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December 11, 2009

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Paul Krugman: Bernanke’s Unfinished Mission

Posted: 11 Dec 2009 12:30 AM PST

Because I was less confident in the ability of monetary policy to get us out of this mess than most, I called for fiscal policy relatively early, and my view that monetary policy is unlikely to be of much help hasn't changed. But we're unlikely to get a significant additional fiscal stimulus at this point, lots of people disagree with my pessimism about monetary policy, and we need to try something to revive labor markets:
Bernanke's Unfinished Mission, by Paul Krugman, Commentary, NY Times: Ben Bernanke, the Federal Reserve chairman, recently had some downbeat things to say about our economic prospects. ... All we can expect, he said, is "modest economic growth next year — sufficient to bring down the unemployment rate, but at a pace slower than we would like."
Actually, he may have been too optimistic: There's a good chance that unemployment will rise, not fall, over the next year. But even if it does inch down, one has to ask: Why isn't the Fed trying to bring it down faster? ... My back of the envelope calculation says that we need to add around 18 million jobs over the next five years, or 300,000 jobs a month. ... So ... someone has to take responsibility for creating a lot of additional jobs. And at this point, that someone almost has to be the Federal Reserve.
I don't mean to absolve the Obama administration of all responsibility. Clearly, the administration proposed a stimulus package that was too small to begin with and was whittled down further by "centrists" in the Senate. And the measures President Obama proposed earlier this week ... fall far short of what the economy needs.
But ... the political reality is that the president ... probably can't get enough votes in Congress to do more than tinker at the edges of the employment problem. The Fed, however, can do more.
Mr. Bernanke has received a great deal of credit,... rightly so, for his use of unorthodox strategies to contain the damage after Lehman Brothers failed. But ... the urgency of late 2008 and early 2009 has given way to a curious mix of complacency and fatalism — a sense that the Fed has done enough now that the financial system has stepped back from the brink, even though its own forecasts predict that unemployment will remain punishingly high for at least the next three years.
The most specific, persuasive case I've seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of ... Mr. Bernanke himself,... Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.
So why isn't the Fed doing it? Part of the answer may be political: Ideological opponents of government activism tend to be as critical of the Fed's credit expansion as they are of the Obama administration's fiscal stimulus. And this has probably made the Fed reluctant to use its powers to their fullest extent. Meanwhile, a significant number of Fed officials, especially at the regional banks, are obsessed with the fear of 1970s-style inflation ... even though there's not a hint of it in the actual data.
But there's also, I believe, a question of priorities. The Fed sprang into action when faced with the prospect of wrecked banks; it doesn't seem equally concerned about the prospect of wrecked lives.
And that is what we're talking about here. The kind of sustained high unemployment envisaged in the Fed's own forecasts is a recipe for immense human suffering — millions of families losing their savings and their homes, millions of young Americans never getting their working lives properly started because there are no jobs available when they graduate. If we don't get unemployment down soon, we'll be paying the price for a generation.
So it's time for the Fed to lose that complacency, shrug off that fatalism and start lending a hand to job creation.

links for 2009-12-10

Posted: 10 Dec 2009 11:03 PM PST

Goldman Alters Bonus Pay

Posted: 10 Dec 2009 05:40 PM PST

Goldman Sachs is feeling the pressure over its plan to award generous bonuses to top executives:

Goldman Sachs Alters Its Bonus Policy to Quell Uproar, by Jenny Anderson, NY Times: Moving to quell the uproar over the return of big paydays on Wall Street, Goldman Sachs announced on Thursday that its top executives would forgo cash bonuses this year and that it would give shareholders a say in determining compensation.
With a resurgent Goldman set to award billions of dollars in bonuses — a trove that could rival the record payouts of the bubble years — the bank said that its 30 most-senior executives would be paid in the form of a special stock, rather than in cash. ...
A year after Washington rescued the nation's financial industry with billions of taxpayer dollars, Goldman is enjoying one of the most profitable years in its 140-year history. Its bonanza — fostered by its own government bailout, as well as the rescue of the broader financial system — has angered the many ordinary Americans who are still waiting for an economic recovery. ...
This year,... top executives will receive bonuses in the form of what Goldman called "shares at risk," or stock that cannot be sold for five years and can be retracted if the executive does something reckless or risky that hurts the firm.
While Goldman will give shareholders a say on pay, the bank would not be required to bow to its investors wishes. Still, a vote against Goldman would be deeply embarrassing for the bank.
Thursday's developments underscore Goldman's quandary as Wall Street enters its annual bonus season and comes a day after the British chancellor of the Exchequer stunned London bankers with news that the government there would levy a windfall tax on bank bonuses. Other European leaders have also expressed support for taxing bonuses heavily. ...

It's a start.

"Defining Success for Climate Negotiations in Copenhagen"

Posted: 10 Dec 2009 03:33 PM PST

Robert Stavins gives his assessment what will constitute "real progress" in the Copenhagen climate talks:

Defining Success for Climate Negotiations in Copenhagen, by Robert Stavins: ...[T]he fact that the White House has decided to send the President to Copenhagen for the final day, where he will assemble with some 90 other world leaders, and participate in closing statements (not to mention photo opportunities), indicates that the Administration is relatively confident that the talks will not collapse in a logjam of disagreement between the industrialized world and the developing countries, but rather that there will be a successful outcome.
The key outstanding question is whether the outcome will be one that provides a sound foundation for meaningful, long-term global action, not simply some notion of immediate, albeit highly visible triumph. ...
The gloom and doom predictions we've been hearing about the global climate negotiations taking place in Copenhagen this week and next are fundamentally misguided. The picture is much brighter than it might seem for ... coming up with a successor for the Kyoto Protocol, which essentially sunsets in 2012.
The best goal for the Copenhagen climate talks is to make real progress on a sound foundation for meaningful, long-term global action, not some notion of immediate triumph. This is because of some basic scientific and economic realities.
First, the focus of scientists (and policy makers) is and should be on stabilizing concentrations at acceptable levels by 2050 and beyond, because it is the accumulated stock of greenhouse gas emissions — not the flow of emissions in any year — that are linked with climate consequences.
Second, the cost-effective path for stabilizing concentrations involves a gradual ramp-up in target severity, to avoid rendering large parts of the capital stock prematurely obsolete.
Third, long-term technological change is the key to the needed transition from reliance on carbon-intensive fossil fuels to more climate-friendly energy sources.
Fourth, the creation of long-lasting international institutions is central to addressing this global challenge.
Indeed, it would be easy, but unfortunate, for countries to achieve what some people wish to define as "success" in Copenhagen: a signed international agreement, glowing press releases, and related photo opportunities for national leaders. Such an agreement could only be the Kyoto Protocol on steroids: more stringent targets for the industrialized countries and no meaningful commitments by the key rapidly-growing emerging economies of China, India, Brazil, Korea, Mexico, and South Africa (let alone by the numerous developing countries of the world).
Such an agreement could — in principle — be signed, but it would not reduce global emissions and it would not be ratified by the U.S. Senate (just like Kyoto). Hence, there would be no real progress on climate change.
If it's not reasonable to expect that a comprehensive post-Kyoto policy architecture will be identified in Copenhagen, what would constitute real progress? One important step forward would be a constructive joint-communiqué from major countries (just seventeen industrialized and emerging economies account for about 90% of annual emissions).
Such a joint-communiqué could lay out key progressive principles to underlie a future climate agreement, such as...: all countries recognize their historic emissions (read, the industrialized world); and all countries are responsible for their future emissions (think of those rapidly-growing emerging economies). ... Various policy architectures could subsequently build on these dual principles and make them operational, beginning to bridge the massive political divide which exists between the industrialized and the developing world.
In addition, a mid-term agreement could be reached on an approach involving an international portfolio of domestic commitments, whereby each nation would commit and register to abide by its domestic climate commitments, whether those are in the form of laws and regulations or multi-year development plans. Support for such an approach has been voiced by a remarkably diverse set of countries, including Australia, India, and the United States.
The key question is not what this approach would accomplish in the short-term, but whether it would put the world in a better position two, five, and ten years from now in regard to a long-term path of action.
Consistent with this portfolio approach, President Obama recently announced that the United States would put a target on the table in Copenhagen to reduce emissions 17 percent below 2005 levels by 2020 (in line with climate legislation in the U.S. Congress). In response, China announced that it would reduce its carbon intensity (emissions per unit of economic activity) 40 percent below 2005 levels over the same period of time. Subsequently, India announced similar targets. Given these countries rapid rates of economic growth, the announced targets won't cut emissions in absolute terms, but they are promising starting points for negotiations.
So, despite the multitude of negative pronouncements about the slow pace of international climate negotiations, there are positive developments and promising paths forward. It is fortunate that a few key nations, including the United States, appear to be more interested in real progress than symbolic action.

Weekly Claims for Unemployment Insurance Increase Slightly

Posted: 10 Dec 2009 11:49 AM PST

From Calculated Risk:

The DOL reports on weekly unemployment insurance claims:
In the week ending Dec. 5, the advance figure for seasonally adjusted initial claims was 474,000, an increase of 17,000 from the previous week's unrevised figure of 457,000. The 4-week moving average was 473,750, a decrease of 7,750 from the previous week's revised average of 481,500.
The advance number for seasonally adjusted insured unemployment during the week ending Nov. 28 was 5,157,000, a decrease of 303,000 from the preceding week's revised level of 5,460,000.
Weekly Unemployment Claims Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 7,750 to 473,750. This is the lowest level since October 2008.

Although falling, the level of the 4 week average is still high, suggesting continuing job losses.

Is this a momentary pause in a slow recovery, noisy weekly data obscuring the trend, or a sign that we are beginning to move sideways? Even if we aren't moving sideways, we aren't doing enough to help labor markets recover, so if we are moving sideways - surely a possibility - the policies that are in place are inadequate. We need to do more.

"How Have Quantitative Financial Models Been Used and Misused?"

Posted: 10 Dec 2009 09:45 AM PST

A recent symposium on Financial models and financial innovation at Columbia University wonders "Why all the Fuss?":

Financial Models: Why All the Fuss?, by Catherine New: The research symposium "The Quantitative Revolution and the Crisis: How Have Quantitative Financial Models Been Used and Misused" at Columbia Business School on December 4 explored the causes and effects of the proliferation of quantitative finance. Donald MacKenzie, a professor of sociology at the University of Edinburgh, gave the keynote speech (PDF).
Professor Bruce Kogut, in his opening remarks, acknowledged that financial engineering and innovation have received an onerous rap in the fallout from the financial crisis. However, he suggested that the field was ripe for public debate.
"It might be easy to leap to the conclusion that the subtext of today is that financial models created the crisis and hence innovation is bad. But such a deduction is in fact deeply complex and largely suspect," he said. "Why is there such debate over financial innovations? After all, innovation is a driver of economic growth and wealth, so why all the fuss?" Kogut suggested three possibilities, including the disparity between private and social value, unanswered questions about systemic risk and the speed at which innovation takes place.
Professor Paul Glasserman pointed to popular media portrayals, like WIRED's "Recipe for Disaster: The Formula That Killed Wall Street" (Feb. 2009), which excoriated the financial industry's use of models, as perpetuating misunderstanding about the uses and capabilities of quantitative finance.
"The article sets the record for the most incorrect statements packed into a title," Glasserman said. "In a very short time there has been a dramatic shift in perception of quantitative finance."
Glasserman moderated the panel "Does the Practice of Quantitative Finance Need to Be Changed?"...
Much of the panel's discussion focused on when models are useful — and not useful — in financial markets. Derman, author of My Life as a Quant, led the discussion and offered a discourse on what models are and how they can be applied (download presentation PDF). He cautioned that there is never a "right" model but rather "somewhere north of common sense and south of hubris lies the appropriate use of models."
Beunza, formerly a visiting professor at the Business School, cautioned that the use of models is a "doubled-edged sword"; his research shows that they lead both to increased arbritrage and better reflexiveness.
Goldman Sachs' research director Kent Daniel argued that models benefit many fields, such as airline safety, and not only financial markets. However, he cautioned that exacting data was fundamental to the use of models. "A successful quant model has to be subjected to every kind of scrutiny you have," he said. "If your organization doesn't do that, you'll have a failure."

There are important uses for financial products, even complicated ones, so I don't want to impugn innovation generally, but I also don't want to adopt the position that it was all useful - it clearly wasn't and stronger regulatory oversight is needed. As for the defense of financial models and innovation described above, the statement that innovation generally is the source of economic growth, therefore financial innovation must also be good, isn't much help. Similarly, if saying "models benefit many fields, such as airline safety, and not only financial markets" is the best defense of risk models available, that's telling.

[For those of you tempted to cite or that already have cited Paul Volcker's recent statement that ATMs are the only useful thing to come out of the financial industry in recent decades, I'd be more comfortable with your citing him as an all-knowing authority if you also adopted his position against auditing the Fed, and his position that the Fed ought to be the primary systemic risk regulator. But rather than listening to Volcker and others you have found to be trustworthy and wise in the past, many of you seem to find the arguments of people like Ron Paul and Jim DeMint compelling, and you have thrown your support behind their positions (something you'd be unlikely to do in any other context -- that alone ought to cause you to rethink this -- whose interests do you think people like DeMint are promoting?). If you get your way and congress, and by extension the financial industry, begins to have a strong influence over both policy and regulation, I hope you get the results you were hoping for. But I don't think you will.]

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