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Daily Archives: April 17, 2009

Stiglitz calls PPIP "corporate welfarism"

Joe Stiglitz and Mike Spence, both 2001 Nobel laureates in economics, discuss PPIP on Bloomberg On the Economy. Joe calls the current system “Corporate Welfarism“, in which gains of extreme risk-taking go to the Wall Street while losses are borne by tax payers. The audio runs about 30 minutes.

Previous discussions on the issue can be found here and here.

Something about "Bond King"

Bond King, Bill Gross, reviews what has happened in the last twenty years in financial sector and what’s to come in the future.

Hall: Another exit strategy for the Fed

Bob Hall, economics professor at Stanford and member of NBER recession dating committee, says the Fed can use the margin between reserve rate (interest rate paid to banks for selling reserves back to central bank) and Fed funds rate to prevent inflation from rising.

Link to the article

Yellen: Minsky Meltdown

Janet Yellen, President of SF Fed, opens the debate on monetary policy, “Should central banks attempt to deflate asset price bubbles before they get big enough to cause big problems?”

Link to the speech

She changed her previous stance on the issue and now is open and willing to entertain the possibility of using monetary policy to deflate bubbles. But as she rightly recognized, it’ll be difficult to identify the bubble in the first place and she prefers to use regulatory and supervisory tools to prevent bubble from forming. A nice review piece of the issue. Highly recommend.

Krugman: Things are getting worse more slowly

Paul Krugman asks you “don’t count your recoveries before they’re hatched”. (source: NYT)

Green Shoots and Glimmers

Ben Bernanke, the Federal Reserve chairman, sees “green shoots.” President Obama sees “glimmers of hope.” And the stock market has been on a tear.

So is it time to sound the all clear? Here are four reasons to be cautious about the economic outlook.

1. Things are still getting worse. Industrial production just hit a 10-year low. Housing starts remain incredibly weak. Foreclosures, which dipped as mortgage companies waited for details of the Obama administration’s housing plans, are surging again.

The most you can say is that there are scattered signs that things are getting worse more slowly — that the economy isn’t plunging quite as fast as it was. And I do mean scattered: the latest edition of the Beige Book, the Fed’s periodic survey of business conditions, reports that “five of the twelve Districts noted a moderation in the pace of decline.” Whoopee.

2. Some of the good news isn’t convincing. The biggest positive news in recent days has come from banks, which have been announcing surprisingly good earnings. But some of those earnings reports look a little … funny.

Wells Fargo, for example, announced its best quarterly earnings ever. But a bank’s reported earnings aren’t a hard number, like sales; for example, they depend a lot on the amount the bank sets aside to cover expected future losses on its loans. And some analysts expressed considerable doubt about Wells Fargo’s assumptions, as well as other accounting issues.

Meanwhile, Goldman Sachs announced a huge jump in profits from fourth-quarter 2008 to first-quarter 2009. But as analysts quickly noticed, Goldman changed its definition of “quarter” (in response to a change in its legal status), so that — I kid you not — the month of December, which happened to be a bad one for the bank, disappeared from this comparison.

I don’t want to go overboard here. Maybe the banks really have swung from deep losses to hefty profits in record time. But skepticism comes naturally in this age of Madoff.

Oh, and for those expecting the Treasury Department’s “stress tests” to make everything clear: the White House spokesman, Robert Gibbs, says that “you will see in a systematic and coordinated way the transparency of determining and showing to all involved some of the results of these stress tests.” No, I don’t know what that means, either.

3. There may be other shoes yet to drop. Even in the Great Depression, things didn’t head straight down. There was, in particular, a pause in the plunge about a year and a half in — roughly where we are now. But then came a series of bank failures on both sides of the Atlantic, combined with some disastrous policy moves as countries tried to defend the dying gold standard, and the world economy fell off another cliff.

Can this happen again? Well, commercial real estate is coming apart at the seams, credit card losses are surging and nobody knows yet just how bad things will get in Japan or Eastern Europe. We probably won’t repeat the disaster of 1931, but it’s far from certain that the worst is over.

4. Even when it’s over, it won’t be over. The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010.

Why? “V-shaped” recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand. In 1982, for example, housing was crushed by high interest rates, so when the Fed eased up, home sales surged. That’s not what’s going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending.

Employment will eventually recover — it always does. But it probably won’t happen fast.

So now that I’ve got everyone depressed, what’s the answer? Persistence.

History shows that one of the great policy dangers, in the face of a severe economic slump, is premature optimism. F.D.R. responded to signs of recovery by cutting the Works Progress Administration in half and raising taxes; the Great Depression promptly returned in full force. Japan slackened its efforts halfway through its lost decade, ensuring another five years of stagnation.

The Obama administration’s economists understand this. They say all the right things about staying the course. But there’s a real risk that all the talk of green shoots and glimmers will breed a dangerous complacency.

So here’s my advice, to the public and policy makers alike: Don’t count your recoveries before they’re hatched.

Feldstein on troubled banks and the economy

Marty Feldstein, former President of NBER, talks about the economic outlook. Given Marty’s remarkable record on predicting this current recession back in early 2008, he’s every bit worth listening to.

Mobius on investing in emerging markets

Mark Mobius, managing director of Templeton Asset Management and a pioneer in emerging markets investment, talks about investing in the next frontier.