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Money and the European Credit Crisis

It would be reasonable - and it sure is tempting - to dedicate this week's CBB to a skeptical look at Europe's latest plan for Credit crisis resolution. I would not be without plenty of company. So I'll instead go in a different direction. This week I found my thoughts returning back about 12 years to my earliest Bulletins. Inspired by the great Austrian economist Ludwig von Mises, my introductory article discussed the need for a contemporary Theory of Money and Credit. Not only was modern economics devoid of monetary analysis, there were critical changes unfolding within U.S. Credit that were going completely unappreciated.

Importantly, Credit creation was gravitating outside of traditional bank lending channels and liability creation. Fannie, Freddie and the Federal Home Loan Bank system had evolved into major risk intermediaries and Credit creators. I began by arguing against the conventional view that "only banks create Credit." Securitization markets were exploding in volumes, both in mortgage and asset backed securities. I was focused on the lack of constraints on this new Credit mechanism that operated outside of traditional bank capital and reserve requirements. In contrast to the antiquated bank loan and deposit "multiplier effect" explained in economic texts, I referred to this powerful new dynamic as an "infinite multiplier effect." Borrowing from Murray Rothbard, new Credit was created "out of thin air."

And the more I studied monetary history the more I appreciated the importance of both money and Credit theory. It became clear to me that money had for centuries played such a profound role in economic cycles (and monetary fiascos). Yet this type of analysis was extinct. Even within the economics community, there was not even a consensus view as to a definition of "money." There had been decades of bickering about what monetary aggregate to use in econometric models (M1, M2 or the newer M3), along with what measure of "money" supply should be monitored and managed by the Federal Reserve. Especially in light of all the financial innovation and new financial instruments, the economics profession and the Fed punted on monetary analysis. Out of sight and out of mind.

Even if one was focused on the issue, the importance of traditional monetary analysis was lost in myriad new complexities. Yet my study of monetary history and research of contemporary Credit convinced me that the analysis of "money" likely had never been more critical to the understanding of (extraordinary) market and economic behavior. I was intrigued by Mises work on "fiduciary media," the financial claims that had the economic functionality of traditional (narrow) money. I began to view contemporary "money" as "money is as money does." And I was especially struck by monetary analysis from the late American economist Allyn Abbott Young. Young wrote brilliantly about the historical "preciousness" of money.

And the more I studied, contemplated and pieced together analyses from scores of monetary thinkers, the more it became clear to me that "money" was critically important because of its special attributes. In particular, money created unusual demand dynamics: essentially, economic agents always wanted more of it and this insatiable demand dynamic created a powerful proclivity to issue it in excess quantities. Keep in mind that a boom financed by junk bonds will pose much less risk (its shorter lifespan will impart less structural damage) than a protracted Bubble financed by "AAA" agency securities and Treasury debt.

Centuries of monetary fiascos made it clear that money had better be backed by something of value and of limited supply (i.e. gold standard) to ensure that politicians and bankers did not fall prey to the same inflationary traps that had repeatedly destroyed currencies and economies across the globe.

While it became fanciful to speak of New Eras and New Paradigms, I saw a world uniquely devoid of a monetary anchor. There was no gold standard and no Bretton Woods monetary regime. And I saw an ad hoc dollar reserve standard, one that was for awhile somewhat restraining global Credit, begin to disintegrate from the poison of runaway U.S. Credit excess and intransigent Current Account Deficits. Marketable debt accounted for the majority of new Credit creation and these new financial sector liabilities were enjoying extraordinary demand in the marketplace. This marketable debt could also be readily leveraged (at typically inexpensive rates "pegged" by the New Age Federal Reserve) by a mushrooming leveraged speculating community, adding only greater firepower to the Credit boom. Over time, the U.S. Credit system exported its Bubble to the rest of the world.

From my perspective, contemporary "money" was just a special - the most "precious" - type of Credit. "Money" had become nothing more than a financial claim that was trusted for its "moneyness" attributes: chiefly, a highly liquid store of nominal value. This new "money" was electronic and incredibly easy to issue in unfathomable quantities. The vast majority of this Credit was created in the process of asset-based lending (real estate and securities finance), and the more that was issued the greater the demand for these "money-like" financial claims. The world had never experienced "money" like this before, and I suspected that the world would never be the same.

In this brave new financial world dominated by one incredible global electronic general ledger of debit and Credit journal entries, "moneyness" became little more than a market perception. If the market perceived a new financial claim was liquid and "AAA," then there essentially became unlimited demand for this "money." Not unexpectedly in such circumstances, this "money" was issued in gross excess. And most of it was created in the process of financing the real estate and securities markets. At the late stage of the boom, a hugely distorted marketplace saw Trillions of risky subprime mortgages sliced and diced into mostly "AAA" "money"-like Credit instruments. Importantly, a distorted marketplace believed that Washington would back GSE obligations and that the Treasury and Fed would ensure the stability of mortgage and housing markets.

The 2008 crisis was really the result of Wall Street risk intermediation and structured finance losing its "moneyness." When the mortgage finance Bubble burst, the market quickly questioned the Creditworthiness and liquidity profile of Trillions of debt instruments. And as finance abruptly tightened, asset market Bubbles popped and maladjusted economies faltered. The "moneyness" phenomenon came back to haunt financial and economic systems. Not only had years of monetary inflation impaired underlying economic structures, a huge gulf had developed between the markets' perception of the "moneyness" of the debt instruments and the Bubble state of the asset markets underpinning an acutely fragile (Hyman Minsky) "Ponzi Finance" Credit structure.

I have posited that the policy response to the 2008 crisis - monetary and fiscal, at home and abroad - unleashed the "global government finance Bubble." Essentially, massive government debt issuance, guarantees and central bank monetization restored "moneyness" to U.S. and global Credit. I have argued that this course of policymaking risked impairing the Creditworthiness - the "moneyness" - of government debt markets, the core of contemporary monetary systems.

At its heart, the European crisis is about the escalating risk that the entire region's debt could lose its "moneyness." Starting with the introduction of the euro, the market perceived that even Greek debt was money-like. Despite massive deficits, a distorted marketplace had an insatiable appetite for Greek, Irish, Portuguese, Spanish and Italian debt. Importantly, the markets believed that European governments and the European Central Bank would, in the end, back individual government and banking system obligations. It proved another historic market price distortion.

Treasury and Federal Reserve backing restored "moneyness" to Trillions of suspect financial claims back in 2008 - and since then massive federal debt issuance and Federal Reserve monetization have reflated asset markets and sustained the maladjusted U.S. economic structure. The markets enjoyed an incredible windfall, and many these days expect European politicians and central bankers to similarly reflate eurozone Credit and economies.

I believe strongly that the Credit recovery and tepid U.S. economic recovery came at an extremely high price: dynamics that ensure the eventual loss of "moneyness" for U.S. government Credit, the heart of our monetary system. Many expect Germany to use the "moneyness" of their Credit to ensure the ongoing "moneyness" for European debt more generally. The conventional view is that, at the end of the day, German politicians will do a cost vs. benefit analysis and realize that it will cost them less to backstop the region's debt than to risk a collapse of European monetary integration. The Germans, however, appreciate like few other societies the critical role that stable money and Credit play in all things economic and social. The Germans have refused the type of open-ended commitments necessary for the marketplace to again trust the Credit issued by the profligate European borrowers (and an incredibly bloated banking system).

European politicians have been desperately seeking some type of structure that would ring-fence the sovereign crisis to protect the "moneyness" of, in particular, Italian and Spanish borrowings. Increasingly, the consequences of a loss of "moneyness" at the periphery were weighing heavily upon the European banking system, with heightened risk of impairing "moneyness" at the core. This was critically important, as it was quickly limiting the options available for monetary crisis management. For example, faltering confidence in Italian debt and what an Italian debt crisis would mean to European and French banks was impacting market confidence in French sovereign Credit. So any crisis resolution structure that placed significant additional demands on French sovereign debt risked impairing the "moneyness" of French Credit at the core of the European debt structure. Understandably, the markets feared the crisis was spiraling out of control.

This week's grand plan was to bring in parties from outside the region - to use "money" from the IMF, the Chinese, the Bric nations, Japan, global sovereign wealth funds and such to backstop the "moneyness" of European debt. With their support, the European Financial Stability Facility will have the capacity to leverage to, it's said, $1.4 TN - providing the bazooka backstop that will ensure market confidence in European Credit generally.

Will it work? I highly doubt it, but it does buy some time - and the markets were content. It appeared to take near-term implosion risk off the table, which set the stage for a huge short squeeze and destabilizing unwind of hedges across virtually all markets. I assume the Chinese will move cautiously and, as always, work only in their self-interest. China will want assurances that their European investments are safe, which means they will want to avoid exposure to periphery and Italian Credit just like everyone else. And I suspect that EFSF debt will struggle to retain "moneyness," as markets fret over ongoing European Credit deterioration and the future of the euro currency. There may be grand plans and grand designs for a credible "ring-fence," but the critical issue of how to ensure ongoing Italian debt "moneyness" continues to prove elusive. Global risk markets were in virtual melt-up mode this week, yet Italian 10-year yields jumped 13 bps to 6.01%.

For the Week:

For the week, the S&P500 jumped 3.8% (up 2.2% y-t-d), and the Dow rose 3.6% (up 5.6 %). The Banks surged 7.5% (down 19.9%), and the Broker/Dealers jumped 9.0% (21.2%). The Morgan Stanley Cyclicals rose 7.0% (down 9.4%), and the Transports gained 4.1% (down 1.9%). The broader market was exceptionally strong. The S&P 400 Mid-Caps gained 5.7% (up 0.4%), and the small cap Russell 2000 jumped 6.8% (down 2.9%). The Morgan Stanley Consumer index increased 1.4% (down 1.4%), and the Utilities added 0.4% (up 11.0%). The Nasdaq100 rose 2.8% (up 8.3%), and the Morgan Stanley High Tech index jumped 4.3% (down 1.6%). The Semiconductors surged 6.5% (down 3.8%). The InteractiveWeek Internet index gained 4.0% (down 1.4%). The Biotechs jumped 4.8% (down 6.6%). With bullion surging $101, the HUI gold index jumped 12.6% (up 1.6%).

One-month Treasury bill rates ended the week at one basis point and three-month bills closed at zero. Two-year government yields were up one basis point to 0.28%. Five-year T-note yields ended the week 4 bps higher to 1.11%. Ten-year yields rose 10 bps to 2.32%. Long bond yields jumped 10 bps to 3.36%. Benchmark Fannie MBS yields were little changed at 3.30%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 10 bps to 98 bps. Agency 10-yr debt spreads declined 8 to negative 11 bps. The implied yield on December 2012 eurodollar futures fell 8 bps to 0.595%. The 10-year dollar swap spread declined 5 to 14.5 bps. The 30-year swap spread declined 2 to negative 24.5 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 17 to 114 bps. An index of junk bond risk declined 104 bps to 613 bps.

Debt issuance picked up. Investment-grade issuance this week included Verizon $4.6bn, Morgan Stanley $2.5bn, IBM $1.85bn, US Bancorp $1.25bn, Suntrust Banks $750 million, and CSX $600 million.

Junk bond funds saw inflows surged to a record $4.25bn (from Lipper). Junk issuance included Beagle Acquisition $375 million and Acadia Healthcare $150 million.

I saw no convertible debt issued.

International dollar bond issuers included Bank of Nova Scotia $2.9bn, Poland $2.0bn, Commonwealth Bank Australia $1.2bn, Codelco $1.15bn, BP Capital $2.0bn, Namibia $500 million, and Export Credit Turkey $500 million.

Greek two-year yields ended the week down only 5 bps to 73.08% (up 6,084bps y-t-d). Greek 10-year yields declined 75 bps to 22.35% (up 989bps). German bund yields increased 7 bps to 2.18% (down 78bps), while French yields declined 9 bps to 3.15% (spread to bunds fell 16 bps to 98 bps). U.K. 10-year gilt yields rose 8 bps this week to 2.61% (down 90bps). Italian 10-yr yields rose 13 bps to 6.01% (up 120bps), and Spain's 10-year yields increased 4 bps to 5.49% (up 5bps). Ten-year Portuguese yields sank 47 bps to 11.48% (up 490bps). Irish yields fell 15 bps to 7.98% (down 107bps). The German DAX equities index surged 6.3% (down 8.2% y-t-d). Japanese 10-year "JGB" yields rose 3 bps to 1.04 (down 1bps). Japan's Nikkei rallied 4.3% (down 11.5%). Emerging markets were much higher. For the week, Brazil's Bovespa equities index jumped 7.7% (down 14.1%), and the Mexico's Bolsa rose 4.8% (down 4.8%). South Korea's Kospi index rallied 5.0% (down 5.9%). India's Sensex equities index jumped 5.7% (down 13.2%). China's Shanghai Exchange rose 6.7% (down 11.9%). Brazil's benchmark dollar bond yields fell 18 bps to 3.59%, while Mexico's benchmark bond yields rose 17 bps to 3.72%.

Freddie Mac 30-year fixed mortgage rates slipped one basis point to 4.10% (down 13bps y-o-y). Fifteen-year fixed rates were unchanged at 3.38% (down 28bps y-o-y). One-year ARMs fell 4 bps to 2.90% (down 40bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 3 bps to 4.82% (down 38bps y-o-y).

Federal Reserve Credit declined $4.9bn to $2.833 TN. Fed Credit was up $425bn y-t-d and $550bn from a year ago, or 24%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 10/26) fell $11.5bn to $3.397 TN (6-wk decline of $77.9bn). "Custody holdings" were up $46.9bn y-t-d and $103bn from a year ago, or 3.1%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $1.274 TN y-o-y, or 14.2% to $10.228 TN. Over two years, reserves were $2.820 TN higher, for 38% growth.

M2 (narrow) "money" supply increased $6.3bn to $9.629 TN. "Narrow money" has expanded at an 11.2% pace y-t-d and 10.2% over the past year. For the week, Currency increased $1.6bn. Demand and Checkable Deposits declined $8.8bn, while Savings Deposits rose $13.3bn. Small Denominated Deposits declined $3.3bn. Retail Money Funds rose $3.3bn.

Total Money Fund assets were unchanged last week at $2.634 TN. Money Fund assets were down $176bn y-t-d and $172bn over the past year, or 6.1%.

Total Commercial Paper outstanding increased $11.8bn (15-wk decline of $276bn) to $961bn. CP was down $10bn y-t-d, with a one-year decline of $207bn.

Global Credit Market Watch:

October 25 - Bloomberg (Radoslav Tomek and Krystof Chamonikolas): "The euro area's credit quality is fading at an unprecedented pace, posing a risk to the region's main tool against the debt crisis as leaders struggle to convince investors they have the situation under control. The... average rating for the bloc, calculated by Bloomberg from the assessments of the three main evaluators, has worsened to 3.14, representing the third-best grade, from 2.12 in May 2010 when the European Financial Stability Facility was designed... The average is calculated by giving a numerical grade for each grading, where 1 is the highest, and adjusting it for each country's share of the EFSF guarantee. Seven of the 17 euro-sharing nations have had their ratings downgraded since the announcement of the facility..."

October 28 - Bloomberg: "European officials are studying the idea of an International Monetary Fund channel for money for their enlarged rescue fund, as China said it needed more detail on any potential plan before deciding whether to contribute. The European Financial Stability Facility may explore setting up a special purpose vehicle with the IMF, Klaus Regling, the EFSF's chief executive officer, said at a briefing in Beijing... Separately, Chinese Vice Finance Minister Zhu Guangyao said his government wants to hear about particulars such as the extent of loan guarantees to countries including Italy, and how the senior-debt portion would be structured."

October 28 - Bloomberg (Zoe Schneeweiss): "Europe's banks will need to increase capital by 106 billion euros ($150 billion) under tougher rules being introduced in response to the euro area's sovereign debt crisis, according to the European Banking Authority."

October 27 - Bloomberg (Jeff Black and Gabi Thesing): "European Central Bank council member Jens Weidmann said he's 'worried' about proposals to increase the firepower of Europe's rescue fund through leverage. 'The leverage instruments that have been tabled are similar in their design to those that helped to cause the crisis,' Weidmann, who heads Germany's Bundesbank, said... 'I consider it very important that all aid extended to member states under threat should only be in the form of loans.'"

October 28 - DPA: "Germany's top court on Friday told the government it should stop relying on a selected group of lawmakers to obtain fast-track approval of eurozone bailout funds. Worried that interventions by the European Financial Stability Facility (EFSF) might need to be decided at a few hours' notice, Berlin planned to seek the approval of a panel of nine members of the parliamentary budget committee, rather than from the whole house. However, the Federal Constitutional Court issued a temporary injunction against its use until judges decide whether or not this is constitutional."

October 25 - Bloomberg (Nicholas Comfort and Aaron Kirchfeld): "Banks are pushing back against European leaders on the size of losses they are ready to accept on Greek bonds as officials struggle to rescue the debt-laden country while avoiding a default. There are limits 'to what could be considered as voluntary to the investor base and to broader market particpants,' Charles Dallara, managing director of the Institute of International Finance, an industry group that's participating in the talks on Greek debt, said in an e-mailed statement yesterday. 'Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default.'"

October 26 - Bloomberg (John Glover): "Junk-rated companies in Europe must refinance more than half of their outstanding debt in the next four years, leaving them vulnerable should the region's crisis drag on, according to Moody's... Borrowers in Europe, the Middle East and Africa have $325 billion of their $601 billion of bonds coming due by 2015... The amount maturing in the next four years has risen by $10 billion since 2010, while total debt surged $99 billion..."

October 26 - Bloomberg (John Martens): "Dexia SA faced margin calls of as much as 47 billion euros on Oct. 7, an increase from 31.3 billion euros at the end of June, as a drop in the yield on German government bonds led the bank's counterparties for interest-rate swap contracts to seek more collateral..."

October 28 - Bloomberg (Matthew Leising and Zachary R. Mider): "MF Global Holdings Ltd., the futures broker run by Jon Corzine, drew down on its revolving credit lines this week as the firm reported its biggest quarterly loss and had its ratings cut to junk by Moody's... and Fitch Ratings."

Global Bubble Watch:

October 26 - Bloomberg: "The Chinese government will fine-tune economic policy as needed, as the nation tries to fight inflation while protecting against global economic turmoil, Premier Wen Jiabao said. Officials will make adjustments at a 'suitable time and by an appropriate degree' and will maintain 'reasonable' growth in money supply, Wen said... The government will continue to make tackling inflation a top priority, Wen said."

October 27 - Bloomberg (Liam Vaughan and Gavin Finch): "European banks, which need to refinance more than $1 trillion of debt next year, may struggle to fund themselves until policy makers follow through on a pledge to guarantee their bond sales. European Union leaders promised this week to 'urgently' look at ways to guarantee bank debt in a bid to thaw funding markets frozen by the sovereign debt crisis. Lenders have found it hard to sell bonds for the past two years and have increasingly turned to the European Central Bank for unlimited short-term emergency financing."

Currency Watch:

October 27 - Bloomberg (Paul Dobson): "Currency-trading strategies are losing the most in two decades as the volatility that's boosted volume and profits for investment banks erodes the ability of investors to make money. Three out of four Royal Bank of Scotland Group Plc indexes of foreign-exchange trading strategies are down this year, including a 2.7% drop through September for its carry trade index. Deutsche Bank AG's dollar-denominated Currency Returns Index has fallen 3.4%, the biggest drop since a 4% slide in 1991. The Stark Currency Traders Index and the Barclay Currency Traders Index have declined by 8.6% and 0.4%."

The U.S. dollar index declined 1.7% this week to 75.089 (down 5.0% y-t-d). For the week on the upside, the Brazilian real increased 6.2%, the Mexican peso 5.2%, the South African rand 4.1%, the South Korean won 3.9%, the Australian dollar 3.1%, the Swedish krona 2.7%, the Singapore dollar 2.5%, the Norwegian krone 2.4%, the New Zealand dollar 2.2%, the Swiss franc 2.2%, the Danish krone 1.9%, the euro 1.8%, the Canadian dollar 1.5%, the Taiwanese dollar 1.4%, the British pound 1.1%, and the Japanese yen 0.6%.

Commodities and Food Watch:

The CRB index jumped 3.9% this week (down 2.9% y-t-d). The Goldman Sachs Commodities Index rallied 3.5% (up 3.3%). Spot Gold surged 6.2% to $1,744 (up 22.7%). Silver surged 13.1% to $35.29 (up 14%). December Crude jumped $5.92 to $93.32 (up 2%). November Gasoline was little changed (up 9%), while December Natural Gas gained 2.5% (down 11%). December Copper rallied 15% (down 17%). December Wheat increased 2.0% (down 19%), and December Corn gained 0.9% (up 4%).

China Bubble Watch:

October 25 - Financial Times (Jamil Anderlini): "China's largest real estate developer believes the country's property market... has turned and expects conditions to worsen in the coming months as sales prices volumes decline further. China Vanke, the country's biggest developer by market share, said government efforts over the past year to rein in soaring prices were having a severe impact on the market and developers were being squeezed after sales volumes in 14 of the country's largest cities halved in September from a year earlier. 'We can see a trend of declining sales, especially in the major cities,' Shirley Xiao, executive vice-president at China Vanke, said... 'Prices have begun to decline little by little so we think even buyers who are able to buy will choose to wait for now because they're targeting even lower price cuts."

India Watch:

October 25 - Bloomberg (Kartik Goyal): "India raised interest rates for a 13th time since the start of 2010 and signaled it's nearing the end of its record cycle of increases as the economy cools."

Latin America Watch:

October 27 - Financial Times (Joe Leahy): "Credit in Brazil grew in September at its fastest monthly rate this year in a sign of the resilience of domestic demand in Latin America's largest economy in contrast to weakness in Europe and the US. The loan data from the central bank come as a separate study shows property prices in some of the biggest cities are continuing to rise at an average of 22-28% a year in spite of cooling in the overall economy."

October 26 - Bloomberg (Ben Bain and Jonathan J. Levin): "Surging volatility in the Mexican peso is driving auction demand for the country's shortest-term bills to a 16-month low. Cetes, as the 28-day securities are known, drew bids of 18.8 billion pesos ($1.4bn) for the 6.5 billion pesos offered in yesterday's auction..."

Unbalanced Global Economy Watch:

October 25 - Bloomberg (Angeline Benoit): "Spain will struggle to meet its deficit-reduction target this year as economic growth slows, threatening further debt-crisis contagion as Europe fails to erect a fail-proof firewall. 'They will never make it,' said Ludovic Subran, chief economist at credit insurer Euler Hermes SA in Paris. 'Our September forecast sees Spain's deficit at 7 percent' of gross domestic product this year, he said, adding that the prediction was made before the nation's credit rating was cut this month."

U.S Bubble Economy Watch:

October 28 - Bloomberg (Brian Faler): "Political dysfunction is often blamed for Congress's inability to curb the U.S. budget deficit. An even bigger obstacle may be the American public. A record 49% of Americans live in a household where someone receives at least one type of government benefit... And 63% of all federal spending this year will consist of checks written to individuals for which the government receives currently no services, the White House budget office estimates. That's up from 46% in 1975 and 18% in 1940."

October 26 - Bloomberg (John Hechinger and Janet Lorin): "Tuition and fees at U.S. public universities soared 8.3% this year, twice the rate of inflation, to an average $8,244, a College Board report found. Nonprofit private college costs rose 4.5% to $28,500."

October 28 - Bloomberg (Anna-Louise Jackson and Anthony Feld): "Restaurants are poised to raise prices as Americans become accustomed to more expensive food at grocery stores. U.S. consumers paid 2.6% more at eateries in September than last year, while food prices at supermarkets were 6.2% higher, according to the Bureau of Labor Statistics'..."

Central Bank Watch:

October 24 - Dow Jones (Karen Johnson): "Federal Reserve Bank of Dallas President Richard Fisher said he doesn't agree with suggestions that the Fed add to its portfolio of mortgage-backed securities... 'We need to have discipline in what we do and not just act for the sake of acting'... He said the U.S. central bank has done nearly all that it can to support the economy, and the ball is now in the court of the White House and Congress. 'We have been a very active central bank, re-liquifying the economy, and undertaking several initiatives,' Fisher said... 'It's not clear that Operation Twist works. The 10-year note has actually backed up, not gone down. It's not clear what impact this will have in spreads. And the goal is not to finance the U.S. government at cheaper rates, the real goal is to light a fire under private sector credit 'to stimulate job creation,' he said... 'The real problem lies with the U.S. fiscal authorities. They are dysfunctional in the United States. They can't agree what taxes they are going to impose on the American people and on American businesses. They can't agree what spending programs they are going to come up with that are going to affect the American people.'"

Fiscal Watch:

October 27 - Bloomberg (Heidi Przybyla): "The congressional supercommittee seeking a long-term debt-reduction deal remains at an impasse with a deadline near, and the prospect of failure is prompting concern about further downgrades of the nation's credit rating. With the committee heading into what may be a make-or-break week for striking a deal over a package of at least $1.2 trillion in deficit cuts, members are deadlocked over Democrats' insistence on tax increases, according to committee aides..."

Muni Watch:

October 27 - Bloomberg (Alex Wayne): "State spending in the U.S. on Medicaid will surge 29% this year, even as governors slash the health program's benefits and payments to hospitals and doctors, a survey showed."

October 25 - Bloomberg (Tim Jones): "It's a prairie puzzler in Illinois: What happened to all the money? Ten months after the largest tax increase in its history, Illinois is unable to give scheduled raises to its workers. The backlog of unpaid bills is $4 billion and years from resolution. The current budget, despite $7 billion in new revenue, isn't balanced. Businesses, even as they argue that government pension costs are unsustainable, will clamor for tax cuts... The Land of Lincoln now resembles that president's 'House Divided,' a cauldron of factions fighting over how to escape a financial crater years in the making. Unions fight Democrats, businesses threaten flight, and a poll shows that majorities of voters oppose cuts in education, public safety, the environment, aid to the poor and those with disabilities -- everything in the spending plan except pensions."

October 25 - Bloomberg (Romy Varghese): "Pennsylvania Governor Tom Corbett declared an emergency in Harrisburg that allows him to assume financial control and name the state's first municipal receiver."

October 26 - Bloomberg (Andrea Riquier): "U.S. state tax collections are heading for their seventh-straight quarter of growth, according to preliminary data released today by the Nelson A. Rockefeller Institute of Government. The... institute said collections rose 6.8% in July and August, the first two months of the third quarter, compared with the same period in 2010."

Real Estate Watch:

October 27 - Bloomberg (Katie Spencer): "Home prices in the Hamptons, the Long Island beach towns that attract summering Manhattanites, surged 22% in the third quarter from a year earlier as demand climbed for the most expensive properties. The median price of homes sold in the quarter increased to $850,000 from $696,000 in the same period last year..."


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