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September 12, 2011

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Latest Posts from Economist's View


Paul Krugman: An Impeccable Disaster

Posted: 12 Sep 2011 12:24 AM PDT

The "euro is now at risk of collapse":

An Impeccable Disaster, by Paul Krugman, Commentary, NY Times: On Thursday Jean-Claude Trichet, the president of the European Central Bank or E.C.B. — Europe's equivalent to Ben Bernanke — lost his sang-froid. In response to a question about whether the E.C.B. is becoming a "bad bank" thanks to its purchases of troubled nations' debt, Mr. Trichet, his voice rising, insisted that his institution has performed "impeccably, impeccably!" as a guardian of price stability.
Indeed it has. And that's why the euro is now at risk of collapse. ... At this point countries in crisis account for about a third of the euro area's G.D.P., so the common European currency itself is under existential threat. ...
Listen to many European leaders — especially, but by no means only, the Germans — and you'd think that their continent's troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they're paying the price, and fiscal austerity is the only answer.
Yet this story applies, if at all, to Greece and nobody else. Spain in particular had a budget surplus and low debt before the 2008 financial crisis; its fiscal record, one might say, was impeccable. ...
So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions. ...
Now, a country with its own currency, like Britain, can short-circuit this process:... the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed); but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. ...
What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. ...
We're not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer. So will the E.C.B. do what needs to be done — lend freely and cut rates? Or will European leaders remain too focused on punishing debtors to save themselves? The whole world is watching.

"Sports Stories Written by Algorithm"

Posted: 12 Sep 2011 12:15 AM PDT

Should sports reporters worry that computers will take their jobs?:

Sports stories written by algorithm, by Shane Greenstein: Have you suspected for some time that most writing about sporting events is formulaic? Well, suspect no more! It is possible to have a computer write a sports story merely from the box score. ... It is described in this article.
Now, seriously, there are two ways to read this article, and one of them is substantially more right than the other. The first interpretation would foresee a massive replacement of sports writers with computers... The second interpretation would foresee the growth of a new service, the creation of stories for events that previously did not receive them — such as local high school games.
I think we will see more of the latter in the next few years.
First of all, the computers do not yet employ that extra verve or wordplay or attitude that makes for great sports writing. ... So the best sports writers are in no danger of losing their uniqueness, the voice that gives their writing value. Second, there is considerable demand for the second type of service. There are lots of sporting events played all over the country. A routine sports story would enhance a web page, and add just a nice element to a summary. Lots of places will pay ten dollars for that (which is what the price is today), and that price will decline with time.
Think about it: Much of sporting news follows a routine canon, a contest with ups and downs and comebacks and heroism and more. These are played out every day on high school playgrounds and in many others places, but the only stories ever written are those written in the heads of the right fielder. Now we have another source.
Onward to a new form of journalism!

Fed Watch: A Modest Monetary Proposal

Posted: 12 Sep 2011 12:06 AM PDT

Tim Duy:

A Modest Monetary Proposal, by Tim Duy: I have been reading and rereading Raghuram Rajan's piece questioning the effectiveness of proposals to raise inflation targets. I tend to be pretty sympathetic to such proposals; traditional monetary policy obviously hit it limit long ago, and active commitments to higher inflation to depress real rates seems to be a logical next step. That said, Rajan has a number of good points questioning both the implementation and efficacy of higher inflation targets. Can the Federal Reserve credibly commit to higher inflation? Can they credibly commit to regain control over inflation at some later time? Most striking, I think, was Rajan's reflection, that a small inflation increase really will not do much good at all:

Moreover, the central bank needs rapid, sizeable inflation to bring down real debt values quickly – a slow increase in inflation (especially if well signaled by the central bank) would have limited effect, because maturing debt would demand not only higher nominal rates, but also an inflation-risk premium to roll over claims.

A mechanism to rapidly accelerate the process of household rebalancing would be extremely helpful. It is not clear that an inflation target of 3 percent is such a mechanism. Something more dramatic is required.

Would that something more dramatic be QE3? I see that over the weekend, St. Louis Federal Reserve President James Bullard came out in favor of QE3 should more easing be necessary. From the Wall Street Journal:

In an interview with the Business News Network, James Bullard said "I still think our most potent weapon is to do more QE3 if necessary," in a reference to the QE2 bond buying program that ended in the summer.

He goes on to undermine the policy that Fed seems to be coalescing around:

Bullard said the experience of the 1960s-era "Operation Twist," when the Fed and Treasury together worked to try to push down long-term borrowing rates, should be cautionary. Bullard said that effort was not particularly effective, which is why more outright purchases would most likely be the way to go.

My sense is that Bullard prefers whatever policy option produces the biggest headline for him. That said, he is probably right on this one – a portfolio rebalancing is a move in the right direction, but don't expect miracles. But could any miracles really be expected from more quantitative easing? As Rajan notes:

Start with the question of whether central banks that have spent decades establishing and maintaining anti-inflation credibility can generate faster price growth in an environment of low interest rates. Japan tried – and failed: banks were too willing to hold the reserves that the central bank released as it bought back bonds.

To be most effective, monetary policy needs to push on some variable that will have a substantial impact on demand. Trading safe assets for cash at near zero interest rates just doesn't accomplish that. But it's the only biggish lever we seem to have left, but it simply is not direct enough. What is needed is to get the money in the hands of someone who will use it, rather than just sloshing around banks as excess reserves. If it is stuck in the banking system, it can't create demand that at least causes a big shift in the prices of both goods and wages.

Maybe at this point we need to be thinking about something a little more direct – one of the proposals floating around is to use Fannie and Freddie to purchase nearly all the outstanding mortgages and refinance them at lower interest rates regardless of loan to value ratios. Better yet, to apply some consistent system of principle reduction for everyone, not just underwater mortgages. Lift the entire boat at once, rather than trying to discern between the most and least deserving lifeboats.

Something like this is not a new idea, but it gets held up by, among other things, by the issue of the cost. So maybe the Treasury needs to issue a class of bonds the Federal Reserve agrees to purchase and hold – essentially monetizing the rebuilding of household balance sheets and freeing future tax payers from the burden of repaying the debt.

I suspect that this entails a sharp, one time increase in the price level, and this is the tricky part. The Fed would have to both accept that increase and make clear they are committed to return to their 2 percent target. I don't think this is impossible, but it might be difficult to accomplish quickly. Also note that once we can lift up off the zero-bound, traditional monetary policy can come back into play to manage inflation. Moreover, they have room to reduce the remainder of the balance sheet, but, when all is said and done, they should not expect to return to the pre-crisis trend, and instead acknowledge the one-time shock to the balance sheet.

Bottom Line: Rather than the more indirect approaches left to monetary policy, maybe there is room for a one-time effort to monetize the rebalancing of household balance sheets, which perhaps can be viewed as a more "modest" alternative to monetization of general government spending. Perhaps the former can be more credibly contained to a one-time event.

links for 2011-09-11

Posted: 11 Sep 2011 10:01 PM PDT

"The Magical World of Voodoo 'Economists'"

Posted: 11 Sep 2011 11:07 AM PDT

A quickie on a busy weekend -- Steven Pearlstein:

The magical world of voodoo 'economists', by Steven Pearlstein, Commentary, Washington Post: If you came up with a bumper sticker that pulls together the platform of this year's crop of Republican presidential candidates, it would have to be:
Repeal the 20th century. Vote GOP.

It's not just the 21st century they want to turn the clock back on — health-care reform, global warming and the financial regulations passed in the wake of the recent financial crises and accounting scandals.

These folks are actually talking about repealing the Clean Air Act, the Clean Water Act and the Environmental Protection Agency, created in 1970s.

They're talking about abolishing Medicare and Medicaid, which passed in the 1960s, and Social Security, created in the 1930s.

They reject as thoroughly discredited all of Keynesian economics, including the efficacy of fiscal stimulus, preferring the budget-balancing economic policies that turned the 1929 stock market crash into the Great Depression.

They also reject the efficacy of monetary stimulus to fight recession, and give the strong impression they wouldn't mind abolishing the Federal Reserve and putting the country back on the gold standard.

They refuse to embrace Darwin's theory of evolution, which has been widely accepted since the Scopes Trial of the 1920s.

One of them is even talking about repealing the 16th and 17th amendments to the Constitution, allowing for a federal income tax and the direct election of senators — landmarks of the Progressive Era.

What's next — repeal of quantum physics?...[continue reading]...

The Lack of Ice Age

Posted: 11 Sep 2011 09:36 AM PDT

Ice[via]

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