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April 17, 2009

Economist's View - 4 new articles

"Something Went Wrong"

Ben Bernanke:

Bernanke Says Crisis Damage Likely to Be Long-Lasting, by Craig Torres, Bloomberg: Federal Reserve Chairman Ben S. Bernanke said the collapse of U.S. lending will probably cause "long-lasting" damage to home prices, household wealth and borrowers' credit scores.

"One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be," the Fed chairman said... "The damage from this turn in the credit cycle -- in terms of lost wealth, lost homes, and blemished credit histories -- is likely to be long-lasting." ...

"Something went wrong," Bernanke said. "We have come almost full circle with credit availability increasingly restricted for low- and moderate-income borrowers." ...

Update: I should add this part about defending financial innovation:

U.S. Federal Reserve Chairman Ben Bernanke Friday defended financial innovation but said the current crisis proves that policy makers must make sure new, complex financial products are transparent enough to enable customers to make reasonable decisions.

"Regulation should not prevent innovation, rather it should ensure that innovations are sufficiently transparent and understandable to allow consumer choice to drive good market outcomes," said Mr. Bernanke in a speech at a community-affairs forum in Washington. "We should be wary of complexity whose principal effect is to make the product or service more difficult to understand by its intended audience."

Paul Krugman: Green Shoots and Glimmers

Glimmers of nope, not yet:

Green Shoots and Glimmers, by Paul Krugman, Commentary, NY Times: Ben Bernanke ... sees "green shoots." President Obama sees "glimmers of hope." And the stock market has been on a tear. So is it time to sound the all clear? Here are four reasons to be cautious....

1. Things are still getting worse. Industrial production just hit a 10-year low. Housing starts remain incredibly weak. Foreclosures ... are surging again. The most you can say is that there are scattered signs that ... the economy isn't plunging quite as fast as it was. And I do mean scattered...

2. Some of the good news isn't convincing. The biggest positive news in recent days has come from banks, which have been announcing surprisingly good earnings. But some of those earnings reports look a little ... funny.

Wells Fargo, for example, announced its best quarterly earnings ever. But ... reported earnings ... depend a lot on the amount the bank sets aside to cover expected future losses on its loans. And some analysts expressed considerable doubt about Wells Fargo's assumptions...

Meanwhile, Goldman Sachs announced a huge jump in profits... But as analysts quickly noticed, Goldman changed its definition of "quarter" ... so that — I kid you not — the month of December,... a bad one..., disappeared from this comparison.

I don't want to go overboard... Maybe the banks really have swung from deep losses to hefty profits in record time. But skepticism comes naturally in this age of Madoff.

Oh, and for those expecting the Treasury Department's "stress tests" to make everything clear: the White House spokesman, Robert Gibbs, says that "you will see in a systematic and coordinated way the transparency of determining and showing to all involved some of the results of these stress tests." No, I don't know what that means, either.

3. There may be other shoes yet to drop. Even in the Great Depression, things didn't head straight down. There was, in particular, a pause in the plunge about a year and a half in — roughly where we are now. But then came a series of bank failures on both sides of the Atlantic, combined with some disastrous policy moves...

Can this happen again? Well, commercial real estate is coming apart at the seams, credit card losses are surging and nobody knows yet just how bad things will get in Japan or Eastern Europe. We probably won't repeat the disaster of 1931, but it's far from certain that the worst is over.

4. Even when it's over, it won't be over. The 2001 recession officially lasted only eight months... But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there's every reason to believe that it will happen this time too. Don't be surprised if unemployment keeps rising right through 2010. ... Employment will eventually recover... But it probably won't happen fast.

So now that I've got everyone depressed, what's the answer? Persistence.

History shows that one of the great policy dangers, in the face of a severe economic slump, is premature optimism. F.D.R. responded to signs of recovery by cutting the Works Progress Administration in half and raising taxes; the Great Depression promptly returned in full force. Japan slackened its efforts halfway through its lost decade, ensuring another five years of stagnation.

The Obama administration's economists understand this. They say all the right things about staying the course. But there's a real risk that all the talk of green shoots and glimmers will breed a dangerous complacency.

So here's my advice, to the public and policy makers alike: Don't count your recoveries before they're hatched.

"Tax Tea Party Time"

Bruce Bartlett says tax protesters "are not entitled to be taken seriously":

Tax Tea Party Time, Part Two, by Bruce Bartlett, Commentary, Forbes: Last week, I presented data comparing taxation in the United States to other major countries and concluded that Americans are not especially overtaxed. ... But what if we compare U.S. taxes today to those in the past? Are Americans more heavily taxed than those in earlier years, and do polls show greater dissatisfaction with taxes today? ... [I]t is hard to find evidence that taxes are rising or unusually high. ...

In response to these facts, some critics say that it is not today's taxes that concern them, but those that will have to be paid in coming years as a result of the large spending and deficits being projected. ...

I have problems with this argument as a justification for the sudden appearance of tea parties to protest taxes. First, many protesters implicitly assume that that the deficit has increased solely as a result of Barack Obama's policies. But in fact, the Congressional Budget Office was projecting a deficit of more than $1 trillion this year back in January...

It's true that projected deficits have gotten larger since January. But much of this resulted from deteriorating economic conditions that would have occurred even if John McCain were president. Moreover, it is absurd to assume that McCain would not have enacted any stimulus programs had he been elected.

More than likely, McCain would have proposed a stimulus plan of roughly the same size as that proposed by Obama. No doubt, it would have had a different composition--heavier on tax cuts, different kinds of tax cuts, less spending, different spending--but it wouldn't have been all that different from Obama's package given large Democratic majorities in the House and Senate and the pressure to act quickly.

I strongly suspect that many of those that loudly denounced the Obama stimulus package for its impact on the deficit would have cheered the McCain stimulus package even though it would have increased the deficit by about the same amount.

Proof of this proposition is that there were no tea parties during the years when George W. Bush was turning the surpluses of the Clinton years into massive deficits. ... Those protesting this week were only protesting because it is a Democrat who has increased the deficit. When a Republican did worse, it's like Emily Litella used to say, "Never mind."

Of course, people are free to protest whatever they want whenever they want, and are also free to change their minds. Maybe this week's tax protesters would have been out protesting even if McCain were president, but I don't think so. I believe this was largely a partisan exercise designed to improve the fortunes of the Republican Party, not an expression of genuine concern about taxes or our nation's fiscal future.

People should remember that while they have the right to their opinion, they are not entitled to be taken seriously. That only comes from having credibility gained by the correct presentation of facts and analysis and a willingness to be even-handed--criticizing one's own side when it is wrong and not only speaking up when the other party does the same thing.

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