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September 23, 2011

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Latest Posts from Economist's View


Paul Krugman: The Social Contract

Posted: 23 Sep 2011 12:33 AM PDT

Who are the real victims of class warfare?:

The Social Contract, by Paul Krugman, Commentary, NY Times: This week President Obama said the obvious: that wealthy Americans, many of whom pay remarkably little in taxes, should bear part of the cost of reducing the long-run budget deficit. And Republicans like Representative Paul Ryan responded with shrieks of "class warfare."
It was, of course, nothing of the sort. On the contrary, it's people like Mr. Ryan, who want to exempt the very rich from bearing any of the burden of making our finances sustainable, who are waging class war.
As background, it helps to know what has been happening to incomes over the past three decades. Detailed estimates from the Congressional Budget Office — which only go up to 2005, but the basic picture surely hasn't changed — show that between 1979 and 2005 the inflation-adjusted income of families in the middle of the income distribution rose 21 percent. That's growth, but it's slow, especially compared with the 100 percent rise in median income over a generation after World War II.
Meanwhile, over the same period, the income of the very rich, the top 100th of 1 percent of the income distribution, rose by 480 percent. No, that isn't a misprint. In 2005 dollars, the average annual income of that group rose from $4.2 million to $24.3 million.
So do the wealthy look to you like the victims of class warfare? ...

Elizabeth Warren, the financial reformer who is now running for the United States Senate in Massachusetts, recently made some eloquent remarks... "There is nobody in this country who got rich on his own. Nobody," she declared, pointing out that the rich can only get rich thanks to the "social contract" that provides a decent, functioning society in which they can prosper.
Which brings us back to those cries of "class warfare."
Republicans claim to be deeply worried by budget deficits. Indeed, Mr. Ryan has called the deficit an "existential threat" to America. Yet they are insisting that the wealthy — who presumably have as much of a stake as everyone else in the nation's future — should not be called upon to play any role in warding off that existential threat.
Well, that amounts to a demand that a small number of very lucky people be exempted from the social contract that applies to everyone else. And that, in case you're wondering, is what real class warfare looks like.

Elizabeth Warren on the Debt Crisis, Fair Taxation, and the Social Contract

Posted: 23 Sep 2011 12:24 AM PDT

Fed Watch: Already Thinking About November

Posted: 23 Sep 2011 12:15 AM PDT

Tim Duy:

Already Thinking About November, by Tim Duy: The ink is barely dry on the Fed's policy shift this week, but the debate is already shifting to the next move. Jon Hilsenrath at the Wall Street Journal offers this assessment:

Since lecturing Japanese officials in the late 1990s and early 2000s about how they should deal with their nation's economic malaise, Mr. Bernanke has made clear his mindset about post-bubble economics: Keep experimenting as long as the economy is stumbling and inflation is muted.

I think Hilsenrath is correct - as long as the economy continues to stumble along, the Fed will continue to tinker with policy. The likely policy paths:

Other options have been discussed. Among them, officials are deep in talks about whether the Fed should shift communications strategy to be clearer about what it would take to get them to raise rates. More clarity might quell any lingering fears in financial markets that the bank might prematurely tighten monetary policy. The Fed also could buy more securities, lower a 0.25% rate it pays banks on their cash deposits at the central bank or consider other unconventional measures.

I would like some more clarity on the "other" measures, but that aside, the usual suspects. I tend to think it will be a challenge to shift the communications strategy given the willingness of Fed policymakers to publicly challenge the stance of monetary policy. Moreover, the stated preferences of policymakers to keep their options open seems incompatible with a firm policy commitment. In any event, should we be looking for more at the November meeting? One former Fed staffer says no:

Nathan Sheets, who retired as director of the Federal Reserve's international affairs group this summer, said he believes the central bank will pause for a while after taking unconventional steps in August and September to bring down long-term interest rates as it assesses the impact of its actions.

"I wouldn't expect at its November meeting the Fed is going to roll out some additional package," he said in an interview.

Sheets sees the Federal Reserve's past two policy moves as aggressive:

Mr. Sheets, who is now the top international economist at Citigroup Inc., said he believed the combination of the actions the Fed took in August and this week were substantial. Both moves provide substantial stimulus to the economy by pushing long-term interest rates down sharply and there is good reason to see how those impacts play out, he said.

He said he was puzzled by the stock market's sell-off in response to the latest move, which he saw as more aggressive than he expected.

As I noted earlier today, the plunging ten-year TIPS breakevens are a clear no confidence vote for monetary policy. And quite frankly, not surprising. The Fed downgraded their assessment, highlighting the substantial risks to an already subpar outcome, and produced what was generally expected - mostly a shift in asset mix that no one believes is anywhere near enough to serve as a counterweight to the severe strains bearing down on the economy. Moreover, the ongoing dissentions and half-measures only further reinforce the notion that the Fed may not be done, but they are not going to pull out all the stops. At least not until it is too late.

As for November, nothing can be ruled out. If you believe there is a high probability Europe implodes between now and then, then you should also believe the odds are high the Fed will act. Aside from financial crisis, all will depend on the flow of data. If the data falls broadly in-line with the Fed's expectation of firming activity in the second half, then they could try to take a pass at the next meeting. But if the forward looking indicators deteriorate, and bring down inflation expectations as well, the Fed will be pressed into service.

Regarding the flow of data/news, note that FedEx has downgraded its outlook:

Providing fresh evidence of weakening global trade, FedEx Corp. said Thursday it is cutting capacity and trimmed its full-year earnings forecast amid weaker demand, mainly due to slowing sales of consumer electronics made in Asia.

The news comes as a slide in Asian air cargo traffic that started in July has shown no immediate signs of abating. The slowdown extends to the makers of perishable foods, high-end apparel and automotive and industrial parts that fill the holds of planes flown by FedEx and rivals such as United Parcel Service Inc. and Cathay Pacific Airways Ltd.

"The consumer just doesn't have an appetite" for spending more, Chief Executive Fred Smith said during a post-earnings conference call. As a result, he added, "we don't anticipate a significant peak [shipping season] this year."

The half-empty cargo holds of the planes that connect manufacturing centers to their end customers provide a stark example of the weak demand outlook facing the global economy, led by a sharp about-face in Asia's once-humming workshops.

This follows along with expectations of a weak holiday shopping season:

Christmas is already shaping up to be a struggle for the nation's retailers.

It isn't even fall yet, but the first forecasts of the all-important year-end period are out, and they're pointing to more muted gains than last year. Shoppers are expected to make fewer trips to stores and, when they do show up, to head straight for bargains they've researched in advance.

Meanwhile, initial unemployment claims show no indication the pain in the labor market will soon ease. Overall, the incoming news might not point to recession, but it sure feels a lot like the post-2001 recession slowdown that send payroll growth into negative territory. Of course, the answer to that turned out to be the housing bubble, and we sure aren't doing that again anytime soon.

Bottom Line: The Fed likely wants to take a break. The US economic data and the fast moving situation in Europe, however, are likely to put the Fed back into play sooner than later.

links for 2011-09-22

Posted: 22 Sep 2011 10:22 PM PDT

Fed Watch: Working on the Wrong Margins

Posted: 22 Sep 2011 02:07 PM PDT

Tim Duy:

Working on the Wrong Margins, by Tim Duy: Brad DeLongs offers some tepid support of yesterday's FOMC outcome.

At the moment ten-year Treasury bonds are selling at a present-value discount of20 14%, and thirty-year Treasury bonds are selling at a present-value discount of 45%. Guess that half of these discounts are expectations of interest rate changes and half are rewards for risk bearing. Then if the Fed buys half 10-year and half 30-year bonds it takes risk currently valued at $60 billion off of the private sector's balance sheet. A ten-year corporate investment project of about $150 billion carries $60 billion worth of risk with it, so if this works and if the risk-bearing capacity freed-up by this version of quantitative easing is then deployed elsewhere, we will have an extra $150 billion of business investment over the year or so it takes to roll out this program and for it to have its effect.

Still, the outcome is too little:

$150 billion is, as Christina Romer likes to say "not chopped liver"--not even in a $15 trillion economy. But it is about 1/10 of our current problem--maybe less when you reflect that our current-problem is a multi-year problem.

I am skeptical that taking on longer-term US debt really draws off much if any risk-bearing capacity off the public's balance sheet, thereby freeing up capacity for additional business investment. I am even more skeptical that even if such risk were reduced, firms would take advantage. There is plenty of cash already on corporate balance sheets, but little incentive to put it to work in an economic environment characterized by slow and uncertain patterns of growth.

I think market participants are also skeptical that this is even a marginally effective policy - note that as of last week, the ten-year TIPS breakeven was just a notch under 2%. As of right now, the breakeven has plunged to 1.72%. Not exactly a ringing endorsement of the Fed's actions. Indeed, quite the opposite - the Fed's relative inaction is intensifying disinflationary expectations.

Simply put, it sure looks like the Fed is playing around at the wrong margins. Barry Ritholtz summarizes:

There is no calvary coming to the rescue.

Will the calvary eventually come? It will not be long before we are right back where we were last fall - a 1.5% ten-year breakeven, pushing the Fed toward another round of quantitative easing. But will the Fed have the stomach to bring it out in meaningful quantities to compensate for operating on the weak margins of monetary policy? They need to stop thinking on the order of hundreds of billions and start thinking on the order of trillions. And they need to be willing to allow inflation to rise above 2% to be most effective. It seems, however, that this is too big a package to expect from the Fed.

Bottom Line: We need policy that decisively lifts the economy off the zero bound. Policies that work through traditional avenues, primarily the credit channel, have been ineffective. Surely effective would be a cooperation between fiscal and monetary authorities - print the money and spend it. We are faced with increasing expectations if disinflation coupled with fears to spend more because of the size of the deficit. There should be more than ample room for policy coordination, and that policymakers are not more aggressive at this point is bewildering. Inaction on the part of the Administration and the Federal Reserve is endangering both of them politically. The former is risking the White House, the latter is only adding fuel to the fire of right-wing criticism by engaging in half-measures with minimal, difficult to quantify results. Caught in the middle is the American people, staring at the possibilty of another lost decade.

"The Unexamined Crisis"

Posted: 22 Sep 2011 12:42 PM PDT

Luigi Zingales is discouraged:

The Unexamined Crisis, by Luigi Zingales, Commentary, Project Syndicate: Three years have now passed since the collapse of Lehman Brothers, which triggered the start of the most acute phase of the 2007-2008 financial crisis. Is the financial world a safer place today? ... To be sure, America has the 2,000-page Dodd Frank Act... Unfortunately, few of those pages address any problem suspected to have caused the financial crisis.
Bond investors' heavy reliance on credit-rating agencies, which tend to be laxer with powerful issuers, has not been fixed. The shadow banking sector's dependence on the official banking sector's liquidity and guarantees, and thus ultimately on the government, has not even been touched. And limits on financial institutions' leverage will change only in the next decade. The list of shortcomings goes on and on. ...
The Financial Crisis Inquiry Commission, chaired by Phil Angelides, did produce a report on the crisis... Unfortunately, the Commission – composed mostly of elected officials, rather than experts – wasted its time in political squabbles. ... After all,... the Commission's focus was on supporting or discrediting (depending on the commissioner's political party) the Dodd/Frank legislation, rather than on establishing the truth.
It was a great opportunity lost. With its subpoena power, the Angelides Commission could have collected and made available to researchers the data needed to answer many crucial questions about the crisis. Did companies that compensated their traders (and not just their CEOs) more highly take more risk? Was financial institutions' assumption of excessive risk the result of incompetence or stupidity, or was it a rational response to the implicit guarantee offered by the government? Did the market see the spread of lax lending standards and price the relevant pools of loans accordingly, or was it fooled? Who were the ultimate buyers of these toxic products, and why did they buy them? How important a role was played by fraud?
These are the questions that needed to be answered. Unfortunately, they are likely to remain unanswered...

I shouldn't be surprised that the banks are winning the battle against regulation, but I have to admit I expected a better, tougher, more on point response than what we have seen to date.

"Boehner, Cantor In Big Trouble"

Posted: 22 Sep 2011 09:09 AM PDT

Are House Democrats finally figuring out who their friends are?:

Boehner, Cantor In Big Trouble After Big CR Defeat, by Stan Collender: House Democrats last night didn't do what they have done so many times before since the 2010 election: they didn't provide the House leadership with the votes it needed to pass a budget bill.
A combination (you can't really refer to it as a "coalition" because they weren't working together) of tea party Republicans and Democrats voted against the leadership-supported continuing resolution and it went down 195 to 230 with 48 Republicans voting no.
This may have been the worst defeat and biggest rebuke ever for House Speaker John Boehner (R-OH) and Majority Leader Eric Cantor (R-VA). A number of House members told me after the vote that both leaders had worked the vote hard but couldn't convince enough (some thought "any" was more correct) to vote for the legislation. Two members even told me that Boehner had gone to the congressional leadership equivalent of DEFCON 1 by moving way beyond twisting arms to threatening GOP members with losing their committee assignments -- almost the ultimate congressional punishment -- if they didn't vote for the bill. Even that didn't work. ...
[N]o matter how they try to spin it today as being the Democrats' fault, this in fact was a huge slap in the face of the GOP leadership by the tea party. It's not the first time the tea partiers have voted against the GOP leadership, but it is the most visible and painful.
The big question now is the one we've been wondering about for some time in analogous budget situations: Where do Boehner and Cantor go from here? ...
The problem ... is that ... moving toward the tea party may not guarantee that the bill passes. On the other hand, moving in the other direction on this one bill very likely will cause the tea party to split permanently with the two House leaders. The tea partiers have been leery of both Boehner and Cantor since the start of the year. In fact, a tea party supporter is running against Boehner in the GOP primary and the Virginia tea party has been threatening to challenge Cantor since before the 2010 election. Working with House Democrats at this point might get the bill passed but might also make it all but impossible for the GOP leadership to lead in 2012, that is, in the months heading into an election where anger about Congress is already at an all-time high.

Steve Benen explains further:

House Republican leaders had a plan and were fairly confident it would work. Last week, the Senate easily passed emergency disaster funding and urged the House to follow suit. This week, House GOP leaders decided to respond by thumbing their noses at the Senate, including disaster aid in a larger spending bill, offsetting the costs by slashing a clean-energy program, and would tell the Senate to pass the bill or they'd shutdown the government.
All they had to do was pass the larger measure, called a "continuing resolution" (CR), which would keep the government running, and would set the stage for another showdown. Boehner, Cantor, and company thought they had the votes. They didn't. ... It wasn't especially close...
At this point, House Republican leaders have a decision to make. They can:
1. Give up on holding disaster aid hostage, put the Senate's FEMA bill in the CR, and pass it. The bill would then sail through the Senate and avoid a shutdown, but it would further weaken Boehner's leadership.
2. Abandon the deal Boehner struck with Democrats last month, cut more spending, and pick up votes from the far-right flank. The Senate would reject this immediately, making a shutdown almost unavoidable. The Speaker's word would become useless, but the right would be happy.
3. Find some different offsets to pay for disaster relief, which some Dems may find acceptable.
4. Remove disaster aid from the CR altogether, and take the issue up as a separate legislative debate.
A decision will have to be made fairly quickly — the deadline is a week from tomorrow, and Congress is supposed to be out next week.

We could hope that they'd put people before politics, but as the unemployed can tell us, that's not going to happen.

"The Fed's Latest Moves May Fall Flat"

Posted: 22 Sep 2011 07:47 AM PDT

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