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November 28, 2012

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Links for 11-25-2012

Posted: 25 Nov 2012 12:06 AM PST

Fed Watch: Stop The Holiday Shopping Media Circus

Posted: 24 Nov 2012 12:30 PM PST

Tim Duy:

Stop The Holiday Shopping Media Circus, by Tim Duy: I feel as if every December I need to mentally prepare myself for the onslaught of inane media coverage of the holiday shopping season. This year, however, we seem to have a few more voices of reason and common sense. Barry Ritholtz, a long-time veteran of the Black Friday Media Wars, sees signs of hope:

Over the years, I have been rather annoyed (perhaps too much) at the annual foolishness over Black Friday forecasts. Each year, we hear breathless predictions of ridiculous increases in consumer spending — holiday shopping rises 16% this season! — which turn out to be wildly over-optimistic, and are never confirmed by the actual data....

....This year, the idea seems to have spread into the mainstream: Lots of coverage about it, with a few choice quotes from you know who tossed in for good measure.

Ritholtz provides a host of links on the subject, but a recent entrant is missing. Neil Irwin at the Washington Post delivers the truth about Black Friday:

Black Friday is here, and if you happen to derive pleasure from streaming around big box stores or mega malls as part of a teeming horde, well, who am I to judge another person's sources of enjoyment.

Let's just not pretend that it means anything...

...sales over Thanksgiving weekend tell us virtually nothing about retail sales for the full holiday season—let alone anything meaningful about the economy as a whole.

So if it is a meaningless event from an economic perspective, what explains the media obsession?

For the media, it is a ready-made story. It takes place at a time that there is little other news, and it is known in advance, so editors and TV news directors can plan in advance for coverage. And there's no doubt that video of people stampeding through the doors of a Wal-Mart in hot pursuit of a new Wii makes for great television. That is even putting aside more cynical possibilities, such as that media depend on retail advertising and thus have a vested interest in creating a sense of hype and anticipation around an orgy of consumerism.

Nothing more than another media manufactured trend. Bookmark the Irwin piece and refer back to it each morning before you get sucked into the inevitable Bloomberg stories detailing the ups and downs of the holiday season. And remember that everyone will be looking for a quick sound bite to leverage off the holiday mania. Sarah Kliff includes one such bite in a piece on the latest Reuters/Michigan Consumer Sentiment numbers:

...the latest round of economic indicators suggest that economic gloom is finally starting to set in with the general public, and the austerity crisis may have something to do with it. The Reuters/University of Michigan Consumer Sentiment Index fell 2.2 points from the preliminary reading early in November to the final reading after the election...They're still more optimistic about the current state of the economy, but consumers have become more pessimistic about what's ahead—a change that IHS Global Insight chalks up to "increased awareness by many Americans of the fiscal cliff."

"If the political rhetoric and finger pointing reaches a fever pitch similar to that of the debt ceiling crisis in the summer of 2011 then consumer confidence is likely to take a very serious hit, and this holiday season will not be very cheerful," the IHS analysis concludes.

Aside from the pointlessness of attempting to gain deep understanding about the economy from a minor blip in the confidence numbers, before you start huddling in the corner for fear of imminent economic collapse, please refer back to last summer's dive in confidence numbers:

While the budget talks did undermine confidence last summer, the impact on spending was essentially nil. I doubt very much that US households will focus much on the fiscal cliff until the new year, choosing instead to focus on holiday parties, egg nog, and gift giving. And if they do give some thought to the cliff, they won't change their spending measurably; they have already set their budgets for the year. That will only happen if going over the fiscal cliff undermines the job market, something that would not be evident until much deeper into 2013. For now, consumer sentiment is only catching back up to where we would expect it to be given the pace of spending. Nothing more, nothing less. For economic trends more relevant to the path of spending, see Neil Irwin's reasons to be thankful this season.

Bottom Line: Black Friday hype - just say no.

Interview with Reinhart and Rogoff

Posted: 24 Nov 2012 11:40 AM PST

Found this interview of Reinhart and Rogoff via Barry Ritholtz (I had to search the title in Google to get past the paywall):

Top Culprit in the Financial Crisis: Human Nature, by Lawrence Strauss: ... What are your thoughts about the steps taken to foster fiscal and monetary policy?

Reinhart: We can always go back and figure out a way in which the fiscal and monetary policy could have been made sharper, to do more. But the thrust in a deep financial crisis, when you throw in both monetary and fiscal stimulus, is to come up with something that helps raise the floor. That's why the decline wasn't 10% or 12%. However, one area where policy really has left a bit to be desired is that both in the U.S. and in Europe, we have embraced forbearance. Delaying debt write-downs and delaying marking to market is not particularly conducive to speeding up deleveraging and recovery. Write-downs are not easy. On the whole, write-offs have been very sluggish.
Rogoff: ... Look at Europe. A lot of policies are directed at keeping European banks afloat, and it is crippling the credit system. You could have said the same about the U.S., where a lot of policies are about recapitalizing the financial system. The policy makers were very, very cautious about breaking eggs. The thinking was, "We just have got to hold out for a year, and it is going to be fine." ...
Is there a regulatory framework that would prevent severe financial crises?
Reinhart: Of course there is. But can we get there?
Rogoff: And stay there?
Reinhart: That's the question. Getting there is one thing, staying there is a different matter. And that's where the memory, or the dissolution of memory, kicks in. This comes out very clearly in our chapter in the book about banking crises. Devastated by what happened in the 1930s, the architects of the Bretton Woods System at the end of World War II, including John Maynard Keynes, were very leery of financial markets. This was an era of financial repression. Trade boomed. Not trade in finance, but trade in goods and services. And this very tight system, with all its distortions and problems, still delivered decade after decade of no systemic crisis. Between 1945 and 1980, it was an unusually quiet period. But then, by the late-1990s, the regulations seemed passé. The financial system found ways of circumventing regulation. It was outmoded. It was discarded, and we started anew.
Rogoff: It's important to channel some financing into safer instruments. If banks were to finance themselves like normal firms by raising a significant share of their lendable capital through issuing equity or retained earnings, we would have much, much safer financial system. So that's a very simple change. ...
Reinhart: You go through history and, in good times, the tendency is to liberalize. Then a crisis happens, and you retrench. But the retrenchment lasts only as long as your memory does, and memory is not that great. Not the memory of the policy makers and not the memory of the markets. So as you start putting time in between where you are now and your last crisis, complacency sets in, and you begin to be more cavalier about what your indicators or warning signals are showing. That's the essence of the this-time-is-different syndrome. The debt ratios are X, but we really don't have to worry about that; the price-earnings ratios are Y, but that's not a concern.
And so, given that this is so grounded in human nature, I'm extremely skeptical that we will overcome financial crises in any definitive way. We may have longer stretches [without a major crisis], as we did after World War II during the era of financial repression, which grew out of the crisis of the early 1930s. Back then, you had a lot more regulation and clamps on risk-taking, both domestically and cross-border. But then we outgrew it. It was passé. Who needed Glass-Steagall? ...

I mostly agree with what they say in the interview, but they are still too hawkish on short-run fiscal policy for my taste. I believe their work and statements in interviews such as this helped to drive the harmful austerity movement in Europe and that should at least bring caution. Reinhart's argument was that yes, immediate austerity makes things worse. But the failure to invoke immediate austerity brings about even bigger problems down the road, so big that the pain now is worth it. She has backed off a bit relative to where she was a few years ago, but as the following quote shows Reinhart will only say "the idea of withdrawing stimulus in what is still a frail environment is not an easy one to tackle" -- notice that she doesn't say it is the wrong policy for a country line the U.S.:

this is not the time to be an inflation hawk. I would rather see the margin of error favor easing too much, rather than too little, for many reasons. The frailty of the recovery is still an issue. The amount of debt that is still out there for households, the financial industry, and the government is still large.
The fiscal side is more complicated, because the idea of withdrawing stimulus in what is still a frail environment is not an easy one to tackle. However, over the longer haul, a comprehensive, credible fiscal consolidation is very much needed, because as much as we allude to the level of public debt, the level of private debt, external debt, and so on are even higher. And we also have a lot of unfunded liabilities in our pension scheme, a long-term issue that needs addressing.

The last statement is annoying. It's health care costs, not unfunded pension liabilities that is the problem for the long-run federal budget. Maybe she has unfunded state and local pension liabilities in mind as well, don't know, but a bit more care when making these kinds of statements would be helpful since this will be interpreted by most as a call for big cuts in Social Security. It was enough to aid and abet the failed austerity movement, do they want to similarly aid and abet the dismantling of Social Security with careless statements such as this?

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