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July 2, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Myths of Austerity

Posted: 02 Jul 2010 12:24 AM PDT

Do you believe in the invisible bond vigilante and the confidence fairy?:
Myths of Austerity, by Paul Krugman, Commentary, NY Times: ...For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world's major economies remain deeply depressed.
This conventional wisdom isn't based on either evidence or careful analysis. Instead, it rests ... on belief in what I've come to think of as the invisible bond vigilante and the confidence fairy.
Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there's no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.
What reason do we have to believe that any of this is true? Yes, America has long-run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems. ...
Nonetheless, every few months we're told that the bond vigilantes have arrived, and we must impose austerity now now now to appease them. Three months ago, a slight uptick in long-term interest rates was greeted with near hysteria: "Debt Fears Send Rates Up," was the headline at The Wall Street Journal, although there was no actual evidence of such fears, and Alan Greenspan pronounced the rise a "canary in the mine."
Since then, long-term rates have plunged again. Far from fleeing U.S. government debt, investors evidently see it as their safest bet in a stumbling economy. Yet the advocates of austerity still assure us that bond vigilantes will attack any day now if we don't slash spending immediately.
But don't worry: spending cuts may hurt, but the confidence fairy will take away the pain. "The idea that austerity measures could trigger stagnation is incorrect," declared Jean-Claude Trichet,.. president of the European Central Bank... Why? Because "confidence-inspiring policies will foster and not hamper economic recovery."
What's the evidence for the belief that fiscal contraction is actually expansionary, because it improves confidence? (By the way, this is precisely the doctrine expounded by Herbert Hoover in 1932.) Well, there have been historical cases of spending cuts and tax increases followed by economic growth. But ... every one of those examples proves ... to be a case in which the negative effects of austerity were offset by other factors, factors not likely to be relevant today. ...
And current examples of austerity are anything but encouraging. Ireland has been a good soldier..., grimly implementing savage spending cuts. Its reward has been a Depression-level slump — and financial markets continue to treat it as a serious default risk. Other good soldiers, like Latvia and Estonia, have done even worse — and all three nations have, believe it or not, had worse slumps ... than Iceland, which was forced by the sheer scale of its financial crisis to adopt less orthodox policies.
So the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you'll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we're bad and the confidence fairy will reward us if we're good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation.


Posted: 02 Jul 2010 12:06 AM PDT

links for 2010-07-01

Posted: 01 Jul 2010 11:03 PM PDT

Credit Continues to Fall

Posted: 01 Jul 2010 01:45 PM PDT

Federal Reserve Governor Elizabeth Duke gave a speech today warning about the falling level of credit in the U.S. economy, but since she doesn't have a Ph.D. in economics, should we listen to her? I'm going to:

Credit Still Tightening, Fed Governor Says, by Sewell Chan, NY Times: The level of outstanding credit in the American economy continues to fall as strong and weak banks alike pull back on lending, worsening the prospects for businesses and consumers to regain their footing, a Federal Reserve governor said Wednesday.
Credit has been slower to return to prerecession levels than in any downturn over the last 40 years, with the exception of the 1990-91 recession, Elizabeth A. Duke, one of five sitting governors on the Fed's board, said ... citing new research by the central bank. ...
Total loans held by commercial banks fell by 5 percent, or more than $345 billion, last year, Ms. Duke said, and that trend, which began in the last quarter of 2008, has continued. ...
"There really is no single step that can be taken to quickly unclog all lending markets," Ms. Duke... Past declines in bank lending "could be traced almost exclusively to declines in the portfolios of weaker banks," but Fed researchers have found that "something very different is happening this time," Ms. Duke said. Strongly capitalized banks are cutting back on lending, not just more fragile ones. ...
Ms. Duke, a community banker who was named to the Fed's board by President George W. Bush in 2008, added: "In no way do we want to return to the world where people could buy a house with no money down and no documentation. But where prudent loans can be made, we want to do everything we can to make sure those deals are struck."
The Fed's surveys of senior loan officers at banks suggest that businesses — which responded to the crisis by reducing inventories and capital spending, paying down debts and hoarding cash — have begun to inquire about new or increased credit lines, though small businesses say that credit is tighter than at any point since the early 1990s.
Ms. Duke said that consumers remained in a precarious state. ... Americans are saving more, but the household debt-service ratio ... is still above its 30-year average of 12 percent. The ratio dropped recently to 12.5 percent from its peak of 14 percent in 2007, Ms. Duke said, as a result of what she called "the largest annual decline in aggregate consumer credit outstanding in the nearly 70-year history" of record-keeping for that statistic.
"Just looking at the statistics, it is not hard to construct a scenario in which consumer demand for credit remains sluggish for quite a while," she said.

On the issue of who should be on the Federal Reserve Board, here's my view:

there has been some speculation recently about potential candidates for the unfilled positions, and the list is skewed toward academics who are specialists in the conduct of monetary policy. The Board does need academic specialists. But the Board also needs experts in financial markets, people with a thorough understanding of all facets of financial markets and the assets that are traded on them, and it needs experts in financial market regulation as well. Those areas are already fairly well covered by Governors Warsh, Duke, and Tarullo, while at present the only academic on the Board is Ben Bernanke.
I still wonder if the Board has sufficient expertise in financial markets and institutions, so perhaps one of the three open positions could be devoted to filling needs in that area. However, Ben Bernanke could use the help of more macroeconomists on the Board, and I'd like to see the other two of the positions, if not all three, go to experts in monetary policy. There was a time I might have pushed harder for all three positions to go to academic experts, but the financial market crash has highlighted the need for a broad range of expertise on the Board.

That was part of a more general complaint about the administration's failure to nominate candidates to fill the open positions on the Federal Reserve Board at a time when they were very much needed to help deal with the financial crisis. Those seats remain unfilled. That leaves the Fed short-handed, and it alters the balance of power on the FOMC toward the regional banks. [Update: After this posted, it was announced that Fed nominees heading for Capitol Hill, finally. The hearings for Janet Yellen, Peter Diamond, and Sarah Bloom Raskin, two academic economists and a financial market expert, are scheduled to begin on July 15.]

As for credit, as the article notes, we don't want households to go back to their old "imprudent" ways. But we do want businesses to invest in worthwhile projects as they arise, and that is more than a supply-side problem. The Fed can loosen up the spigot as much as possible without causing irresponsible risk-taking, but if the demand isn't there, then firms will not want to take out credit. We need firms to be optimistic about the future, that's more important than anything the Fed can do to enhance credit supplies, and it's not at all clear where that optimism will come from, especially with all the recent talk about the need for government to tighten its belt. If that talk turns to action, and let's hope it doesn't, that won't help.

Weekly Initial Unemployment Claims Remain High and Stagnant

Posted: 01 Jul 2010 11:07 AM PDT

The report on new claims for unemployment insurance is disappointing. Here's Calculated Risk. The main thing to note is that claims have been moving sideways for some time now [Cross-posted at MoneyWatch]:

Weekly Initial Unemployment Claims increase to 472,000, by Calculated Risk: The DOL reports on weekly unemployment insurance claims:

In the week ending June 26, the advance figure for seasonally adjusted initial claims was 472,000, an increase of 13,000 from the previous week's revised figure of 459,000. The 4-week moving average was 466,500, an increase of 3,250 from the previous week's revised average of 463,250. ...

Weekly Unemployment Claims
Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since January 2000. The four-week average of weekly unemployment claims increased this week by 3,250 to 466,500. The dashed line on the graph is the current 4-week average. Initial weekly claims have been at about the same level since December 2009. ...

And here's a reaction from Steven Russolillo at Market Talk:

Looks Like Another Stinking Jobless Recovery: I give up. There's nothing pretty about this morning's jobless claims report. Claims jump 13,000 to 472,000 in the week ended June 26. The previous week's level was also revised upward, from 457,000 to 459,000. And all this comes as economists had expected claims would fall by 2,000. ...
As we mentioned in the opener, a Labor Department economist blames the latest rise on the educational services sector, where bus drivers, cafeteria workers and others lost their jobs due to the summer holidays.
What a crock of … I mean, c'mon. Think about it, the school year coming to an end isn't some brand new phenomena; it happens every year at the exact same time. Isn't seasonally adjusted data supposed to take these sort of situations into account?
It also seems like the Labor Department always has an excuse in its back pocket whenever there's an "unexpected" rise in jobless claims. Remember in early April when the increase in claims was attributed to Cesar Chavez Day? Really? ...
"Bottom line, following the weak private sector job growth seen in yesterday's ADP report, today's initial claims data continues to point to a lackluster labor market and another jobless recovery," says Peter Boockvar, also of Miller Tabak.

We don't need excuses, we need action. If the big banks were in trouble, do you think more help would come? I do, and it wouldn't take long. We'd see action. But when millions of people who are are, collectively, every bit as important as a big bank are in trouble, we don't just fail to help them further, there's a battle to stop the help that is there from being withdrawn. Draw your own conclusions, but to me it's pretty obvious who Congress thinks it needs to please.

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