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November 29, 2011

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How to Avoid Public Anger over Bank Bailouts

Posted: 29 Nov 2011 01:08 AM PST

How to avoid public anger over bank bailouts, e.g. the recent uproar over the report from Bloomberg that too big to fail banks made $13 billion on loans from the discount window:

Better than a Bank Bailout: A Federal Lottery

(I'm not sure if I'm serious about this or not, the point is that we need to focus policy on people, not banks.)

Time for the Fed to Take Over the ECB’s Job?

Posted: 29 Nov 2011 12:42 AM PST

Dean Baker says the Fed should step in if the ECB refuses to act as a lender of last resort (Antonio Fatas is also frustrated with the ECB's failure to act):

Time for the Fed to Take Over the European Central Bank's Job, by Dean Baker, Al Jazeera English: The European Central Bank (ECB) has been working hard to convince the world that it is not competent to act as central bank. One of the main responsibilities of a central bank is to act as the lender of last resort in a crisis. The ECB is insisting that it will not fill this role. It ... would sooner see the eurozone collapse than risk inflation exceeding its 2.0 percent target.
It would be bad enough if the ECB's incompetence just put Europe's economy at risk. ... However, it is also likely that the financial panic following the collapse of the euro will lead to the same sort of financial freeze-up that we saw following the collapse of Lehman. In this case,... we will be seeing unemployment possibly rising into a 14-15 percent range. This would be a really serious disaster.
Fortunately, the Fed has the tools needed to prevent this sort of meltdown. It can simply take the steps that the ECB has failed to do. First and most importantly it has to guarantee the sovereign debt of eurozone countries. ... This doesn't mean giving the eurozone countries a blank check. The Fed can adjust the interest rate at which it guarantees debt depending on the extent to which countries reform their fiscal systems. ... The difference between a 2.0 percent interest rate and 7.0 percent interest would be a powerful incentive to eliminate corruption and waste. ...
Of course this sort of intervention will look horrible from the standpoint of the eurozone countries. It will appear as though they cannot be trusted to manage their own central bank and deal with their own economic affairs.
Unfortunately, this is the case. They have entrusted the continent's most important economic institution to a group of ideological zealots who are infatuated by the sight of low inflation rates...
Perhaps the Europeans will respond... But if they can't rise to the task, we should not allow the ECB ideologues to wreak havoc on the lives of tens of millions of innocent people in Europe, the developing world, and here in the United States.

While the Fed is solving the world's problems, it might also think about the high rates of unemployment that already exist in the US, and how easing policy at home could help.

Republicans Don't Mind a Payroll Tax Increase

Posted: 29 Nov 2011 12:33 AM PST

John Kyl doesn't mind some types of tax increases:

Saturday's Jon Kyl vs. Sunday's Jon Kyl, by Steve Benen: On Saturday, Senate Minority Whip Jon Kyl (R-Ariz.), along with his five other GOP colleagues from the super-committee, wrote a Washington Post op-ed on the debt-reduction process. Kyl's point wasn't subtle: he and other Republicans just can't accept tax increases, at least for the foreseeable future.

Kyl called tax increases "the wrong medicine for our ailing economy," and said the mere possibility of tax increases has "put a wet blanket over job creation and economic recovery."

That was Saturday. Just 24 hours later, Kyl told a national television audience he's comfortable with a payroll tax increase on all American workers on 2012. ......

Senate Democrats are moving forward with its plan to extend the payroll tax cut, with a vote perhaps coming as early as this week. Republicans will filibuster the proposal, though Sen. Pat Toomey (R-Pa.) told ABC yesterday that "probably some package" that includes a payroll extension "might very well pass."

The reason for the objection, as Steve Benen points out, is that the payroll tax cut would be paid for by increasing taxes on the very wealthy. Can't have that. But unlike their reaction to other types of proposed tax increases, Republicans are not insisting that spending be cut to protect workers from a tax increase. Wonder why?

Links for 2011-11-29

Posted: 29 Nov 2011 12:06 AM PST

Can the US Decouple From the Eurozone?

Posted: 28 Nov 2011 04:23 PM PST

Tim Duy:

Can the US Decouple From the Eurozone?, by Tim Duy: The OECD cut forecasts for 2012. Via the Wall Street Journal:

The Paris-based think tank cut its forecasts among its 34 members to 1.9% this year and 1.6% in 2012, from 2.3% and 2.8% in May. The OECD said it expects the euro zone's economy to contract by 1% at an annualized rate in the last quarter of this year and by 0.4% in the first three months of 2012.

For 2012, the OECD said the 17-country bloc's economy will only grow by 0.2%.

This is far too optimistic. The European economy is about to fall over a cliff, and last week's Eurostat report on new industrial orders reveals that manufacturing is leading the way. New orders fell by a whopping 6.4%, a move that hearkens back to the darkest days of 2008. Will the US be able to resist the pull of the European downturn? These charts don't offer much optimism:

Fedwatch1

Fedwatch2

Not a perfect match, but enough to suggest the idea of substantial decoupling looks like more myth than reality, especially in the face of a severe recession. Could this be why US Treasury yields held steady today even as equities roared forward?  

Bottom Line: Don't take US resilience for granted this time around - Europe is getting ugly, and it is far too late to prevent severe recession. The best policymakers can hope for at this point is too avoid a depression.

The Source of Cronyism Is *Not* Social Programs for the Poor

Posted: 28 Nov 2011 11:34 AM PST

Jeff Sachs:

Fairness and the Occupy Movement Revisited, by Jeff Sachs: A recent Wall Street Journal article by Arthur C. Brooks on the Occupy Movement and fairness says some interesting things about potential common ground between free-market ideas and the Occupy movement. Yet Brooks also commits some very important errors. ...
Brooks, the head of the American Enterprise Institute, denounces crony capitalism as the dark side of American politics and economics. On this we should all agree. The level of corruption in Washington is staggering, growing, and rife in both parties. ...
The Republicans answer to crony capitalism is to slash government. Yet by this they mean mainly an attack on the remaining social programs. This is a kind of bait-and-switch strategy: rev up the anger against government corruption, and then kill the life-support programs of the poor and working class. Crony capitalism exists mainly in the big-ticket sectors of the economy -- banking, oil, real estate, private health insurance, military contractors, and infrastructure -- not in the essential but much smaller parts of the economy: malnutrition of poor children, lack of quality pre-school, insufficient job training, and inadequate student loan coverage.
Yes, crony capitalism should be confronted anywhere in the economy, yet cutting the life-support systems for the working class and poor won't fix government, but instead would cripple the prospects of more than 100 million poor and near-poor Americans. To control crony capitalism, we need to direct our attention where it belongs: the wealth-support systems of the rich, not the life-support systems of the poor. ...
Yes, Mr. Brooks, let us find common ground. We all agree on the need to end crony capitalism. But let us also work together not to cripple government but to make it work for all Americans.

The hope for common ground where there is none can lead to Obama like one-sided concessionary behavior, and we have more than enough of that already. Yes, let's find common ground where it exists, but let's also be careful not to try to meet in the middle when the other side is pursuing a bait and switch strategy. The Republican goal of reducing the size of government through reductions in social programs is unwavering, and they will pursue any argument handy at the moment to bring this about. In recessions, they tell us tax cuts are needed to stimulate the economy, but the real goal is to cut funding for the government permanently. Once the taxes are reduced, they won't agree to increase them again (unless it's to protect their cronies, i.e. an increase in payroll taxes is fine so long as it prevents the increase in taxes on the wealthy needed to fund it). In normal times, we're told tax cuts stimulate economic growth even though there's not much evidence to support this claim. Presently, it's the cronyism argument, and tomorrow it will be something else. The Republicans have their eyes on the ball, and the rules of the game are to be adjusted as necessary to allow them the best opportunity to take the ball across the goal line. Winning is all that matters. Fairness for both sides playing the game, etc. has nothing to do with it and we'd be wise to keep our eyes on the ball as well.

The other thing to note is that the location of common ground has shifted to the right from where it used to be. "Meet us in the middle" now means meeting on ground that would have been considered on the right not all that long ago. Democrats have already conceded too much in the ideological war, and there comes time when leaders in the party must take a stand and hold their ground. That time is long past.

"Don't Read Too Much Into Holiday Shopping"

Posted: 28 Nov 2011 09:18 AM PST

Tim Duy wrote this yesterday, but I forgot to post it:

Don't Read Too Much Into Holiday Shopping, by Tim Duy: I have something of a visceral dislike of the media frenzy that surrounds the holiday shopping season. And I sense this year will be worse than usual, as we are entering the season with what I believe are relatively low expectations. At first blush, those expectations will be easily beaten. From the Wall Street Journal:

Black Friday sales rose 6.6% from a year ago, getting the holiday shopping season off to a strong start, retail data and consulting firm ShopperTrak said Saturday.

The gains were the strongest since 2007 and topped last year's anemic 0.3% increase, said ShopperTrak, which installs monitoring devices in stores to gauge foot traffic.

Discounting works - more on that later. Although I believe underlying household budgets are fragile, I also have faith the American consumer will not break easily. Indeed, note the path of retail sales - excluding autos, gas, and restaurants - since the end of the recession:

Fedwatch1

For all the talk of a "new normal," retail spending is growing at nearly exactly its pre-recession trend of 0.43% a month. I have no reason to believe this trend will falter in the next two months, and, therefore, would anticipate the holiday season, at least in nominal terms to be at least average if not a little better (average includes some bad years).
What I believe is more interesting is the path of real sales:

Fedwatch2

In this measure, I converted to real dollars using the GAFO (deparment store type goods) deflator. Note again the similarity between the pre- and post-recession trends, 0.53% and 0.58% respectively. The high real growth is the product of steady price deflation in the retail sector:

Fedwatch3

Whatever ill is said about outsourcing, it does deliver cheap toys to put under the Christmas tree. Arguably, we are see the tiniest bit of trend reversion, attributable to an acceleration in the deflationary trend through early 2010:

Fedwatch6

Note that mid-year, retailers attempted to push through higher prices:

Fedwatch4

Bad timing, as nominal spending slowed somewhat this period to 0.37% a month. The end result was that real growth stalled in the April to August period, growing just 0.2% a month. Retailers apparently expected consumers to simply absorb the higher prices while holding the path of real spending constant. This grossly overestimated the strength of household budgets, and retailers soon reversed course. Prices fell between August and October at a 3.3% annualized pace.

The interesting question is how much retailers will panic and extend the price declines, resorting to deep discounting to continue to move volume. If so, we could see a solid real gain in the November to January period. At least so far, it appears discounting is indeed a key factor enticing early shopping. Back to the Wall Street Journal:

Brick-and-mortar retailers also saw more visits, with foot traffic to malls and shopping centers up 5.5%, ShopperTrak said.

Consumers were drawn out by heavy promotions and early store openings, said Bill Martin, co-founder of the firm.

They remain value conscious, however, and are more targeted in their shopping. It remains to be seen whether the rest of the season until Christmas —which accounts for about a fifth of retailers' annual sales—will keep up the strong pace, ShopperTrak said.

Will a solid holiday season put the nail on the coffin of recession fears? I don't think so. The US is not in recession right now; it is simply premature to be looking for recession in the data flow. If you are concerned about recession, which I am, you are looking at impending fiscal contraction in 2012 coupled with the implosion of the Eurozone, an event that will likely blow back to the US via the financial channels. But if those fears are realized, don't expect too much of it in the data before the middle of next year.

Finally, note that retail sales do not necessarily suffer greatly during a recession. Recall 2001:

Fedwatch5

The sharp drop we saw in 2008-09 is a relatively unusual permanent (for lack of a better term) negative IS shock that is costing retailers something on the order of $375 billion a year. That is not to likely to be repeated anytime soon. At least I hope not!
Bottom Line: Enjoy the Holiday Season. Don't get too preoccupied with the media-driven "holiday spending" frenzy. It just isn't that important, nor is it a key economic indicator.

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