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November 30, 2010

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"The Irish Banking Crisis: A Parable"

Posted: 30 Nov 2010 02:40 AM PST

Umair Haque:

The Irish Banking Crisis: A Parable, by Umair Haque: Once upon a time, there was a country where bankers..., fed up with regulation, dissatisfaction, and downright hostility,... went on strike, not once, but three times.
Here's what orthodox economics would have predicted for a country without banks: A collapse in the money supply, a credit crunch, a trade implosion, mass unemployment, an atomized GDP, and the gears of industry and commerce grinding to a crashing halt. Imagine all the veins in your body suddenly shrinking and collapsing ... and you might begin to see how economists conceive of banking shutdowns.
This is no fairy tale, so we don't have to imagine what happened next. And what did come next was something really, really interesting — and just a little bit awesome..., the economy continued to grow. Though the money supply did contract sharply, neither trade, commerce, nor industry came to a grinding halt.
How? People created their own currencies, to substitute for the collapsing money supply. ... The country in question was Ireland — today, in deep crisis because of profligate banks.
So why were the Irish of yesteryear able to trade notes with one another, in lieu of credit issued by banks? Well, Ireland ... was ... characterized by intense, frequent, conversational personal contact: tight, dense, solid local knowledge circulating at high velocity within and across communities. Result? Borrowers and lenders could build solid microfoundations of trust. In other words, when you've been chatting with Bill every night at the local pub for twenty years, you probably know whether his note is a good bet or not.... Furthermore, if you're the publican, and you've been chatting with me and with Bill, then you're even better positioned to become a de facto arbitrator of notes — a bank. And that's exactly the role that pubs began to play. ...
Now, here's what I'm not suggesting: that you or I extrapolate directly and naively from history. ... I'd suggest it's more like a parable — a tale that highlights deeper principles at play.
It's not that Ireland can exit its troubles merely by vaporizing the banks, and letting pubs trade notes. Ireland 1970 is a far cry from the Celtic tiger of the 2000s. ...
[When mega-banks] blow up..., people and societies are left holding the bag. ... The parable of the disappearing bankers gives the tiniest glimpse of a better way: a path to a smarter kind of growth, built on a different set of institutions — those that operate at micro-scale, instead of mega-scale, built on human relationships, instead of anonymous transactions, self-organizing, instead of "administered," and that have the humanistic and the meaningful, instead of soul-crushingly trivial, hardwired into their very DNA.
Maybe, just maybe, banks need people a lot more than people need banks. Perhaps that's true for the whole imperious, plodding gamut of yesterday's zombie institutions, from corporations, to newspapers, to governments. Perhaps people and societies are a tiny bit more adaptive, resilient, intelligent, and creative than yesterday's institutions assume. And perhaps failing to recognize that is what's really at the root of this great crisis.

"Administrative Measures are Not Effective in Controlling Inflation"

Posted: 30 Nov 2010 02:40 AM PST

The old raise the price by shrinking portion size trick:

During the sixty years of the People's Republic, we have learned that administrative measures are not effective in controlling inflation. For instance, the government often forbids university canteens from raising food prices, so prices do not change. Instead the portions get smaller. Unfortunately the government is doing the same again.

"And There, Lurking Among Dozens of Well-Intentioned Opinions, is a Troll"

Posted: 30 Nov 2010 02:39 AM PST

Comments on this, anonymous or otherwise?:

Where Anonymity Breeds Contempt, by Julie Zhou, Commentary, NY Times: There you are, peacefully reading an article or watching a video on the Internet. You finish, find it thought-provoking, and scroll down to the comments section to see what other people thought. And there, lurking among dozens of well-intentioned opinions, is a troll. ...
Trolling, defined as the act of posting inflammatory, derogatory or provocative messages in public forums, is a problem as old as the Internet itself, although its roots go much farther back. Even in the fourth century B.C., Plato touched upon the subject of anonymity and morality in his parable of the ring of Gyges.
That mythical ring gave its owner the power of invisibility, and Plato observed that even a habitually just man who possessed such a ring would become a thief, knowing that he couldn't be caught. Morality, Plato argues, comes from full disclosure; without accountability for our actions we would all behave unjustly.
This certainly seems to be true for the anonymous trolls today. ...
Some may argue that denying Internet users the ability to post anonymously is a breach of their privacy and freedom of expression. But until the age of the Internet, anonymity was a rare thing. When someone spoke in public, his audience would naturally be able to see who was talking. ...
Content providers, stop allowing anonymous comments. ... In slowly lifting the veil of anonymity, perhaps we can see the troll not as the frightening monster of lore, but as what we all really are: human.

Expected TARP Cost: $25 Billion

Posted: 30 Nov 2010 02:38 AM PST

The estimated cost of TARP falls again:

TARP expected to cost U.S. only $25 billion, CBO says, by Lori Montgomery, Washington Post: The Troubled Asset Relief Program, which was widely reviled as a $700 billion bailout for Wall Street titans, is now expected to cost the federal government a mere $25 billion...
A new report released Monday by the nonpartisan Congressional Budget Office found that the cost of the program, known as TARP, has plummeted... "Clearly, it was not apparent when the TARP was created two years ago that the cost would turn out to be this low," the CBO report says. ...
The TARP was conceived in the final days of the Bush administration and pushed through a reluctant Congress in less than three weeks. It is widely thought to have helped stabilize a financial sector on the verge of collapse, though it remains hugely unpopular with the public. ...
All told, $389 billion has been distributed through the TARP, which expired in October. The CBO estimates that an additional $44 billion is still waiting to go out the door, primarily to troubled insurance giant American International Group and federal mortgage programs. That would bring total TARP outlays to $433 billion, of which about half - $216 billion - has been repaid. The rest of the TARP investments, meanwhile, have become markedly less risky, according to the CBO, and in many cases even profitable. ...
While the cost of the TARP is coming in far below expectations, it is just one of several massive government programs aimed at propping up the financial industry. The Federal Reserve and the FDIC have together guaranteed billions of dollars in bank debt.

links for 2010-11-29

Posted: 29 Nov 2010 10:02 PM PST

"A Transparently Cynical Policy Gesture"

Posted: 29 Nov 2010 12:47 PM PST

I was trying to think of a succinct way to respond to Obama's plans to freeze federal pay. This expresses my sentiment fairly well:

Freeze Frame: Yep, that's exactly what we needed: a transparently cynical policy gesture, trivial in scale but misguided in direction, and in effect conceding that your bitter political opponents have the right idea.

Update: I also like pgl's characterization of the policy:

This strikes me as short-term fiscal restraint but not a really serious attempt to getting the long-term fiscal house in order. In other words precisely the opposite of what we should be doing while in a very depressed economy.

"Milton Friedman Would Have Supported QE2"

Posted: 29 Nov 2010 09:12 AM PST

David Beckworth:

Case Closed: Milton Friedman Would Have Supported QE2, by David Beckworth: The debate over what Milton Friedman would say about QE2 can now be closed. Below is a Q&A with Milton Friedman following a speech he delivered in 2000. In this excerpted exchange with David Laidler, we learn that Friedman's prescription for Japan at that time is almost identical to what the Fed is doing now with QE2:...

David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?
Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it's a good example. I'm glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.
During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it's been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan's argument is, "Oh well, we've got the interest rate down to zero; what more can we do?"
It's very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.
The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

...Thanks to Doug Irwin for locating this gem.

November 29, 2010

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Paul Krugman: The Spanish Prisoner

Posted: 29 Nov 2010 12:42 AM PST

Spain provides a lesson for those who believe that the Fed should pursue a "hard-money" policy focused on "keeping the dollar strong and fighting the imaginary risks of inflation":

The Spanish Prisoner, by Paul Krugman, Commentary, NY Times: The best thing about the Irish right now is that there are so few of them. By itself, Ireland can't do all that much damage to Europe's prospects. ...
But then there's Spain. ... Like America, Spain experienced a huge property bubble, accompanied by a huge rise in private-sector debt. Like America, Spain fell into recession when that bubble burst... And like America, Spain has seen its budget deficit balloon thanks to plunging revenues and recession-related costs.
But unlike America, Spain is on the edge of a debt crisis. ... Why is Spain in so much trouble? In a word, it's the euro. ...
Through the good years,... the Spanish government appeared to be a model of both fiscal and financial responsibility... But ... prices and wages rose more rapidly in Spain than in the rest of Europe... And when the bubble burst, Spanish industry was left with costs that made it uncompetitive with other nations.
Now what? If Spain still had its own currency, like the United States ... it could have let that currency fall, making its industry competitive again. But with Spain on the euro, that option isn't available. Instead, Spain must achieve "internal devaluation": it must cut wages and prices until its costs are back in line with its neighbors.
And internal devaluation is an ugly affair. For one thing, it's slow: it normally take years of high unemployment to push wages down. Beyond that, falling wages mean falling incomes, while debt stays the same. So internal devaluation worsens the private sector's debt problems.
What all this means for Spain is very poor economic prospects over the next few years ... and ... fears about Spain's fiscal future.
Should Spain try to break out of this trap by leaving the euro...? ... Spain would be better off now if it had never adopted the euro — but trying to leave would create a huge banking crisis... — it's hard to see any Spanish government taking the risk of "de-euroizing."
So Spain is in effect a prisoner of the euro, leaving it with no good options.
The good news about America is that we aren't in that kind of trap: we still have our own currency, with all the flexibility that implies. ...
The bad news about America is that a powerful political faction is trying to shackle the Federal Reserve, in effect removing the one big advantage we have over the suffering Spaniards. Republican attacks on the Fed — demands that it stop trying to promote economic recovery and focus instead on keeping the dollar strong and fighting the imaginary risks of inflation — amount to a demand that we voluntarily put ourselves in the Spanish prison.
Let's hope that the Fed doesn't listen. Things in America are bad, but they could be much worse. And if the hard-money faction gets its way, they will be.

links for 2010-11-28

Posted: 28 Nov 2010 10:01 PM PST

The Administration's "Communication Problem"

Posted: 28 Nov 2010 10:17 AM PST

I find it incredible and disturbing that on the eve of the recent election in which Democrats got trounced, the administration was still trying to figure out if the unemployment problem is structural or cyclical.

Even if you attribute a large fraction of the unemployment to structural factors, there is still plenty of cyclical unemployment left over to target with policy. For example, the SF Fed estimates that only about 1.25% of the rise in the unemployment rate is due to structural factors. The rest of the rise to nearly 10% is due to cyclical problems. Even if you attribute half of the rise in unemployment to structural factors, that still leaves between 2% and 3% of the rise in unemployment to cyclical problems. Since neither monetary or fiscal policy is likely to be large or aggressive enough to fully solve the cyclical problem, there's no need to have the debate. That is, any reasonable fiscal policy that the administration might have pushed for would not fully solve the cyclical unemployment problem, so there was no real need to debate this issue, particularly on the eve of the election. No matter how you slice it, the numbers indicate that we have a substantial cyclical problem, and the administration needs to try to do something about it.

Even the person who had a lot to do with the "it's all structural and there's nothing we can do about it" attitude that some people have, President of the Federal Reserve Bank of Minneapolis Narayana Kocherlakota, recently said  QEII  "should lead to less unemployment and upward pressure on prices." Thus, even he believes unemployment can be helped through policy action.

The administration needed to be out there pushing for employment policies, doing everything it could to signal to people that it was on their side, not the side of corporations and big banks. That requires that you figure out that you have a cyclical unemployment problem before the election is all but over, and that you begin pushing for solutions in public forums. That push needs to start at the very top with Obama, and it needs to be reinforced every single day by other administration officials. One mention by Obama in a Saturday address to the nation doesn't get the job done.

I understand that Congress may not have supported additional policy to try to stimulate employment, but the fight would have been worth it no matter the outcome, and with the administration actually leading rather than accepting defeat before the game has been played, the outcome may not have been as preordained as the administration seems to believe:

Obama could learn from Bush, by Richard Wolffe, Commentary, LA Times: The day before his party's shellacking in this month's elections, President Obama sat down with his economic team to examine the single most important issue for voters across the country: jobs.
But the question on the agenda was not how to accelerate the recovery or target job creation... The president had called the meeting to grapple with what he and his propeller-head economists have been debating for some time: the wonkish question of whether today's high unemployment rate is structural or cyclical. ...
Two years into this presidency, and many months into a sluggish recovery, may be a little late to try to agree on the root cause of today's high unemployment.
This lack of agreement on economic fundamentals is a primary factor behind one of this White House's most obvious failures: communications. As one senior Obama advisor told me the day after the disastrous midterms: "It was hard to find a single economic message when the economic team couldn't agree on a single economic policy." ...
However, a new economic team will not resolve the communications problems... In fact, the president has been frustrated by his communications strategy for most of the last year. ... Obama told me six months ago that poor communications had hampered his ability to execute his policies, and that was after several months of internal reviews.
But the White House has failed to realize that the communications problem is a symptom of Obama's problems, not a cause. ... As Vice President Joe Biden told me, few voters know who saved the teachers' jobs in their children's schools, while many employees had no idea they were getting a tax cut with the extra money in their paychecks. Both were in fact thanks to Obama's Recovery Act.
The lesson of 2004 is that the president cannot be an empty vessel for hope, no matter how big or small his own hopeful base. And if he doesn't fill the vessel with his own story of how and why he delivered on hope, then his opponents will fill it for him. ...
The pundits have prematurely written this president's obituary too many times before. ... Reports of Obama's political death have been greatly exaggerated. To prove the pundits wrong, he needs to take control of writing his own story once more.

As far as I can tell, this hasn't changed. The administration is still allowing the other side to take control of policy debates. We saw a brief flash of change on the question of whether tax cuts should be extended for the wealthy, but nothing consistent, and certainly nothing like the effort we are seeing from opponents.

Update: Brad Delong:

Can we please get the White House back on message? ...

Let me point out that I think that the senior Obama advisor quoted is a liar.

Given who they were and what I know of how they all think, all the members of Obama's original economic policy team--except, I suspect, Peter Orszag--did indeed have different views of what would be the best policy to try to generate jobs in the short run, but they all agreed that anything was better than nothing. (Peter thought, I think, that only policies that promised credible long-term deficit reduction were better than nothing.)

Update: Paul Krugman:

...apparently Obama held a meeting ... to debate whether our unemployment problem is cyclical or structural.

What I want to know is, who was arguing for structural? I find it hard to think of anyone I know in the administration's economic team who would ... deny that the bulk of the rise in unemployment since 2007 is cyclical. And as I and others have been trying to point out, none of the signatures of structural unemployment are visible...

More generally, I can't think of any Democratic-leaning economists who think the problem is largely structural. Yet someone who has Obama's ear must think otherwise.

No wonder we're in such trouble. Obama must gravitate instinctively to people who give him bad economic advice, and who almost surely don't share the values he was elected to promote. That's what I'd call a structural problem.

"Workers Must Work Longer for Less Because the Rich are Living Longer"

Posted: 28 Nov 2010 09:57 AM PST

It's nice to see the local paper highlighting this side of the Social Security debate:

Washington elites making their move on Social Security, by Nancy Altman and Eric Kingson, Commentary, Register Guard: Alan Simpson and Erskine Bowles, the co-chairs of President Obama's deficit commission ... released their proposal to reduce the federal deficit... In releasing their plan, the co-chairs went out of their way to make clear that they were proposing changes to Social Security "for its own sake, not for deficit reduction." ... Simpson and Bowles just couldn't keep their hands off the program.
One thing they propose is increasing Social Security's retirement age to 69. ... Increasing the age to 69 would cut benefits by one-quarter from a decade ago, when the retirement age was 65. The co-chairs also want to increase the early retirement age to 64. ... As a new General Accountability Office report concluded,... Raising the early retirement age will shut out workers who are disproportionately low income and minority,... potentially forcing them to seek disability benefits or welfare. ...
Over the last quarter-century, life expectancy of lower-income men increased by one year, compared to five for upper-income men. And lower-income women have experienced declines in longevity. ... In effect, the Bowles-Simpson plan says to America's workers that they must work longer for less because the rich are living longer.
In addition to raising the retirement age, the Bowles-Simpson plan would reduce benefits to ... future recipients ... by as much as 36 percent... Bowles and Simpson ... also propose cutting the cost-of-living adjustment for those now receiving Social Security. ...
For all the talk of polarization, the American people are clear... A recent poll ... found that 67 percent ... opposed cuts in benefits; 69 percent opposed raising the Social Security retirement age to 69. ... Some 66 percent ... favored doing away with the current cap on payroll taxes to fund Social Security. Currently, taxpayers are taxed only on their first $106,800... Simply requiring ... taxpayers to pay the tax on all their income would bring in enough revenue to allow benefits to be raised across the board and still have the program in balance for at least the next 75 years. ...
 Despite the clear view of the American people, the elites in Washington seem to think it would be better to reduce benefits than to require the wealthy to pay the same percentage of their salaries into Social Security as everyone else does.
If politicians choose to cut Social Security benefits, when they could simply scrap the cap, we predict that this midterm will seem like a walk in the park compared to what awaits them in 2012.

[It's not even clear that all of the proposed changes are for Social Security's "own sake" rather than deficit reduction. The Government Accountability Office report referenced above indicates that increasing the early retirement age will actually have a negative impact on Social Security solvency.]

November 28, 2010

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links for 2010-11-27

Posted: 27 Nov 2010 10:01 PM PST

Toles: There is No 'Rest of the Trick'

Posted: 27 Nov 2010 12:00 PM PST

Tom Toles:

Toles2See also: Rising worker productivity, innovation boosts profits but may lessen hiring need, by Anthony Feld and Craig Torres (I think there's more to the delayed recovery of labor markets than just changes in productivity, but that's part of the story).

On the title, there is supposed to be a "rest of the trick," but it doesn't come until later. The idea is that the labor that is freed up from the increased productivity will be used to produce new goods and services thereby increasing the quantity and variety of the nation's output. In a dynamic, growing economy, even though there's a delay before the new jobs appear (and hence a need to help workers through the transition), the new jobs are supposed to be even better than the old ones. But as workers look forward, the fear is that that won't be the case. Workers who have lost jobs face an uncertain future where, if they can get new jobs at all, they are unlikely to pay as well or have the same level of benefits as the jobs they lost. New workers do not appear to have the same opportunities that their parents had, particularly workers without a college degree.

If workers could be assured that rising productivity would translate into better jobs and higher pay, the outlook would be different. But the last several decades of stagnant wages have undermined that promise. The growth that has occurred was not widely shared -- it did not trickle down as promised -- and the frustrations and uncertainties households have are understandable. It's a mistake to think that just because the economy starts growing again, all will be well. If the growth that occurs post-recession simply picks up where pre-recession growth left off, i.e. with income gains flowing mainly to the upper classes, and with even more income inequality than we have now, the frustrations and tensions will continue to build and our troubles will not have ended.

Holding Down the Economy for Political Gain?

Posted: 27 Nov 2010 10:06 AM PST

I have been hesitant to embrace the idea that the GOP is intentionally trying to keep the economy from recovering in order to make political gains. Instead, I have taken the more charitable route of assuming the policies they are pushing arise from honestly held ideological differences. But if members of the GOP are willing to take positions that undermine national defense just to make political gains, why shouldn't I assume they'd be willing to do something similar to the economy?:

...Indiana Sen. Richard Lugar ... has unapologetically backed Obama in support of START... In an attempt to rally bipartisan support for the treaty, the White House has enlisted the kind of GOP foreign policy wise men that Lugar exemplifies — among them former Secretaries of State Henry Kissinger and James A. Baker. But they have had no success with members of their own party, and it has left them scratching their heads over the source of the GOP opposition.
"It's not clear to me what it is," said Brent Scowcroft, a former national security adviser to President George H.W. Bush who noted that this START treaty is not very different from previous ones negotiated and ratified under Republican presidents. "I've got to think that it's the increasingly partisan nature and the desire for the president not to have a foreign policy victory." ...
In fact, Lugar has opposed most of Obama's domestic agenda, voting against the Recovery Act, the health care reform bill, and financial regulatory reform legislation. But on START he is adamant.
"One of those warheads could demolish my city of Indianapolis. Now some Americans may have forgotten that, I've not forgotten that," Lugar said... "At this point, I'm simply trying, in as civil a manner as possible to say to my colleagues, please do your duty by your country." ...

November 27, 2010

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links for 2010-11-26

Posted: 26 Nov 2010 10:02 PM PST

"Starve the Beast: Just Bull, not Good Economics"

Posted: 26 Nov 2010 11:07 AM PST

Bruce Bartlett says starve and feed the beast theory -- a favorite of Republicans -- is a "crackpot theory" that serves as a rationalization "for Republican budgetary irresponsibility":

Starve the Beast: Just Bull, not Good Economics, by Bruce Bartlett: A prime reason why we have a budget deficit problem in this country is because Republicans almost universally believe in a nonsensical idea called starve the beast (STB). By this theory, the one and only thing they need to do to be fiscally responsible is to cut taxes. They need not lift a finger to cut spending because it will magically come down, just as a child will reduce her spending if her allowance is cut — the precise analogy used by Ronald Reagan to defend this doctrine in a Feb. 5, 1981, address to the nation.
It ought to be obvious from the experience of the George W. Bush administration that cutting taxes has no effect whatsoever even on restraining spending, let alone actually bringing it down. Just to remind people, Bush inherited a budget surplus of 1.3 percent of the gross domestic product from Bill Clinton in fiscal year 2001. ...
When Bush took office in January 2001,... He immediately pushed for a huge tax cut, which Congress enacted. In 2002 and 2003, Bush demanded still more tax cuts, even as the economy showed no signs of having been stimulated by his previous tax cuts. The tax cuts and the slow economy caused revenues to evaporate. ...
Spending did not fall in response to the STB decimation of federal revenues; in fact, spending rose from 18.2 percent of GDP in 2001 to 19.6 percent in 2004, and would continue to rise to 20.7 percent of GDP in 2008. Insofar as the Bush administration was a test of STB, the evidence clearly shows not only that the theory doesn't work at all, but is in fact perverse. ...
But there is a flip side to STB at work as well. If tax cuts starve the beast, then it logically follows that tax increases must feed the beast. This variation of STB was on full display in a Nov. 21 Wall Street Journal op-ed article by ... Republican operative Steve Moore ... and Ohio University economist Richard Vedder. The Moore-Vedder article argues strenuously that tax increases must never be considered no matter how big the deficit is. The reason, ... is that tax increases always feed the beast, leading to spending increases larger than the tax increase ...
By this logic, the tax increase enacted in 1993, which raised the top federal income tax rate to 39.6 percent from 31 percent, should have caused a massive increase in the federal budget deficit. In fact, it did not. ... And contrary to another commonly-held Republican idea — that all tax increases reduce revenue via the Laffer Curve — revenues rose from 17.5 percent of GDP in 1992 to 20.6 percent in 2000. ...
Starve the beast is a crackpot theory, and its flip side that higher taxes invariably feed the beast is no better. They are just self-serving rationalizations for Republican budgetary irresponsibility.

Feldstein: Quantitative Easing and the Renminbi

Posted: 26 Nov 2010 11:01 AM PST

Martin Feldstein says China will use QE as an excuse to accelerate appreciation in the renminbi:

Quantitative Easing and the Renminbi, by Martin Feldstein, Commentary, Project Syndicate: The United States Federal Reserve's policy of "quantitative easing" is reducing the value of the dollar relative to other currencies that have floating exchange rates. ... The Fed's goal may be to stimulate domestic activity in the US and to reduce the risk of deflation. But, intended or not, the increased supply of dollars also affects the international value of the dollar. ...
But the market forces that cause ... currencies to appreciate do not work on the renminbi, because China has only very limited capital-account convertibility. ... The Chinese government ... determines the renminbi's exchange rate.
So the relevant question is how the Chinese government will choose to respond to the Fed's quantitative easing and the impact of the Fed's policy on other currencies. Between 2008 and June of this year, the Chinese held the renminbi at a fixed rate of 6.8 to the dollar. In June of this year, the Chinese authorities decided to allow the renminbi to appreciate at a moderate pace...
Indeed, in the five months since that announcement, the Chinese government has allowed the renminbi to appreciate by 3.1% – not much less than the average rate of appreciation that it allowed between 2006 and 2008. ...
Chinese Prime Minister Wen Jiabao has stressed that China does not want more rapid appreciation of the renminbi, because of the potential adverse impact on Chinese exporters. Rising Chinese exports between 2006 and 2008, despite renminbi appreciation, suggests that this worry is misplaced or at least exaggerated. But it is clear that ... the Fed's policy of quantitative easing now gives the Chinese scope for more rapid appreciation of the renminbi relative to the dollar.
Greater scope for renminbi appreciation comes at a good time for China. A stronger renminbi would help to reduce rising inflationary pressure in China by reducing the cost of imports, which would also increase Chinese households' real incomes – a key goal of China's new five-year plan. ...
In short, the Fed's policy of quantitative easing is likely to accelerate the rise of the renminbi – an outcome that is in China's interest no less than it is in America's. But don't expect US officials to proclaim that goal openly, or Chinese officials to express their gratitude.

November 26, 2010

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Paul Krugman: Eating the Irish

Posted: 26 Nov 2010 12:36 AM PST

Ireland's austerity measures -- which amount to punishing the public for bankers' mistakes -- aren't working:

Eating the Irish, by Paul Krugman, Commentary, NY Times: What we need now is another Jonathan Swift. Most people know Swift as the author of "Gulliver's Travels." But recent events have me thinking of his 1729 essay "A Modest Proposal," in which he observed the dire poverty of the Irish, and offered a solution: sell the children as food. "I grant this food will be somewhat dear," he admitted, but this would make it "very proper for landlords, who, as they have already devoured most of the parents, seem to have the best title to the children."
O.K., these days it's not the landlords, it's the bankers — and they're just impoverishing the populace, not eating it. But only a satirist — and one with a very savage pen — could do justice to what's happening to Ireland now.
The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy ... financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.
Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. ... But, no, the Irish government stepped in to guarantee the banks' debt, turning private losses into public obligations.
Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses,... the nation's creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts... — ... those spending cuts have caused a severe recession...
But there is no alternative, say the serious people: all of this is necessary to restore confidence. Strange to say, however, confidence is not improving. On the contrary: investors have noticed that ... austerity measures are depressing the Irish economy — and are fleeing...
Now what? Last weekend Ireland and its neighbors put together ... a "bailout." But what really happened was that the Irish government promised to impose even more pain, in return for a credit line ... that would presumably give Ireland more time to, um, restore confidence. Markets, understandably, were not impressed: interest rates on Irish bonds have risen even further.
Does it really have to be this way? ...Ireland, say the wise heads..., must continue to inflict pain on its citizens — because to do anything else would fatally undermine confidence.
But Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers' sins is worse than a crime; it's a mistake.

links for 2010-11-25

Posted: 25 Nov 2010 10:02 PM PST

"The Retreat of Macroeconomic Policy"

Posted: 25 Nov 2010 09:36 AM PST

Brad DeLong:

The Retreat of Macroeconomic Policy, by J. Bradford DeLong, Project Syndicate: One disturbing thing about studying economic history is how things that happen in the present change ... our understanding of the past. For decades, I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy. But the political reaction to the Great Recession has changed the way we should think about this issue.
Governments before World War I – and even more so before WWII – did not embrace the mission of minimizing unemployment during economic downturns. There were three reasons...
First, there was a hard-money lobby... Second, the working classes that were hardest-hit by high unemployment generally did not have the vote. ... Third, knowledge about the economy was in its adolescence. ...
All three of these factors vanished between the world wars. ... Today, we have next to no hard-money lobby, almost all investors have substantially diversified portfolios, and nearly everybody suffers mightily when unemployment is high and capacity utilization and spending are low. Economists today know a great deal more – albeit not as much as we would like... And the working classes all have the vote.
Thus, I would confidently lecture only three short years ago that the days when governments could stand back and let the business cycle wreak havoc... No such government today, I said, could or would tolerate any prolonged period in which the unemployment rate was kissing 10% and inflation was quiescent without doing something major about it.
I was wrong. That is precisely what is happening.
How did we get here? How can the US have a large political movement – the Tea Party – pushing for the hardest of hard-money policies when there is no hard-money lobby with its wealth on the line? How is it that the unemployed, and those who fear they might be the next wave of unemployed, do not register to vote? Why are politicians not terrified of their displeasure?
Economic questions abound, too. Why are the principles of nominal income determination, which I thought largely settled since 1829, now being questioned? Why is the idea, common to John Maynard Keynes, Milton Friedman, Knut Wicksell, Irving Fisher, and Walter Bagehot alike, that governments must intervene strategically in financial markets to stabilize economy-wide spending now a contested one?
It is now clear that the right-wing opponents to the Obama administration's policies are ... objecting to the very idea that government should try to serve a stabilizing macroeconomic role.
Today, the flow of economy-wide spending is low. ... Yet..., here we are. The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.

I wrote about something similar here: The Return of the Laissez Faire Economy.

Happy Thanksgiving

Posted: 25 Nov 2010 08:31 AM PST

A chance for me to say thank you to everyone who visits here.


November 25, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

links for 2010-11-24

Posted: 24 Nov 2010 10:02 PM PST

Initial Claims for Unemployment Fall, But So Do Orders for Durable Goods

Posted: 24 Nov 2010 09:36 AM PST

At MoneyWatch, I have a (quick) reaction to today's release of data on initial claims for unemployment and orders for durable goods:

Initial Claims for Unemployment Fall, But So Do Orders for Durable Goods

[Travel day today.]