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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 25 Jul 2012 12:33 AM PDT
Paul Krugman:
They Didn't Build That: A few thoughts related to the fake controversy over Obama's "you didn't build that":
First, sure enough, the self-reliant businessman featured in Romney's ads was the beneficiary of large government loans and contracts. This doesn't make him a bad guy; pretending that he did it all himself does.
And as many others have pointed out, what does it say about Romney's campaign that to run against a sitting president, one with a three and a half year track record, they have to lie about what he said to find a point of attack? ...
Posted: 25 Jul 2012 12:06 AM PDT
Posted: 24 Jul 2012 04:32 PM PDT
One more from Tim Duy:
Is There Even a Panic Button in Europe?, by Tim Duy: I didn't think it was possible, but my confidence in the ability of European policymakers to pull the Continent out of crisis continues to fall. This is saying a lot because I had virtually no confidence to begin with.
Consider where we are at today. Greece once again is making the headlines, as it is increasingly evident that they have made virtually no progress on the last bailout package, and will therefore need another. This should have come as no surprise; it was increasingly politically impossible to engage in additional austerity with the Greek economy plummeting into the abyss. But bailout fatigue will finally hit this time, as there appears to be no more appetite to limp Greece along. Evan Ambrose-Pritchard argues that Germany is leading the drive to finally force Greece out of the Eurozone. Ambrose rightly places at least some, if not the lion's share, of the blame for this outcome at the feet of the Troika:
This was entirely predictable – and was predicted by many critics – since Greece faced an IMF-style austerity package without the usual IMF cure of devaluation. The Troika's ideology of "expansionary fiscal contraction" – which the IMF has to its credit since abjured, but the fanatics in charge still swear by – is breaking a whole society on the wheel.
The Greeks were never given a bailout plan that had any hope of success. And they deserved such a bailout, given the rest of Europe's culpability in this crisis for letting Greece into the Euro in the first place.
Whether or not Greece can be forced from the Euro with little impact elsewhere remains to be seen. I doubt we will need to wait much longer to learn the outcome of Grexit. But the devastating train that is the debt crisis keeps rolling right along, currently crashing through Spain's economy.
And make no mistake, European policymakers have learned nothing from the Greek experience. One gets the sense that policymakers think the prescription was correct, but that the patient was simply unwilling to take the medicine. Where Greece failed, Spain will succeed, or at least so it is hoped. Indeed, today Spanish Finance Minister Luis de Guindos met with his German counterpart, and the FT reports:
Germany on Tuesday threw its considerable weight behind the reform and austerity programme of the Spanish government, in the face of a continuing surge in the cost of borrowing for Madrid, and strong protests against its spending cuts.
Spain is doing the right thing, apparently. It's just the markets that have it all wrong:
A joint statement by Wolfgang Schäuble, German finance minister, and Luis de Guindos, Spanish economy minister, condemned the high interest rates demanded for the sale of Spanish bonds as failing to reflect "the fundamentals of the Spanish economy, its growth potential and the sustainability of its public debt".
The truth is exactly the opposite - market participants have looked at Spain's fiscal and economic situation, including the issue of provincial bailouts, and concluded that another sovereign bailout is coming, complete with private sector involvement. The "voluntary" kind of involvement, of course. And in return for this bailout, Spain will be pushed further down the same path of never ending recession as Greece. Because if once you don't succeed, try, try again. European policymakers will pursue the same path because they know of no other:
But after talks in Berlin last night on the eurozone crisis, the two gave no hint of any new initiatives to try to calm the markets, or prevent contagion from Spain affecting any other members of the eurozone, such as Italy.
This comes as Spanish 10 year yields hit 7.62% and the Italian equivalent lurches up to 6.60%. And unbelievably, the ECB is apparently out of the game, no longer willing to buy sovereign debt either to avoid being a victim of "public sector bailout" or because they believe that restrictions against monetizing the debt of member states trump imminent financial collapse. Meanwhile, the crisis is increasingly bleeding through to the supposedly immune German economy, with the Markit PMI continuing to fall. The deeper Europe slides into recession, the harder it will be to find solutions.
And it is already almost near impossible to find solutions, a fact proved by the seemingly pointless European summits that always seem to come too late and offer too little.
Yet despite what is obviously clear and present danger to the Eurozone project, and, more importantly than the project, but to the economy on which millions depend for their livelihood, there doesn't seem to be any panic in official circles. No sense that policies need to be fundamentally reassessed. No sense that time is of the essence. No one is even bothering to leak unsubstantiated and false rumors of some "Grand Plan" in the works.
In my view, the lack of panic is downright scary. Is Europe completely devoid of new ideas? Or is everyone simply on vacation?
Bottom Line: Still a Euroskeptic, and an increasingly pessimistic one at that. I really, really want to believe that Europe will quickly coalesce around a solution to the crisis, and I hope to see a move in that direction soon. At a minimum, the ECB should throw in the towel and backstop sovereign debt. But all I see are the same failed policies again and again. Worse, no one is running for the panic button. Maybe there isn't a panic button; I guess it was another piece of the necessary institutional framework forgotten during the creation of the Euro.
Posted: 24 Jul 2012 11:43 AM PDT
Tim Duy:
A Missing Ingredient, by Tim Duy: Ryan Avent makes a good point about San Francisco Federal Reserve President John Williams' recent FT interview.
Avent is less impressed than me on Williams' conversion to open-ended QE as a policy tool because it by itself does not communicate a willingness to allow inflation to exceed 2%. I think that Avent is on the right path. While Williams did make what I think is a big step, he could go one step further and not only call for open-ended QE, but to do so in the context of Chicago President Charles Evans' suggestion for explicitly tolerating inflation up to 3%. That said, I also think this is too much to hope for, as I haven't seen any indication that Williams would be willing to deviate from the 2% target.
Also, you can interpret open-ended QE as a higher possibility that the Federal Reserve will not be able to pull-back the increase in the money supply, thus one could expect higher inflation in the future. And by leaving the program as open-ended, you remove the uncertainty created by arbitrary end dates and purchase amounts. So I do think that Williams is making a significant shift in the right direction. But I agree with Avent that a clear communication of tolerance for higher inflation would be even more effective.
Ultimately, I think the Federal Reserve made a huge policy error in committing to an explicit 2% inflation target. I think policymakers were under the impression that such a commitment would give them more flexibility by removing concerns that QE would be inflationary. In reality, I think it had the opposite effect - it eliminated a policy tool, thereby reducing their flexibility. And that commitment stands as a barrier to Evans' suggested policy path. I think the rest of the Fed would loathe accepting inflation as high as 3% given they just committed to 2% at the beginning of this year. In doubt, they would view such backtracking as a threat to their much-cherished credibility.
Interestingly, they don't see Treasury rates below 1.4% as a threat to their credibility. They really should.
Here's what I said on this topic a few months ago:
...why does the Fed put so much value on its credibility?
An abundance of credibility allows the Fed to bring the inflation rate down from, for example, 5 percent to 2 percent at minimal cost to the economy. It also makes it less likely that inflation will become a problem in the first place, because high credibility makes long-run inflation expectations less sensitive to temporary spells of inflation. So maintaining high credibility has substantial benefits.
Does this mean the Fed should do its best to keep the inflation rate at 2 percent?
Sticking to a 2 percent target independent of circumstances is not optimal. There are times, such as now, when allowing the inflation rate to drift above target would help the economy. Higher inflation during a recession encourages consumers and businesses to spend cash instead of sitting on it, it reduces the burden of pre-existing debt, and it can have favorable effects on our trade with other countries.  
If inflation begins to rise before the recovery is complete the Fed could, for example, announce that it is willing to allow the inflation rate to stay above target temporarily in the interest of helping the economy. But once unemployment hits a pre-set rate, for example 6.25 percent, or core inflation rises above some predetermined threshold, for example, 5 percent, then, and only then, will the Fed step in and take action. ...
So no disagreement here, except that I would set the limit even higher than 3 percent inflation since I am not at all worried about the Fed's long-run credibility on inflation. As I noted, "I have no doubt that, once the economy has finally recovered, the Fed will ensure that the inflation rate is near its target value, so long-run credibility is not at risk."
One further note: I have asked Federal Reserve officials directly why the 2% inflation target is treated as a ceiling rather than a central value, and have been assured that it is, in fact, a central value (so that inflation should fluctuate around the target value instead of staying at or below target as it would if the target is a ceiling). But the data suggests otherwise -- the errors have been mostly one-sided (i.e. inflation has generally been below target). Even if the Fed is unwilling to raise the target, it should at least tolerate enough of a rise in the inflation rate to get two-sided errors, but it hasn't even been willing to do that.
Posted: 24 Jul 2012 09:09 AM PDT
Jack Abramoff:
I Know the Congressional Culture of Corruption, by  Jack Abramoff: ...No one would seriously propose visiting a judge before a trial and offering a financial gratuity, or choice tickets to an athletic event, in exchange for special consideration from the bench. Yet no inside-the-Beltway hackles are raised when a legislative jurist -- also known as a congressman -- receives a campaign contribution even as he contemplates action on an issue of vital importance to the donor.
During the years I was lobbying, I purveyed millions of my own and clients' dollars to congressmen, especially at such decisive moments. I never contemplated that these payments were really just bribes, but they were. Like most dissembling Washington hacks, I viewed these payments as legitimate political contributions, expressions of my admiration of and fealty to the venerable statesman I needed to influence.
Outside our capital city (and its ever-prosperous contiguous counties), the campaign contributions of special interests are rightly seen as nothing but bribes. The purposeful dissonance of the political class enables congressmen to accept donations and solemnly recite their real oath of office: My vote is not for sale for a mere contribution. They are wrong. Their votes are very much for sale, only they don't wish to admit it. ...
Posted: 24 Jul 2012 09:00 AM PDT
The Institute of New Economic Thinking has formed a Council on the Euro Zone:
Press Release: Europe is on the threshold of catastrophe. The euro zone's fault lines are readily apparent and the interaction between markets, inadequate institutions, and the unsustainable political conditions in many countries is driving the European economy toward depression and the euro zone toward disintegration.
It is with a sense of urgency and a desire to overcome these dangerous conditions that The Institute for New Economic Thinking (INET) sponsored the formation of the INET Council on the Euro Zone Crisis (ICEC) that is comprised of 17 leading European economists. (list of members). The group held its first meeting on June 26-27 in Brussels and a nonstop virtual meeting has taken place since then.
As the pressures toward disintegration of the euro increase and the deep social unrest in Spain, Italy, and other countries erupts, the INET Council of the Euro zone members felt compelled to issue a brief report that creates a vision of how the euro zone could be repaired and redesigned at this desperate juncture.
The report recognizes that there has been little overlap between what is economically and financially necessary to repair the flaws in the euro zone system and what is politically feasible in an environment that has degenerated into distrust among nations within the system. It is in that context that the ICEC has recommended the following:
1. This dramatic situation is the result of a euro zone system that is thoroughly broken. This systemic failure exacerbated a boom in capital flows and credit, and complicated its aftermath after the boom turned to bust.
2. It is the responsibility of all European nations that were parties to the euro's flawed design, construction, and implementation to contribute to a solution.
3. Absent a collective effort the euro zone will disintegrate quickly. The stresses have been building for a long time and conditions in several countries are not socially or politically sustainable much longer.
4. In formulating recommendations, the ICEC report makes a clear distinction between the legacy problems that were created by the dysfunctional design of the euro zone over the past 10 years and the challenges of re-design that would restore the soundness of the Euro zone system.
5. One cannot deal with the legacy overhangs as long there is no clear commitment to long-term re-design.
6. At the same time it is impossible to build long-term mechanisms such as a banking union as long as the legacy overhang of debt imbalances debt, competitiveness, and capital inadequacy of financial institutions impede the path toward a healthy Europe.
See the report for more detail on the recommendations. The ICEC will meet next in the early fall to examine scenarios that include disintegration of the Euro zone and its ramifications, a realignment of the Euro zone into two blocs, and the role of the United Kingdom in the future of Europe.
Report: Breaking the Deadlock: A Path Out of the Crisis

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