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Mark Gongloff   |   November 4, 2013    1:06 PM ET

The next time a Republican tells you government spending is out of control, the chart below is all you need to prove otherwise.

The Financial Times has a story on Monday that is long and paywalled and not all that surprising to anybody who has been watching Republicans squeeze the life out of the economy for the past four years or so. Still, it's a story worth telling again and again, and it can be summed up in its opening paragraph:

"Public investment in the US has hit its lowest level since demobilisation after the second world war because of Republican success in stymieing President Barack Obama’s push for more spending on infrastructure, science and education," write Robin Harding, Richard McGregor and Gabriel Muller.

And they have a helpful chart to illustrate this, which I have reproduced here using data from the Bureau of Economic Analysis (story continues after chart):

investment

Government investment is what the government sector spends on buildings and equipment and research and development. It fell in the second quarter of 2013 to 3.6 percent, the lowest level since 1948. This is because, driven by Republicans' newfound religion about deficits, a conversion that miraculously occurred on Inauguration Day 2009, the U.S. government has slashed spending by the largest amount since the end of the Vietnam War, The New York Times reported earlier this year.

That is austerity, and it's a big reason -- maybe the big reason -- the recovery has been so sluggish. Yet Republicans still aren't satisfied, wanting another round of cuts, which is why we'll probably have another destructive budget fight all over again early next year.

Mark Gongloff   |   November 1, 2013   11:58 AM ET

Austerity isn't just hurting the U.S. economy: It's also starving Wall Street's watchdogs.

The Commodity Futures Trading Commission has decided not to press charges against two traders in the "London Whale" case partly because it is so strapped for cash, its former chief enforcement officer, David Meister, told the Wall Street Journal. The CFTC is also slowing down investigations and laying off staff as a result of its funding crunch.

"We will do everything we can… but we have limited staff and limited resources," Meister, who stepped down this week, told the WSJ. "Ultimately, it comes down to the math."

House Republicans, as you may know, have made it pretty hard for the CFTC to do its job lately. They've repeatedly rejected requests for more CFTC funding and most recently turned down a raise for the agency to $315 million from $195 million. Of course, the agency's budget was already squeezed by the automatic spending cuts of the sequestration.

Republicans seem to think that the CFTC's budget, up from just $111 million five years ago, is more than enough. But as Bloomberg Businessweek pointed out on Friday, the markets under the CFTC's jurisdiction have gotten more than ten times bigger. (And as the WSJ notes, CFTC fines have paid for the agency's $195 million annual budget many times over.)

During the government shutdown, which was caused by House Republicans, the CFTC was unable to watch markets for several weeks. And as the government shutdown began, the CFTC was handed a critical new task, based on the Dodd-Frank financial-reform law, of watching the $600 trillion -- that's "trillion," with a "t" -- market for swaps. These derivatives were at the heart of the financial meltdown in 2008. The CFTC was already struggling to keep an eye on the $37 trillion -- again, "trillion," with a "t" -- futures market.

Just last week the agency said it will have to furlough its workers for 14 days during the current fiscal year, simply to make ends meet.

"In handing the swaps market to the CFTC, Congress gave its biggest, hardest regulatory task to one of the smaller agencies in Washington," Bloomberg Businessweek's Matthew Phillips wrote.

There are at least some mitigating circumstances when it comes to those "London Whale" cases. The two former JPMorgan Chase traders the CFTC wanted to charge, Julien Grout and Javier Martin-Artajo, have already been charged in criminal and civil court by federal prosecutors and the Securities and Exchange Commission. Both are accused of covering up the massive losses racked up by JPMorgan's chief investment office last year on credit-derivatives trades. Both have repeatedly denied the accusations.

Despite limited funds, the CFTC has been a remarkably aggressive regulator, especially in the three years of Meister's term as enforcement chief, when it filed nearly 300 enforcement actions, roughly double the amount of the previous three years. It took the lead on cracking down on manipulation of the London Interbank Offered Rate, a key short-term interest rate that is apparently just manipulated constantly by every major bank in the world, raising $1.8 billion so far in fines.

It also got JPMorgan to pay $100 million in fines in the "London Whale" case, making use of a brand-new law, much-hated by Wall Street, against market manipulation.

But the agency's enforcement was down by a fifth in the latest fiscal year, according to the WSJ, largely due to budget constraints. And it has the same staffing level it had in 2002, when financial markets were much smaller and much less complex.

Now Meister is leaving, and he will soon be followed by CFTC chief Gary Gensler, who has been a surprisingly tough regulator in his four years at the helm. The CFTC's paltry funding makes recruiting replacements for them even tougher than usual. Hopefully there are plenty of smart, civic-minded people out there who like a challenge. The problem is that the challenge may be impossible.

Mark Gongloff   |   October 31, 2013    2:11 PM ET

It's a Halloween miracle: A member of the 1 percent is fighting for the rest of us, and probably spooking the hell out of his own kind.

Wealthy people need to stop whining about the taxes they pay, realize their success is mostly dumb luck and pay even higher taxes to help the less fortunate, Bill Gross, the billionaire founder and chief investment officer of Pacific Investment Management Co., wrote to his wealthy investors on Thursday.

"Having gotten rich at the expense of labor, the guilt sets in and I begin to feel sorry for the less well-off," Gross writes in his latest monthly missive, entitled "Scrooge McDucks," posted on the website of PIMCO, the world's biggest bond fund. His letters are usually colorful and sometimes self-critical. But this one is notable for its direct mockery of his own wealthy peers and clients:

Admit that you, and I and others in the magnificent '1%' grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living.

But Gross is not just assuaging his personal guilt by penning a cri de wallet: He suggests the soaring income inequality of the past few decades is a serious problem for the entire U.S. economy:

Developed economies work best when inequality of incomes are at a minimum. Right now, the U.S. ranks 16th on a Gini coefficient for developed countries, barely ahead of Spain and Greece. By reducing the 20% of national income that “golden scrooges” now earn, by implementing more equitable tax reform that equalizes capital gains, carried interest and nominal income tax rates, we might move up the list to challenge more productive economies such as Germany and Canada.

He joins another billionaire, America's grandfatherly mascot of capitalism, Warren Buffett, in calling for higher taxes on the wealthy:

I would ask the Scrooge McDucks of the world who so vehemently criticize what they consider to be counterproductive, even crippling taxation of the wealthy in the midst of historically high corporate profits and personal income, to consider this: Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1% pay, consider how much of the national income you’ve been privileged to make.

Reading like a white paper from a lefty think tank, Gross notes that the 1 percent now take up 20 percent of U.S. income, up from 10 percent in the 1970s -- a fact he attributes at least partly to the massive tax cuts for the wealthy enacted by Presidents Ronald Reagan and George W. Bush.

Gross also points out that the wealthy have gotten all of the benefit of the explosive rise of the financial sector over the past several decades, along with a 30-year decline in interest rates. Together, these two factors lined the pockets of the wealthy, but left everybody else behind (emphasis added):

Yes I know many of you money people worked hard as did I, and you survived and prospered where others did not. A fair economic system should always allow for an opportunity to succeed. Congratulations. Smoke that cigar, enjoy that Chateau Lafite 1989. But (mostly you guys) acknowledge your good fortune at having been born in the ‘40s, ‘50s or ‘60s, entering the male-dominated workforce 25 years later, and having had the privilege of riding a credit wave and a credit boom for the past three decades. You did not, as President Obama averred, “build that,” you did not create that wave. You rode it. And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions.

Did you catch that poke at Republicans, who essentially themed their entire 2012 convention around mocking Obama for saying "you didn't build that"? Obama and Gross probably meant slightly different things, but both caused monocles to pop from wealthy eye sockets all around the country.

But Gross has not yet begun to poke! He also jabs at financial muckraker Carl Icahn, who lately has been agitating for Apple to pay its shareholders a bigger dividend. Gross recently got into a Twitter war with Icahn over this, suggesting Icahn's time might be better spent in philanthropy than corporate shakedowns. Gross takes the fight several steps further in his letter, suggesting the Icahns of the world are part of our economy's bigger problem:

If X can’t grow revenues any more, if X company’s stock has only gone up because of expense cutting and stock buybacks, what does that say about the U.S. or many other global economies? Has our prosperity been based on money printing, credit expansion and cost cutting, instead of honest-to-goodness investment in the real economy?

In a past life I made a lot of fun of Gross for bad calls he made. But I'm glad to say that, if this bond-fund thing doesn't work out for him (hint: it's working out just fine), I'm pretty sure he's HuffPost material.

Mark Gongloff   |   October 31, 2013    8:50 AM ET

Robert Shiller is a smart man who just said a dumb thing.

Shiller, a Nobel-Prize-winning Yale economist, suggested on Wednesday that Goldman Sachs would be a better employer for young people with a "moral purpose" than Google, according to Business Insider.

"When you study finance, you are studying how to make things happen, on a big scale, on a lasting scale. That has to matter more than getting into Google and programming some little gimmick," Shiller reportedly said in a debate at The Economist magazine's Buttonwood Gathering in New York.

The debate was called "Goldman Vs. Google: A career on Wall Street or in Silicon Valley?" Shiller's opponent was Vivek Wadhwa, vice president at Singularity University, a Silicon Valley college-type thing co-founded by Google. Wadhwa seemed dumbfounded that the debate was even necessary.

"Would you rather have your children going and cooking up the financial system, engineering the financial system, and creating more bubbles for us?" Wadhwa reportedly said. "More bubbles like the ones my esteemed friend is famous for? Or would you rather have them saving the world?

"I can’t even believe I’m having this debate with a Nobel Prize winner," he added.

It is a little surprising that Shiller was the one taking the pro-finance side. As Wadhwa hinted, Shiller is celebrated mainly for his work on the study of financial bubbles, particularly the recently exploded housing bubble. These bubbles were created by the very financiers doing what Goldman Sachs CEO Lloyed Blankfein once infamously called "God's work." Shiller apparently has the religion.

Now, it is true, as Shiller suggests, that a small-business loan is probably a better thing for humanity than, say, Snapchat. In a slightly less-inflammatory writeup of the Shiller-Wadhwa debate in the New York Times, Shiller is quoted as saying Goldman vs. Google doesn't have to be an either-or proposition. The future Googles of the world will need financiers to get them started. The two go hand-in-hand.

And despite its self-admonishment to not "be evil," Google is trying to make a ton of money, as is most of the rest of Silicon Valley. They are not, generally, doing charity work. In fact, the bright, hot center of the universe of greedy douchebaggery has steadily been shifting toward Silicon Valley and away from Wall Street for a few years now.

On the other hand, it is ridiculous to dismiss Google's primary business -- a highly effective search algorithm used by the entire planet -- as "some little gimmick." It is plainly more beneficial to humanity than, say, the collateralized debt obligation.

The lines get fuzzier around things like Google Glass and mortgage-backed securities, which are both potentially useful and also potentially destructive.

But when Silicon Valley's creations go horribly wrong, they do not destroy the entire global economy, emptying government coffers and leaving millions unemployed for years. And in its pursuit of profit, Silicon Valley has not yet found a way to screw so many people so royally that it racks up more than $100 billion (and counting) in penalties and fines.

These key differences may be one reason why, as CNBC's John Carney noted on Wednesday, the "best and brightest" of young Americans are increasingly shunning careers on Wall Street. Just 27 percent of Harvard MBA graduates this year took jobs in finance, the lowest since at least 2006, when 42 percent went into finance. Eighteen percent of MBAs went into technology, compared with 7 percent in 2006. Finance still has the edge, but it is narrowing rapidly.

Mark Gongloff   |   October 29, 2013   11:35 AM ET

Debt scolds like Harvard economists Kenneth Rogoff and Carmen Reinhart constantly warn us that too much government debt causes terrible things like soaring interest rates and wrecked economies. History often disagrees.

Paul Krugman teased Rogoff and Reinhart about this on Tuesday with a chart he found on the Bank of England's website. It's a chart that shows 300 years of British debt and interest rates, which is just awesome in its own right, if you are the kind of geek that gets into that sort of thing. Adding to the risk of nerdgasm, the chart highlights England's "major war periods." (Story continues after chart.)

uk rates

The chart also directly contradicts the debt scolds. It shows many long stretches in which England carried a massive debt burden, particularly after its extended war orgy around the turn of the 19th century, which included the American Revolution and the War of 1812.

For several years, the ratio of England's debt to gross domestic product was way, way above 90 percent. That particular ratio is what Rogoff and Reinhart infamously decreed was a threshold beyond which horrible things happen to economic growth, because government borrowing crowds out private borrowing, causing interest rates to rise. They pushed this warning on policy makers, who used their research as intellectual justification for brutal austerity measures around the world, including the U.K.

Too late to save millions of jobs, Rogoff and Reinhart's work has since been shot full of more holes than the French fleet at Trafalgar, partly because, whoopsie, they left out historical examples in which nothing of the sort happened.

Krugman's chart is another such example. In it, you can see that England's debt-to-GDP ratio rose steadily for more than a century starting in 1700, reaching more than two times GDP by 1825. Contrary to the warnings of Reinhart and Rogoff, however, British interest rates fell steadily between 1800 and 1900. British interest rates skyrocketed in the late 20th Century, along with those of the U.S. and the rest of the world, even as British debt levels plunged from their World War II highs.

"You might think that these data, and the relationship they show — or, actually, don’t show — should have some impact on our current debate, especially given the tendency of many players to reject modeling and appeal to what they claim are the lessons of history," Krugman wrote in his blog on Tuesday. "Or are they claiming that this time is different?"

That last line was a barb aimed directly at Reinhart and Rogoff, authors of a book called "This Time Is Different," who have whined publicly and often about Krugman's harsh treatment of them.

Mark Gongloff   |   October 24, 2013    9:49 AM ET

JPMorgan Chase has racked up more than $31 billion in fines, penalties and legal settlements since 2009, according to a rough tally by The Huffington Post -- evidence the bank is too big to be safely managed.

Like pretty much every other day, Thursday was another bad-news day for America's biggest bank. The New York Times reported JPMorgan might be criminally charged for allegedly ignoring Bernie Madoff's Ponzi-scheming through a big chunk of the 2000s. This came just days after the bank cut a deal with federal regulators to pay $13 billion to settle charges it knowingly sold bad mortgage bonds ahead of the financial crisis. The bank is also close to settling similar mortgage-related claims with a group of private investors for nearly $6 billion, The Wall Street Journal reported on Thursday.

These latest estimated settlements -- along with dozens of other settlements that have included fines and restitution paid to regulators, investors and homeowners in the U.S., U.K. and elsewhere in the past five years -- have ballooned JPMorgan's total legal costs during that time to about $31.3 billion, by our count. The recent figures do not include the many investigations still ongoing, including probes into alleged manipulation of the LIBOR interest rate, alleged bribery in China and more. (Story continues after the infographic.)

A JPMorgan spokesman pointed HuffPost to the bank's regulatory filings, in which it periodically tells investors how much money it sets aside for legal costs. The bank earlier this month said it had $23 billion in reserves for such costs. The spokesman also pointed to CEO Jamie Dimon's annual letters to investors, in which Dimon discusses the pros and cons of being ginormous. The pros obviously include being able to digest $31 billion in legal costs with hardly any discomfort.

If you get all your news from the financial press, you might have the mistaken idea that these legal costs are the petty punishments of a government that hates success and redistributes wealth. Jon Stewart on Wednesday documented the spectacle of Jim Cramer, Maria Bartiromo, Charlie Gasparino and other JPMorgan apologists in financial news rushing to the bank's defense. Another member of JPMorgan's PR team, America's cuddliest capitalist, Warren Buffett, has also moaned this week about the shoddy treatment of JPMorgan and its sainted CEO.

As Stewart eloquently put it, "F*ck all y'all."

We and a few others have noted recently that JPMorgan is getting a sweet deal in paying only $13 billion (maybe $9 billion after tax breaks) to close the books on those alleged mortgage mis-sales, even if many of them were allegedly mis-sold by Bear Stearns and Washington Mutual, which JPMorgan bought during the financial crisis. JPMorgan knew the risks it was taking when it bought those companies, and has made way more cash from them than it is paying in fines.

And, yes, $30 billion is a lot of money. But that $30 billion is just the cost of doing business for JPMorgan, which has netted about $82 billion in profit since 2009. That figure includes the bank's $400 million loss in the third quarter, the one time the bank's legal headaches finally hurt its bottom line. The bank's stock price is near an all-time high, proving just how much damage these costs are doing -- by which we mean none.

To bleeding-heart liberals, the bank's missteps, including the complete management failure that led to the London Whale debacle, are reason enough for Dimon to lose his job. Losses like those in the third quarter might help convince more conservative types of the same thing. But as ProPublica's Jesse Eisinger points out, Dimon's job is probably safe. Nobody at the bank is calling for his head, and if Lloyd Blankfein can survive the whole "Vampire Squid" era at Goldman Sachs, then Dimon can probably survive this.

Anyway, firing Dimon might send a very useful message, but it will probably not keep the bank out of trouble. When you've got a global outfit with $2.4 trillion in assets, populated by bankers incentivized to take risks and push regulatory envelopes to keep turning profits, you're going to break rules. The bigger the bank, the more rules get broken.

So the problem is not so much Dimon, but the fact that the bank is simply too big to fail and/or jail. A mere $30 billion in fines is plainly not enough to change the bank's course significantly. Getting it to admit wrongdoing, as the Securities and Exchange Commission has admirably done, won't change much, either. Prosecuting the bank for crimes might make a difference, but it is doubtful the Justice Department is going to take that risk.

If there's a silver lining, it's that the $30 billion in legal costs, along with JPMorgan's sinking reputation, have at least pushed the bank to keep a closer eye on its bankers and their rule compliance -- at least for the moment, while we're all paying attention. The bank is also dumping some businesses, including commodities warehousing and private equity, partly to avoid more regulatory stinkeye. That is helping keep it from getting any bigger, at the very least. So, there's that.

Mark Gongloff   |   October 21, 2013   11:42 AM ET

If JPMorgan Chase is a scapegoat, it is an extremely well-paid scapegoat: The crisis-era mergers that are costing the bank a small fortune in fines probably have racked up an even bigger fortune in profits.

Many on Wall Street, including the Wall Street Journal editorial page, are in a fit of rage over the news that JPMorgan has struck a tentative deal to pay $13 billion to settle federal charges that it sold bad mortgage securities to Fannie Mae and Freddie Mac ahead of the crisis.

The source of the rage is the fact that most of these securities were sold by Bear Stearns and Washington Mutual, two banks that JPMorgan bought in 2008 to help calm the financial crisis.

It seems JPMorgan is being punished unfairly for its kind-hearted assistance to the U.S. government at its darkest hour. That should make JPMorgan and other massive banks far less likely to come to the rescue in the next financial crisis, in Wall Street's view.

“My only hope,” bank analyst Gerard Cassidy of RBC Capital Markets sobs on the Wall Street Journal's MoneyBeat blog, “is that the next time a large financial institution gets into trouble and the government calls a large bank CEO to help with a bail out that he chooses not to pick up the phone.”

But before we start playing the world's smallest violin for America's biggest bank (by assets), it is worth remembering that JPMorgan and its CEO, Jamie Dimon, knew the risks when they bought Bear Stearns and Washington Mutual. They took the good with the bad, and there will likely be a lot more good from those deals than bad.

When asked for comment on this story, JPMorgan spokesman Joseph Evangelisti pointed to Dimon's annual letters to shareholders in the past two years, saying "he gives plenty of detail on the pluses and minuses of the WaMu and Bear purchases." You can read them for yourself, but I didn't see all that much detail in them. The 2010 letter has a little bit more detail, but no tally of the pros and cons.

In each letter, Dimon brags that the bank absorbed Bear Stearns and Washington Mutual without hurting its capital levels. That is at least partly because JPMorgan bought both banks at fire-sale prices.

The bank bought Washington Mutual essentially for free, paying $1.9 billion for a bank that had $40 billion in shareholders' equity just before the deal, and then recording a $2 billion profit on it immediately, The New York Times' Peter Eavis noted last month.

For Bear Stearns, JPMorgan ultimately paid $10 a share for a bank that a year earlier was worth $170 a share. It also got the Fed to cover possible losses from about $30 billion in risky Bear Stearns assets.

Though the WSJ editorial page claims JPMorgan was rushed into these deals without any due diligence, Eavis points out that bank officials repeatedly claimed to understand the risks they were taking.

"We have known Bear Stearns for a long time," the bank's chief financial officer said in a conference call in 2008. About the Washington Mutual deal, Dimon said, "Our eyes are not closed on this one."

At the time of the deals, JPMorgan estimated that Bear Stearns and Washington Mutual combined would add about $3.5 billion to net income annually, Eavis notes. If correct, that would add up to about $16 billion in extra profit since 2008, trumping the $13 billion in fines.

Of course, this is a super-simplistic approach to measuring the value of these deals. Banks make bad predictions all the time, and it's possible that JPMorgan has not made $16 billion in profit from Bear Stearns and WaMu in the past five years.

On the other hand, it is also possible that JPMorgan has made a whole lot more than $16 billion from these deals. As Fortune's Cyrus Sanati pointed out last year -- in response to Dimon grousing about Bear Stearns' legal problems -- JPMorgan's net interest income alone soared by $6 billion in 2008, partially because of all of the good, non-toxic assets the bank picked up from Bear Stearns. (Remember, the Fed took most of the toxic stuff.) Bear Stearns was such an amazing deal for JPMorgan that it quickly raised its offering price to $10 a share from $2, rather than let rivals pick up the scattered pieces of Bear Stearns, Sanati notes.

In several earnings releases after the deals, JPMorgan waxed enthusiastic about the benefits of Bear Stearns' brokerage and WaMu's massive retail-banking business. And while the government might be punishing JPMorgan on the one hand, it has been using the other hand to dole out too-big-to-fail borrowing subsidies and cheap Fed loans.

Clearly JPMorgan shareholders aren't taking the $13 billion in fines too seriously. The bank's share price was unchanged on Monday, not far from an all-time high. "It's becoming increasingly clear that investors are beginning to look past the headlines," Sterne Agee analyst Todd Hagerman wrote in a research note.

So the next time the government rings up a big-bank CEO and asks if he wants some basically free money, along with a side order of minor legal headaches, that big-bank CEO would be a fool not to pick up the phone.

Mark Gongloff   |   October 17, 2013   10:02 AM ET

With the government back open and the hellstorm of a U.S. debt default delayed, you're probably feeling pretty good about things, right? Like maybe we've thwarted the Tea Party's quest to destroy the U.S. economy? Sadly, no.

Although House Republicans seem to have failed miserably to ransom the economy over Obamacare or "spending" or "disrespect" or whatever the last three weeks of idiocy and terror were about, they actually won, Bloomberg Businessweek points out in its latest cover story. The deal Congress struck to get the government back to work and raise the debt ceiling maintains a Tea Party pogrom happening since at least 2010, slashing spending at the fastest rate since the end of World War II, according to Businessweek. Rather than helping the economy, the latest debt deal is another disaster for it in four very specific ways:

1. We Get To Do This All Over Again In January. The deal only pushes the fight down the road for a few months, keeping the government open until mid-January and raising the debt ceiling until early February -- just after Groundhog Day, fittingly -- which means the government might run out of cash to pay its bills by some time in March, the Washington Post notes.

2. The Harsh Spending Cuts Of The Sequester Are Still In Place. The Tea Party's fervor about debt and deficits, which purely out of coincidence blossomed immediately after the election of President Obama, has pushed the government into a series of belt-tightening measures, frustrating the economy's recovery from the worst recession since the Great Depression. In fact, government spending has been the weakest of any recovery since 1948, according to a study by the Economic Policy Institute, a left-leaning think tank. The latest round of brutal cuts, the sequestration that helped "solve" the Tea Party-driven fiscal-cliff crisis earlier this year, are still in place, dragging on the recovery and costing potentially three million jobs.

austerity

3. The U.S. Is Perilously Close To Being Downgraded Again. Nobody really cares what rating agencies think, we should point out right off the bat. But if two or three major agencies strip the U.S. of its AAA rating, that could force some investors to re-think their purchases of Treasurys, the Washington Post notes, which could cause issues in global markets. Standard & Poor's stripped the U.S. of its AAA rating in 2011 because of Tea Party shenanigans and was reportedly this close to downgrading it again in the latest round of dumbassery. And Fitch put the U.S. on a negative rating watch, meaning it could launch the deadly Downgrade Trident at any time.

4. The Whole Fiasco Is Still Hurting The Economy. The shutdown alone will likely cut 0.3 percent from economic growth in the fourth quarter, economists estimate. Ordinarily that would be recovered in the first quarter of 2014. But in the first quarter of 2014 we could be dealing with yet another debt crisis. Meanwhile, the uncertainty caused by our perpetual state of crisis is an endless drag on the economy, according to a recent study by Macroeconomic Advisers. That has already cost 900,000 jobs and will likely cost many more in the months ahead.

lost jobs

Mark Gongloff   |   October 14, 2013   12:34 PM ET

Wall Street may be starting to freak out a bit about the risk of a U.S. government default, but the rest of the world is playing it cool, or pretending to at least.

In recent days, banks have been dumping one-month Treasury bills that come due shortly after Thursday, Oct. 17, the day the Treasury Department says it will run out of cash to pay its bills, the Wall Street Journal reports. (This news is in line with earlier reports of such sales by Fidelity and J.P. Morgan Asset Management.)

After Thursday, Treasury may not be able to cover its daily obligations, including debt payments to those with Treasury bills, and there is a chance the government could even default on its debt. Such an event could possibly trigger a financial crisis that makes the Lehman Brothers bankruptcy look like a trip to Six Flags.

Despite this impending doom, at least some of Uncle Sam's foreign creditors are taking things pretty calmly, according to Bloomberg, which quotes government officials and investors from around the world saying they're holding on to their Treasury bonds.

“There’s no other way than for the U.S. government itself and the U.S. Congress to sort it out,” Japanese Finance Minister Taro Aso optimistically told Bloomberg Television. This is an important endorsement, as Japan happens to be the world's second-biggest holder of Treasury debt, after China, with $1.1 trillion.

Not everybody in the world is so sanguine. International Monetary Fund chief Christine Lagarde warned Congress it could push the world into another recession if it allowed a debt default.

And Bloomberg did not get a quote from anybody in China, the biggest holder of Treasury debt. And it seems unlikely, doesn't it, that a foreign government would really want to go on the record saying, "Hells yeah, we just dumped a whole bunch of this debt that we own." Which seems like a good way to start an international incident while also putting a dent in your bond portfolio.

Then again, President Obama probably wouldn't mind if the market started panicking a good bit more. That's what it might take to get Congress to finally stop futzing around and raise the government's borrowing limit and stave off disaster.

Markets so far have been in orderly retreat, with stocks down just a bit since mid-September. The interest rate on Treasury debt maturing right after the debt-ceiling breach jumped at the end of last week, but steadied as investors started hoping for a short-term solution from Congress. Stocks were only barely lower by midday on Monday.

The calm of the markets, and the rest of the world, will be more likely to fall apart the closer we get to Thursday without a deal.

Mark Gongloff   |   October 11, 2013   11:19 AM ET

If he hasn't lost it already, JPMorgan Chase CEO Jamie Dimon should probably lose his title as America's greatest banker. Maybe it's also finally time we talk about him losing his job.

JPMorgan, the biggest U.S. bank by assets, on Friday reported a $380 million loss in the third quarter. Its results were slammed by a flabbergasting $9.2 billion in legal expenses arising from the bank's many, many wrongdoings -- alleged and/or admitted -- all of which have occurred on the watch of Dimon, once considered the world's greatest bank CEO. These included settlements of alleged energy-market manipulation, allegedly bad credit-card practices, and admitted securities-law violations in its handling of the "London Whale" trading debacle last year.

The bank's quarterly legal hit was about 50 percent higher than the $6 billion or so it lost as a result of the London Whale scandal, which happened partly because Dimon commanded his staid chief investment office to take bigger risks, and it eagerly obliged. The bank has paid about $1 billion in fines so far because of that incident. The bank now spends more money on legal and regulatory battles than on anything else -- including worker salaries, rent or buying securities, Tim Fernholz points out in Quartz.

And there is more to come: JPMorgan is still trying to settle other government charges, including what could be an $11 billion tab for mortgage-debt sales ahead of the financial crisis. Most of that particular mess is not Dimon's fault, as most of the alleged wrongdoing was committed by Bear Stearns and Washington Mutual before JPMorgan bought those banks during the crisis.

Anyway, JPMorgan has set its legal reserves at an astonishing $23 billion, a giant lake of money from which plaintiffs' lawyers will be dipping for years to come. The kicker is that this bank, once widely considered the best-managed in the universe, also said on Friday that it was shocked, shocked by how much its legal expenses piled up in the quarter.

The giant quarterly loss was the first of Dimon's eight-year tenure as CEO, which has gone from storied to stormy. It erodes the main defense usually raised by his supporters -- a group that includes most JPMorgan shareholders, all of Wall Street, and most of the financial press, really -- that we should judge Dimon only on the money he makes and not by such niceties as making sure his bank isn't constantly getting into trouble.

That defense was on full, pathetic display recently on CNBC, when presenters Maria Bartiromo and Scott Wapner and Fortune columnist Duff McDonald ritually eviscerated liberal Salon blogger Alex Pareene because he dared to suggest that Dimon lose his job over the many embarrassments the bank suffered on his watch. Bartiromo, Wapner and McDonald didn't even bother to conceal their disgust with Pareene and his foolish suggestion.

"Should we talk about the financial strength of JPMorgan at this point?" blustered Bartiromo, who at one point literally threw her hands in the air in outrage. "I mean, even with all of these losses the company continues to churn out tens of billions of dollars in earnings and hundreds of billions of dollars in revenue. How do you criticize that?"

"This is preposterous," McDonald sneered at Pareene's idea. "The stock's touching a 10-year high, it's a cash-generating machine. Sure, they've had their regulatory issues, but he's looking to settle them expeditiously at this point, which is everything you want out of a CEO. It's an absurd suggestion."

And, sure, the bank is still making a lot of money, one quarter aside. It made $13 billion in profit in the first two quarters of the year, more than making up for its third-quarter loss. The stock price is indeed around a record high.

Then again, JPMorgan is almost certain to make tons of money no matter who is the CEO, be it Jamie Dimon or a blob fish. It is practically impossible for the world's biggest bank to fail, by virtue of it being, you know, Too Big To Fail. The epitome of Too Big To Fail, in fact.

It may also be, as Pareene suggested, impossible for any person or blob fish to manage a bank of such size and sprawl and keep it out of constant trouble.

But Dimon's unique hubris, his elephant-sized Truck Nutz, were what turned JPMorgan from a reputed paragon of banking strength into a lightning rod for public anger at the banking sector. Rather than being content to do God's work, Dimon has busied himself in the years since the crisis with constant whining and complaining about banking regulations, while darkly warning that any efforts to tie his bank's hands could result in economic catastrophe. Now his bank is Exhibit A for those who think banks aren't regulated enough.

Maybe this poetic justice is all Dimon deserves. It may be all he's going to get: Shareholders seem in no hurry to toss him. In fact, they recently made sure he'd keep both of his jobs at the bank, as CEO and Chairman of the Board.

But shareholders would go a long way toward restoring the reputation of the bank, and the entire sector, if they showed Dimon the door instead.

Mark Gongloff   |   October 9, 2013    1:09 PM ET

We have now reached the stage of the looming debt-ceiling crisis in which everybody starts making threat-level awareness charts.

Morgan Stanley economists on Wednesday announced that they were taking the economy to "DEFCON 3," saying there is a rising risk that House Republicans' refusal to raise the government's borrowing limit could cause real economic damage, as markets worry about the potential for a catastrophic debt default. (h/t Business Insider)

defcon 3

It's a riff on the U.S. military's "defense readiness condition," or DEFCON, made famous in the movie "War Games." (Story continues after video.)



On Morgan Stanley's DEFCON scale, a "5" represents total complacency about the risks of a debt-ceiling crisis hurting the economy, while a "1" means "economic demise is imminent." A "3" means they see "nascent signs of financial stress, and jitters are on the rise."

Meanwhile, the Washington Post's Wonkblog has been putting together its own handy doom-meter called the Daily Default Dashboard, using quantifiable market measures such as stock prices and bond yields. On Wednesday the Wonks raised their threat level to "Getting Kind Of Scary," their own version of DEFCON 3.

dashboard

Markets are still relatively calm, considering. The market's so-called "fear gauge," the Chicago Board Options Exchange volatility index, or VIX, has risen to its highest level since those terrifying days of June. If you don't remember what was so terrifying about June, you're not alone. It's a sign there's still not very much fear in the market. The VIX is still far away from where it was during the last debt-ceiling crisis in the fall of 2011. But we're getting there.

vix

Mark Gongloff   |   October 8, 2013    2:58 PM ET

Most financial markets are only slowly getting worried about the possibility of a U.S. debt default, but in one tiny corner of the bond market things are starting to look a little panicky.

Investors on Tuesday dumped one-month Treasury bills due for payment after October 17, the date the Treasury Department has warned it will no longer have the cash to pay all of its obligations unless Congress raises its borrowing limit, known as the debt ceiling. Every day that passes after that date raises the risk the government will default on some of its debt. These short-term bills will probably be the first to go unpaid.

As you can see in the following chart from bond-market tracker Tradeweb, Tuesday's selloff drove interest rates on these 1-month bills to higher levels even than during the August 2011 debt-ceiling crisis, which resulted in the U.S. government losing its "AAA" credit rating. T-bill rates are the highest since the Lehman Brothers collapse in the fall of 2008. (Story continues after chart.)

rate spike

Interest rates and bond prices move in opposite directions. When investors have less of an appetite for Treasury debt, the U.S. government has to pay higher interest to attract them. Already money-market funds, which traffic in short-term debt and took a beating during the Lehman crisis, are avoiding some U.S. Treasury debt, Reuters reports. That means U.S. borrowing costs go up.

Let's repeat that: As a result of House Republicans holding the U.S. debt ceiling hostage because of "spending" or "Obamacare" or "disrespect" or whatever their reason du jour, the U.S. government's debt situation will get worse. As a result of this spike in rates, the government is paying more to borrow for one month than it does to pay for one year, a freak occurrence.

We need to keep this scary chart in perspective. This selloff is mainly affecting T-bills that mature in the next month or so. Bills that come due later in November are behaving normally: Markets, in other words, are expecting Congress to come to its senses fairly soon.

Rates on bills are still nowhere near where they were before the Lehman crisis -- even with Tuesday's spike, the government was paying a little more than 0.3 percent to borrow for a month, compared with about 1.6 percent at the time of Lehman's bankruptcy. The markets obviously do not yet see this as a Lehman-like event. Give them time!

Mark Gongloff   |   October 8, 2013   10:31 AM ET

America's newspapers, or at least two of the ones that still exist, are full of stories about how Wall Street isn't panicking about the looming crisis of the debt ceiling. We can show you that in just one chart!

The chart was made by HSBC economists and comes to us via the Twitter account of Fabrizio Goria, a reporter with the Italian news website Linkiesta. The chart shows how little the price of insuring against a U.S. debt default has reacted to the fact that the nation is about a week away from not being able to pay all of its bills any more. (Story continues after chart.)

less risk

As you can see from the chart, the price of buying insurance against a default has jumped in recent weeks, but it is not nearly as high as it was back in 2011, the last time we came close to breaching the U.S. debt ceiling. It is not even as high as it was last year, when Washington was only fighting about the fiscal cliff and the debt ceiling was not involved.

House Republicans are holding the government's borrowing limit hostage to extract concessions that they can't exactly articulate. The Treasury Department has said that, if they don't raise the debt ceiling by Oct. 17, then the government won't be able to pay all of its bills. This could lead the government to default on its debts, causing an unprecedented global crisis.

Most on Wall Street agree that such a crisis would be worse than the 2008 financial crisis. But the unspeakably terrifying nature of this hypothetical crisis has convinced Wall Street that it will almost certainly never happen, the Wall Street Journal and New York Times point out in separate stories today.

Wall Street's attitude is that certainly our politicians wouldn't be so moronic as to crash the global economy for unidentified concessions about government spending and/or Obamacare! And the more Wall Street doubts that such a crisis is possible, the less it reacts, which means the morons in Congress don't realize the danger, which makes such a crisis even more possible, notes the NYT's Andrew Ross Sorkin (and me and Quartz's Matt Phillips and President Obama, last week).

To be fair to Wall Street, though it says there's a "zero percent" chance of a U.S. default, it's not acting that way. Interest rates on one-month Treasury bills are the highest since August 2011, a sign investors are nervous they won't get paid back on those bills. And stocks have fallen on 11 of the past 14 days, taking the Dow Jones Industrial Average down more than five percent. The Dow was down another 75 points on Tuesday morning. Wall Street is getting there.

Mark Gongloff   |   October 4, 2013    8:30 AM ET

We don't need a functioning government to tell us that the job market is lousy. But we do need one to help make the job market better.

It's the first Friday of the month, usually the day we get a bunch of random numbers from the government telling us what we already knew: Good jobs are scarce. This month, the government is too busy being held hostage by House Republicans to give us those random numbers. But there's plenty of evidence already that September was grimly similar to many of the months that came before it in this grinding recovery.

With sagging consumer confidence and hiring surveys, September may even have been worse than August, which was itself not a great month for jobs.

And October could be worse still, given the political chaos in Washington, which Republicans are threatening to turn into a full-blown financial crisis. That is starting to worry financial markets and could already be affecting hiring.

Whenever Bureau of Labor Statistics workers stop being furloughed by a government shutdown, economists, on average, expect it to report 185,000 new jobs on nonfarm payrolls in September and an unemployment rate holding at 7.3 percent, according to a tally by MarketWatch.

But earlier this week a report on private job growth by the payroll-processing firm ADP and a service-sector hiring survey by the Institute for Supply Management was worse than economists expected, suggesting September's official jobs numbers would disappoint.

September's job report will probably look a lot like August's, with less than 170,000 new jobs and an unemployment rate probably still well north of 7 percent, mainly because people keep checking out of the labor market. When you give up looking for work, you're no longer "unemployed" in the eyes of the BLS, et voila, lower unemployment rate.

These numbers are certainly an improvement over the depths of the Great Recession, when unemployment hit 10 percent. We have recovered about 7 million of the jobs lost during the recession, but are still about 2 million jobs below the peak before the recession began. (Story continues after chart of frustration.)

not all back

This grind has made for the slowest job-market recovery since the Great Depression, as you can see from this chart updated monthly by Bill McBride of the Calculated Risk blog:

worst recovery

The jobs that have been created are mostly low-paying jobs:

Which is one reason wages have lagged far behind the stock market and corporate profits:

stocks and profits

Despite what amounts to an employment crisis, Congress and the White House have spent most of the past couple of years locked in nonstop pointless battles over the federal budget. The austerity that has resulted has kept the recovery slow and painful:

employment without fiscal austerity

Now House Republicans are making the situation even worse by shutting down the government and threatening a government debt default. That could turn a weak recovery into another recession.