it 2009, and $27.35 billion in the first 11 months of 2010, according to the data.

So if China decides to not only not buy any incremental debt issued by the US, but to fully commit to selling, this virtually guarantees QE3, as the only way to find a buyer for the debt will be to prime the Fed's printer. Which in turn will activate the timer fuse on the 21st century's first Wiemar Republic recreation. And to think of just how much of a coward Tim Geithner was forced to appear last week when he announced that China is not a currency manipulator: it will be so very fitting for the country to add insult to injury and literally take a bond dump on Geithner's front lawn.

h/t Papa

US speaker vows massive budget cuts

Editor's Note: $23.7 trillion to the banks that caused the mess, $20 trillion wars, and austerity cuts for poor Americans. Robin Hood-in-reverse wealth redistribution in full swing.

US Speaker of the House John Boehner (L)
and House Majority Leader Eric Cantor
© AFP/File Tim Sloan
AFP/Activist Post

WASHINGTON (AFP) - Republican House Speaker John Boehner on Thursday vowed the biggest budget cuts in US history as budget talks in the Congress heated up.

Some of the cuts will be part of a House spending bill to fund the US government through the end of the fiscal year on October 1, replacing a stopgap measure approved last year that expires March 4.

Boehner also wants to slash the federal budget for fiscal year year 2012. President Barack Obama's administration is scheduled to introduce its proposed budget for next year on Monday.

"We've been in the majority now five weeks," Boehner told reporters. "You're going to see more spending cuts come out of this Congress than in any Congress in the history of this country."

The sweeping budget cuts may be approved in the Republican-controlled House, but will likely change when the measure reaches the Democratic-controlled Senate.

"Next week we'll bring to floor a continuing resolution that contains the largest discretionary spending cut in the history of our country," Boehner said at his weekly meeting with reporters.

"We're working with our members and our committee chairmen to make sure that this cut is as big as possible, to make sure that we send the signal that we're serious about cutting spending here in Washington."

Proposed Republican cuts would slash funding for foreign aid, scientific research, "green" energy, and environmental protection.

Republicans also want to block financing of the new healthcare reform program, approved by legislators in the previous Congress.

"Everything is on the table. We're broke!" said Boehner. "It's time for Washington to get serious and that's exactly what the Americans expect of us."

Boehner said he was worried about Obama's 2012 budget proposal.

"I'm concerned that he'll soon send Congress a budget that destroys jobs because it sends too much, taxes too much and borrows too much," Boehner said.

CHART: Fed Surpasses China In U.S. Treasury Holdings

It's gotta be the Fed. How many times have you heard or read something along those lines in the last two years. As in, How can this insane rally in stocks keep going? It's gotta be the Fed. Or, How can 30-year Treasuries yield only 3.5%? It's gotta be the Fed. More pointedly...How can the U.S. government get foreigners to keep buying hundreds of billions of dollars in Treasuries every single month, when they get next to nothing in return -- are they suckers? It's gotta be the Fed.

Well guess what, ladies and gentlemen, it is the Fed. At the Federal Reserve Bank of New York, Brian Sack and his NYU interns have bought so many Treasury securities that the Fed now owns more U.S. debt than anyone else in the world, including China. China currently holds $896B. Japan owns $877B. And the Fed comes in at $1.108 TRILLION, and no sign of letting up.

This is the most recent chart we could locate and though not updated to reflect the changes of the past month, you get the idea. Did someone say monetization?

Fed Passes China in Treasury Holdings

Source - Financial Times

The Federal Reserve has surpassed China as the leading holder of US Treasury securities even though it has yet to reach the halfway mark in its latest round of quantitative easing, according to official figures.

Based on weekly data released on Thursday, the New York Fed’s holdings of Treasuries in its System Open Market Account, known as Soma, total $1,108bn, made up of bills, notes, bonds and Treasury Inflation Protected Securities, or Tips.

According to the most recent US Treasury data on foreign holders of US government paper, China holds $896bn and Japan owns $877bn.

  • “By June [the Fed] will have accumulated some $1,600bn of Treasury securities, likely to be in the vicinity of China and Japan’s combined holdings,” said Richard Gilhooly, a strategist at TD Securities. “The New York Fed surpassed China in the past month as the largest holder of US Treasury securities,” he noted.

The Fed is buying Treasury debt under two programmes. The largest is QE2, which began in November and is scheduled to involve $600bn of purchases by June.

It is also buying $30bn of Treasuries a month as it reinvests principal payments from its large holdings of mortgage debt and debt issued by government housing agencies – a programme dubbed QE lite.

By the end of June, the Fed plans to buy $800bn in Treasury debt under both programmes. Since November, the Fed has purchased $284bn of Treasuries.

“The end of QE2 will be a big test as rates are likely to rise once the Fed stops buying large amounts of Treasuries,” said David Ader, a strategist at CRT Capital. “We don’t know if that means a rise of 20, 30 or even 50 basis points for key yields.”

This is the room where Bernanke's magic happens...

U.S. Housing ‘Vicious Circle’ Worsens

It wasn’t supposed to be like this. For three years, two successive U.S. administrations have made “fixing the housing sector” explicitly a top priority. Since that time, we have been assured by a plethora of politicians, housing “experts”, and media talking-heads that the U.S. housing sector had “bottomed”, and (like the U.S. economy itself) had begun a “recovery”.

It was all fiction.

New numbers show that roughly 27% of all U.S. mortgages are currently “underwater”, worse than the (supposed) “bottom” of the original collapse, when that number soared to a previous record of 25%. This single number exposes a multitude of myths.

For three years, Americans have been told by both politicians and bankers that they were “working hard” specifically to eliminate/alleviate the blight of underwater mortgages. In fact, what this number proves is that these charlatans were “hardly working”. Their “progress” after three years is less-than-zero.

For two years, Americans have been told by politicians and bankers that there is a “U.S. economic recovery” underway. Two years ago, the U.S. housing market was in the worst shape it had ever been in, after a collapse more severe than the worst years of the Great Depression. And now after two years of a “recovery”, it’s in even worse shape?

Quite simply, one could spend their entire life scanning the annals of economic history, and would never find another example where a housing market which was already at a multi-decade bottom has deteriorated after two years of “an economic recovery”.

There is no “U.S. economic recovery”. There never was a recovery. Rather than debate this obvious point, as the saying goes “a picture is worth a thousand words”.

Looking at that chart, the obvious question is not “when did the recovery start?” but rather how could any rational adult ever have believed this government propaganda? Note the tiny "peak" in 2008: this is when Americans were told that the economy had "bottomed".

Equally important in this overall propaganda scheme has been to pretend that “job gains” were taking place within the U.S. economy. I have spent countless commentaries attacking the ridiculous jobs-lies of the U.S. Bureau of Labor Statistics, backed up by the more methodical, scientific research of John Williams of The patterns of distortions are large and unmistakable. Any pretense of valid “adjustments” has been abandoned.

Illustrating this point, the BLS has had to invent an entirely new branch of statistical fiction in recent months to cover-up the increasing magnitude of its fraud in its monthly “non-farm payrolls report”. The BLS has taken the tool known as “seasonal adjustments”, and created a “permanent season” where it simply erases 100,000 to 200,000 “weekly lay-offs” every week, in order to hide the fact that U.S. job losses are once again accelerating. Remove the lies of the BLS, and this is not a “job-less recovery” but a “less-jobs recovery”. Both phrases are economic self-contradictions, and thus just more government fiction.

There is one more fundamental myth which has been dispelled by the latest, disastrous news about U.S. underwater mortgages. For well over a year, we have been assured by politicians, bankers, and media talking-heads that “churning through” these underwater mortgages (via bankers foreclosing on them as fast as possible) would “help to heal” the U.S. housing market., itself little more than a mouthpiece for the housing industry, acknowledges that “underwater mortgages” are the second-leading cause of foreclosures. It is also just simple arithmetic (along with empirical evidence) that dumping foreclosed real estate onto an already over-supplied market causes prices to fall, directly creating more underwater mortgages, followed by more foreclosures, followed by a further collapse in prices, leading to even more underwater mortgages…precisely where does the “healing” take place in this vicious circle?

Along with the unequivocal evidence that more foreclosures only cause more foreclosures - harming everyone except government-subsidized bankers – we have a concurrent catastrophe in the U.S. housing market: banker-fraud totally undermining the legal validity of the entire U.S. land-title registry, a legal nightmare unprecedented in the history of any modern economy. It is thus very fortunate that there is a single policy which would simultaneously address both of these nightmares.

A five-year, nation-wide moratorium on all foreclosures would seem to be an appropriately strong “medicine” to heal this ailing market. For the housing market as a whole, a moratorium of this magnitude immediately accomplishes two things: it dries-up supply and encourages nervous potential-buyers to enter the market – since they are guaranteed not to lose their homes for the next five years. The combination of higher demand and lower supply automatically means firmer prices than would have otherwise existed – reducing underwater mortgages, and reversing the “vicious circle” I just described.

For the foreclosure-fraud crisis, five years allows each and every state to methodically audit their entire registries, and to once-and-for-all purge this massive Wall Street fraud from the U.S. housing market. As I have pointed out in previous commentaries, allowing the entire land-title registry to be polluted with millions (10’s of millions?) of fraudulent titles not only means endless/infinite litigation over this fraud, but a permanent discount on all U.S. real estate.

For the millions of American homeowners who are victims of Wall Street’s housing-bubble, and sit with hopelessly underwater mortgages, the five-year moratorium gives them five years to live rent-free while they try to rebuild their lives financially.

As the cause of this entire crisis, and the recipients of $15 trillion in hand-outs, government guarantees, loans, and tax breaks it is only the absolute minimum of “justice” that Wall Street banks should now be forced to subsidize U.S. homeowners in this manner – rather than fraudulently stealing their homes through rubber-stamped foreclosures. Fortunately, with Wall Street banks once again boasting about their “fat profits”, and continuing to pay out $10’s of billions per year in “bonuses” (and with access to infinite amounts of 0% “loans”), these banks can easily afford such mandatory “charity”.

For the smaller, U.S. “regional banks” whom would also be harmed by such a policy, it’s only fair that they finally got their own turn to suck on the Federal Reserve’s “0% teat”. Indeed, why aren’t American homeowners getting their own opportunity at 0% financing? As an alternative to a five-year foreclosure moratorium, perhaps a mandatory reduction of all U.S. mortgages to 0% (for the next five years) could also be considered?

A reduction in interest rates to 0% also automatically makes potential buyers much “richer” (since their monthly payments would be much, much lower), meaning more total buyers and the ability to pay higher prices. Like a five-year foreclosure moratorium, this also reverses the vicious-circle of underwater mortgages which has been created by the bankers and the politicians. The draw-back to this solution, however, is it does nothing to address Wall Street foreclosure-fraud.

The facts are crystal-clear. Everything the bankers and the politicians claimed they were “doing” to fix the U.S. housing sector they have not done. All of the “progress” the bankers and politicians claimed they were making in fixing a catastrophe they created has been fiction.

Americans have to decide whether they want to continue to passively sit back like chumps, and allow the politicians to keep making phony promises, while Wall Street bankers continue to back-stab them at every opportunity; or they must demand real solutions which will actually make their own situations better, rather than merely fattening the bottom-line of Wall Street banks.

Fact Off: Gaffes galore as US big hitters grapple with geography

Paul Ryan Faces Off Against Bernanke: "There Is Nothing More Insidious That A Country Can Do To Its Citizens Than Debase Its Currency" (Video)

Video - Bernanke testifies before Paul Ryan and House Budget - Feb. 09, 2011

Bernanke faces off against Paul Ryan

NEW YORK (CNNMoney) -- Facing off against some of his toughest critics on Capitol Hill Wednesday, Federal Reserve Chairman Ben Bernanke told lawmakers they need a "credible program" to reduce the nation's growing deficit.

"Even after economic and financial conditions return to normal, the federal budget will remain on an unsustainable path... unless the Congress enacts significant changes in fiscal programs," Bernanke told the House Committee.

Paul Ryan, a Republican from Wisconsin who heads the committee, has been a vocal opponent of the Fed's recent stimulus policy, which pumps $600 billion into the economy through purchases of long-term Treasuries.

He said he fears the policy, known as quantitative easing, will cause inflation to accelerate rapidly, forming asset bubbles and crushing the dollar.

  • "There is nothing more insidious that a country can do to its citizens than debase its currency," Ryan said.

Highlight clip from CNN...

Ryan vs. Bernanke - Inflation Wars

EXCLUSIVE: White House to Cut Energy Assistance for the Poor

Budget proposal would cut billions from aid program.

The White House is targeting the Low Income Home Energy Assistance Program.


The White House is targeting the Low Income Home Energy Assistance Program.

Darren McCollester/Getty Images
Darren McCollester/Getty Images

Updated at 8:06 a.m. on February 10.

President Obama’s proposed 2012 budget will cut several billion dollars from the government’s energy assistance fund for poor people, officials briefed on the subject told National Journal.

(Analysis: Who Wants Grandma to Freeze?)

It's the biggest domestic spending cut disclosed so far, and one that will likely generate the most heat from the president's traditional political allies. Such complaints might satisfy the White House, which has a vested interest in convincing Americans that it is serious about budget discipline.

One White House friend, Sen. Chuck Schumer, D-N.Y., said earlier today that a Republican proposal to cut home heating oil counted as an "extreme idea" that would "set the country backwards." Schumer has not yet reacted to Obama's proposed cut. Sen. Jeanne Shaheen, D-N.H., declared: “The President’s reported proposal to drastically slash LIHEAP funds by more than half would have a severe impact on many of New Hampshire’s most vulnerable citizens and I strongly oppose it." A spokesman for Rep. Edward Markey, D-Mass., declared similarly: “If these cuts are real, it would be a very disappointing development for millions of families still struggling through a harsh winter.”

In a letter to Obama, Sen. John Kerry, D-Mass., wrote, "We simply cannot afford to cut LIHEAP funding during one of the most brutal winters in history. Families across Massachusetts, and the country, depend on these monies to heat their homes and survive the season."

The Low Income Home Energy Assistance Program, or LIHEAP, would see funding drop by about $2.5 billion from an authorized 2009 total of $5.1 billion. The proposed cut will not touch the program's emergency reserve fund, about $590 million, which can be used during particularly harsh cold snaps or extended heat spells, three officials told National Journal.

In 2010, Obama signed into law an omnibus budget resolution that released a total of about $5 billion in LIHEAP grants for 2011. Pointing to the increasing number of Americans who made use of the grants last year, advocates say that LIHEAP is already underfunded. The American Gas Association predicts that 3 million Americans eligible for the program won't be able to receive it unless LIHEAP funding stays at its current level.

How many people, if any, might actually lose the assistance is difficult to determine. Officials were quick to point out that LIHEAP spending has grown significantly over the past several years as the government tried to keep up with rising gas prices. In 2008, the government spent $2.6 billion on LIHEAP. In 2009, the figure jumped to $8.1 billion. So the cut from that high level restores LIHEAP to something close to where it was before Obama took office. Other circumstances, such as the weather and fuel prices, could affect the distribution of benefits.

"In real terms, under our budget, LIHEAP funding will be at levels similar to the Clinton administration," a senior administration official said.

Still, despite the uncertainties surrounding the proposed cut, it is dramatic. LIHEAP has been semi-sacred for most Democrats and many Republicans -- a program that carries an emotional resonance as it was designed to keep poor people, particularly older poor people, cool in the summer and warm in the winter. “A lot of people in the Northeast are going to be unhappy,” an administration official briefed on the budget said. That's one reason why Republican senators like Scott Brown of Massachusetts plus Olympia Snowe and Susan Collins of Maine would probably join Democratic efforts to keep funding levels higher.

Critics say that the program is poorly administered and that, contrary to intentions, it’s become a subsidy for energy companies, most of whom are prohibited by law from turning off services to delinquent bill-payers during weather emergencies. About 10 percent of LIHEAP funds are transferred to “weatherization” programs, according to a government study.

Obama tapped the LIHEAP discretionary fund in January during a record-shattering cold snap in the Northeast.

News of the cut comes on the very day that the National Fuel Funds Network, a coalition of energy groups and community advocates, holds its “Washington Action Day” on Capitol Hill to call on Congress to increase funding by at least $1 billion.

The president’s budget is due next Monday, and the administration has been bracing traditional Democratic allies for cuts to favorite programs. The White House understands that Americans are skeptical of Obama’s willingness to tackle the estimated $1.5 trillion budget deficit and believes that he must cross a threshold of seriousness in their minds.

Republicans on Wednesday unveiled a partial list of items they’d cut from the resolution that funds the current budget year. Obama won’t cut nearly as much.

Beyond the LIHEAP cut, many of Obama's proposed cuts will come from federal programs where new incentives and increased competition could provide the service more cheaply, or where a lack of oversight has created waste and inefficiency, the officials said.

Since Obama’s State of the Union speech, the White House has been eager to show it’s serious about deficit reduction. It has begun to outline the cuts that would offset more spending for education, infrastructure, and research. These cuts include a $300 million reduction in community development block grants, $350 million for programs that support “grassroots” community groups, and $125 million from the Great Lakes Restoration Initiative. Collectively, those three reductions will barely make a dent in the budget, which is projected to run a deficit of at least $1.5 trillion this year.

Obama has said that his proposed five-year freeze on domestic discretionary spending will save the government $400 billion.

Officials were quick to stress that while LIHEAP was being trimmed, many other Department of Health and Human Services programs, particularly those funding early childhood education initiatives, will see their funding rise.

Administration officials said that government departments and agencies were asked last summer to identify ways to reduce to their top-line budget by 5 percent.

Those proposals were forwarded to the Office of Management and Budget and the White House in the fall, and Obama and his team have spent the past two months targeting the least efficient programs. The OMB was particularly interested in programs that distribute money to secondary groups but lack mechanisms to evaluate how it is spent, officials said.

"Ireland Needs The IMF Like Children Need The Vatican"

Song - Brian Cowen's Lament

New Mexico Native Americans will share $3.4B settlement

The U.S. Government created trust accounts for Native American landowners more than a hundred years ago. The landowners were supposed to receive money from the government for any revenue generated from the land, but many never did.

In January, the government agreed to a $3.4 billion settlement.

Samuel Benallie was one landowner who came out to Farmington Wednesday morning to find out if he qualified for a piece of the settlement money. “It hurts when your money has been misused,” said Benallie.

Hundreds packed the Civic Center in Farmington to hear Lead Plaintiff Elouise Cobell talk about the billions of dollars she won for Native Americans. “We had to do a lot of work to convince people that this money was owed to individual Indians because it was their money,” she said.

Now organizers are holding meetings all over the country to raise awareness.

“We made the government pay attention that individual Indians are somebody and you better be accountable,” said Cobell.

Those who qualify for a piece of the settlement will get e minimum of $1,800.

The next informational meeting will be at the Torreon Chapter house in Torreon, New Mexico.

How the Fed Fuels Unemployment

Mr. Chairman and members of the committee, I thank you for the opportunity to address the issue of today’s hearing: "Can Monetary Policy Really Create Jobs?" Since I am an academic economist, you will not be surprised to learn that I believe that the correct answer to this question is: "yes and no." Monetary policy under the direction of the Federal Reserve has a history of creating and destroying jobs. The reason for this is that the Fed, like all other central banks, has always been a generator of boom-and-bust cycles in the economy. Why this is so is explained in three classic treatises in economics: Theory of Money and Credit by Ludwig von Mises, and two treatises by Nobel laureate economist F.A. Hayek: Monetary Theory and the Trade Cycle and Prices and Production. Hayek was awarded the Nobel Prize in Economic Science in 1974 for this work. I will summarize the essence of this theory of the business cycle as plainly as I can.

When the Fed expands the money supply excessively it not only is prone to creating price inflation, but it also sows the seeds of recession or depression by artificially lowering interest rates, which can ignite a false or unsustainable "boom" period. Lower interest rates induce people to consume more and save less. But increased savings and the subsequent business investment that it finances is what fuels economic growth and job creation.

Lowered interest rates and wider availability of credit caused by the Fed’s expansionary monetary policy causes businesses to invest more in (mostly long-term) capital projects (primarily real estate in the latest boom-and-bust cycle), and there is an accompanying expansion of employment in those industries. But since the lower interest rates are caused by the Fed’s expansion of the money supply and not an increase in savings by the public (i.e., by the free market), businesses that have invested in long-term capital projects eventually discover that there is not enough consumer demand to justify their investments. (The reduced savings in the past means consumer demand is weaker in the future). This is when the "bust" occurs.

The economic damage done by the boom-and-bust policies of the Fed occur in the boom period when resources are misallocated in the ways described here. The "bust" period is actually a necessary cure for the economic miscalculations that have occurred, as businesses liquidate their unsound investments and begin to make decisions on realistic, market-based interest rates. Prices and wages must return to reality as well.

Government policies that bail out businesses that have made these bad investment decisions will only delay or prohibit economic recovery while encouraging more of such behavior in the future (the "moral hazard problem"). This is how short recessions can be turned into seemingly endless ones. Worse yet is for the Fed to create even more monetary inflation, rather than allowing the necessary economic adjustments to take place, which will eventually set off another boom-and-bust cycle.

As applied to today’s economic situation, it is obvious that the artificially low interest rates caused by the policies of the Greenspan Fed created an unsustainable boom in the housing market. Thousands of new jobs were in fact created – and then destroyed – giving an updated meaning to Joseph Schumpeter’s phrase "creative destruction." Many Americans who obtained jobs and pursued careers in housing construction and related industries realized that those jobs and careers were not sustainable after all; they were fooled by the Fed’s low interest rate policies. Thus, the Fed was not only responsible for causing the massive unemployment that we endure today, but also a great amount of what economists call "mismatch" unemployment. The skills that people in these industries developed were no longer in demand; they lost their jobs; and now they must retool and re-educate themselves.

The Fed has been generating boom-and-bust cycles from its inception in January of 1914. Total bank deposits more than doubled from 1914 to 1920 (partly because the Fed financed part of the American involvement in World War I) and created a false boom that turned to a bust with the Depression of 1920. GDP fell by 24% from 1920–1921, and the number of unemployed more than doubled, from 2.1 million to 4.9 million (See Richard Vedder and Lowell Galloway, Out of Work: Unemployment and Government in Twentieth-Century America). This was a more severe economic decline than was the first year of the Great Depression.

In America’s Great Depression economist Murray N. Rothbard demonstrated that, once again, it was the excessively expansionary monetary policy of the Fed – and of other central banks – that caused yet another boom-and-bust cycle that spawned the Great Depression. It was not the Fed’s subsequent restrictive monetary policy of 1929–1932 that was the problem, as Milton Friedman and others have argued, but its previous expansion. The Fed was therefore guilty of contributing greatly to the massive unemployment of the Great Depression.

In summary, the Fed’s monetary policies tend to create temporary and unsustainable increases in employment while being the very engine of recession and depression that creates a much greater degree of job destruction and unemployment.

Battle of the bourses heats up

Deutsche Boerse and NYSE Euronext
said on Wednesday they are in
"advanced discussions" to merge.
© AFP/DPA Marius Becker
AFP/Activist Post

NEW YORK (AFP) - The battle for supremacy among stock exchange operators heated up in a salvo of announcements: a merger between London and Toronto, and advanced talks by NYSE Euronext and Deutsche Boerse.

Within hours, the global landscape of exchanges shifted.

The London Stock Exchange and its new Canadian partner TMX Group, which operates the Toronto exchange, unveiled a deal to create one of the world's biggest trading platforms, which will dominate the raw materials and energy sectors.

Financial markets then heard from the transatlantic NYSE Euronext and Deutsche Boerse, which manages the Frankfurt exchange, that they were in "advanced discussions" on a merger.

That would create the world's largest securities exchange, with particular strength in derivatives markets.

NYSE Euronext's equities markets, which include the New York, Paris, Brussels and Amsterdam stock exchanges, already represent one third of world equities trading, the most liquidity of any global exchange group.

"Exchange mergers always make sense from a revenue and expense synergy standpoint and also from a strategic-positioning standpoint," said Michael Wong, a Morningstar analyst.

A merger between NYSE Euronext and Deutsche Boerse would create "probably the most prestigious venue in the world," he added.

"Strategically, this deal makes a lot of sense," Chris Allen, analyst at Evercore Partners, said in a note to clients.

The tie-up "broadens the futures platform, diversifies the companies, and lessens the need" for NYSE Euronext to build up clearing business in Europe, he said.

Spurring the consolidation in the industry is the growing competition for new company listings, and the appearance of new rivals.

"The reality is that the NYSE loses market share every day," said Gregory Volokhin, of Meeschaert Capital Markets.

In the United States, the BATS Exchange trading platform, founded in 2005, claims a 10 percent market share in equity trading.

In the European Union, the phenomenon has been encouraged by an EU directive aimed at opening up competition. The alternative bourse Chi-X Europe became the second-largest equity exchange in Europe in 2010, after London's LSE.

"Nimbler competitors such as BATS and Chi-X have eroded market share and Chi-X in particular has global aspirations," said Simon Denham, head of Capital Spreads.

But the creation of behemoths could face challenges.

"The largest outside risk in our minds is whether the European regulators would grant approval of a deal that combines the two main European futures exchanges -- Liffe and Eurex," Allen said.

"This could be seen as creating a de facto monopoly within European futures, but this is a similar landscape to one we have within the US."

Some analysts already have sounded alarms, such as Jon Ogg at 24/7 Wall, who warned consolidation could result in "too few players that are too powerful."

Volokhin wondered how these new mega exchanges would be regulated and by whom.

"Is that going to increase security and transparency? It fails to simplify the task at both the regulatory and the technology levels," he said.

5 dead after massive Pa. gas blast

Firefighters battle a blaze sparked by an explosion in Allentown, Pa., that left at least six people unaccounted for.
© AP

A thunderous gas explosion devastated a rowhouse neighborhood, killing five people, and suspicion fell on an 83-year-old cast-iron gas main. The fiery blast was latest natural-gas disaster to raise questions about the safety of the nation's aging, 2.5-million-mile network of gas and liquid pipelines.

The explosion, which flattened a pair of rowhouses and set fire to a block of homes late Wednesday night, occurred in an area where the underground gas main lacked shut-off valves. It took utility workers five hours of toil in the freezing cold to punch through ice, asphalt and concrete and seal the 12-inch main with foam, finally cutting off the flow of gas that fed the raging flames.

An elderly couple who lived in the home died. They were identified by their daughter-in-law as Beatrice Hall, 74, and her husband, William, 79, the Allentown Morning Call newspaper reported on its website. The names of the others were not immediately released.

It took utility workers five hours of toil in the freezing cold to punch through the ice, the asphalt and a layer of reinforced concrete and seal the 12-inch main with foam, finally cutting off the flow of gas that fed the raging flames.

Images from NBC station WCAU showed flames reaching hundreds of the feet into the air from the scene of the blast. The explosion was so powerful it was felt nine miles away in Bethlehem, Pa.

Dorothy Yanett, 65, said was in her living room with her husband awaiting the evening news when she heard a series of booms.

"Everything falling and crashing, glass, just a nightmare," said. She found glass in the shoes she was going to put to leave the house. "There was no odor, there was no smell. Then it was like all hell broke loose."

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California Treasurer Spanks Legislature Over Junk Spending

Remarkable clip. Five stars. There is no hope for California government.
Video: California Treasurer Bill Lockyer eats his own kind...
High marks for truth-telling. Details and transcribed quotes below.
California Treasurer, Democrat Bill Lockyer testifying (and attacking his own party) last Thursday at an informational hearing on state government reform. Lockyer is tired of the junk legislation and out of control spending coming from fellow Democrats and issues a stern warning about looming bankruptcy. Powerful stuff considering the source.
"I'm sorry but 2/3's of the the bills that i see come out of the Assembly, if they never saw the light of day, God Bless It. Just stop it. JUST STOP IT! Just stop it. I mean they're junk, and they're consuming all your staff time, with junk. It's not a rule, it's cultural. Nancy Reagan is right. Just say NO!
"It’s impossible for this legislature to reform the pension system, and if we don’t, we bankrupt the state. And I don’t think anybody can do it here, because of who elected you. … You’re just captive of the current environment — I don’t see any way out! By the way, Democrats have to call other Democrats on this problem."
More on this story:
Lessons From Bill Lockyer
State Treasurer Bill Lockyer generated a storm last week with his testimony before the Senate and Assembly Select Committees on Improving State Government. He warned that public pensions and health care costs could bankrupt the state, that taxes will not go up, and that the legislature should clean up its act by getting rid of “junk” bills.
The former legislative leader and former attorney general is no stranger to bold speaking.
Lockyer has suggested that one way to remove the effects of money in elected politics is to pick the legislature by lottery. He proposed the University of California system be cut loose from state funding and allow it to survive on foundation grants, alumni giving, tuitions and research contracts. At the Milken Institute conference earlier last week, Lockyer said the state needed a spending limit.

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WATCH LIVE - Bernanke Testifies Before House

Live Video - Bernanke Testifimony - House Budget Committee
Summaries from this morning's testimony:
CNN - Paul Ryan vs. Bernanke
C-Span - Congress wants answers from Bernanke
Prepared Statement
Ben Bernanke
Chairman Ryan, Ranking Member Van Hollen, and other members of the Committee, I am pleased to have this opportunity to offer my views on the economic outlook, monetary policy, and issues pertaining to the federal budget.
The Economic OutlookThe economic recovery that began in the middle of 2009 appears to have strengthened in the past few months, although the unemployment rate remains high. The initial phase of the recovery, which occurred in the second half of 2009 and in early 2010, was in large part attributable to the stabilization of the financial system, the effects of expansionary monetary and fiscal policies, and the strong boost to production from businesses rebuilding their depleted inventories. But economic growth slowed significantly last spring and concerns about the durability of the recovery intensified as the impetus from inventory building and fiscal stimulus diminished and as Europe's fiscal and banking problems roiled global financial markets.
More recently, however, we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold. Notably, real consumer spending rose at an annual rate of more than 4 percent in the fourth quarter. Although strong sales of motor vehicles accounted for a significant portion of this pickup, the recent gains in consumer spending appear reasonably broad based. Business investment in new equipment and software increased robustly throughout much of last year, as firms replaced aging equipment and as the demand for their products and services expanded. Construction remains weak, though, reflecting an overhang of vacant and foreclosed homes and continued poor fundamentals for most types of commercial real estate. Overall, improving household and business confidence, accommodative monetary policy, and more-supportive financial conditions, including an apparently increasing willingness of banks to lend, seem likely to result in a more rapid pace of economic recovery in 2011 than we saw last year.
While indicators of spending and production have been encouraging on balance, the job market has improved only slowly. Following the loss of about 8-3/4 million jobs from 2008 through 2009, private-sector employment expanded by a little more than 1 million in 2010. However, this gain was barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly erode the wide margin of slack that remains in our labor market. Notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms' hiring plans, do provide some grounds for optimism on the employment front. Even so, with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.
On the inflation front, we have recently seen increases in some highly visible prices, notably for gasoline. Indeed, prices of many industrial and agricultural commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nonetheless, overall inflation is still quite low and longer-term inflation expectations have remained stable. Over the 12 months ending in December, prices for all the goods and services consumed by households (as measured by the price index for personal consumption expenditures) increased by only 1.2 percent, down from 2.4 percent over the prior 12 months. To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed. Core inflation was only 0.7 percent in 2010, compared with around 2-1/2 percent in 2007, the year before the recession began. Wage growth has slowed as well, with average hourly earnings increasing only 1.7 percent last year. These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy.
Monetary PolicyAlthough the growth rate of economic activity appears likely to pick up this year, the unemployment rate probably will remain elevated for some time. In addition, inflation is expected to persist below the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our statutory mandate to foster maximum employment and price stability. Under such conditions, the Federal Reserve would typically ease monetary policy by reducing its target for the federal funds rate. However, the target range for the federal funds rate has been near zero since December 2008, leaving essentially no room for further reductions. As a consequence, since then we have been using alternative tools to provide additional monetary accommodation. In particular, over the past two years the Federal Reserve has further eased monetary conditions by purchasing longer-term securities--specifically, Treasury, agency, and agency mortgage-backed securities--on the open market. These purchases are settled through the banking system, with the result that depository institutions now hold a very high level of reserve balances with the Federal Reserve.
Although large-scale purchases of longer-term securities are a different monetary policy tool than the more familiar approach of targeting the federal funds rate, the two types of policies affect the economy in similar ways. Conventional monetary policy easing works by lowering market expectations for the future path of short-term interest rates, which, in turn, reduces the current level of longer-term interest rates and contributes to an easing in broader financial conditions. These changes, by reducing borrowing costs and raising asset prices, bolster household and business spending and thus increase economic activity. By comparison, the Federal Reserve's purchases of longer-term securities do not affect very short-term interest rates, which remain close to zero, but instead put downward pressure directly on longer-term interest rates. By easing conditions in credit and financial markets, these actions encourage spending by households and businesses through essentially the same channels as conventional monetary policy, thereby strengthening the economic recovery. Indeed, a wide range of market indicators suggest that the Federal Reserve's securities purchases have been effective at easing financial conditions, lending credence to the view that these actions are providing significant support to job creation and economic growth.1
My colleagues and I have said that we will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices. In particular, we remain unwaveringly committed to price stability, and we are confident that we have the tools to be able to smoothly and effectively exit from the current highly accommodative policy stance at the appropriate time. Our ability to pay interest on reserve balances held at the Federal Reserve Banks will allow us to put upward pressure on short-term market interest rates and thus to tighten monetary policy when needed, even if bank reserves remain high. Moreover, we have developed additional tools that will allow us to drain or immobilize bank reserves as needed to facilitate the smooth withdrawal of policy accommodation when conditions warrant. If necessary, we could also tighten policy by redeeming or selling securities.
As I am appearing before the Budget Committee, it is worth emphasizing that the Fed's purchases of longer-term securities are not comparable to ordinary government spending. In executing these transactions, the Federal Reserve acquires financial assets, not goods and services; thus, these purchases do not add to the government's deficit or debt. Ultimately, at the appropriate time, the Federal Reserve will normalize its balance sheet by selling these assets back into the market or by allowing them to run off. In the interim, the interest that the Federal Reserve earns from its securities holdings adds to the Fed's remittances to the Treasury; in 2009 and 2010, those remittances totaled about $125 billion.
Fiscal PolicyFiscal policymakers also face significant challenges. Our nation's fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession. To a significant extent, this deterioration is the result of the effects of the weak economy on revenues and outlays, along with the actions that the Administration and the Congress took to ease the recession and steady financial markets. However, even after economic and financial conditions return to normal, the federal budget will remain on an unsustainable path, with the budget gap becoming increasingly large over time, unless the Congress enacts significant changes in fiscal programs.
For example, under plausible assumptions about how fiscal policies might evolve in the absence of major legislative changes, the Congressional Budget Office (CBO) projects the deficit to fall from its current level of about 9 percent of gross domestic product (GDP) to 5 percent of GDP by 2015, but then to rise to about 6-1/2 percent of GDP by the end of the decade.2In subsequent years, the budget situation is projected to deteriorate even more rapidly, with federal debt held by the public reaching almost 90 percent of GDP by 2020 and 150 percent by 2030, up from about 60 percent at the end of fiscal year 2010.
The long-term fiscal challenges confronting the nation are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors. The two most important driving forces behind the budget deficit are the aging of the population and rapidly rising health-care costs. Indeed, the CBO projects that federal spending for health-care programs will roughly double as a percentage of GDP over the next 25 years.3The ability to control health-care spending, while still providing high-quality care to those who need it, will be critical for bringing the federal budget onto a sustainable path.
The CBO's long-term budget projections, by design, do not account for the likely adverse economic effects of such high debt and deficits. But if government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe. Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living. Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, resulting in further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult.
In thinking about achieving fiscal sustainability, it is useful to apply the concept of the primary budget deficit, which is the government budget deficit excluding interest payments on the national debt. To stabilize the ratio of federal debt to the GDP--a useful benchmark for assessing fiscal sustainability--the primary budget deficit must be reduced to zero.4Under the CBO projection that I noted earlier, the primary budget deficit is expected to be 2 percent of GDP in 2015 and then rise to almost 3 percent of GDP in 2020 and 6 percent of GDP in 2030. These projections provide a gauge of the adjustments that will be necessary to attain fiscal sustainability. To put the budget on a sustainable trajectory, policy actions--either reductions in spending, increases in revenues, or some combination of the two--will have to be taken to eventually close these primary budget gaps.
By definition, the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis. Acting now to develop a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Plans recently put forward by the President's National Commission on Fiscal Responsibility and Reform and other prominent groups provide useful starting points for a much-needed national conversation. Although these proposals differ on many details, they demonstrate that realistic solutions to our fiscal problems do exist.
Of course, economic growth is affected not only by the levels of taxes and spending, but also by their composition and structure. I hope that, in addressing our long-term fiscal challenges, the Congress and the Administration will undertake reforms to the government's tax policies and spending priorities that serve not only to reduce the deficit, but also to enhance the long-term growth potential of our economy--for example, by reducing disincentives to work and to save, by encouraging investment in the skills of our workforce as well as new machinery and equipment, by promoting research and development, and by providing necessary public infrastructure. Our nation cannot reasonably expect to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face.
Thank you. I would be pleased to take your questions.

'Corrupt' Mubarak fortune in focus as Western cash donors exposed