The uncertainties introduced as a result coincide with other, less qualitative measures of the U.S. economy’s performance, which generally show that the recovery has slowed.

The rating adjustment’s blow to sentiment is amplifying concerns about what these metrics imply for the outlook, prompting investors to move out of risky positions and—ironically—into the safety of Treasuries.

Against this difficult backdrop, Friday’s unemployment report offered a rare bit of positive news, but one that must be taken in context. The Bureau of Labor Statistics (B.L.S.) data show private-sector hiring in July outpacing economists’ expectations. While those expectations were decidedly reserved, it is significant that firms expanded payrolls in the midst of the incapacitation emanating from Washington.

The B.L.S. data also show that serious challenges remain, requiring a more concerted response to the historically weak job recovery trends. The share of the U.S. population gainfully employed fell to 58.1 percent in July, its lowest level in almost three decades and well below the 64.7 percent peak from 11 years ago.

With a falling share of the population employed and the unemployed remaining out of work longer, attention must refocus on tackling the structural drags on job growth and the deleterious role of policymaking in worsening labor market rigidities.

The Jobs Report by the Numbers

Seasonally adjusted private payrolls expanded by 154,000 jobs in July, the best result since April. The private increase was offset in part by an expected decline of 37,000 public jobs, almost exclusively at the state and local levels.

Nonresidential construction employment was essentially unchanged, increasing by 2,100 jobs. Nonresidential specialty contractors fared slightly better, adding 8,100 jobs. The results suggest a trough in commercial construction but not a strong rebound in activity.

In the service sector, retail employment gains were surprisingly strong. Retail employers added 25,900 jobs in July, principally at auto dealers; health and personal care stores, including pharmacies; and department stores. Overall retail employment is slightly higher than a year earlier.

The financial services sector, perhaps the most important for Manhattan’s office market, remains a weak point in the payroll data, at least at the national level. The sector shed 4,000 jobs in July and is 15,000 jobs short of its level a year earlier. In spite of the improving profits of many intermediaries, the jobs outlook is qualified by several factors, including uncertainties related to the implementation of Dodd-Frank.

Like financial services, professional and business services is one of the primary contributors to office-space demand. The sector posted a gain of 34,000 jobs in July. Computer systems registered a gain of 6,100 jobs, in a rising trend consistent with growth in technology businesses. However, an even larger share of professional jobs was recorded in relatively lower-wage administrative and support services.

Gains in the leisure and hospitality sector were confined to the first of its two components, with a healthy increase in arts and entertainment employment. Still, employment across the range of accommodation types increased by 2,700 jobs, and is up roughly 2 percent on a year earlier.

Real Estate Implications

Labor market trends are still falling woefully short of real estate investment and credit trends, with the result that pricing improvements for lower-quality properties continue to lag trends for top-tier assets. Until job growth accelerates, we should not expect that spillovers from the top of the market will suffice as sustainable drivers of momentum for broader investment.

Fiscal stimulus is only one option deserving of consideration. In support of job growth, policymakers must also consider that encouraging a sense of normalcy in the business environment will prove as effective as any spending program.

dsc@chandan.com

Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.

That is an important consideration. From my discussions this week with colleagues in Germany and Switzerland, European central bankers and the core nations’ heads of state are acutely aware that they lack the tools to manage a wider crisis.

Regrettably, markets have largely internalized Greece’s orderly default and are now focused on conditions in other countries—including Portugal and Ireland—that have seen little new consideration as a result of the Greek agreement, but that present more difficult tests of European consensus.

In fact, the threat no longer relates to specific countries in the minds of many economists, policy makers and bond investors, but to the durability of the European economic and monetary union itself. Leaders are understandably wary of visiting issues of how the market is structured; doing so now might unseal Pandora’s box.

A Eurobond?

There is no sovereign entity in Europe that is sufficiently removed from the vagaries of its politics that it could serve as a backstop for further crisis. Germany would have to be part of any such program. But Chancellor Angela Merkel is already under threat at home from her perceived largesse in Brussels.

And so Europe still finds itself unequipped to deal with the crisis except on a country-by-country basis and at a pace that belies the rapidity with which investors might sour on a particular sovereign issuer.

Eurobonds, coupled with the European Central Bank balance sheet, could address the absence of a tool that is sufficiently scalable and flexible to bolster market confidence. Politically, such a program would be a tough sell. The implicit or explicit guarantee of Eurobonds by member countries would likely impact the credit ratings of the major economies, principally Germany and France, raising their borrowing costs.

Little short of the threat of the euro zone’s dissolution would empower Chancellor Merkel to forward a proposal of this nature at home.

Regarding the U.S.

The possibility of a Eurobond also has implications for the United States. The puerile debt debate at home leaves the ratings agencies with little choice but to downgrade Treasuries in the coming months, even if an agreement is reached by the early-August debt-ceiling deadline.

The notion that U.S. government bonds are free of any risk is no longer credible from a risk-management perspective. An adjustment must ensue to reflect that default is a tail risk with non-zero probability. All else being equal, losing its gold-standard credit rating will mean marginally higher Treasury yields that are structural rather than cyclically driven. Couple this with a complement to or substitute for the Treasury in Europe, and yields must rise again in the United States as the global supply curve of relatively low-risk sovereign bonds shifts out.

In all, the long-term result of the sophomoric approach to debt and deficit politics in the U.S. and the potential for a new class of sovereign bonds to emerge in Europe means that higher underlying costs of financing—in terms of treasuries and any instrument measured over them—will ultimately prove to be among the legacies of this crisis.

dsc@chandan.com

Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.

Jean-Luc Godard

As Greece teeters on the brink of default--because of actual economic issues, not just political mayhem, as in the U.S.--French director Jean-Luc Godard has come forward with an innovative plan to solve the problem, Artforum notes today.

Mr. Godard reportedly suggested in a recent interview with the German weekly paper Freitag that the European Union should tax use of the word "therefore" to pay off Greece's massive debt. The word, he notes, is used every day, and was invented by the Greek philosopher Artistotle.

"If we transferred ten euro to Greece every time we used the word, the crisis would be over in a day, and Greece would not have to sell the Pantheon to Germany,” the famously erratic director said.

The Congressional Republican leaders, like their counterparts on the Democratic side and in the White House, all understand that the debt limit must be increased -- just as they understood the imperative of the bank bailouts two years ago. But that won't stop them from indulging in reckless rhetoric -- or from seeking to take advantage of the situation in ways that could result in dangerous consequences, as they vow to hold the debt ceiling hostage to enormous budget cuts. These veteran leaders appear to have learned nothing since the debacle of 1995, when then-Speaker Newt Gingrich told the bond industry that he would allow the country to default on its debt unless President Clinton agreed to his plans to slash Medicare and other federal programs. "I don't care what the price is," he declared.

That was a very different time -- and the price of default would be far higher today, in a world where nations and states on the verge of insolvency continuously threaten to scuttle global recovery. Back in the Nineties, the Clinton Administration was able to outwit Gingrich both politically and fiscally, using tactics that preserved the full faith and credit of the Treasury without capitulating to Republican demands. Clinton forced the Republicans to fulfill their bluff. Now the numbers are bigger, the space to maneuver is smaller, the potential downside is incalculable -- and the nihilistic ignorance of the Tea Party faction is the dominant attitude within the GOP.

Even the merest prospect of default would be gravely damaging to American prestige and prosperity, continuing the apparent Republican project of hastening our national decline that began with the invasion of Iraq under false pretenses (and the refusal to pay for that multi-trillion-dollar disaster). So it is understandable that the Obama administration would want to find some way to lure the Republicans and their fanatical minions back from taking us all over the cliff.

What the Republicans have hinted they must have in order to release the debt hostage is a package of budget cuts amounting to at least $100 billion this year -- or a rollback of spending on discretionary programs (excepting veterans, defense and homeland security) to 2008 levels -- and perhaps a deal to destroy Social Security and Medicare as well. They have carefully refused to offer specific cuts that might anger their own constituencies.

No doubt the Obama White House, which too often prefers "bipartisanship" to principled confrontation, will be tempted to make such a deal. The problem is that cutting the budget so drastically will undo the stimulative effects of the December tax-and-spending agreement -- and plunge the economy back into recession. The President loses either way.

Perhaps the time has come for the Democrats to adopt a different strategy. Let the Republicans govern, or misgovern. Don't rescue them from their own recklessness. Don't vote to raise the debt ceiling unless and until the Republican leadership supports the bill -- and if they refuse, let them take the responsibility for the consequences. Let's see how long they can listen to the screaming of their major contributors on Wall Street as the world economy shudders. Make the hostage takers surrender this time. 

According to documents filed with the New York City Department of Finance, Mr. Falcone and his wife took out a $22.5 million mortgage on their upper-east side townhouse this summer.

A spokesman told The Journal: "This is a normal ordinary course mortgage financing on Mr. Falcone's home that was completed seven months ago and has no relevance to Harbinger Capital Partners' business or its investors."

Fair enough!

mtaylor [at] observer.com | @mbrookstaylor

Icahn said he's willing to pony up the $963 million in principal, maybe more, in exchange for a disruption of the proposed marriage. As prospective MGM spouses go, Icahn vastly prefers Lions Gate Entertainment, in which he is a dominant shareholder.

The activist shareholder did not mince words in voicing his disapproval of the mooted joinup between MGM and Spyglass. From the press release announcing the offer:

Mr. Icahn noted that "the plan is being backed by certain members of the MGM creditors committee, and is being ramrodded through with the typical fear tactic that the "sky will fall" if the plan is not approved." Mr. Icahn stated that he believes that "it is more likely for the sky to fall if the Spyglass Plan was approved."

In case investors didn't catch his drift the first time, Icahn repeated himself. We've taken the liberty of removing every part of his statement that's not in all-caps: "I URGE ALL SENIOR LENDERS TO VOTE AGAINST THE SPYGLASS PLAN [...] WE SHOULD NOT ALLOW OURSELVES TO BE RAILROADED INTO THE SPYGLASS PLAN." (Emphasis in the original.)

OKAY, CARL, WE GET IT!

mtaylor@observer.com | @mbrookstaylor

Companies' tendency to temporarily pay off debt ahead of quarterly balance-sheet disclosures has lately come under scrutiny by the SEC following a Wall Street Journal investigation into the matter. Bank of America, Citigroup and AIG have said that they have classified certain assets as sales by briefly exchanging them for cash on the repossession market. The technique, known as "Window Dressing," isn't illegal but it can be misleading to investors. The Journal investigation found that a group of 18 large banks had reduced their debt by an average of about 42 percent for each of the past six quarters.

Perhaps the most famous form of window dressing is the "Repo 105" trick used by Lehman Brothers before its bankruptcy.

The new rules propose to curtail the accounting shenanegans by making firms disclose the average rate of their borrowing over a quarter as opposed to a one-day picture of their balance sheets. They would also have to report the maximum amount outstanding during the quarter and the average interest rate on their debt.

Cantankerous finance blog Zero Hedge today points to a letter Goldman Sachs has written to the Financial Accounting Standards Board, the private organization that establishes accounting standards that the Securities and Exchange Commission subscribes to. The letter, written by Matt Schroeder, managing director and global Head of accounting policy for Goldman, details the widespread practice among financial firms of giving sweetheart loans to companies that have enlisted them to underwrite their initial public offerings or conduct other business on their behalf. This results in a heap of low-interest debt (which seems less risky than high-interest debt) entering the securities market at off-market prices, thereby increasing risk of defaults and creating fragility in the system.

Here's what happens.

A company that's going to file for an IPO so its stock can trade on an exchange will stipulate with an underwriter (that's the company that gets hired to price the stock on the day its client goes public) that, in order to get its business, the underwriter has to float the client a "relationship loan." This is a loan that carries terms favorable to the client. Goldman writes:

In many situations the borrower will be very explicit and inform the bank that it will not be permitted to participate in future underwriting business without participating in these "relationship loans."

Because the terms of these loans are favorable to the client, their price does not accurately reflect the risk involved. That problem is made worse by current accounting standards, which do not force banks to value these loans at their market value, but rather at the price they're worth if all goes well and the borrower doesn't default. But the resulting dysfunction in the credit markets isn't even the biggest problem. Zero Hedge writes:

Setting aside the fact that loans, both those held on books, and traded in the secondary market, are by implication largely mispriced (although one could make the argument that sophisticated investors should be able to adjust for this syndicator arbitrage... of course one could also make that claim of CDO purchasers in 2006 and 2007), the bigger question is just how major the conflict of interest is to the firms that serve as both lender and IPO underwriter.

A company that has just lent to a client on terms that are favorable to the client, having created a loan that doesn't accurately reflect the risk of default, faces an incentive to encourage people to buy the client's stock to help maintain adequate capital levels. "does one realistically see the possibility of a bank issuing anything less than a Buy or a Strong Buy in a name in which it was forced off the bat to put in debt capital, and whose equity buffer could be largely impaired if the same firm's Sell rating were to decimate the equity market cap?" Zero Hedge says.

In other words, banks are bribing IPO clients with loans whose prices create market instability. These loans are either held on banks' books or are securitized, spreading throughout the financial system. On top of this, banks face incentives to artificially prop up the stock prices of their clients to minimize risk of default on the sweetheart loans. Call it loan payola.

Why is Goldman so generously pointing this out? Zero Hedge says it's in Goldman's interest to do so, because unlike other financial firms, it mainly makes money by trading and does not hold risky assets on its books. It would be very harmful to Goldman's competition were a solution to this problem -- marking debt assets to their market value instead of valuing them at the price they would have if held to maturity. In this particular case, it appears that Goldman Sachs' interests are aligned with those of the financial system writ large.

The problem is what is sometimes called "combined sewer overflows." In cities like New York, the sewage from your home and the rainwater in the street both end up in the same sewer system. During big rainstorms, the surge of water through the system is too much for our sewage treatment plants to process and so the raw sewage is dumped straight into our waterways.

This is less of a problem in New York City than in other places, because our drinking water comes from upstate reservoirs. However, in places like Long Island that rely on groundwater for household use, pollution of this sort is a major problem. Serious health problems can also result from raw sewage back-ups in people's basements. And while the issue of private dumping of toxins into public water systems seems to be a case of lax law enforcement against corporations that can easily modify their practices, the combined sewage overflow problem is much more difficult to address. A solution would require massive investment and major public resources.

Duhigg's piece notes that the government has spent over $35 billion in the past thirty years to improve the city's water quality, yet over $50 billion more would be needed to prevent these combined sewer overflows. The issue is clearly one of resources, technology and investment in infrastructure. This is yet another example of a society that refuses to tax itself sufficiently to provide adequate investment in the transportation, park, educational, library, health and environmental facilities that we require.

The recent financial crisis seems to have caused some scaling back of our high rates of consumption, and we even see private savings rates starting to grow.  However, as a society we seem to be unwilling to admit our need to invest in infrastructure. The American political culture currently rejects taxation almost as a reflex at virtually every turn.

Governments' highly visible failures are one reason for this continued anti-tax fervor. So too is the culture of consumption that gets people trampled to death at Black Friday store sales the day after Thanksgiving. In the case of the combined sewage problem, the $50 billion solution is probably not a great idea anyway. It is based on a bricks-and-mortar approach typical of traditional engineering thinking and technology that I believe is being supplanted by more ecologically-oriented, creative and cost-effective pollution control technologies. One of the causes of combined sewage overflows is that we have paved over land that used to absorb water during rains. If we encourage green roofs and other decentralized ways of collecting the water during storms, we can more easily reduce surges and avoid spending at least part of the $50 billion that some think is needed.

Still, new large-scale investments are needed to improve treatment of sewage in New York City. When this is added to funds needed for transportation, energy, new school buildings, and other basic needs, it is easy to feel overwhelmed.

What we need both in New York and nationwide is an infrastructure investment strategy and financial model - sort of a business plan for the United States. For a variety of reasons, our federal government does not have a capital budget. Our cities and states have capital budgets, which separate funds allocated to long-term projects from funds allocated to day-to-day expenses, but not the federal government. The federal government has a single budget that incorporates both immediate expenses and expenses that should be paid off over time into one lump sum. Consequently, the U.S. doesn't have a means of managing its borrowing - all borrowing is considered part of the federal deficit. Some of that borrowing is for capital improvements that we should finance and some is for day-to-day expenses that in good times should not be paid for with borrowed funds. In that respect we are like those people that use their credit card to buy groceries and other necessities, but don't pay the full balance on their bill each month.

State and local government debt is relatively transparent and is analyzed and rated by private firms that guide investors. The ratings of state and local finances by private rating agencies such as Moody's influence the interest rates that states and cities must pay to borrow money. This serves to encourage at least a little bit of financial planning by these governments. But the federal government has no similar incentive to plan their long-term borrowing or think about the investments the nation truly needs and can actually afford.

The issues of combined sewage overflow and the capital needs of our society as a whole require that we give some thought to a long-term capital investment plan for this complicated business called the United States of America. I know that our policy and investment decisions are based on a wide variety of political factors that have nothing to do with rationality and even common sense. But shouldn't our national, state and local infrastructure investment decisions be based on a plan that looks realistically at our capacity to generate the revenues needed for investment and the priorities among capital facility needs? I do not think we are rich enough to do everything, and I know we need to start making some strategic investment choices.