The NYT reports that opponents of a measure that would save money by putting private lenders out of the government guaranteed student loan business warn that it could cost jobs. This is of course true.

Suppose there is an efficient computer company that sells computers for $500 each and an inefficient computer company that sell comparable computers for $1,000 each. It is likely that the inefficient computer company employs more workers for each computer produced than the efficient manufacturer. Therefore switching orders from the less efficient company to the more efficient company would cost jobs.

This is effectively what is happening with the student loan program, except the more efficient provider happens to be the government. There is no more argument to obstruct this switch because of possible job loss than there would be to try to prevent people from buying goods from more efficient producers. This is economic growth. The people who lose their jobs should be reemployed where they could be more productive.

--Dean Baker

God Helps With Personal Decisions, Most Americans Say Huffington Post

Chief exorcist says Devil is in Vatican Telegraph. I’m so glad they found him.

Hot Property Sex.com on Auction Block ABC (hat tip reader John D)

OECD: UK has worse social mobility record than other developed countries Guardian

Commercial property may cause new crisis, says FSA Independent

Gallup: Can’t Get No Satisfaction Ed Harrison. A very stark contrast with the cheery market talk of late.

Regional Employment Report: Unemployment Rate up in 30 States, Down in 9; Manufacturing States Benefit Most Michael Shedlock

A Government Takeover of the Economy? Mark Thoma

The Volcker Principles Move Closer To Practice Simon Johnson. The interesting bit is his argument re what to do with Goldman

How to handle the sovereign debt explosion Mohamed El Erian, Financial Times versus The long wave of government debt Andrew Scott, Vox EU

Principal Writedowns and the Fake Stress Test Mike Konczai, New Deal 2.0. Today’s must read, with a tidy and compelling analysis.

Antidote du jour (hat tip Crocodile Chuck). From a very nice slideshow with audio:

The “miracle” Asian elephant calf was born alive at Taronga Zoo after he was believed to have died in his mother Porntip’s womb two days ago.

Dan Gross:

As noted above, "the proposed health care reform does not take over the system in any sense." But why would government run health care along the lines of successful models in other countries be a bad thing? Don't we want lower costs and better health outcomes?

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And shouldn't health care be available to everyone?:

One of the bizarre things that occurs whenever particular high profile slots are up for grabs is that the discussion rapidly devolves into which candidate A Lot of People Have Heard Of should get it, rather than focusing on selection criteria (which is how most managers go about filling jobs).

In addition, some of the evident selection criteria for heavyweight roles look pretty dubious. A former Fed economist and hedge fund manager who can claim to have invented swaps, but for some odd reason doesn’t (he will lay claim to caps and collars, however) commented dryly when Bernanke was appointed Fed chairman: “The record of academic economists in that job is pretty poor” and then proceeded to dissect Arthur Burns’ record. By contrast, Kevin Warsh’s presence in the Board of Governors (a favorite hobbyhorse of Doc Holiday) seems quite unfathomable.

The letter below, from Senator Sherrod Brown, chairman of the panel that oversees Fed monetary policy, thus puts the focus on the right foot. I agree with the criteria he sets forth, namely, having anticipated the crisis, having a pro-consumer stance, and being willing to release AIG-related e-mails. I’d actually go a bit further and would like someone who supports transparency in areas outside monetary policy (where I can see reason for the Fed to need to insulate itself from political pressure). For instance, the Fed’s refusal to provide information as to who used its various facilities during the crisis is without merit. If the information is sufficiently aged (say released a year in arrears) it will be stale from a trading/counterparty risk standpoint, and hence would pose no danger to market participants, but would be very useful from an analytical perspective.

Text of Sherrod’s letter follows:

March 10, 2010

The Honorable Timothy Geithner
Secretary
United States Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

The Honorable Lawrence Summers
Director
National Economic Council
The White House
1600 Pennsylvania Avenue, NW
Washington, D.C. 20500

Dear Secretary Geithner and Director Summers,

I write to you today to express my concern about the vacancies at the Federal Reserve, both on the Federal Open Market Committee (FOMC) and soon in the Vice Chairman’s office. This is the financial equivalent of leaving open vacancies on the United States Supreme Court, and it is essential that we fill these positions.

As Chairman of the Senate Banking Committee’s Subcommittee on Economic Policy, with jurisdiction over the Federal Reserve System’s monetary policy functions, I am acutely aware of the importance of monetary policy at the Fed. Both the full Banking Committee and the Economic Policy Subcommittee have examined the causes of the financial crisis and the resulting effects on lending, access to credit, and employment. The evidence presented to the Committee about the role that Fed policy decisions played in the financial crisis and the economic downturn has led me to conclude that the Fed’s monetary policy has focused almost entirely on controlling inflation rather than maximizing employment and that the Fed has too often put banks’ soundness ahead of its other responsibilities. In light of this experience, there are several other important qualifications that I would urge you to consider in selecting the new Vice Chairman and new members of the FOMC:

1. Recognition of the causes of the financial crisis before it occurred.

Many economic experts, including some at the Federal Reserve, failed to anticipate the impending economic crisis. However, there were exceptional people who sounded alarms about the rapidly inflating housing bubble, the proliferation of subprime lending, and the packaging, selling, and investing in toxic financial products by Wall Street. Unfortunately, regulators, including the Fed, ignored or attempted to discredit many of these courageous individuals, rather than heeding their warnings. We need economic policy makers who possess the foresight to identify harmful economic trends, the courage to speak out about the necessity of addressing these practices before they inflict lasting damage to our economy, and the wisdom to listen even if their views are challenged.

2. Demonstrated dedication to protecting consumers and maximizing employment.

For years, the Federal Reserve’s monetary policy has maintained an almost single-minded focus on inflation. This has been detrimental to the Fed’s other core missions, particularly maximizing employment and protecting consumers. The results of this fixation speak for themselves. The national unemployment rate is more than double the Fed’s statutorily mandated 4 percent unemployment target. The Fed also failed to act on repeated warnings about predatory mortgage lending and credit card abuses. Consumer protection experience is particularly important if the new consumer protection entity were to be housed at the Fed. Our economy will benefit from renewed attention to all of the Fed’s priorities.

3. Commitment to releasing e-mails related to the Fed’s involvement in the AIG bailout.

A growing number of experts – including economists, academics, and former regulators – have called upon the Federal Reserve to release all e-mails, internal accounting documents, and financial models related to AIG’s collapse. The American taxpayers now hold the majority of AIG shares, and they have a right to know how their money is being spent. Providing greater detail about the AIG bailout is particularly important because that episode continues to taint the Fed’s reputation. Focusing on candidates committed to full transparency related to this particular economic event would help to restore the Fed’s stature and credibility in the eyes of many Americans.

The American public has lost a great deal of confidence in the Federal Reserve. Selecting a Vice Chair and FOMC members with the above qualifications will send the message that the Federal Reserve has learned from the financial crisis, and that the Fed’s weaknesses are being addressed with more than just cosmetic changes.

I would be happy to discuss specific candidates with you at your convenience. Thank you for considering my views, and I look forward to working with you to address these vacancies at the Fed.

Sincerely,

Sherrod Brown
United States Senator

Yves again. I note the similarity between his criteria and those from Barry Ritholtz , and have heard similar ideas from others in policy circles. Hopefully sound ideas like these will prevail.

We are all very lucky that David Broder is not in charge of fiscal policy. He thinks it's a good idea to balance the budget in a recession:

From the same editorial page, some sanity:

Same for columnists.

• Invictus: An Epidemic of Laziness?
• Mary Daly and Bart Hobijn: Okun’s Law and the Unemployment Surprise of 2009
• Romer: Too soon for spending clamp-down
• Felix Salmon: Why did Nick Denton truncate Gawker’s RSS feeds?
• J. Michael McWilliams: Letting Perfect be the Enemy of Good?
• Andrew Taylor: Senate passes jobless aid, business tax breaks: Bill will add $130 billion to the budget deficit over next year and a half
• Ezra Klein: Don't pull back on stimulus
• David Pilling: Mismanaging China’s rural exodus
• Joseph Rosenberg: Preliminary Revenue Estimate and Distributional Analysis of the Tax Provisions in Paul Ryan's "A Roadmap for America’s Future Act of 2010"
• George Packer: Mitch Daniels Redux
• Mark Benjamin: Waterboarding for dummies
• Ultimi Barbarorum: Econobloggers need their crisis back
• Jim Hamilton: Modeling problems in credit markets
• Matthew Yglesias: Jacob Weisberg Doesn’t Know Much About Europe
• Matthew Yglesias: The Ryan Tax Plan: Higher Taxes for 90% of Americans, Less Revenue for the Government
• Jason Kuznicki: A Plea for Alcibiades, or, How to Philosophize with a Bottle
• Doug Elmendorf: Presentation on “Fiscal Policy Choices” to the National Association for Business Economics
• Daniel Little: Rawls on Marx; December 1973
• Mark Thoma: Why Do Federal Reserve Board Seats Remain Unfilled?
• Simon Johnson: Inside Man: On The Brink: Inside the Race to Stop the Collapse of the Global Finance System by Henry Paulson Jr.
• Geoff Dyer: China: A populist rising
• Martin Wolf: Germany's eurozone crisis nightmare
• Matthew Yglesias: Justice and Stabilization Most people have stronger views about morality than they do about macroeconomic stabilization policies, and they look at policies that are unfair and outcomes that are wrong and find it hard to believe that it’s also the case that these policies worked. Conversely, to technocrats things that worked are things that worked, and policies that emphasize just deserts are naive.
• Mario Rizzo: No Classical Economist Ever Believed in Say's Law
• Matt: John Stuat Mill Channels His Inner Friedman on Speculation

• TARP Oversight Panel Finds Fault With GMAC Bailouts - NYTimes.com
• Bill to Include Agency That Tracks Financial Risk - NYTimes.com
• What if price-level targeting were already in place? - Stephen Gordon
• Underappreciated benefits of the Eurozone - voxeu.org
• The long wave of government debt - voxeu.org
• How to handle the sovereign debt explosion - FT.com
• A Note to the Financial Crisis Inquiry Commission - David Beckworth
• Whose Justice? Daniel Little’s Notes from Rawls on Marx - Open Economics
• On Asymmetry, Reflexivity and Sovereign Default - Rajiv Sethi
• Consumer credit, credit availability and The Credit CARD Act - macroblog
• How tiny is the blogosphere? - Knowing and Making
• Health Reform: If Not Now, When? - Maxine Udall
• Does Lack of Insurance Kill? - Economix
• Economix - links
• Felix Salmon - links
• Marginal Revolution - links
• New Deal 2.0 - links
• FT Alphaville - links
• Real Time Economics - links
• Market Talk - links
• Credit Writedowns - links
• Free Exchange - links
• Abnormal Returns - links
• Brad DeLong - links

In case you somehow harbored the notion that the other half doesn’t live differently than the rest of us, an eye-opening report released by the Insight Center for Community Economic Development, “Lifting as We Climb,” analyzes a topic that too often gets short shrift, the net worth, or “wealth” of the lower economic strata. The media (to the extent it has taken up the issue of income inequality) has focused on the rising concentration of income and assets at the very top, and less attention has gone to the obverse side of this coin: the relative decline of the standing of lower ranks.

This study drew on the 2007 Survey of Consumer Finances, which is conducted one in every three years and is considered one of the most relaible sources of information on wealth disparities. The analysis uses the same definition of net worth as the Federal Reserve does. The report notes:

While the 2007 data is the most recent release of the SCF to date, it is important to take into consideration that most of the data were collected prior to the economic downturn and therefore present a more favorable portrait of levels of wealth than is likely to be the case currently. Nonetheless, the overall patterns depicted with respect to wealth of whites versus non-whites are likely to hold. If anything, the portrait of wealth holdings for people of color is likely to be less favorable today than it was in 2007 since people of color hold greater amounts of their assets in homeownership (see Table 4) and communities of color have been hardest hit by the foreclosure debacle. Therefore, the data provides a “conservative estimate” of the current wealth holdings for women of color.

Here is the punch line:

However, while white women in the prime working years of ages 36-49 have a median wealth of $42,600 (still only 61% of their white male counterparts), the median wealth for women of color is only $5.

Once they get past their childbearing/rearing years, single black women do better. Their net worth rises to nearly $60,000 for the 50 to 65 cohort. But single white women show a greater increase in net worth across the two age groups, of nearly $70,000.

One of the few papers to pick up this story, the Pittsburgh Post-Gazette (hat tip reader John D) add some more disheartening factoids:

Black women, in general, were more likely to have participated in the subprime loan crisis with upper-income black women being five times more likely to have received a high-cost mortgage than upper-income white men.

“The popular image is they spend too much, which is the reason they are running up credit card and consumer debt, but the cost of living has risen faster than income, and they need to go into debt for basic daily necessities,” Ms. Lui said. “It’s compounded because unemployment is twice as high in the black community than it is in the white community.”

Huffington Post has a short write-up by a project manager at the Insight Center, but that is the sort of exception that serves to prove the rule, that of lack of media interest in the fate of the poor and near poor.

On a separate but related sighting, The Big Picture’s post ” An Epidemic of Laziness?” takes issue with the idea that extending unemployment insurance creates a disincentive to find work, when the fact that there are more than five job-seekers for every opening would seem to be a more significant impediment. The comment stream at points veers into vitriol

If you wonder why I recommend a shower after investing in Russia, Bill Browder will give you the reasons at length on his YouTube video (click here for the link at http://www.youtube.com/watch?v=84MsRuC-1l8 ). Bill is the founder and CEO of Hermitage Capital Management, one of the firms that pioneered equity investment in the former Soviet Union in the nineties.

After a decade of pursing a campaign of activist investing that brought major changes in corporate governance in big companies like Gazprom and Sberbank, a mafia connected government struck back with a vengeance. It deported Browder in 2005, arrested his lawyer, and pressured him to provide false testimony against his boss, which he refused. A year later, the man died in prison from “natural causes.”
The Russian government then seized Browder’s operating companies, but fortunately for investors, not before he was able to sell off $4.5 billion in holdings and spirit the funds out of the country.

Browder, who is of Russian descent, and whose grandfather was chairman of the American Communist Party, says his case is but the tip of the iceberg. Major multinationals like Shell, BP, and Ikea have also been the victims of corruption and faced arbitrary seizure of assets by the well connected. This lawlessness is the reason why Russian companies perennially trade at single digit multiples. They are cheap on paper, but carry hidden, unquantifiable risks.

Browder has since refocused his interests, and is now managing $1.2 billion in other safer emerging markets, like Indonesia (IDX), Thailand (THD), and India (PIN).

Despite all of the above, mega hedge fund Traxis Partners founder, Barton Biggs, says there is still a case to make for investment in Russia. It is the classic emerging middle class story. Russians have no credit card debt, no home mortgages, and terrible housing, but the resource wealth to buy what they need. Barton sees Russia eventually becoming a basic, functioning European country, but will first have to engineer a growth spurt to get there. That is the play. The principal vehicle for most foreigners to get into the land of Lenin and Red Square is to buy the ETF, (RSX), which was up 300% in 2009.

No doubt that investing in Russia is a double edged sword. It offers enormous oil reserves and natural resources, with GDP flipping from a -7.9% rate in 2009 to an expected 3.2% this year. But you run the risk of a knock on the door in the middle of the night.

For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, or listen to me on Hedge Fund Radio at http://www.madhedgefundtrader.biz/ .

RealtyTrac has reported February foreclosure activity, which at 308,524 units, was a 2% decline from January, and a 6% increase year over year. This equates to one in 418 housing units. And not surprisingly, the snow was once again implicated, this time in painting a falsely positive picture of the economy as "severe winter weather temporarily slowed the processing of foreclosure records in Northeastern and Mid-Atlantic states." From Jim Saccacio, CEO of RealtyTrac: “The 6 percent year-over-year increase we saw in February was the smallest annual increase we’ve seen since January 2006, when we began calculating year-over-year increases, but it still marked the 50th consecutive month of year-over-year increases in foreclosure activity. This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure, but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity — albeit at a historically high level that will likely continue for an extended period." In a nutshell, the foreclosure extend and pretend got a snow day holiday in February.

A detail of the various foreclosure activity:

Default notices (Notices of Default and Lis Pendens) were reported on a total of 106,208 U.S. properties during the month, an increase of 3 percent from the previous month but down 3 percent from February 2009. Default notices were down 25 percent from their peak of more than 142,000 in April 2009 but were still more than three times the number they were four years ago in February 2006.

Foreclosure auctions (Notices of Trustee’s Sale and Notices of Sheriff’s Sales) were scheduled for the first time on a total of 123,633 U.S. properties, a decrease of 1 percent from the previous month but still 16 percent higher than the level reported in February 2009. Scheduled auctions were down 14 percent from their peak of more than 144,000 in August 2009 but were also about three times higher than the number reported in February 2006.

Bank repossessions (REOs) were reported on a total of 78,683 U.S. properties during the month, a 10 percent decrease from the previous month but an increase of 6 percent from February 2009. Bank repossessions were down nearly 15 percent from their peak of more than 92,000 in December 2009 but were at nearly twice the level reported in February 2006.

No change among the usual suspects:

Nevada foreclosure activity decreased nearly 7 percent from the previous month and was down 30 percent from February 2009, but the state’s foreclosure rate continued to rank highest in the nation for the 38th month in a row. One in every 102 Nevada housing units received a foreclosure filing during the month — more than four times the national average.

Arizona and Florida documented nearly identical foreclosure rates, with one in every 163 housing units receiving a foreclosure filing in both states. Despite a nearly 21 percent decrease in foreclosure activity from the previous month, Arizona’s rate was statistically slightly higher than Florida’s rate and ranked second highest among the states.

California’s foreclosure rate ranked fourth highest among the states, with one in every 195 housing units receiving a foreclosure filing during the month, and Michigan’s foreclosure rate ranked fifth highest among the states, with one in every 226 housing units receiving a foreclosure filing.

Other states with foreclosure rates among the nation’s 10 highest were Utah (one in every 275 housing units), Idaho (one in 296), Illinois (one in 305), Georgia (one in 331) and Maryland (one in 407).

February showed a divergence at the top, with California improving slightly while Florida deteriorated materially.

The six states with the most foreclosure activity accounted for 61 percent of the national total in February. California led the way, with 68,562 properties receiving a foreclosure filing during the month — down nearly 5 percent from the previous month and down 15 percent from February 2009.

Foreclosure activity in Florida increased nearly 15 percent from the previous month and was up more than 16 percent from February 2009. The state continued to post the nation’s second highest total, with 54,032 properties received a foreclosure filing during the month.

Increasing foreclosure activity boosted Michigan’s total to third highest among the states. A total of 20,028 Michigan properties received a foreclosure filing during the month — up nearly 14 percent from the previous month and up 59 percent from February 2009.

With 17,312 properties receiving a foreclosure filing, Illinois posted the fourth highest total, followed by Arizona, with 16,718 properties receiving a foreclosure filing, and Texas, with 12,638 properties receiving a foreclosure filing in February.

Other states with totals among the 10 highest in the country were Georgia (12,177), Ohio (11,286), Nevada (11,035), and Maryland (5,732).

Full RealtyTrac report.

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Kenneth Lovett of the New York Daily News reports that Hevesi official David Loglisci pleads guilty in pension fund scandal, agrees to sing to Cuomo:

David Loglisci, who was Hevesi's chief investment officer, has agreed to dish to investigators for Attorney General Andrew Cuomo on a culture of corruption that existed in the office.

Loglisci had been charged along with top Hevesi political consultant Hank Morris of steering lucrative pension fund business to companies that agreed to pay kickbacks.

Morris is said to have received more than $25 million in pension-related fees during the four years Hevesi was in office.

Loglisci is the highest-ranking Hevesi official to plead guilty during the nearly three-year probe.

Loglisci said he was instructed by senior office officials to obtain Morris' approval prior to making recommendations on proposed investments.

He also said Morris had complete control over the pension fund's alternative investment portfolio and doled out business to those who paid him lucrative fees or contributed to Hevesi's campaign.

Those who refused were denied business.

"With today's plea, a former top official overseeing the state's single largest asset admitted that decisions were driven by politics and greed - not the best interests of the fund or its beneficiaries," Cuomo said.

"Not only were pension recipients defrauded but so were the taxpayers across New York who are ultimately responsible for sustaining the fund."

Loglisci's brother, Steven, a film producer, also benefitted. Various firms paid Loglisic hundreds of thousands of dollars to help finance a poorly received movie, "Chooch."

And he detailed how Morris was paid as a political consultant while also having financial interests in various proposed investments. Morris also made investment decisions for the office, including on deals in which he had ties, Loglisci admitted.

Loglisci pleaded guilty before Manhattan Supreme Court Justice Bart Stone and was released on his own recognizance with travel restrictions.

He faces a possible sentence of up to 1 1/3 to 4 years in prison for the charge of a felony violation of the Martin Act, a class E felony.

Dan Walters of the Sacramento Bee reports, Legislature's 'oversight' unit misses mark:

In Capitol jargon it means the Legislature's holding hearings or conducting investigations into how state programs are functioning.

Steinberg, in fact, has created a Senate Office of Oversight and Outcomes and staffed it with ex-newspaper reporters, supposedly to do the same kind of deep drilling they did in journalism.

Committees in both legislative houses are doing what they say are oversight hearings on various matters.

There have been some noteworthy oversight efforts in years past, such as investigations into former Insurance Commissioner Chuck Quackenbush's virtual shakedowns of insurers for political slush funds, and former Gov. Gray Davis' award of a big computer contract to a campaign contributor.

More recently, however, "oversight" has tended either to focus on relatively minor issues, or be grandstanding, such as Republican Sen. Jeff Denham's hearing last week on veterans' home services in Fresno, where he's seeking a congressional seat.

Back to Steinberg's Office of Oversight and Outcomes. He's hired some talented journalists, but so far they haven't produced much of lasting import. Recently, it generated a third report that was critical of Gov. Arnold Schwarzenegger's furloughs of state employees.

That's an important issue to public employees and their unions, and Steinberg's Sacramento district has a heavy contingent of unionized state workers. But it's hardly a bedrock issue for 38 million Californians.

Steinberg spokesman Nathan Barankin said the unit chooses its own topics to investigate, and the importance of the findings is "in the eye of the beholder."

So what might be more important targets for legislative gumshoes? How about the scandal at the California Public Employees' Retirement System over huge payments to "placement agents" who obtain multibillion-dollar investments for their clients? Many of them have been money losers, adding to the fund's huge value decline that taxpayers will have to cover.

How about the anomaly of CalPERS buying a $600 million chunk of Apollo Global Management, a conspicuous employer of placement agents, only to see that stake decline by more than 75 percent? How about a belated examination of how and why Apollo founder Leon Black persuaded U.S. Rep. John Garamendi, then the state insurance commissioner, to seize the junk bond portfolio of a big insurance company and then resell it some to some shadowy French investors for billions less than its value?

But wait. The same unions that hate furloughs also control the CalPERS board that made those sucker bets. Just a coincidence?

When the Legislature stops wasting taxpayer- financed time on trivia and bores into the CalPERS debacle, maybe we'll take its "oversight" seriously.

The propensity for corruption at public pension funds is extremely high. How high? I trust nobody and assume that at any given time, some senior public pension fund managers are on the take. Oversight is meaningless unless you have mechanisms in place to deter fraud and stop it before it occurs. I have long argued that every unit of a public pension fund should be subjected to an annual independent, comprehensive fraud audit, preferably done by experienced certified fraud examiners.

The same goes for an independent performance review of various investment activities. If you got guys gaming their benchmarks, they're defrauding the plan sponsor and stakeholders. Ignoring the problem only feeds a culture of corruption, enriching pension fund managers for delivering mediocre results. At one point, regulators have to put a stop to this gross injustice or else they're complicit in the plundering of public pension funds.

Good Evening: U.S. stocks continued their recent advance today, and the benchmark S&P 500 has now posted positive closes in eight of the previous nine trading sessions. Though the rally is most likely attributable to price momentum and rising risk appetites, more than a few will credit today’s levitation in share prices to statements made this morning by former European Commission president, Romano Prodi. “‘For Greece, the problem is completely over,’ said Prodi, who was also Italian prime minister, in an interview in Shanghai today. ‘I don’t see any other case now in Europe’.” (source: Bloomberg article below). Over? And not just for Greece, but for all EU nations?

Mr. Prodi may turn out to be right some day, but Greece has yet to roll over huge slugs of debt, and neither the EU nor the IMF has yet wired Athens a single euro. This drama may recede from the headlines for a while, but it is far from over. Mr. Prodi sounds like a police officer trying to clear a crowd away as they gawk at a burning building. “Move along, folks, there’s nothing to see now. The Fire Department is here”. If the less encumbered EU nations (France, Germany, etc.) can be thought of as the Fire Department in this comparison, then to me it looks like they are standing around and arguing about which fire hydrants to hook up first. Maybe the financial fire threatening Greece will burn itself out via self-imposed fiscal responsibility, but maybe not. The EU hoses may be trained on Greece right now, but not a drop of liquidity has reached the flames.

Another story that captured the attention of market participants today was the notable rebound in both Chinese imports and exports (see below). If this report sounds like good news for the global economy, it is. But some investors worry that China’s success will lead to further monetary policy tightening by Beijing. The potential for further measures to rein in growth in China will receive more attention tonight when that nation’s latest CPI report hits the tape. Whether these concerns over stimulus withdrawal played a role in today’s decline in the precious metals, I have no idea. Then again, if Romano Prodi’s optimism about the fiscal condition of various EU members is indeed justified, how could the latest quote for gold be anywhere near $1100/oz?

Stocks opened marginally higher but the major averages were soon up 0.5%. The Dow and S&P then dipped back toward unchanged, but the Russell 2000 and NASDAQ curiously remained aloft. The Dow never did muster much of comeback, but the other indexes rallied to close at nearly their best levels of the session. The gains, ranging from the Dow’s +0.03% to the Russell’s +0.8%, actually masked the considerable strength in certain important sectors. The semiconductor, bank, and biotech indexes galloped ahead by +2%, +2%, and +5% respectively. Treasurys were down as yields rose a modest 2 to 5 bps across the coupon curve. Today’s ten year note auction was particularly well received, with the sale benefiting from what some reports claimed to be a record high bid-to-cover ratio. The dollar seemed not to notice much of anything today and slid 0.2%. And, despite the damage visited upon the precious metals, the CRB index itself was only fractionally lower on Wednesday.

It wasn’t so many years ago that a U.S. budget deficit of $221 billion brought with it howls of concern over the sustainability of so much red ink and the damage it would some day bring to our children and grandchildren. Today our government announced that we reached this negative milestone in a single month (see below). February’s deficit figures are a record high for any month in our nation’s history, a fact which is even more depressing when one considers it came during the shortest month on the calendar. With apologies to Will Rogers, our Congress seems to have never have met a deficit it didn’t like. In fact, there are far too few on either side of the aisle that think budget deficits even matter.

They do matter. The most poignant and articulate explanation about why they do so can be found under the heading entitled “Risk Factors” in the latest issue of Grant’s Interest Rate Observer. Jim turned his entire issue into a would-be prospectus for an upcoming 30 year bond auction. It is a must read for all investors, not just those who like to clip coupons.

As for why deficits don’t seem to matter right now but will at some point in the fairly near future, consider the latest views of PIMCO’s Mohamed El-Erian. The PIMCO CEO presents an excellent case in today’s Financial Times, but rather than put my words in his mouth, the final paragraph of his Opinion piece will do nicely:

“Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential. The sooner this is recognised, the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them.” (source: FT article below)

Since I agree with Mr. El-Erian but would like to take his “not yet sufficiently appreciated and understood” notion a step further, I would like to offer a modest proposal for at least a partial solution. First, I propose that whenever the previous year’s budget deficit exceeds 3% of GDP, an immediate and across-the-board salary freeze be put in place for anyone on the federal payroll. Yes, no COLA adjustments for anyone, period. The only justifiable exception would be for military personnel serving in combat areas. Unlike bureaucrats, Congress-people, and even Presidents, soldiers earn their pay by risking far more than their incomes.

Second, I propose that whenever the previous year’s budget deficit exceeds 5% of GDP (as is currently the case), all federal workers receive a 5% pay cut and are frozen at that level until the deficit drops back below the 5% of GDP threshold (again, with an exception for combat personnel). I would double the cut to 10% for all Senators, Representatives, and yes, even the President. The resulting cries of anguish from inside the Beltway would be matched only by the “serves you right” murmurs outside it. What would also happen in short order is that our federal workforce would suddenly find unique and concrete ways to be more efficient and productive. The ideas for saving money in order to restore their compensation would flood corner offices and oval-shaped rooms all over official Washington. We could even propose bonuses for the best money-saving ideas, or even modest, across-the-board bonuses once the budget reaches surplus.

My ideas are unlikely to ever see a House committee room, let alone the Senate floor or the President’s desk. If they did, however, the incentive-driven behaviors they would unleash at the federal level might stun even the Tea Party crowd. What’s more, these concepts are scalable in reverse, since they apply equally well at the state and local levels of government. And if I’m wrong about the behavioral changes I envision, it won’t be a total loss. We’ll have saved the money on those frozen/shrunken salaries and reduced our budget deficit in the process — not to mention giving hundreds of thousands of federal employees a taste of how things work for those of us in the private sector. If we’re all in this together, and if shared sacrifice is the way out, then it is high time federal workers begin learning how to share.

– Jack McHugh

Stocks Climb as Treasuries, Yen Retreat on Economic Optimism
Greek Crisis Is Over, Rest of Region Safe, Prodi Says
China’s Exports, Property Prices Add Pressure to Pare Stimulus
Budget Deficit in U.S. Widens to Record $221 Billion
How to handle the sovereign debt explosion

Thanks for all the feedback on the T-Shirt designs for my forthcoming walk from Parliament House to Mt Kosciuszko. I must admit I was a bit surprised by how many people were opposed to the distorted text, but I take the point (of course, there were some who were strongly in favour of it).

And I do also want to have some fun–it isn’t all sour grapes! As someone who has done graphic design at various stages in my life, I like the look of the “fit text to curve” text–it’s the T-shirt I’d like to have in my collection. So what I’ve decided to do is to produce at least 4 of the 5 T-shirts shown below, two of which have text fitted to the curves, and three of which do not.

In one of the text-to-curve cases, the text is easily legible–unlike the earlier design with US, Japanese and Australian house prices where the text overlapped; in the second, it’s an effort to read, partly because of the coloured text–but I want at least one shirt with a full range of colours.

I’ll alternate wearing the T-shirts on different days and stages of The Walk, and I will suggest to the (so far) three people who are going to do the whole route with me that we each wear one of them at the start at Parliament House.

I have also changed to the modern and linguistically accurate spelling of Kosciuszko, and I’ve added the references to the two blogs on the front of the shirt as well as the back, following suggestions from the blog.

Each of the shirts has a graphic to tell part of the story about why we’ve had a house price bubble–debt, government manipulation with the FHVG, and time. There were one or two suggestions about doing the T-shirt with just words (and adding an answer to the question).

I’d prefer to keep some information content in them that may be relevant in a future when the bet itself is no longer remembered.

All that makes the T-shirts rather busy–which detracts from the aesthetics–but in the balance between information and appearance, I’ll bias in favour of the former.

The only shirt I’m unsure of is the last, showing mortgage debt to both household disposable incomes and GDP (the reason I have both there is that the fall in the ratio to disposable income at the end was because the impact of the government’s stimulus package and RBA rate cuts on household disposable income was actually larger than the increase in mortgage debt caused by the FHVB; that’s why that ratio fell while the mortgage debt to GDP ratio rose).

So the five designs are:

David Loglisci, who was Hevesi's chief investment officer, has agreed to dish to investigators for Attorney General Andrew Cuomo on a culture of corruption that existed in the office.

Loglisci had been charged along with top Hevesi political consultant Hank Morris of steering lucrative pension fund business to companies that agreed to pay kickbacks.

Morris is said to have received more than $25 million in pension-related fees during the four years Hevesi was in office.

Loglisci is the highest-ranking Hevesi official to plead guilty during the nearly three-year probe.

Loglisci said he was instructed by senior office officials to obtain Morris' approval prior to making recommendations on proposed investments.

He also said Morris had complete control over the pension fund's alternative investment portfolio and doled out business to those who paid him lucrative fees or contributed to Hevesi's campaign.

Those who refused were denied business.

"With today's plea, a former top official overseeing the state's single largest asset admitted that decisions were driven by politics and greed - not the best interests of the fund or its beneficiaries," Cuomo said.

"Not only were pension recipients defrauded but so were the taxpayers across New York who are ultimately responsible for sustaining the fund."

Loglisci's brother, Steven, a film producer, also benefitted. Various firms paid Loglisic hundreds of thousands of dollars to help finance a poorly received movie, "Chooch."

And he detailed how Morris was paid as a political consultant while also having financial interests in various proposed investments. Morris also made investment decisions for the office, including on deals in which he had ties, Loglisci admitted.

Loglisci pleaded guilty before Manhattan Supreme Court Justice Bart Stone and was released on his own recognizance with travel restrictions.

He faces a possible sentence of up to 1 1/3 to 4 years in prison for the charge of a felony violation of the Martin Act, a class E felony.

In Capitol jargon it means the Legislature's holding hearings or conducting investigations into how state programs are functioning.

Steinberg, in fact, has created a Senate Office of Oversight and Outcomes and staffed it with ex-newspaper reporters, supposedly to do the same kind of deep drilling they did in journalism.

Committees in both legislative houses are doing what they say are oversight hearings on various matters.

There have been some noteworthy oversight efforts in years past, such as investigations into former Insurance Commissioner Chuck Quackenbush's virtual shakedowns of insurers for political slush funds, and former Gov. Gray Davis' award of a big computer contract to a campaign contributor.

More recently, however, "oversight" has tended either to focus on relatively minor issues, or be grandstanding, such as Republican Sen. Jeff Denham's hearing last week on veterans' home services in Fresno, where he's seeking a congressional seat.

Back to Steinberg's Office of Oversight and Outcomes. He's hired some talented journalists, but so far they haven't produced much of lasting import. Recently, it generated a third report that was critical of Gov. Arnold Schwarzenegger's furloughs of state employees.

That's an important issue to public employees and their unions, and Steinberg's Sacramento district has a heavy contingent of unionized state workers. But it's hardly a bedrock issue for 38 million Californians.

Steinberg spokesman Nathan Barankin said the unit chooses its own topics to investigate, and the importance of the findings is "in the eye of the beholder."

So what might be more important targets for legislative gumshoes? How about the scandal at the California Public Employees' Retirement System over huge payments to "placement agents" who obtain multibillion-dollar investments for their clients? Many of them have been money losers, adding to the fund's huge value decline that taxpayers will have to cover.

How about the anomaly of CalPERS buying a $600 million chunk of Apollo Global Management, a conspicuous employer of placement agents, only to see that stake decline by more than 75 percent? How about a belated examination of how and why Apollo founder Leon Black persuaded U.S. Rep. John Garamendi, then the state insurance commissioner, to seize the junk bond portfolio of a big insurance company and then resell it some to some shadowy French investors for billions less than its value?

But wait. The same unions that hate furloughs also control the CalPERS board that made those sucker bets. Just a coincidence?

When the Legislature stops wasting taxpayer- financed time on trivia and bores into the CalPERS debacle, maybe we'll take its "oversight" seriously.

The propensity for corruption at public pension funds is extremely high. How high? I trust nobody and assume that at any given time, some senior public pension fund managers are on the take. Oversight is meaningless unless you have mechanisms in place to deter fraud and stop it before it occurs. I have long argued that every unit of a public pension fund should be subjected to an annual independent, comprehensive fraud audit, preferably done by experienced certified fraud examiners.

The same goes for an independent performance review of various investment activities. If you got guys gaming their benchmarks, they're defrauding the plan sponsor and stakeholders. Ignoring the problem only feeds a culture of corruption, enriching pension fund managers for delivering mediocre results. At one point, regulators have to put a stop to this gross injustice or else they're complicit in the plundering of public pension funds.

I was thrilled to see the large outpouring of emotion from the demonstration protesting the evisceration of the University. I have not seen anything like this since the Vietnam protests of the early 70s.

In Chico, before I came, people were so disgusted with the apathy about the war, that they carried out what may perhaps have been the world’s only grovel-in.

The organizers did an outstanding job of preparation and execution; they did so with considerable maturity.

Still, I wished that they had a broader perspective. For example, I did not have any sense of a connection with the local community college or with K-12 education.

In many ways, California is undergoing a self-induced (by a powerful minority) structural adjustment. The problem is not a matter of taking advantage of students and faculty. People are resisting the same forces in Iceland and Greece. Even worse, structural adjustment is only episodic in such advanced countries. In poorer nations, structural adjustment is the norm.

Just as national austerity is not the result of an impoverished state, but perverted priorities, which emphasize war and pork barrel politics. In California, where massive funds go to irrigate agriculture lands to grow crops which could be more economically grown elsewhere. Oil funds, which were intended for higher education, have also been siphoned off for water. To make matters worse, the state is intending to float multibillion bond offerings for water.

In an institution, where education is the norm, students should be getting to learn about how much they have in common with people whose struggles are far worse than their own.

The most common chant: “Whose University is it? Ours.” I found this approach naïve. Students and faculty need to reach out to a broader swath of people experiencing structural adjustment. Home health care workers are getting screwed. Unemployed workers are worse off than most students ….

Imagine if the antiwar protests were just about not wanting to be drafted. Would they have any effect?

1) Ryan Avent: Fiscal policy: The "treading water" stimulus:

HERE is some food for thought, via Tyler Cowen: "This note shows that the aggregate fiscal expenditure stimulus in the United States, properly adjusted for the declining fiscal expenditure of the fifty states, was close to zero in 2009. While the Federal government stimulus prevented a net decline in aggregate fiscal expenditure, it did not stimulate the aggregate expenditure above its predicted mean." There are a lot of interesting issues to explore here. Was monetary policy running even tighter than expected, as the Fed partially offset a fiscal stimulus that wasn't, in fact, there? What does this say about the state of fiscal federalism in America? And why isn't federal aid to states more popular, and popular enough to get through Congress, given that nearly every American lives in one?

2) Sarah Palin:

We used to hustle over the border for health care we received in Canada...

3) Sebastian von Morley: State Tax Tweak Show:

By California law, income specifically excludes compensation for false imprisonment and reparations to those oppressed by the Ottoman Empire between 1915 and 1923.

4) DELONG SMACKDOWN OF THE DAY: Robert Waldmann: "A Shortage of Safe Assets":

James Wimberley is very smart. He knows that an imbalance between supply and demand can be eliminated by a shift in supply, demand or prices. If Treasury securities paid 0 real not 2% real, those who demand safe assets would demand less and other assets would become pretty safe (it is hard to go bankrupt paying r equals a quality premium so the quality premium would be low so it would be real hard to go bankrupt). The problem is not demand for safe assets. It is demand for high yielding safe assets combined with self deception about which assets are safe. Brad DeLong knows this too. DeLong and Wimberley are using any argument to hand. They support a higher deficit (so do I) and make up a true shortage of safe assets based on evidence of an irrational belief that there must be high yielding safe assets. DeLong Smackdown watch duty calls. A friend in need is a friend indeed and a friend asked us to smack him down.

5) STUPIDEST THING I HAVE SEEN TODAY: Citi CEO Vikram Pandit's claim that Citi's woes were due to "short selling," as obsered by Tom Braithwaite and Alan Rappeport: Pandit blames Citi’s woes on short selling:

Vikram Pandit, chief executive of Citigroup, on Thursday blamed short selling rather than any self-inflicted weakness for the bank’s near-collapse in 2008 and thanked taxpayers for its government bail-out. His comments, made in testimony to the bipartisan Congressional Oversight Panel, will be disputed by many analysts who identified fundamental problems with Citi’s balance sheet. “There were a number of instances post the Lehman collapse ... where the markets were not really functioning in a rational way – they were frozen,” Mr Pandit said. “There are ways that fear overtakes it and that’s the tool that short sellers need to make money.” Short sellers borrow stock in a company, sell it and hope to buy it back at a lower price.

Mr Pandit added: “This was not a fundamental situation. It was not about the capital we had, not about the funding we had at that time. Christopher Whalen, managing director of Institutional Risk Analytics, took issue with Mr Pandit. “His bank has got the highest [credit] loss rate of any of the big four,” he said. “The shorts were just responding – the emperor had no clothes.” Mr Pandit said Citi had repaid $20bn in bail-out funds, and paid $3bn in dividends to the government and $5.3bn in premiums on the asset guarantee programme. The US holds a 27 per cent stake in Citi...