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November 28, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Let’s Not Make a Deal

Posted: 09 Nov 2012 12:24 AM PST

Just say no to "economic blackmail":

Let's Not Make a Deal, by Paul Krugman, Commentary, NY Times: To say the obvious: Democrats won an amazing victory. Not only did they hold the White House despite a still-troubled economy, in a year when their Senate majority was supposed to be doomed, they actually added seats.
Nor was that all: They scored major gains in the states. ... But one goal eluded the victors..., the G.O.P. retains solid control of the House... And Representative John Boehner, the speaker of the House, wasted no time in declaring that his party remains as intransigent as ever...
So President Obama has to make a decision, almost immediately, about how to deal with continuing Republican obstruction. How far should he go in accommodating the G.O.P.'s demands?
My answer is, not far at all. Mr. Obama should ... hold his ground even at the cost of letting his opponents inflict damage on a still-shaky economy. And this is definitely no time to negotiate a "grand bargain" on the budget that snatches defeat from the jaws of victory. ...
Why? Because Republicans are trying, for the third time since he took office, to use economic blackmail to achieve a goal they lack the votes to achieve through the normal legislative process. In particular, they want to extend the Bush tax cuts for the wealthy... So they are, in effect, threatening to tank the economy unless their demands are met. ...
Well, this has to stop — unless we want hostage-taking, the threat of making the nation ungovernable, to become a standard part of our political process.
So what should he do? Just say no, and go over the cliff if necessary.
It's worth pointing out that the fiscal cliff isn't really a cliff..., nothing very bad will happen to the economy if agreement isn't reached until a few weeks or even a few months into 2013. So there's time to bargain.
More important, however, is the point that a stalemate would hurt Republican backers, corporate donors in particular, every bit as much as it hurt the rest of the country. As the risk of severe economic damage grew, Republicans would face intense pressure to cut a deal after all.
Meanwhile, the president is in a far stronger position than in previous confrontations. ... Most of all, standing up to hostage-taking is the right thing to do for the health of America's political system.
So stand your ground, Mr. President, and don't give in to threats. No deal is better than a bad deal.

Fed Watch: Missing the Bigger Picture in Greece

Posted: 09 Nov 2012 12:12 AM PST

Tim Duy:

Missing the Bigger Picture in Greece, by Tim Duy: The FT has an update on the Greek bailout:

Eurozone leaders face a new round of brinkmanship over Greece's €174bn bailout after international lenders failed to bridge differences on how to reduce Athens' burgeoning debt levels, pushing the country perilously close to defaulting on a €5bn debt payment due next week.

The sticking point:

The IMF remains more pessimistic about Greece's ability to return to economic growth, the amount it will collect in its €50bn privatisation programme, and how much money is needed to recapitalise the country's teetering banking system.

As a result, Brussels and Washington are 5-10 percentage points apart on where Greece's debt will stand by 2020, the target date in the rescue programme for returning Athens to sustainable debt levels.

Further complicating negotiations, officials said the IMF is insisting Greek debt levels are reduced to 120 per cent of gross domestic product by 2020, while the European Commission is urging an easing of the target to about 125 per cent by 2022.

If past experience is any guide, the IMF is correct to be skeptical. But the bigger picture here is that the Troika has repeatedly failed to hit this target of 120 percent, and this time will be no different. 120, 125, or 135 percent is more about political posturing than economic reality. With any of these targets, the ongoing waves of austerity are doing nothing more than pushing Greece deeper into a death spiral.

Five years of recession and counting. Unemployment above 25%. Still too many sticks, not enough carrots. And remember, the 120 percent target itself does not guarantee safety. It is largely an artifact of wanting to justify the level of Italian debt. From Reuters:

The 120 percent figure was fixed on because Italy had debts of 120 percent of GDP at the time and was managing okay. But Italy is a very different case to Greece, with high domestic ownership of its debt, and its situation is now less stable.

I understand this is considered political dynamite in Europe, but I still think it will be virtually impossible to fix Greece without a direct transfer of resources. A large, official debt forgiveness program. I suspect the alternative - a failed state on Europe's borders - will be more costly in the long-run.

Links for 11-09-2012

Posted: 09 Nov 2012 12:06 AM PST

The Sound of Silence

Posted: 08 Nov 2012 07:58 PM PST

The last comment I can find from anne is 2:46 pm (11:46 am EST) on October 29. That's the day Hurricane Sandy hit.

It seems like she's been here longer than I have. Hope to hear from her again soon.

Fed Watch: Europe Back In The Spotlight

Posted: 08 Nov 2012 12:38 PM PST

Euroskeptic Tim Duy:

Europe Back In The Spotlight, by Tim Duy: Europe faded from the news over the summer. European Central Bank President Mario Draghi's shift to allowing his institution to serve as a lender of last resort calmed nerves and took the worst case scenario of imminent breakup off the table even though the program has yet to be implemented. With crisis again averted, market participants shifted their focus to the Federal Reserve and the US elections.

In the meantime, economic conditions in Europe continued to slowly deteriorate. We are now looking at another year of dismal growth in the Eurozone. This crisis seems to have no end in sight.

To be sure, a little relief today as the Greek parliament pushed through the latest austerity package, throwing the bailout back to the Troika. But the relief was short-lived. Interestingly, the Greeks were rewarded with news that the next tranche of aid is not a done deal. From Bloomberg:

Euro-area finance ministers may not make a decision on unlocking funds for Greece until late November as they await a full report on the country's compliance with the terms of its bailout, a European Union official said.

Finance chiefs won't make the call to release 31.5 billion euros ($40.1 billion) of aid for Greece that has been frozen since June when they meet in Brussels on Nov. 12, the official said today on condition of anonymity because the deliberations are private...

...The EU official said Nov. 26 is a possible date for euro- area finance ministers to sign off on the next disbursement of rescue aid to Greece.

I think I would have kept this under my hat until Greece votes on its budget this Sunday. Still, I understand the hesitation. I am guessing that the Troika increasingly sees no way out for the Greek economy, at least under the current policy path. Does anyone really expect this to be anything more than just another effort to kick the can down the road? Everything to date as simply intensified what Ambrose Evans-Pritchard described as the "Greek death spiral." Highlighting that outcome was today's news that Greece's unemployment rate in August rose yet again. From Bloomberg:

The rate rose to 25.4 percent from a revised 24.8 percent in July, the Athens-based Hellenic Statistical Authority said in an e-mailed statement today. That's the highest since the agency began publishing monthly data in 2004...

...A breakdown of today's release showed the female jobless rate was 29 percent, while the rate for Greeks aged 15 to 24 was 58 percent. That's more than double the youth unemployment rate of 24.3 percent in August 2009, before the extent of Greece's deficit became known, sparking the debt crisis.

At some point, the austerity will become too much - and the rise of Golden Dawn, the neo-Nazi group in Greece, raises concerns about the ugliness that will ensue if Greece finally breaks. At this rate, Europe is setting itself up to have a failed state on its borders.

Likewise, Spain too is an ongoing disaster. Unemployment is currently expected to peak at 26.6 percent next year, and this I suspect remains too optimistic. Yet the austerity continues. Moreover, the pain is clearly expanding deeper and deeper throughout the Eurozone. From Reuters:

The European Union's executive Commission said the 17 countries sharing the euro would grow only 0.1 percent in 2013 after a bigger than previously forecast 0.4 percent contraction this year as a result of the sovereign debt crisis.

But don't worry, the future is bright:

Growth is predicted to rebound to 1.4 percent in 2014 as structural reforms now under way start bearing fruit.

Still the seemingly endless hope in the structural reform fairies. Meanwhile, it is clearer by the day that Germany is the next to fall. Also from Reuters:

Recent data from Germany, Europe's growth locomotive and paymaster, has been largely disappointing, with business sentiment worsening, the private sector contracting, joblessness rising and industrial orders falling at their sharpest rate in a year, though consumer morale has held up and exports have leapt...

...While Germany's economy long fended off the single currency bloc's troubles, expanding by 4.2 percent in 2010 and 3 percent last year, growth slowed to 0.3 percent in the second quarter of this year from 0.5 percent in the first and some economists expect a contraction in the fourth quarter.

For their part, the ECB stood pat on rates today, as expected. From Bloomberg:

"We are ready to undertake" Outright Monetary Transactions, "which will help to avoid extreme scenarios," Draghi said at a press conference in Frankfurt today after policy makers left the benchmark interest rate at a historic low of 0.75 percent. "The risks surrounding the economic outlook remain on the downside" and underlying inflation pressures "should remain moderate," he said.

Really, 25%+ unemployment in Greece and Spain is not already an "extreme scenario"? From my perspective, that's pretty extreme. Like Great Depression extreme. Draghi also implied he is done helping Greece:

Draghi sought to end a debate on whether the central bank will do more to ease the debt burden of Greece, where Prime Minister Antonis Samaras yesterday gathered the support of enough lawmakers to pass austerity measures needed to unlock the next tranche of European funds.

The ECB can't take losses on the Greek bonds it holds and has already distributed any profits made on them to governments, Draghi said.

"It's up to the governments to decide whether they want to use these profits for Greece," he said. "The governments actually committed themselves to do so. So, the ECB is by and large done."

No more OSI for you. Meanwhile, the ECB and Spain continue their game of chicken:

Spanish Prime Minister Mariano Rajoy said on Nov. 6 he needs to know how much the ECB would push down Spain's borrowing costs before his government applies for aid and signs up to the conditions attached.

"It's entirely up to Spain and the Spanish government to take the decision," Draghi said. "The ECB can't give any assurances ex ante. The Governing Council will take the decision in total independence. There isn't any automatic quid pro quo."

Given the path of Greece, it is reasonable for Spain to ask what exactly they would get out of the deal. Because at least right now, you can make an argument that the ECB has no incentive to actually buy bonds if just by saying they are willing to buys bonds eliminates convertibility risk. In that case, Rajoy gets nothing more from the ECB for his efforts. It seems that the OMT will only be activated after sufficient crisis to push a nation into the loving arms of the Troika. By that time, of course, it will be too late to prevent another round of economic deterioration. With that in mind, see FT Alphaville for the latest on Spain's financing problems and unrealistic deficit forecasts.

Bottom Line: Yes, I remain a Euroskeptic. Maybe it is just in my blood. Europe still looks ugly, and will continue to be so for the next year at least (I tend to think wave after wave of austerity will push the Eurozone into a multi-year malaise, but let's just take it one year at a time for now). I expect European troubles will continue to cloud the global outlook and vex the earning plans of large multinationals for the time being.

We Must 'Stand Up to Concentrated and Powerful Corporate Interests'

Posted: 08 Nov 2012 10:41 AM PST

Simon Johnson:

The Importance of Elizabeth Warren: One of the most important results on Tuesday was the election of Elizabeth Warren as United States senator from Massachusetts. ... Hopefully, Ms. Warren will get a seat on the Senate Banking Committee, where at least one Democratic slot is open.
President Obama should now listen to her advice. ... If President Obama wants to have impact with his second term, he needs to stand up to the too-big-to-fail banks on Wall Street.
The consensus among policy makers has shifted since 2010, becoming much more concerned about the dangers posed by global megabanks. ...
Senator Warren is well placed, not just to play a role in strengthening Congressional oversight but also in terms of helping her colleagues think through what we really need to make our financial system more stable.
We need a new approach to regulation more generally – and not just for banking. We should aim to simplify and to make matters more transparent, exactly along Senator Warren's general lines.
We should confront excessive market power, irrespective of the form that it takes. We need a new trust-busting moment. And this requires elected officials willing and able to stand up to concentrated and powerful corporate interests. ...

I'm glad to see Simon Johnson at least hinting that this criticism goes beyond just banks. Growing economic power is not limited to the financial sector, and attempts to "stand up to concentrated and powerful corporate interests" must be broadened beyond "too big to fail" financial institutions:

The economics of enormity, The Economist: How big is too big? America's firms are growing in size and while there have been huge firms stretching back to Standard Oil the fact that so many firms are so big is a new phenomenon. This week's Free exchange print article—Land of the corporate giants—takes a look at the implications of the megafirm era. As many of the names towards the top of the list (Exon Mobil, ConocoPhillips) suggest, lots of the growth at the very top is due to mergers. In some cases this is a good thing because bigger firms can be more efficient when they exploit economies of scale. But evidence suggests that scale economies are starting to wear thin. That's a concern given that many mergers are justified on the basis of cost efficiencies (see Waddling forward, also in this week's newspaper, for example). Even more worryingly, other studies suggest that some companies are bulking up for entirely the wrong reasons. Bigger isn't always better. Read the article here.

Monopoly power distorts both economic activity -- you pay more, and less is produced -- and the distribution of income. And if you are big enough, it also gives you political power and influence. We should do more, much more, to eliminate excessive economic power.

Economic Policy During President Obama's Second Term

Posted: 08 Nov 2012 09:09 AM PST

A few thoughts on economic policy during Obama's second term. I'm a bit worried that unemployment is going to remain a persistent problem:

Economic Policy during President Obama's Second Term, CBS MoneyWatch

[There were a few edits I wouldn't have made, e.g. the phrase "Now that we know it will be Obama on the economic tiller," but nothing substantive.]

Will a Woman Lead the Federal Reserve?

Posted: 08 Nov 2012 09:00 AM PST

More post-election comments that appeared elsewhere: I've talked about this before. If Bernanke is replaced when his term ends on January 31st, 2014 (which is far from certain):

Will a Woman Lead the Federal Reserve?

Or, failing that, how about the Treasury?

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