U.S. Economy

YoungPacific20

wannabe star
Registered
Within the next 2 years the dollar will fall.. making way for the "AMEURO" some sort of "terrorist attack" will happen and the government will blame iran.. and what better justification to go to war with them than a terroist attack.. not only that iran has been trying for years to only sell oil to countries who only have euro as currency.. how convient of the US to make the dollar fall


The world bank has been printing fake dollars for a long time and we will ALWAYS be in debt to the world bank aka jews


but no one pays attention to ne of this.. jus care about wat new wayne songs are out or j's to put on ur feet smh



n i like obama but dont think he aint down with them he aint got a choice
 

thoughtone

Rising Star
BGOL Investor
Geed, spin these facts.

source: msn

A stormy September batters stocks

The Dow falls more than 300 points as weekly jobless claims jump a day before the government's August jobs report comes out. Merrill Lynch is having problems unloading some troubled assets. Boeing faces a strike. Wal-Mart's August same-store sales come in higher than expected.

By Charley Blaine and Elizabeth Strott

So far, September is living up to its reputation as a nasty month: Stocks plunged today on worries about shrinking jobs, weakness among financial companies and falling commodity prices.

At 3 p.m. ET, the Dow Jones industrials were down 305 points, or 2.7%, to 11,228. The Standard & Poor's 500 Index was down 34 points, or 2.7% to 1,241, and the Nasdaq Composite Index was off 66 points, or 2.8%, to 2,268.

Crude oil, meanwhile, closed down $1.46 a barrel to $107.89 and is down more than 26% since its peak in mid-July.

The slump is big and broad. Only two of the 30 Dow stocks were higher -- Wal-Mart Stores (WMT, news, msgs) and Coca-Cola (KO, news, msgs). Only 28 S&P 500 stocks were showing gains, along with five stocks in the Nasdaq-100 Index ($NDX.X). Apple (AAPL, news, msgs), down 2.4% to $163, and Research In Motion (RIMM, news, msgs), down 4.4% to $109.69, have subtracted 11 points from the index, which was down 2.3% to 1,791.

The selling has put the major averages back into bear market territory. The Dow and S&P 500 are down 20.4% from their highs on Oct. 9. The Nasdaq is off 20.2% from its all-time high on Oct. 31. The popular definition of a bear market is a decline of 20% or more from a high.

* Get free, real-time stock quotes on MSN Money

The market looks like it is will test its lows reached in July. In fact, the NYSE Composite Index ($NYA.X) was at 8,030 this afternoon, down 239 points, or 2.9%, on the day and nearly 60 points, under its intraday low of 8,089 on July 15.

The S&P 500 is only 34 points above its July low, the Dow 429 points above and the Nasdaq up 108 points.

Here's what's blown up the market:

* A weakening jobs picture. The number of initial jobless claims rose by 15,000 last week to a seasonally adjusted 444,000 rate -- more than economists had predicted. Most economists believe that a jobless claims figure above 400,000 indicates weakness in the economy. The number of Americans collecting benefits rose to 3.44 million in the week ending August 23, the highest level since November 2003. Apprehension is high that Friday's payrolls report from the Labor Department will be especially weak.

* Merrill Lynch. Shares of investment house Merrill Lynch (MER, news, msgs) were down 7.3% to $26.26 this afternoon on reports that negotiations to sell bad debt to Korea Asset Management were foundering. Financial stocks generally pushed lower. The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund was down 4.2% to $21.13.

* The continuing sell-off in commodity stocks. The sell-off reflects the decline in prices for oil, copper, silver, gold, and grains. Freeport-McMoRan Copper & Gold (FCX, news, msgs) was off 7.9% to $74.04. Fertilizer maker Potash of Saskatchewan (POT, news, msgs) was off 5.5% to $146.89. U.S. Steel (X, news, msgs) has tumbled 5.2% to $112.54.

* Continued stress in housing. Housing starts have been bad, and earnings reports from Hovnanian Enterprises (HOV, news, msgs) and Toll Bros. (TOL, news, msgs), two of the biggest homebuilding companies, suggest that the bottom in the housing market isn’t yet at hand.

* Weak retail sales. While Wal-Mart had a decent report on August sales, the rest of the picture was not so pretty. The Standard & Poor's Retail Index($RLX.X) was down 2.2% to 405 this afternoon.

No relief on the jobs picture
There was other jobs news out this morning as well: Automatic Data Processing's unemployment report showed a decline of 33,000 jobs in August. Economists had predicted ADP to show a loss of 25,000 jobs.

On Friday, economists will get the August jobs report from the government; the estimate is for a loss of 75,000 jobs last month, which would be the eighth month in a row of job losses. The ADP report counts only private-sector jobs, while the Labor Department's includes government payrolls.

In separate economic news, the Institute of Supply Management's service index came in at 50.6 in August, up from 49.5 in July -- and above economists' expectations for a 49.5 reading for August. Readings above 50 indicate expansion in the sector.

Meanwhile, second-quarter nonfarm productivity was revised higher this morning, up to a 4.3% annual rate from a previous reading of 2.2%. Unit labor costs, a gauge of inflation, fell 0.5%, revised lower from a previous gain of 1.3%.

"Higher productivity permits businesses to better absorb increases in wages and benefit costs, and have something left over to help cover higher material costs," Peter Morici, professor of economics at the University of Maryland, wrote in a note today. "Higher productivity should ease Federal Reserve fears about inflation and cause it to keep interest rates steady."
Boeing machinists prepare to strike
Boeing (BA, news, msgs) shares were down 5.3% to $62.60 this afternoon after the aircraft maker's machinists approved a strike. The stock’s drop subtracted 26 points from the Dow.

The International Association of Machinists said that 87% of its members voted to strike, after rejecting a contract offer of an 11% raise over three years and a $2,500 signing bonus. The IAM did, however, delay the strike action by 48 hours in case last-ditch efforts solved the crisis.

"We've got to keep talking to see if the gap can be narrowed," said Doug Kight, Boeing vice president and lead negotiator. "Our job at this time is to listen to the union."

A strike would be the seventh by the IAM in 73 years; the most recent strike was called in 2005 and lasted four weeks. It would cost Boeing $100 million per day in lost revenue, according to CNBC.
Sales jump at Wal-Mart
Recession or no recession, shoppers are still showing up at Wal-Mart.

The retail giant this morning said August sales at stores open at least one year rose 3%, excluding fuel, an increase well above the consensus estimate of a 1.6% gain. Wal-Mart had forecast August sales to rise between 1% and 2%.

Looking forward, the company said that comparable-store sales, excluding fuel, will increase between 2% and 3% in September.

Shares of the Dow component rose 0.7% to $60.23 this afternoon.
The broader retail picture
But while Wal-Mart has had success pitching bargains to consumers anxious about recession, other retailers have struggled. Overall, same-store sales are expected to rise 2% in August, according to an estimate from the International Council of Shopping Centers. That would be lower than the 2.9% growth rate seen in August 2007.

"You'll see a compressed back-to-school shopping season this year, with consumers waiting until they have to spend . . . and waiting for the best prices," retail analyst Patrick McKeever of MKM Partners, told Bloomberg Television.

Nordstrom (JWN, news, msgs) this morning said same-store sales fell 7.9% last month; Limited Brands (LTD, news, msgs) said August sales were down 7%. Both fell more than economists had expected. Nordstrom was off 4% to $32; Limited was off 6.2% to $20.70.

Target (TGT, news, msgs) said sales fell 2.1%, better than the consensus estimate of a 2.6% drop, while Costco Wholesale's (COST, news, msgs) sales jumped 9%, shy of analysts' expectations of a 9.9% increase.

Target was off 2% to $53.94; Costco shed 0.6% to $67.89.
Homebuilders report losses
Meanwhile, the housing sector -- source of the current weakness in the economy -- has a way to go before any real recovery, it seems.

Hovnanian late Wednesday said its fiscal-third-quarter loss was $202.5 million, or $2.67 per share, more than double last year's loss of $80.5 million, or $1.27 per share. Analysts had been expecting a loss of $1.68 per share.

"As we continue to compete against record foreclosures, higher than normal levels of resale listings and poor consumer confidence, the housing market remains challenging," Ara Hovnanian, president and chief executive, said in a press release.

Hovnanian wasn't all gloom and doom, however. "The recently enacted $7,500 federal tax credit for first-time homebuyers should help spur some short-term demand."

That wasn't enough to lift the stock: Shares of the company fell 17.6% to $6.39.

Toll Bros. also had a bleak quarter, losing $29.3 million, or 18 cents per share, better than the 25-cents-per-share loss analysts expected but reversing its year-ago results of $26.5 million, or 16 cents per share.

Shares of Toll Bros. slipped 0.4% to $24.71this afternoon.
 

thoughtone

Rising Star
BGOL Investor
source: The Washington Times

Fannie Mae, Freddie Mac takeover expected
Alan Zibel ASSOCIATED PRESS
Friday, September 5, 2008

WASHINGTON (AP) _ The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation's mortgage debt, a person briefed on the matter said Friday night.

Some of the details of the intervention, which could cost taxpayers billions, were not yet available, but are expected to include the departure of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced.

Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies' chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government's plan to put the troubled companies into a conservatorship.

The news, first reported on The Wall Street Journal's Web site, came after stock markets closed. In after-hours trading Fannie Mae's shares plunged $1.54, or 22 percent, to $5.50. Freddie Mac's shares fell $1.06, or almost 21 percent, to $4.04. Common stock in the companies will be worth little to nothing after the government's actions.

The news also followed a report Friday by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.

That confirmed what investors saw in Fannie and Freddie's recent financial results: trouble in the mortgage market has shifted to homeowners who had solid credit but took out exotic loans with little or no proof of their income and assets.

Fannie Mae and Freddie Mac lost a combined $3.1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments. While both companies said they had enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount.

Many in Washington and on Wall Street hadn't expected Treasury Secretary Henry Paulson to intervene unless the companies had trouble issuing debt to fund their operations. This summer, Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the two companies if needed.

Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.

Supporters, however, argue the Bush administration had little choice but to support Fannie and Freddie, which together hold or guarantee $5 trillion in mortgages — almost half the nation's total.

Representatives of Fannie and Freddie declined to comment on the government assistance plan.

Treasury spokeswoman Brookly McLaughlin said officials "have been in regular communications" with Fannie and Freddie, but refused to comment saying, "We are not going to comment on rumors."

Concern has been growing that a government rescue of Fannie and Freddie could not only wipe out common stockholders, but also be costly for scores of investment, banking and insurance companies that hold billions of dollars in their preferred shares.

Paulson has been in contact in recent weeks with foreign governments that hold billions of dollars of Fannie and Freddie debt to reassure them that the United States recognizes the importance of the two companies.

The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.

Mudd, the son of TV anchor Roger Mudd, was elevated to Fannie Mae's top post in December 2004 when chief executive Franklin Raines and chief financial officer Timothy Howard were swept out of office in an accounting scandal. Syron was named Freddie Mac's CEO in 2003, replacing former chief Gregory Parseghian, who was ousted in after being implicated in accounting irregularities. He formerly was executive chairman of Thermo Electron Corp., a Waltham, Mass.-based maker of scientific equipment, served head of the American Stock Exchange was president of the Federal Reserve Bank of Boston in the early 1990s.

Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie. A government takeover could cost taxpayers up to $25 billion, according to the Congressional Budget Office.

But the epic decision highlights the size of the threats facing the housing market and the economy. On Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns by JP Morgan Chase.
 

Greed

Star
Registered
The dream for a human capital agenda

The dream for a human capital agenda
By Edward L. Glaeser | September 5, 2008

ONE OF an economist's jobs is to be a sort of public scrooge, complaining loudly and obnoxiously when politicians come up with foolish ways of playing St. Nicholas with taxpayers' dollars. Subsidies for Iowa farmers or Detroit carmakers? Bah humbug. Gas tax holidays? Rent control? Certainly not. Go ahead and raise Bob Cratchit's rent.

But in this hopeful season of presidential change, even economists need to be for something. Some of my colleagues labor to improve healthcare; others fight for tax reform. My dream is that one, or both, candidates will make human capital the centerpiece of their campaign.

More than 70 percent of Americans routinely tell pollsters that the country is headed in the wrong direction. America will not change course just by electing a new president, no matter how much charisma or character that leader might have. America's future will instead depend on the skills of its citizens. In a remarkable new book, my colleagues Claudia Goldin and Lawrence Katz make a compelling case that America's 20th-century achievements owed much to our nation's once-robust investment in education, and that since the 1970s the growth in that investment has slowed dramatically.

Also since the mid-1970s, America has become much more unequal. Not all inequality is bad. I wouldn't mind if the guys who gave us Google earned even more, given their contributions to society. I do, however, care deeply that millions of Americans seem to have reaped, at best, modest benefits from the past 30 years of technological change.

Scrooge-like economists stress that most means of fighting inequality carry large costs. Progressive taxation reduces the incentives for entrepreneurship. Taxes on capital gains reduce investment. Allegedly redistributive regulations, like rent control, restrict the supply of things, like apartments, that should be abundant. Large welfare programs create the prospect of a permanent, government-funded underclass.

By contrast, investing in human capital offers the potential for permanent increases in earnings that encourage work. Education increases the ability to deal with innovation, so that investing in skills today will make Americans better able to weather the storms of future technological changes.

The attractiveness of education, to liberals and conservatives, explains why President Bush and Senator Edward M. Kennedy came together to pass the No Child Left Behind Act in 2001. Despite the law's flaws, it was a legislative high point of the last decade. But it was a small intervention, relative to the size of the education sector, targeted at failing students and schools.

A national human capital agenda requires investing in all children, not just those who might be left behind, and it requires much more than $50 billion a year.

Such spending needs to be justified by more than just a desire to reduce inequality. The case for governmental investment in education reflects the fact all of us become more productive when our neighbors know more. The success of cities like Boston reflects the magic that occurs when knowledgeable people work and live around each other. As the share of adults in a metropolitan area with college degrees increases by 10 percent, the wages of a worker with a fixed education level increases by 8 percent. Area level education also seems to increase the production of innovations and speed economic growth.

American education is not just another arrow in a quiver of policy proposals, but it is the primary weapon, the great claymore, to fight a host of public ills. One can make a plausible case that improving American education would do as much to improve health outcomes as either candidate's health plans. People with more years of schooling are less obese, smoke less, and live longer. Better-educated people are also more likely to vote and to build social capital by investing in civic organizations.

Improving America's human capital requires more than just writing a large check. My next columns will outline the details of a Marshall Plan for American Education. Because education is both important and difficult, it should be at the center of the presidential political debates.

Edward L. Glaeser, a professor of economics at Harvard University, is director of the Rappaport Institute for Greater Boston.

http://www.boston.com/bostonglobe/e...8/09/05/the_dream_for_a_human_capital_agenda/
 

nittie

Star
Registered
Re: The dream for a human capital agenda

America needs to get back to the basics. Honest days work, honest days pay. There's too many educated experts getting paid enormous salaries despite their poor job performaces. When a funds manager, business executive, pro athlete, or anyone gets paid million dollar wages they should deliver million dollar results.
 

thoughtone

Rising Star
BGOL Investor
Here we fucking go again. Investors and speculators need to start taking the hard hits. They are the ones supporting McCain, they are they ones saying the private sector can work best on it's own. Let your 401k drop to nothing, they then will understand why Social Security was created.

source: Wall Street Journal

September 9, 2008, 5:38 pm
Should the Fed Bail Out Lehman? Can It?
Posted by Heidi N. Moore

Is it time for the government to help out Lehman Brothers Holdings?

It has been all of two days since the Fannie Mae-Freddie Mac bailout was announced, the Dow Jones Industrial Average fell 280 points and a general sense of doom hangs over the markets.

And yet, Lehman is the center of an anxiety show all of its own. Its shares fell 45% on news that Korea Development Bank wasn’t interested in a deal. Then there are the three fears: coming third-quarter earnings, expected to be horrid; its exposure to risky real estate and mortgages, a market already plagued with uncertainty amid the government intervention at Fannie Mae and Freddie Mac; and the threat that worried counterparties might avoid doing business with Lehman in a replay of what happened to Bear Stearns. Banc of America Securities analyst Michael Hecht tonight said, “from here, we continue to view the situation as very binary, with a worst case scenario including a [Bear Stearns] type of bail-out/outright sale (which likely leaves little value left for common stockholders of about $2 per share after setting aside a ~$20B+ reserve for troubled asset markdowns, plus severance & retention).” The other option would be for Lehman to limp along by raising capital or selling off a portion of Neuberger Berman at fire sale prices.

When it comes to banks and thrifts, the Federal Reserve and Treasury have a wealth of legally approved options, including taking over and liquidating assets or creating a “bridge bank.” When it comes to broker-dealers like Lehman, federal regulators have only a hammer, a plumb line and a wrench. They can force a shotgun marriage, arrange a line of credit or put their authority–often referred to as “moral suasion”–behind an industry-led bailout of Lehman. Deal Journal took a look at their options.

Line of credit: The Fed discount window still is open for Lehman, so unless things really are dire the Fed probably won’t be called upon to further boost the company’s access to funding. Remember, the Fed offered a $30 billion line of credit to Bear Stearns, and this summer the Treasury extended a line of credit to Fannie Mae and Freddie Mac.

Shotgun marriage: This is a tried-and-true method of federal intervention that keeps the pressure off the government. The technique has more of a history among deposit institutions–which are heavily regulated–than investment banks like Lehman. Still, examples abound. One banking lawyer recalled how Riggs Bank, facing a money-laundering investigation, was nudged into a deal with PNC Financial in 2005 after the two banks had blown two other attempts to merge. This April, Fremont General sold its deposits and bank branches to Capital Source weeks after regulators ordered Fremont to raise capital or put itself up for sale.

The problem with this option for Lehman is the paucity of potential partners to whom the Fed or Treasury could make an appeal. Saddling another bank with Lehman’s mortgage-backed securities wouldn’t exactly be the definition of a bailout.

Moral suasion: The Fed is a guardian of the U.S. economy. Moral suasion is the term for the Fed’s ability to intervene so that the company to be saved isn’t embarrassed by an official Fed censure. The best example is the bailout of Long-Term Capital Management, in which the Fed called 13 banks to the table and asked them to work out a solution themselves. Another was the bailout of Chrysler, in which low-cost funding was provided by the government, with the Fed and Treasury sitting on the “stabilization committee” overseeing the process. In the 1970 case of Penn Central, the Fed didn’t impose a bailout but said it would be available to help businesses access the then-constricted market for short-term commercial paper. In New York City’s fiscal crisis in the 1970s, the Fed was the fiscal agent.

Of course, the Fed isn’t a bottomless pit of resources, and it has lavished a considerable chunk of its own balance sheet on asset acquisitions and bailouts this year, to the tune of at least $200 billion. Paul Volcker fretted about the Fed’s funding in May when the Fed still had about $800 billion in Treasury securities on its balance sheet to save the markets. It has considerably less room now. Treasury, as well, has its balance sheet occupied with Fannie Mae and Freddie Mac. Bailing out Lehman is one thing; if that were to then lead to a bailout of the regulators themselves, that would be quite another.

Update: We added Hecht’s observation tonight. In addition, Lehman just announced that it would release its second-quarter earnings and an update on its “key strategic initiatives” tomorrow morning at 7:30 a.m., with a conference call at 8 a.m.
 

QueEx

Rising Star
Super Moderator
THE ECONOMY


<font size="5"><center>Fed Leaves Key Rate Unchanged
Central Bank Resisted Pleas From Wall Street</font size></center>



PH2008091603509.jpg

Traders in Chicago react to the Fed's announcement
yesterday that it would leave its main interest rate at
2 percent. (By Tim Boyle -- Bloomberg News)

Washington Post
By Neil Irwin
Washington Post Staff Writer
Wednesday, September 17, 2008; Page D01

The Federal Reserve yesterday elected to leave the interest rate it controls unchanged, rebuffing calls to bolster the economy at a time of global turmoil in financial markets.

The central bank's policymaking committee, in a meeting scheduled long before the convulsions that are reshaping Wall Street, decided that it would leave the federal funds rate unchanged at 2 percent. That rate ultimately affects what consumers pay to borrow money through a credit card or pay for an adjustable-rate mortgage, and what businesses must pay to borrow money to expand.

Many on Wall Street were urging the Fed to cut that rate following the bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch, and the turbulence at insurance firm AIG. But Fed leaders were trying to draw a clear line between their efforts to address problems in the financial markets -- such as injecting $70 billion in cash into the banking system yesterday -- and their broad policy to deal with the nation's economic distress. The Fed concluded that it was impossible to know whether, or how much, the volatile times on Wall Street would slow the economy on Main Street.

"They want to see if this is just a temporary blip in the financial turmoil or whether it lasts for a while," said David Wyss, chief economist at Standard & Poor's. "For them to cut rates, it would take some evidence this is hurting the economy, not just the financial markets."

Indeed, the policymaking Federal Open Market Committee didn't seem tremendously concerned about the turbulence in the financial world. "Strains in financial markets have increased significantly," it said in its announcement of the action, which in the view of many analysts was an understatement.

"It does read a little bit like it was written last week," said Michael J. Feroli, a U.S. economist at J.P. Morgan Chase. "It could sound like having a bit of a tin ear to what's going on in the markets."

The central bank also seemed to indicate that risks of higher inflation and weaker-than-expected growth are roughly balanced, indicating that they "are both of significant concern to the Committee" and that it will "act as needed" to promote sustainable growth and low inflation. Many market watchers had expected a clearer signal that the Fed would consider cutting interest rates in the future if the economy gets much worse.

The Fed was meeting under different circumstances than it has for most of the year: Prices for oil and other commodities have fallen sharply in the past three months, and other world economies are slowing, suggesting that upward pressure on energy and other resources may continue to ease. The policymaking committee said in its statement that it "expects inflation to moderate later this year and next year."

One sign of the easing of inflation concerns: For the first time in a year, the committee was unanimous, as members who had previously dissented in favor of being more vigilant about inflation went with the crowd.

But the committee didn't express great confidence in the prediction that inflation will moderate, saying the outlook "remains highly uncertain."

Federal Reserve Chairman Ben S. Bernanke has designed his response to the financial crisis in part by relying on his knowledge of the Great Depression, of which he was a leading scholar. By allowing a cascading series of failures in the financial sector and not cutting interest rates, Bernanke concluded in his academic research, the Fed allowed a "financial accelerator" to take hold in which a weak financial sector and weak economy fed back into each other, creating a vicious cycle.

By cutting interest rates to 2 percent in the spring, from 5.25 percent in 2007, Bernanke was aiming to avert a similar phenomenon. Now, with the crisis deepening, the open question is whether that will be enough.

On one hand, the economy has weakened significantly in the past six months, but roughly along the lines that Bernanke and his Fed colleagues had forecast when slashing the rate.

On the other hand, banks and other financial institutions, walloped by the troubles on Wall Street, have tightened their lending standards and charged higher rates for loans. For example, despite the aggressive Fed rate cuts, mortgage rates are still about where they were a year ago. In that sense, the Fed rate cuts have merely prevented the rates that many consumers pay from rising, not lowered the cost of borrowing money in many cases.

In the past few days, the crisis in the financial system has made it hard for the Fed to maintain the rate near its 2 percent target; the central bank buys and sells government bonds to try to maintain the rate, and it has had to make a series of massive cash injections, including the $70 billion yesterday, to keep cash-hoarding banks from bidding up the rate.

"It purely reflects a lack of confidence," said Diane Swonk, chief economist at Mesirow Financial. "No one's willing to lend at 2 percent right now, so it takes these large interventions to get the rate to that point."

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/16/AR2008091601923.html?hpid=topnews
 

Greed

Star
Registered
Don't Worry About Inflation

Don't Worry About Inflation
By FREDERIC S. MISHKIN
SEPTEMBER 18, 2008

The Federal Reserve is facing a major challenge because high commodity prices, especially oil, have produced high headline inflation. But the Fed should not overreact.

The Consumer Price Index (CPI) last month rose more than 5% over a year earlier, way above a rate that is consistent with price stability. At the same time, the federal-funds rate is at 2%, so the real interest rate on federal funds -- the interest rate adjusted for inflation -- has turned very negative.

Will this low real interest rate lead to inflation spiraling out of control? Shouldn't the Fed react more to the currently high inflation numbers by tightening policy, a view often advocated on this page, or at least not further lower the fed-funds rate if the economy looks like it might go into a tailspin? The answer is no.

It is certainly true that central banks should be worried about high headline inflation caused by high commodity prices. After all, households daily pay for energy and food items, and they are a big chunk of people's budgets. But central banks cannot control relative prices for food and energy. When a cold snap freezes the Florida orange crop or a tropical storm hits the gasoline refineries along the Gulf Coast, monetary policy cannot reverse the resulting spikes in prices for fresh orange juice or for gasoline at the pump that lead to high inflation in the short run. Particularly volatile items like food and energy, which are included in headline measures of inflation, are inherently noisy and often do not reflect changes in the underlying rate of inflation, the rate at which headline inflation is likely to settle and which monetary policy can affect.

This is why the Fed pays attention to measures of core inflation, which attempt to strip out or smooth volatile changes in particular prices to distinguish the inflation signal from the transitory noise. Relative to changes in headline inflation measures, changes in core measures are much less likely to be reversed, provide a clearer picture of the underlying inflation pressures, and so serve as a better guide to where headline inflation itself is heading. Of course, if a particular shock to noncore prices turns out to be more persistent, then the higher costs are likely to put some upward pressure on core prices.

Central bankers must always be aware of this risk. However, research has shown that over the past 25 years or more, headline inflation in the U.S. declines more strongly toward core inflation than core inflation has moved toward headline inflation. As that record suggests, core measures often are much better than headline indexes at providing a first approximation of the permanent changes to inflation.

The current situation illustrates exactly this point. While headline CPI inflation over the past year was above 5%, core CPI inflation was around 2.5%. With the sharp decline in oil prices from over $140 per barrel to below $100 now, and the decline in other commodity prices, headline inflation should fairly quickly move back towards core inflation.

If the monetary authorities react to headline inflation numbers, they run the risk of making serious policy mistakes. We have seen that headline inflation has risen well above its underlying trend as the price of energy has risen. But with energy prices having fallen, it will soon fall back to or below its underlying trend. A tightening of monetary policy in reaction to the rise in headline inflation would lead to a decline in employment and inflation. Because of the long lags between monetary policy actions and changes in economic activity, that decline would occur sometime down the road, when inflation would more likely be at or below its underlying trend.

The outcome of such a policy would be a more pronounced fall in inflation, with a decline in employment. It would increase volatility in inflation and employment, which is the opposite of what a central bank should be trying to achieve as it seeks to promote price stability and maximum sustainable employment.

Monetary policy should not overreact to headline inflation. It can do little about the first-round effects of a rise in energy prices, which include both its direct impact on the energy component of overall consumer prices, and the pass-through of higher energy costs into prices of non-energy goods and services. But the Fed does have to worry about possible second-round effects associated with changes in the underlying trend rate of inflation. Such second-round effects are likely to be quite limited only as long as the rise in the relative price of energy does not lead to a rise in long-run inflation expectations. Here there is good news as well. Inflation expectations have remained quite well grounded during this recent spike in energy and commodity prices.

Longer run inflation expectations have ticked up a couple of tenths as measured by surveys of professional forecasters and households. Even more telling is that information about inflation expectations from the financial markets have not risen appreciably. One widely watched measure called the break-even inflation rate -- the difference between yields on longer maturity Treasury Inflation Protection Securities (TIPS) and Treasury bonds -- has fallen substantially in the last couple of months. Not all of this decline should be attributed to falling longer-run inflation expectation -- break-even inflation also is affected by inflation uncertainty and liquidity considerations. But it certainly suggests that inflation expectations are more likely to be falling rather than rising.

Of course, the Fed should not be complacent about the current inflation situation. Headline inflation is certainly way too high. There is always a possibility that the currently high numbers could lead to longer-run inflation expectations becoming unhinged, which would weaken the Fed's nominal anchor and produce rising underlying inflation in the future.

The Fed must preserve the nominal anchor at all costs. As I have argued in many of my speeches when I was governor of the Federal Reserve, a strong long-term commitment to providing a nominal anchor is crucial to not only keeping inflation under control, but to reducing volatility of unemployment and output growth. Thus the Fed must remain vigilant and take the appropriate steps to tighten monetary policy, when that is needed to ensure that inflation expectations and underlying inflation remain under control.

But isn't the currently low fed-funds rate -- which is certainly below underlying inflation and implying a negative real policy rate -- very accommodative? Doesn't this mean that underlying inflation is likely to rise?

Again, the answer is no. It is true that real interest rates on federal funds and Treasury bills are very low. But we are in the throes of major financial disruption that has led to a slowing economy and a substantial widening of credit spreads, so the interest rates that businesses and households must pay to finance their purchases are not low at all.

As recent events indicate, we are also far from sure that the worst is over. There is still plenty of downside risk to the economy. The Fed not only has to be vigilant on the inflation front, but needs to be ready, if necessary, to respond aggressively to possible negative developments in the financial markets and the aggregate economy.

At some point in the future, financial markets and the economy will begin to recover, credit spreads will fall and then the current fed-funds rate will be too accommodative. Surely that time is not now.

Mr. Mishkin is a professor of finance and economics at Columbia University's Graduate School of Business, a former member of the Board of Governors of the Federal Reserve System, and the author of "Monetary Policy Strategy" (MIT Press, 2007).

http://online.wsj.com/article/SB122169336538749851.html
 

Greed

Star
Registered
Wall Street Will Drown Alone

Wall Street Will Drown Alone
Sunday, September 28, 2008
Casey B. Mulligan

There was a time when people believed that the Sun and stars revolved around the Earth. Of course, now we know that the Earth is not the center of the universe, or even the center of our little solar system. In the somewhat more recent past, economists thought that the non-financial sector in a modern economy revolved around financial markets, despite the facts that only 4 percent of the workforce was employed in the financial sector (including insurance and real estate), and even today that sector employs only 6 percent of the total. President Bush and supporters of the recent massive Wall Street bailout plan still believe Wall Street to be the center of the entire economy.

Economic research over the last couple of decades rejects this belief. It has shown that the financial and non-financial sectors experience quite independent changes, especially over the short and medium term. Take for example the promised yield on the best commercial paper. Fluctuations in this yield are critically important to persons in the financial sector (such as money market traders), but have hardly anything to do with activity outside of that sector. Since World War II, the correlation between the inflation-adjusted commercial paper yield and subsequent inflation-adjusted growth of GDP per capita is zero. That is, GDP growth has been high following high yields just as often as it has been low. It is equally hard to detect a correlation between stock returns, long term bond returns, or commodity returns and subsequent GDP growth. Quite simply, history has shown that the non-financial sector can do well when the financial sector does poorly, and vice versa.

In order to find good predictors of non-financial sector performance, and GDP growth generally, we look to the non-financial sector itself. One of those predictors is the profitability of non-financial capital, or the “marginal product of capital” as we economists call it. The marginal product of capital after-tax is a measure of how much profit (revenue net of variable costs and taxes) that each unit of capital is producing during, say, the last year. When the marginal product of capital after-tax is above average, subsequent rates of economic growth (and subsequent marginal products of capital) also tend to be above average.

Since World War II, the marginal product of capital after-tax averaged between 7 and 8 percent per year. During 2007 and the first half of 2008 – exactly the time when financial markets had been spooked by oil price spikes and housing price crashes – the marginal product had been over 10 percent per year: far above the historical average. Compare this to the marginal product of capital in 1930-33 (the years of Depression-era bank panics): 0.5 percentage points per year less than the postwar years and significantly less than in 1929. The marginal product of capital was also below average prior to the 1982 recession (in this case, far below average) and prior to the 2001 recession. Thus, the surprise was not that GDP continued to grow 2007-8 despite the bleak outlook from Wall Street’s corner of the world, but that GDP growth failed to be significantly above the average. More important from today’s perspective is that much capital in America continues to be productive, and that this will likely permit Americans to advance their living standards as they have in years past. The non-financial sector today looks nothing like it did in 1930.

The weak correlation between asset prices and non-financial sector performance and the strong profitability of today’s non-financial capital are two good reasons to scoff at the idea that the non-financial sector will collapse because of the recent events on Wall Street, and even better reasons to scoff at the Bernanke-Paulson-Bush idea that a massive bailout of financial firms is the key to avoiding a non-financial collapse. Wall Street’s woes are and will be largely limited to Wall Street. The Bush administration should not use the power of the IRS to force the rest of us to board Wall Street’s sinking ship.

Of course, six percent of the workforce is bigger than zero, so a Wall Street mess has indirect effects on the non-financial sector as it absorbs former Wall Street employees and finds alternatives to the financial services Wall Street once provided. But, as long as the government does not get in the way, the marketplace will quickly react to provide the non-financial sector with financial services, even if the main players in that marketplace are no longer named Lehman, Merrill, or Goldman. There are two basic obstacles that Washington might create in this process, both of which are included in the Bernanke-Paulson-Bush proposal. One is to pile on regulation and further impede entry by new firms that might provide financial services to the non-financial sector in the years ahead. The second is to impose a heavy tax burden on the non-financial sector to pay for Wall Street subsidies. The Treasury and the Fed should let Wall Street drown alone, to be replaced by new financial service providers who can swim as robustly as are non-financial American businesses.

http://caseymulligan.blogspot.com/2008/09/wall-street-will-drown-alone.html
 

QueEx

Rising Star
Super Moderator
Re: Wall Street Will Drown Alone

<font size="5"><center>
The Fall of America, Inc.</font size>
<font size="4">

Along with some of Wall Street's most storied firms,
a certain vision of capitalism has collapsed.
How we restore faith in our brand.</font size></center>



capitalism-fukuyama-IN01-vl-vertical.jpg

Illustration: Steve Brodner for Newsweek


NEWSWEEK
By Francis Fukuyama
Published Oct 4, 2008
From the magazine issue dated Oct 13, 2008


The implosion of America's most storied investment banks. The vanishing of more than a trillion dollars in stock-market wealth in a day. A $700 billion tab for U.S. taxpayers. The scale of the Wall Street crackup could scarcely be more gargantuan. Yet even as Americans ask why they're having to pay such mind-bending sums to prevent the economy from imploding, few are discussing a more intangible, yet potentially much greater cost to the United States—the damage that the financial meltdown is doing to America's "brand."

Ideas are one of our most important exports, and two fundamentally American ideas have dominated global thinking since the early 1980s, when Ronald Reagan was elected president. The first was a certain vision of capitalism—one that argued low taxes, light regulation and a pared-back government would be the engine for economic growth. Reaganism reversed a century-long trend toward ever-larger government. Deregulation became the order of the day not just in the United States but around the world.

The second big idea was America as a promoter of liberal democracy around the world, which was seen as the best path to a more prosperous and open international order. America's power and influence rested not just on our tanks and dollars, but on the fact that most people found the American form of self-government attractive and wanted to reshape their societies along the same lines—what political scientist Joseph Nye has labeled our "soft power."

It's hard to fathom just how badly these signature features of the American brand have been discredited. Between 2002 and 2007, while the world was enjoying an unprecedented period of growth, it was easy to ignore those European socialists and Latin American populists who denounced the U.S. economic model as "cowboy capitalism." But now the engine of that growth, the American economy, has gone off the rails and threatens to drag the rest of the world down with it. Worse, the culprit is the American model itself: under the mantra of less government, Washington failed to adequately regulate the financial sector and allowed it to do tremendous harm to the rest of the society.

Democracy was tarnished even earlier. Once Saddam was proved not to have WMD, the Bush administration sought to justify the Iraq War by linking it to a broader "freedom agenda"; suddenly the promotion of democracy was a chief weapon in the war against terrorism. To many people around the world, America's rhetoric about democracy sounds a lot like an excuse for furthering U.S. hegemony.

The choice we face now goes well beyond the bailout, or the presidential campaign. The American brand is being sorely tested at a time when other models—whether China's or Russia's—are looking more and more attractive. Restoring our good name and reviving the appeal of our brand is in many ways as great a challenge as stabilizing the financial sector. Barack Obama and John McCain would each bring different strengths to the task. But for either it will be an uphill, years-long struggle. And we cannot even begin until we clearly understand what went wrong—which aspects of the American model are sound, which were poorly implemented, and which need to be discarded altogether.

Many commentators have noted that the Wall Street meltdown marks the end of the Reagan era. In this they are doubtless right, even if McCain manages to get elected president in November. Big ideas are born in the context of a particular historical era. Few survive when the context changes dramatically, which is why politics tends to shift from left to right and back again in generation-long cycles.

Reaganism (or, in its British form, Thatcherism) was right for its time. Since Franklin Roosevelt's New Deal in the 1930s, governments all over the world had only grown bigger and bigger. By the 1970s large welfare states and economies choked by red tape were proving highly dysfunctional. Back then, telephones were expensive and hard to get, air travel was a luxury of the rich, and most people put their savings in bank accounts paying low, regulated rates of interest. Programs like Aid to Families With Dependent Children created disincentives for poor families to work and stay married, and families broke down. The Reagan-Thatcher revolution made it easier to hire and fire workers, causing a huge amount of pain as traditional industries shrank or shut down. But it also laid the groundwork for nearly three decades of growth and the emergence of new sectors like information technology and biotech.

Internationally, the Reagan revolution translated into the "Washington Consensus," under which Washington—and institutions under its influence, like the International Monetary Fund and the World Bank—pushed developing countries to open up their economies. While the Washington Consensus is routinely trashed by populists like Venezuela's Hugo Chávez, it successfully eased the pain of the Latin American debt crisis of the early 1980s, when hyperinflation plagued countries such as Argentina and Brazil. Similar market-friendly policies are what turned China and India into the economic powerhouses they are today.

And if anyone needed more proof, they could look at the world's most extreme examples of big government—the centrally planned economies of the former Soviet Union and other communist states. By the 1970s they were falling behind their capitalist rivals in virtually all respects. Their implosion after the fall of the Berlin Wall confirmed that such welfare states on steroids were an historical dead end.

Like all transformative movements, the Reagan revolution lost its way because for many followers it became an unimpeachable ideology, not a pragmatic response to the excesses of the welfare state. Two concepts were sacrosanct: first, that tax cuts would be self-financing, and second, that financial markets could be self-regulating.

Prior to the 1980s, conservatives were fiscally conservative— that is, they were unwilling to spend more than they took in in taxes. But Reaganomics introduced the idea that virtually any tax cut would so stimulate growth that the government would end up taking in more revenue in the end (the so-called Laffer curve). In fact, the traditional view was correct: if you cut taxes without cutting spending, you end up with a damaging deficit. Thus the Reagan tax cuts of the 1980s produced a big deficit; the Clinton tax increases of the 1990s produced a surplus; and the Bush tax cuts of the early 21st century produced an even larger deficit. The fact that the American economy grew just as fast in the Clinton years as in the Reagan ones somehow didn't shake the conservative faith in tax cuts as the surefire key to growth.

More important, globalization masked the flaws in this reasoning for several decades. Foreigners seemed endlessly willing to hold American dollars, which allowed the U.S. government to run deficits while still enjoying high growth, something that no developing country could get away with. That's why Vice President Dick Cheney reportedly told President Bush early on that the lesson of the 1980s was that "deficits don't matter."

The second Reagan-era article of faith—financial deregulation—was pushed by an unholy alliance of true believers and Wall Street firms, and by the 1990s had been accepted as gospel by the Democrats as well. They argued that long-standing regulations like the Depression-era Glass-Steagall Act (which split up commercial and investment banking) were stifling innovation and undermining the competitiveness of U.S. financial institutions. They were right—only, deregulation produced a flood of innovative new products like collateralized debt obligations, which are at the core of the current crisis. Some Republicans still haven't come to grips with this, as evidenced by their proposed alternative to the bailout bill, which involved yet bigger tax cuts for hedge funds.

http://www.newsweek.com/id/162401/page/1
 

QueEx

Rising Star
Super Moderator
Re: Wall Street Will Drown Alone

<font size="5">
The Fall of America, Inc.</font size>
<font size="4">
Part Two

</font size>

The problem is that Wall Street is very different from, say, Silicon Valley, where a light regulatory hand is genuinely beneficial. Financial institutions are based on trust, which can only flourish if governments ensure they are transparent and constrained in the risks they can take with other people's money. The sector is also different because the collapse of a financial institution harms not just its shareholders and employees, but a host of innocent bystanders as well (what economists soberly call "negative externalities").

Signs that the Reagan revolution had drifted dangerously have been clear over the past decade. An early warning was the Asian financial crisis of 1997-98. Countries like Thailand and South Korea, following American advice and pressure, liberalized their capital markets in the early 1990s. A lot of hot money started flowing into their economies, creating a speculative bubble, and then rushed out again at the first sign of trouble. Sound familiar? Meanwhile, countries like China and Malaysia that didn't follow American advice and kept their financial markets closed or strictly regulated found themselves much less vulnerable.

A second warning sign lay in America's accumulating structural deficits. China and a number of other countries began buying U.S. dollars after 1997 as part of a deliberate strategy to undervalue their currencies, keep their factories humming and protect themselves from financial shocks. This suited a post-9/11 America just fine; it meant that we could cut taxes, finance a consumption binge, pay for two expensive wars and run a fiscal deficit at the same time. The staggering and mounting trade deficits this produced—$700 billion a year by 2007—were clearly unsustainable; sooner or later the foreigners would decide that America wasn't such a great place to bank their money. The falling U.S. dollar indicates that we have arrived at that point. Clearly, and contrary to Cheney, deficits do matter.

Even at home, the downside of deregulation were clear well before the Wall Street collapse. In California, electricity prices spiraled out of control in 2000-2001 as a result of deregulation in the state energy market, which unscrupulous companies like Enron gamed to their advantage. Enron itself, along with a host of other firms, collapsed in 2004 because accounting standards had not been enforced adequately. Inequality in the United States rose throughout the past decade, because the gains from economic growth went disproportionately to wealthier and better-educated Americans, while the incomes of working-class people stagnated. And finally, the bungled occupation of Iraq and the response to Hurricane Katrina exposed the top-to-bottom weakness of the public sector, a result of decades of underfunding and the low prestige accorded civil servants from the Reagan years on.

All this suggests that the Reagan era should have ended some time ago. It didn't partly because the Democratic Party failed to come up with convincing candidates and arguments, but also because of a particular aspect of America that makes our country very different from Europe. There, less-educated, working-class citizens vote reliably for socialist, communist and other left-learning parties, based on their economic interests. In the United States, they can swing either left or right. They were part of Roosevelt's grand Democratic coalition during the New Deal, a coalition that held through Lyndon Johnson's Great Society in the 1960s. But they started voting Republican during the Nixon and Reagan years, swung to Clinton in the 1990s, and returned to the Republican fold under George W. Bush. When they vote Republican, it's because cultural issues like religion, patriotism, family values and gun ownership trump economic ones.

This group of voters will decide November's election, not least because of their concentration in a handful of swing states like Ohio and Pennsylvania. Will they tilt toward the more distant, Harvard-educated Obama, who more accurately reflects their economic interests? Or will they stick with people they can better identify with, like McCain and Sarah Palin? It took an economic crisis of massive proportions from 1929 to 1931 to bring a Democratic administration to power. Polls indicate we may have arrived again at that point in October 2008.

The other critical component of the American brand is democracy, and the willingness of the United States to support other democracies around the world. This idealistic streak in U.S. foreign policy has been constant over the past century, from Woodrow Wilson's League of Nations through Roosevelt's Four Freedoms to Reagan's call for Mikhail Gorbachev to "tear down this wall."

Promoting democracy—through diplomacy, aid to civil society groups, free media and the like—has never been controversial. The problem now is that by using democracy to justify the Iraq War, the Bush administration suggested to many that "democracy" was a code word for military intervention and regime change. (The chaos that ensued in Iraq didn't exactly help democracy's image either.) The Middle East in particular is a minefield for any U.S. administration, since America supports nondemocratic allies like the Saudis, and refuses to work with groups like Hamas and Hizbullah that came to power through elections. We don't have much credibility when we champion a "freedom agenda."

The American model has also been seriously tarnished by the Bush administration's use of torture. After 9/11 Americans proved distressingly ready to give up constitutional protections for the sake of security. Guantánamo Bay and the hooded prisoner at Abu Ghraib have since replaced the Statue of Liberty as symbols of America in the eyes of many non-Americans.

No matter who wins the presidency a month from now, the shift into a new cycle of American and world politics will have begun. The Democrats are likely to increase their majorities in the House and Senate. A huge amount of populist anger is brewing as the Wall Street meltdown spreads to Main Street. Already there is a growing consensus on the need to re-regulate many parts of the economy.

Globally the United States will not enjoy the hegemonic position it has occupied until now, something underscored by Russia's Aug. 7 invasion of Georgia. America's ability to shape the global economy through trade pacts and the IMF and World Bank will be diminished, as will our financial resources. And in many parts of the world, American ideas, advice and even aid will be less welcome than they are now.

Under such circumstances, which candidate is better positioned to rebrand America? Barack Obama obviously carries the least baggage from the recent past, and his postpartisan style seeks to move beyond today's political divisions. At heart he seems a pragmatist, not an ideologue. But his consensus-forming skills will be sorely tested when he has to make tough choices, bringing not just Republicans but unruly Democrats into the fold. McCain, for his part, has talked like Teddy Roosevelt in recent weeks, railing against Wall Street and calling for SEC chairman Chris Cox's head. He may be the only Republican who can bring his party, kicking and screaming, into a post-Reagan era. But one gets the sense that he hasn't fully made up his mind what kind of Republican he really is, or what principles should define the new America.

American influence can and will eventually be restored. Since the world as a whole is likely to suffer an economic downturn, it is not clear that the Chinese or Russian models will fare appreciably better than the American version. The United States has come back from serious setbacks during the 1930s and 1970s, due to the adaptability of our system and the resilience of our people.

Still, another comeback rests on our ability to make some fundamental changes. First, we must break out of the Reagan-era straitjacket concerning taxes and regulation. Tax cuts feel good but do not necessarily stimulate growth or pay for themselves; given our long-term fiscal situation Americans are going to have to be told honestly that they will have to pay their own way in the future. Deregulation, or the failure of regulators to keep up with fast-moving markets, can become unbelievably costly, as we have seen. The entire American public sector—underfunded, deprofessionalized and demoralized—needs to be rebuilt and be given a new sense of pride. There are certain jobs that only the government can fulfill.

As we undertake these changes, of course, there's a danger of overcorrecting. Financial institutions need strong supervision, but it isn't clear that other sectors of the economy do. Free trade remains a powerful motor for economic growth, as well as an instrument of U.S. diplomacy. We should provide better assistance to workers adjusting to changing global conditions, rather than defend their existing jobs. If tax cutting is not a path to automatic prosperity, neither is unconstrained social spending. The cost of the bailouts and the long-term weakness of the dollar mean that inflation will be a serious threat in the future. An irresponsible fiscal policy could easily add to the problem.

And while fewer non-Americans are likely to listen to our advice, many would still benefit from emulating certain aspects of the Reagan model. Not, certainly, financial-market deregulation. But in continental Europe, workers are still treated to long vacations, short working weeks, job guarantees and a host of other benefits that weaken their productivity and will not be financially sustainable.

The unedifying response to the Wall Street crisis shows that the biggest change we need to make is in our politics. The Reagan revolution broke the 50-year dominance of liberals and Democrats in American politics and opened up room for different approaches to the problems of the time. But as the years have passed, what were once fresh ideas have hardened into hoary dogmas. The quality of political debate has been coarsened by partisans who question not just the ideas but the motives of their opponents. All this makes it harder to adjust to the new and difficult reality we face. So the ultimate test for the American model will be its capacity to reinvent itself once again. Good branding is not, to quote a presidential candidate, a matter of putting lipstick on a pig. It's about having the right product to sell in the first place. American democracy has its work cut out for it.


Fukuyama is professor of International Political Economy at the Johns Hopkins School of Advanced International Studies.


© 2008 Newsweek

`
 

nittie

Star
Registered
Wall Street will not fall unless a new institution emerges to replace it. The powers that be will keep pouring money into it. There has to be another model or else the status quo will prevail. People should see whats happening as a opportunity to move up, get out of the rat race, quit worshiping mere mortals. The people on Wall Street, in Congress, have proven for the umpteenth time they don't know what the fuck they're doing.
 

Greed

Star
Registered
Consensus Emerges to Let Deficit Rise

Consensus Emerges to Let Deficit Rise
By LOUIS UCHITELLE and ROBERT PEAR
October 20, 2008

Like water rushing over a river’s banks, the federal government’s rapidly mounting expenses are overwhelming the federal budget and increasing an already swollen deficit.

The bank bailout, in the latest big outlay, could cost $250 billion in just the next few weeks, and a newly proposed stimulus package would have $150 billion or more flowing from Washington before the next president takes office in January.

Adding to the damage is that tax revenues fall as the economy weakens; this is likely just as the government needs hundreds of billions of dollars to repair the financial system. The nation’s wars are growing more costly, as fighting spreads in Afghanistan. And a declining economy swells outlays for unemployment insurance, food stamps and other federal aid.

But the extra spending, a sore point in normal times, has been widely accepted on both sides of the political aisle as necessary to salvage the banking system and avert another Great Depression.

“Right now would not be the time to balance the budget,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan Washington group that normally pushes the opposite message.

Confronted with a hugely expensive economic crisis, Democratic and Republican lawmakers alike have elected to pay the bill mainly by borrowing money rather than cutting spending or raising taxes. But while the borrowing is relatively inexpensive for the government in a weak economy, the cost will become a bigger burden as growth returns and interest rates rise.

In addition, outlays for Medicare and Social Security are expected to balloon as the first baby boomers reach full retirement age in the next three years.

“The next president will inherit a fiscal and economic mess of historic proportions,” said Senator Kent Conrad, Democrat of North Dakota and chairman of the Senate Budget Committee. “It will take years to dig our way out.”

The Congressional Budget Office estimates that the deficit in the current fiscal year, which started this month, will reach roughly $700 billion, up more than 50 percent from the previous year. Measured as a percentage of all the nation’s economic activity, the deficit, at 5 percent, would rival those of the early 1980s, when a severe recession combined with stepped-up federal spending and Reagan-era tax cuts resulted in huge budget shortfalls.

Resorting to credit has long been the American solution for dealing with expensive crises — as long as the solution has wide public support. Fighting World War II certainly had that support. Even now many Americans tolerate running up the deficit to pay for the wars in Iraq and Afghanistan, which cost $11 billion a month combined. And so far there is wide support for an initial outlay of at least $250 billion for a rescue of the financial system, if that will stabilize banks and prevent a calamitous recession.

“There are extreme circumstances when a larger national debt is accepted as the lesser of two evils,” said Robert J. Barbera, chief economist at the Investment Technology Group, a research and trading firm.

There are also assumptions that help to make America’s deficits tolerable, even logical.

One is that people all over the world are willing, even eager, to lend to the United States, confident that the world’s most powerful nation will always repay on time, whatever its current difficulties.

“So far the market is showing that it is quite willing to finance our needs,” said Stephen S. McMillin, deputy director of the White House Office of Management and Budget.

Lenders are accepting interest rates of 4 percent or less, often much less, to buy what they consider super-safe American debt in the form of Treasury securities. The 4 percent rate means that the annual cost of borrowing an extra $1 trillion is $40 billion, a modest sum in a nearly $14 trillion economy, helping to explain why the current growing deficit has encountered little political resistance so far.

But if recent history repeats itself, the deficit is likely to be an issue again when the economy recovers.

Interest rates typically rise during a recovery, so the low cost of servicing the nation’s debt will not last — unless a recession set off by the banking crisis endures, repeating the Japanese experience in the 1990s and perhaps even stripping the United States and the dollar of their pre-eminent status.

The assumption is that will not happen, and as the economy recovers, the private sector will step up its demand for credit, making interest rates rise.

Higher rates in turn would increase the cost of financing the deficit, and there would probably be more pressure to reduce it through cuts in spending. That happened in the late 1980s, as Congress and the White House coped with the swollen Reagan deficits. The Gramm-Rudman-Hollings Act, with its attempt to put a ceiling on deficits, came out of this period.

Another assumption, also based on 60 years of post-World War II experience, is that although the economy is sliding into recession, in a year or two that recession will end and the national income (also known as the gross domestic product) will expand once again.

When that happens, the national debt — the accumulated borrowing to finance all the annual deficits — will shrink in relation to the income available to pay off the debt.

The nation’s debt as a percentage of all economic activity, while growing alarmingly now, is not at historic highs. The portion held outside the American government, here and abroad, in the form of Treasury securities was $5.8 trillion at the end of last month.

That is a relatively modest 40.8 percent of the nation’s annual income, far below the 109 percent coming out of World War II or the nearly 50 percent in much of the 1990s.

Put another way, if the entire national income were dedicated to debt repayment, the debt would be paid off in less than five months. For most of the years since 1940, paying down the debt would have taken longer, putting a greater strain on income.

Still, these are not ordinary times. The banking system is broken, and the national economy, in response, is plunging toward recession in a manner that evokes comparisons with the Great Depression. To soften the blow, the administration and Congress ran up a record $455 billion deficit in the just-ended 2008 fiscal year, and they are en route to a shortfall of $700 billion or more this year.

“I do think we need to be ready for a very significant increase in the budget deficit,” said Peter Orszag, director of the Congressional Budget Office.

Apart from the war spending, outlays for unemployment insurance have risen by one-third and spending on food stamps has increased 13 percent over the last 12 months. Congress has agreed to expand education benefits for veterans of the current wars, and last spring it authorized $168 billion for a stimulus package, most of it in the form of tax rebate checks. Now the Democratic Congressional leadership is pushing for another stimulus of at least that much.

All of this is happening as tax revenues are falling, particularly corporate tax receipts, which were down $66 billion, or 18 percent, in the fiscal year that just ended. The decline accelerated in September.

Many Republicans would probably go along with two elements in the stimulus package proposed by the Democrats — a tax cut of some sort and extended unemployment benefits. But they resist stepped-up spending on public works projects and a temporary increase in federal aid to the states.

Representative Roy Blunt of Missouri, the House Republican whip, said the stimulus bill should not be used to finance “a huge public works plan” or to bail out “states that spent a lot more money than they should have on Medicaid and other social programs.”

To pay for the surge in spending — and the shortfall in taxes — the federal government increased the national debt by $768 billion over the last year, to the present $5.8 trillion, with $300 billion of that amount going to the Federal Reserve for a variety of rescue initiatives for the financial system.

The outlays swell as each day brings fresh reports of a financial system that is costly to repair and a rapidly sinking economy in need of a leg up.

“The deficit is a burden in a long-term sense,” Mr. Barbera, the economist, said, “but it is small beer compared to the concerns of the moment.”

http://www.nytimes.com/2008/10/20/b...r=1&oref=slogin&ref=business&pagewanted=print
 

nittie

Star
Registered
Re: Wall Street Will Drown Alone

If economy is defined as

An economy is the realized social system of production, exchange, distribution, and consumption of goods and services of a country or other area.


Then any group can build their own economy. 100 people can generate enuff revenue to support themselves and not be hostage to what those idiots on Wall Street do.
 

Greed

Star
Registered
Depression 2009: What would it look like?

Depression 2009: What would it look like?
Lines at the ER, a television boom, emptying suburbs. A catastrophic economic downturn would feel nothing like the last one.
By Drake Bennett | November 16, 2008

OVER THE PAST few months, Americans have been hearing the word "depression" with unfamiliar and alarming regularity. The financial crisis tearing through Wall Street is routinely described as the worst since the Great Depression, and the recession into which we are sinking looks deep enough, financial commentators warn, that a few poor policy decisions could put us in a depression of our own.

It's a frightening possibility, but also in many ways an abstraction. The country has gone so long without a depression that it's hard to know what it would be like to live through one.

Most of us, of course, think we know what a depression looks like. Open a history book and the images will be familiar: mobs at banks and lines at soup kitchens, stockbrokers in suits selling apples on the street, families piled with all their belongings into jalopies. Families scrimp on coffee and flour and sugar, rinsing off tinfoil to reuse it and re-mending their pants and dresses. A desperate government mobilizes legions of the unemployed to build bridges and airports, to blaze trails in national forests, to put on traveling plays and paint social-realist murals.

Today, however, whatever a depression would look like, that's not it. We are separated from the 1930s by decades of profound economic, technological, and political change, and a modern landscape of scarcity would reflect that.

What, then, would we see instead? And how would we even know a depression had started? It's not a topic that professional observers of the economy study much. And there's no single answer, because there's no one way a depression might unfold. But it's nonetheless an important question to consider - there's no way to make informed decisions about the present without understanding, in some detail, the worst-case scenario about the future.

By looking at what we know about how society and commerce would slow down, and how people respond, it's possible to envision what we might face. Unlike the 1930s, when food and clothing were far more expensive, today we spend much of our money on healthcare, child care, and education, and we'd see uncomfortable changes in those parts of our lives. The lines wouldn't be outside soup kitchens but at emergency rooms, and rather than itinerant farmers we could see waves of laid-off office workers leaving homes to foreclosure and heading for areas of the country where there's more work - or just a relative with a free room over the garage. Already hollowed-out manufacturing cities could be all but deserted, and suburban neighborhoods left checkerboarded, with abandoned houses next to overcrowded ones.

And above all, a depression circa 2009 might be a less visible and more isolating experience. With the diminishing price of televisions and the proliferation of channels, it's getting easier and easier to kill time alone, and free time is one thing a 21st-century depression would create in abundance. Instead of dusty farm families, the icon of a modern-day depression might be something as subtle as the flickering glow of millions of televisions glimpsed through living room windows, as the nation's unemployed sit at home filling their days with the cheapest form of distraction available.

The odds are, most economists say, we will yet avoid a full-blown depression - the world's policy makers, they argue, have learned enough not to repeat the mistakes of the 1930s. Still, in a country that has known little but economic growth for 50 years, it matters to think about what life would look like without it.

. . .

There is, in fact, no agreed-upon definition of what a depression is. Economists are unanimous that the Great Depression was the worst economic downturn the industrial world has ever seen, and that we haven't had a depression since, but beyond that there is not a consensus. Recessions have an official definition from the National Bureau of Economic Research, but the bureau pointedly declines to define a depression.

What sets a depression apart, most economists would agree, are duration and the scale of joblessness. To be worthy of the name, a depression needs to be more than a few years long - far longer than the eight-month average of our recent recessions - and it needs to put a lot of people out of work. The Great Depression lasted a decade by some measures, and at its worst, one in four American workers was out of a job. (By comparison, unemployment now is at a 14-year high of 6.5 percent.)

In a modern depression, the swelling ranks of the unemployed would likely change the landscape of the country, uprooting people who would rather stay where they are and trapping people who want to move. In the 1930s, this took the visible form of waves of displaced tenant farmers washing into California, but it also had another, subtler effect: it froze the movement of the middle class. The suburbanization that was to define the post-World-War-II years had in fact started in the 1920s, only to be brought sharply to a halt when the economy collapsed.

Today, a depression could reverse that process altogether. In a deep and sustained downturn, home prices would likely sink further and not rise, dimming the appeal of homeownership, a large part of suburbia's draw. Renting an apartment - perhaps in a city, where commuting costs are lower - might be more tempting. And although city crime might increase, the sense of safety that attracted city-dwellers to the suburbs might suffer, too, in a downturn. Many suburban areas have already seen upticks in crime in recent years, which would only get worse as tax-poor towns spent less money on policing and public services.

"You could have a sort of desurburbanization phenomenon," suggests Michael Bernstein, a historian of the Depression and the provost of Tulane University.

The migrations kicked off by a depression wouldn't be in one direction, but a tangle of demographic crosscurrents: young families moving back to their hometowns to live with the grandparents when they can no longer afford to live on their own, parents moving in with their adult children when their postretirement fixed incomes can no longer support them. Some parts of the country, especially the Rust Belt, could see a wholesale depopulation as the last remnants of the American heavy-manufacturing base die out.

"There will be some cities like Detroit that in a real depression could just become ghost towns," says Jeffrey Frankel, a Harvard economist and member of the National Bureau of Economic Research committee that declares recessions. (Frankel does not, he emphasizes, think we are headed for a depression.)

. . .

At the household level, the look of want is different today than during the last prolonged downturn. The government helps the unemployed and the poor with programs that didn't exist when the Great Depression hit - unemployment insurance, Medicaid, food stamps, Social Security for seniors. Beyond that, two of the basics of existence - food and clothing - are a lot cheaper today, thanks to industrial agriculture and overseas labor. The average middle-class man in the late 1920s, according to the writer and cultural critic Virginia Postrel, could afford just six outfits, and his wife nine - by comparison, the average woman today has seven pairs of jeans alone. So we're less likely to see one of the iconic images of the Great Depression: Formerly middle-class workers in threadbare clothes lining up for free food.

If we look closely, however, we might see more former lawyers wearing knockoffs, doing their back-to-school shopping at Target or Wal-Mart rather than Banana Republic and Abercrombie & Fitch. Lean times might kill off much of the taboo around buying hand-me-downs, and with modern distribution networks - and a push from the reduce-reuse-recycle mind-set of environmentalism - we might see the development of nationwide used-clothing chains.

In general, novelty would lose some of its luster. It's not simply that we'd buy less, we'd look for different qualities in what we buy. New technology would grow less seductive, basic reliability more important. We'd see more products like Nextel phones and the Panasonic Toughbook laptop, which trade on their sturdiness, and fewer like the iPhone - beautiful, cleverly designed, but not known for durability. The neighborhood appliance shop could reappear in a new form - unlicensed, with hacked cellphones and rebuilt computers.

And while very few would starve, a depression would change how we eat. Food costs remain far below what they were for a family in the 1920s and 1930s, but they have been rising in recent years, and many people already on the edge of poverty would be unable to feed themselves on their own in a harsh economic climate - soup kitchens are already seeing an uptick in attendance. At the high end of the market, specialty and organic foods - which drove the success of chains like Whole Foods - would seem pointlessly expensive; the booming organic food movement could suffer as people start to see specially grown produce as more of a luxury than a moral choice. New England's surviving farmers would be particularly hard-hit, as demand for their seasonal, relatively high-cost products dried up.

According to Marion Nestle, a food and public health professor at New York University, people low on cash and with more time on their hands will cook more rather than go out. They may also, Nestle suggests, try their hands at growing and even raising more of their own food, if they have any way of doing so. Among the green lawns of suburbia, kitchen gardens would spring up. And it might go well beyond just growing your own tomatoes: early last month, the English bookstore chain Waterstone's reported a 200 percent increase in the sales of books on keeping chickens.

At the same time, the cheapest option for many is decidedly less rustic: meals like packaged macaroni and cheese and drive-through fast food. And we're likely to see a move in that direction, as well, toward cheaper, easier calories. If so, lean times could have the odd effect of making the population fatter, as more Americans eat like today's poor.

. . .

To understand where a depression would hit hardest, however, look at the biggest-ticket items on people's budgets.

Housing, health insurance, transportation, and child care are the top expenses for American families, according to Elizabeth Warren, a bankruptcy law specialist at Harvard Law School; along with taxes, these take up two-thirds of income, on average. And when those are squeezed, that could mean everything from more crowded subways to a proliferation of cheap, unlicensed day-care centers.

Health insurance premiums have risen to onerous levels in recent years, and in a long period of unemployment - or underemployment - they would quickly become unmanageable for many people. Dropping health insurance would be an immediate way for families to save hundreds of dollars per month. People without health insurance tend to skip routine dental and medical checkups, and instead deal with health problems only when they become acute - meaning they get their healthcare through hospital emergency rooms.

That means even longer waits at ERs, which are even now overtaxed in many places, and a growing financial drain on hospitals that already struggle to pay for the care they give uninsured people. And if, as is likely, this coincided with cuts in money for hospitals coming from cash-strapped state and local governments, there's a very real possibility that many hospitals would have to close, only further increasing the burden on those that remain open. In their place people could rely more on federally-funded health centers, or the growing number of drugstore clinics, like the MinuteClinics in CVS branches, for vaccines, physicals, strep throat tests, and other basic medical care. And as the costs of traditional medicine climbed out reach for families, the appeal of alternative medicine would in all likelihood grow.

Higher education, another big expense, would probably take a hit as well. Students unable to afford private universities would opt for public universities, students unable to afford four-year colleges would opt for community colleges, and students unable to afford community college wouldn't go at all. With fewer applicants, admissions standards would drop, with spots that once would have been filled by more qualified, poorer students going instead to wealthier applicants who before would not have made the cut. Some universities would simply shrink. In Boston, a city almost uniquely dependent on higher education, the results - fewer students renting apartments, going to restaurants and bars, opening bank accounts, buying books, taking taxis - would be particularly acute.

A depression would last too long for unemployed college graduates to ride out the downturn in business or law school, so people would have to change career plans entirely. One place that could see an uptick in applications and interest is government work: Its relative stability, combined with a suspicion of free-market ideology that would accompany a truly disastrous downturn, could attract more people and even help the public sector shake off its image as a redoubt for the mediocre and the unambitious.

. . .

In many ways, though, today's depression would not look like the last one because it would not look like much at all. As Warren wrote in an e-mail, "The New Depression would be largely invisible because people would experience loss privately, not publicly."

In the public imagination, the Depression was a galvanizing time, the crucible in which the Greatest Generation came of age and came together. That is, at best, only partly true. Harvard political scientist Robert Putnam has found that, for many, the Depression was isolating: Kiwanis clubs, PTAs, and other social groups lost around half their members from 1930 to 1935. And other studies on economic hardship suggest that it tends to sap people's civic engagement, often permanently.

"When people become unemployed in the Great Depression, they hunker down, they pull in from everybody." Putnam says.

That effect, Putnam believes, would only be more pronounced today. The Depression was, famously, a boom time for movies - people flocked to cheap double features to escape the dreariness of their everyday poverty. Today, however, movies are no longer cheap. Nor is a day at the ballpark.

Much of a modern depression would unfold in the domestic sphere: people driving less, shopping less, and eating in their houses more. They would watch television at home; unemployed parents would watch over their own kids instead of taking them to day care. With online banking, it would even be possible to have a bank run in which no one leaves the comfort of their home.

There would be darker effects, as well. Depression, unsurprisingly, is higher in economically distressed households; so is domestic violence. Suicide rates go up in tough times, marriage rates and birthrates go down. And while divorce rates usually rise in recessions, they dropped during the Great Depression, in part because unhappy couples found they simply couldn't afford separation.

In precarious times, hunkering down can become not simply a defense mechanism, but a worldview. Grant McCracken, an anthropologist affiliated with MIT who studies consumer behavior, calls this distinction "surging" vs. "dwelling" - the difference, as he wrote recently on his blog, between believing that the world "teems with new features, new things, new opportunities, new excitement" and thinking that life's pleasures come from counting one's blessings and appreciating and holding onto what one already has. Economic uncertainty, he argues, drives us toward the latter.

As a nation, we have grown very accustomed to the momentum that surging imparts. And while a depression remains far from inevitable, it's as close as it has been in a lifetime. We might want to get a sense for what dwelling feels like.

Drake Bennett is the staff writer for Ideas. E-mail drbennett@globe.com.

http://www.boston.com/bostonglobe/i...ssion_2009_what_would_it_look_like/?page=full
 

BigUnc

Potential Star
Registered
Good Morning it's a little after 3 am thought I'd stop in for a minute or two.Hope everyone is reasonably well.

Interesting times we're living in.This economy dived a year later than I expected and took some unexpected turns also.Never thought there would be no safe havens for those that stayed in the casino too long.

Appears to me this will be a multi year event and we'll never return to the party times of the late 20th and early 21st centuries.

IMHO the TARP will be a failure and it looks like Citi Group will be the first of the big banks to go under. A bailout of GM, Ford and Chrysler will fail unless the UAW gives up huge concessions to stave off massive layoffs even with the bailout and there has to be at least a 35% redution in corporate staff. Far too much legacy cost for them to survive with the present system. Not to mention sales will be down no matter what they do cause no one gonna want to buy and the banks are hesitant to loan.

Gotta run the situation is heating up where I'm at. I'll check in later.

Peace
 

Greed

Star
Registered
The Velocity of Money

The Velocity of Money
John Mauldin
Dec 08, 2008 11:30 am

Depending upon which monetary measure you use, the money supply is growing very slowly, alarmingly fast, or just about right. This might be called the velocity of money - and it affects the growth of the economy.

First, let's look at the adjusted monetary base, or plain old cash plus bank reserves (remember that fact) held at the Federal Reserve. That’s the only part of the money supply the Fed has any real direct control of. Until recently, there was very little year-over-year growth. The monetary base grew along a rather predictable long-term trend line, with some variance from time to time, but always coming back to the mean.

But in the last few months the monetary base has grown by a staggering amount - over 1400% on an annual basis, as shown in the next chart from my friend Dr. Lacy Hunt at Hoisington Asset Management. And when you see the "J-curve" in the monetary base (which is likely to rise even more!) it does demand an explanation. There are those who suggest this is an indication of a Federal Reserve gone wild and that 2,000-dollar gold and a plummeting dollar are just around the corner. They are looking at that graph and leaping to conclusions. But it is what you don't see that is important.

https://admin.minyanville.com/assets/FCK_Aug2007/File/Cory/mau1.jpg

Now, the same graph but in percentage terms:

https://admin.minyanville.com/assets/FCK_Aug2007/File/Cory/mau2.jpg

Several of my readers have sent me questions related to the chart below, which compares the above graph to the value of the US dollar, as measured in the trade-weighted dollar index. If the Fed is flooding the market with dollars, does that not mean a crash in the dollar is imminent? What foreign government or investor would want to hold dollars when the Fed is debasing the currency so rapidly?

https://admin.minyanville.com/assets/FCK_Aug2007/File/Cory/mau3.jpg

Give Me Your Tired, Your Poor, Your Illiquid

The answer is that the Fed is not creating money in the sense of monetizing the national debt. Remember that the adjusted monetary base is cash plus bank reserves on deposit at the Fed. Banks have to hold a certain portion of their assets as liquid assets in order to meet potential demand from depositors for their money. If they go below that required number, the regulators come in and demand they increase their liquid assets immediately.

Various assets have been getting a "haircut" as to their ability to count as liquid reserves. With more and more assets becoming illiquid, the amount of money held in the liquid asset portion of many US banks assets has been dwindling. What to do? The Fed decided to take these assets and trade them (temporarily) for US treasuries, which are quite liquid. But while the Fed did create the T-bills, they did not inject new capital into the overall system. If a bank had one billion in assets and gave the Fed $100 million to get liquid T-bills, it still just has $1 billion in assets. Yes, it could sell them to someone else to get cash, but that someone else would use already existing dollars. The Fed has provided liquidity but did not inject (yet) new cash into the overall system through this program. At some point in the future, when banks are once again doing business with each other and the system is more liquid, banks will take those T-bills back to the Fed and receive back whatever collateral they used to get them in the first place.

To illustrate what I am saying, let's look at Money of Zero Maturity, or MZM. Stated another way, you can think of it as cash, whether in a bank, a money market fund, or in your hands. We will look at the growth of MZM in the next two charts, one of which shows the actual growth and the other the growth in annual percentage terms.

Now remember, Friedman taught us that inflation is a monetary phenomenon. If you increase the money supply too fast, you risk an unwanted rise in inflation. If the money supply shrinks or grows too slowly, you could see deflation develop.

https://admin.minyanville.com/assets/FCK_Aug2007/File/Cory/mau4.jpg

https://admin.minyanville.com/assets/FCK_Aug2007/File/Cory/mau5.jpg

Note that MZM was growing at close to an 18% rate year-over-year earlier in the year but that growth is now down to 10%. Also note that less than 3 years ago MZM was growing close to zero. Since then inflation has increased. Therefore, one could make the case that the Fed is causing inflation by allowing the money supply to increase too rapidly. Case closed?

Maybe not. Correlation is not causation. More cash sometimes means that people and businesses are taking less risk. The Fed cannot control what we do with our money, only how much bank reserves it allows and how much cash it puts into the system.

Forecasting inflation from a money-supply graph is very difficult. It used to be a lot simpler, but in recent decades it’s proven very unreliable. But it is much too simplistic to draw a direct comparison between inflation and an arbitrary money-supply measure.

If we look at a graph of M2, which includes time deposits, small certificates of deposit, etc., we again see a rise in recent growth. M2 is the measure of money supply that most economists use when they are thinking about inflation. And we see that M2 is growing at a sprightly 7% year over year. This is not all that high historically, but again it is up significantly from the past few years. See the graph below. Note that there have been several times (as recently as 2000) when annual M2 growth was over 10%.

https://admin.minyanville.com/assets/FCK_Aug2007/File/Cory/mau6.jpg

But there is more to the inflation/deflation debate than just money supply. Money supply is what you see. And now we look at what most of us don't see.

The Velocity of Money

Now, let's introduce the concept of the velocity of money. Basically, this is the average frequency with which a unit of money is spent. Let's assume a very small economy of just you and me, which has a money supply of $100. I have the $100 and spend it to buy $100 worth of flowers from you. You in turn spend the $100 to buy books from me. We have created $200 of our "gross domestic product" from a money supply of just $100. If we do that transaction every month, in a year we would have $2400 of "GDP" from our $100 monetary base. So, what that means is that gross domestic product is a function not just of the money supply but how fast the money supply moves through the economy. Stated as an equation, it is Y=MV, where Y is the nominal gross domestic product (not inflation-adjusted here), M is the money supply, and V is the velocity of money. You can solve for V by dividing Y by M.

Now, let's complicate our illustration just a bit. Let's imagine an island economy with 10 businesses and a money supply of $1,000,000. If each business does approximately $100,000 of business a quarter, then the gross domestic product for the island would be $4,000,000 (4 times the $1,000,000 quarterly production). The velocity of money in that economy is 4.

But what if our businesses got more productive? We introduce all sorts of interesting financial instruments, banking, new production capacity, computers and such and now everyone is doing $100,000 per month. Now our GDP is $12,000,000 and the velocity of money is 12. But we have not increased the money supply. Again, we assume that all businesses are static. They buy and sell the same amount every month. There are no winners and losers as of yet.

Now let's complicate matters. Two of the kids of the owners of the businesses decide to go into business for themselves. Having learned from their parents, they immediately become successful and start doing $100,000 a month themselves. GDP potentially goes to $14,000,000. But, in order for everyone to stay at the same level of gross income, the velocity of money must increase to 14.

Now, this is important. If the velocity of money does NOT increase, that means that on average each business is now going to buy and sell less each month. Remember, nominal GDP is money supply multiplied with velocity. If velocity does not increase and money supply stays the same, GDP must stay the same, and the average business (there are now 12) goes from doing $1,200,000 a year down to $1,000,000.

Each business now is doing around $80,000 per month. Overall production on our island is the same, but is divided up among more businesses. For each of the businesses, it feels like a recession. They have fewer dollars, so they buy less and prices fall. They fall into actual deflation (very simplistically speaking). So, in that world, the local central bank recognizes that the money supply needs to grow at some rate in order to make the demand for money "neutral."

It is basic supply and demand. If the demand for corn increases, the price will go up. If Congress decides to remove the ethanol subsidy, the demand for corn will go down, as will the price.

If the central bank increased the money supply too much, you would have too much money chasing too few goods, and inflation would rear its ugly head. Let's say the central bank doubles the money supply to $2,000,000. If the velocity of money is still 12, then the GDP would grow to $24,000,000. That would be a good thing, wouldn't it?

No, because only 20% more goods is produced from the two new businesses. There is a relationship between production and price. Each business would now sell $200,000 per month or double their previous sales, which they would spend on goods and services, which only grew by 20%. They would start to bid up the price of the goods they want, and inflation sets in. Think of the 1970s.

So, our mythical bank decides to boost the money supply by only 20%, which allows the economy to grow and prices to stay the same. Smart. And if only it were that simple.

Let's assume 10 million businesses, from the size of Exxon down to the local dry cleaners, and a population which grows by 1% a year. Hundreds of thousands of new businesses are being started every month, and another hundred thousand fail. Productivity over time increases, so that we are producing more "stuff" with fewer costly resources.

Now, there is no exact way to determine the right size of the money supply. It definitely needs to grow each year by at least the growth in the size of the economy, plus some more for new population, and you have to factor in productivity. If you don't then deflation will appear. But if money supply grows too much, then you've got inflation.

And what about the velocity of money? Friedman assumed the velocity of money was constant. And it was from about 1950 until 1978 when he was doing his seminal work. But then things changed. Let's look at two charts sent to me by Lacy. First, let's look at the velocity of money for the last 108 years.

https://admin.minyanville.com/assets/FCK_Aug2007/File/Cory/mau7.jpg

Now, let's look at the same chart since 1959, but with shaded gray areas which show us the times the economy was in recession. Note that (with one exception in the 1970s) velocity drops during a recession. What is the Fed response? An offsetting increase in the money supply to try and overcome the effects of the business cycle and the recession. Y=MV. If velocity falls then the money supply must rise for nominal GDP to grow. The Fed attempts to jump-start the economy back into growth by increasing the money supply.

https://admin.minyanville.com/assets/FCK_Aug2007/File/Cory/mau8.jpg

If you can't read the print at the bottom of the chart, he assumes that GDP is $14.17 trillion, M2 is $7.6 trillion and therefore velocity is 1.85, down from almost 1.95 just a few years ago. If velocity reverts to or below the mean, it could easily drop 10% from here. We will explore why this could happen in a minute.

Y=MV

But let's go back to our equation, Y=MV. If velocity slows by 10%, then money supply (M) would have to rise by 10% just to maintain a static economy. But that assumes you do not have 1% population growth, 2% productivity growth and a target inflation of 2%, which means M (money supply) would need to grow about 5% a year, even if V is constant. And that is not particularly stimulative, given that we are in recession. And notice above that M2 is growing just about in line with that.

Bottom line? Expect money-supply growth well north of 7% annually for the next few years. Is that enough? Too much? We won't know for a long time. This will allow armchair economists to sit back and Monday morning quarterback for many years. My friends at GaveKal have their own measure of world velocity, and as you might expect it is slowing too. This slowing is a global problem and is one of the reasons we are in a global recession.

https://admin.minyanville.com/assets/FCK_Aug2007/File/Cory/mau9.jpg

A Slowdown in Velocity

Why is the velocity of money slowing down? Notice the significant real rise in V from 1990 through about 1997. Growth in M2 (see the above chart) was falling during most of that period, yet the economy was growing. That means that velocity had to have been rising faster than normal. Why? It is financial innovation that spurs above-trend growth in velocity. Primarily because of the financial innovations introduced in the early '90s, like securitizations and CDOs, etc., we saw a significant rise in V.

And now we are watching the Great Unwind of financial innovations, as they went to excess and caused a credit crisis. In principle, a CDO or subprime asset-backed security should be a good thing. And in the beginning they were. But then standards got loose, greed kicked in, and Wall Street began to game the system.

What drove velocity to new highs is no longer part of the equation. The absence of new innovation and the removal of old innovations (even if they were bad innovations, they did help speed things up) are slowing things down. If the money supply did not rise significantly to offset that slowdown in velocity, the economy would already be in a much deeper recession.

While the Fed does not have control over M2, when they lower interest rates it is supposed to make us want to take on more risk, borrow money, and boost the economy. So, they have an indirect influence.

I expect the Fed to cut at least another 50 basis points next week, and to give us a statement with a nod toward difficult economic conditions. The latest Beige Book from the Fed was simply dreadful, so you can bet the governors will have a deteriorating economy in mind. Given the 25-plus-year low in consumer confidence, they have little choice.

I believe the Fed will soon move rates close to zero.

Within a few quarters we will be facing outright deflation. The Fed is going to monetize at least a portion of what will be a $1+ trillion dollar US deficit. They have announced they are going to purchase $800 billion in mortgage-backed and other types of consumer loan assets. That will be a direct infusion of dollars into the economy. That is serious monetization. But they may feel they have no choice if they want to keep the US economy from going Japanese.

How much monetization will be enough to halt deflation and overcome the slowdown in the velocity of money and the rise in personal savings? No one knows. There is no fancy equation or model which can encompass all the factors, or at least not one I know of.

We’ll also see which of the additional deflation-fighting policies that Bernanke outlined in his 2002 "helicopter" speech the Fed will adopt. It is highly likely that we will see more than a few of them. It is quite possible that we will see the Fed start to set rates on longer-term bills and even bonds in an effort to pull down longer-term rates for corporations and individuals.

Remember that there will come a time when the Fed will have to "take back" some of the liquidity they're going to provide. That means we could be in for a multi-year period of slow growth after we pull out of this recession.

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes out to over one million readers each week. For more information on John, or to read his free weekly economic letter, go to Frontlinethoughts.com.

Copyright 2008 Minyanville Publishing and Multimedia, LLC. All Rights Reserved.

http://www.minyanville.com/articles/Fed-liquidity-velocity/index/a/20257
 

Greed

Star
Registered
Are Employers Unwilling to Hire, or Are Some Workers Unwilling to Work?

Are Employers Unwilling to Hire, or Are Some Workers Unwilling to Work?
By Casey B. Mulligan
December 24, 2008, 6:30 am

President-elect Barack Obama was not the first University of Chicago professor to serve in the United States Senate. More than 50 years ago, a professor named Paul Douglas became a United States senator representing Illinois.

As an economics professor, Professor Douglas wrote about the supply and demand for labor. Some of his techniques can lead us to a surprising conclusion about today’s recession: The recent decrease in employment may be due less to employers’ unwillingness to hire more workers and more to workers’ unwillingness to work.

As you’ve probably heard, employment has been falling over the past year. After peaking in December 2007, employment fell 1.4 percent over the next 11 months. Hours per employee also fell. As a result, if total hours worked had continued the upward trend they had been on in the years before the recession, they would be 4.7 percent higher than they are now.

Explanations for the decline — like most everything in economics — can be classified in two ways: supply or demand.

In many recessions, the demand for labor gets much of the blame. The demand explanation says that, with orders for their products down, many companies have trouble finding productive uses for employees. Some workers are then let go. In this view, productivity — the amount produced per hour worked — should decline because reduced productivity is a driving force of layoffs. (Gross domestic product thereby declines for two reasons: fewer workers and less productivity per worker.)

Indeed, hourly productivity did decline in the 1981-82 recession, falling three out of four quarters for a cumulative peak-to-trough decline of 2.3 percent. Productivity fell faster and longer during the Depression.

The second type of explanation is reduced labor supply.

Suppose, just for the moment, that people were less willing to work, with no change in the demand for their services. This means that employees would have to be more productive because they have to get by with fewer workers.

Of course, people have not suddenly become lazy, but the experiment gives similar results to the actual situation in which some employees face financial incentives that encourage them not to work and some employers face financial incentives not to create jobs.

Professor Douglas gave us a formula for determining how much output per work hour would increase as a result of a reduction in the aggregate supply of hours: For every percentage point that the labor supply declines, productivity would rise by 0.3 percentage points.

As mentioned earlier, in late 2008, labor hours were 4.7 percent below where trends from previous years would predict the number to be. According to Professor Douglas’s theory, this means productivity should rise 1.4 percent above its previous trend by the fourth quarter.

So let’s take a look at the numbers. Unlike in the severe recessions of the 1930s and early 1980s, productivity has been rising. Through the third quarter of 2008, productivity had risen six consecutive quarters, with an increase of 1.9 percent over the past three, or 0.7 percent above the trend for the previous 12 quarters.

Because productivity has been rising — almost as much as the Douglas formula predicts — the decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).

Why would some people have fewer incentives to take a job in 2008 than they did in 2006 and 2007 (and employers fewer incentives to create jobs)?

I will tackle that question in my next post, but even without a specific answer we learn a lot about today’s recession from the conclusion that labor supply – not labor demand – should be blamed. First of all, it suggests that a fundamental solution to the recession would encourage labor supply (perhaps cutting personal income tax rates, so people can keep more of their wages), rather than tinker with demand.

Second, the recent supply reduction may be more short-lived than the demand reductions of past severe recessions. In particular, as people adjust to the reality of depleted retirement accounts and vanished home equity, many of them will decide to make up for some of the shortfall by working more and retiring later.

And on another note, the department of economics at the University of Chicago does not conform to stereotypes: Professor Douglas ran for senator on the Democratic Party ticket and was occasionally accused of being a socialist. I teach his formula frequently and with admiration.

Casey B. Mulligan is an economist at the University of Chicago.

http://economix.blogs.nytimes.com/2...ing-to-hire-or-are-workers-unwilling-to-work/
 

Greed

Star
Registered
Bailout of Long-Term Capital: A Bad Precedent?

Bailout of Long-Term Capital: A Bad Precedent?
By TYLER COWEN
Published: December 26, 2008

THE financial crisis is a result of many bad decisions, but one of them hasn’t received enough attention: the 1998 bailout of the Long-Term Capital Management hedge fund. If regulators had been less concerned with protecting the fund’s creditors, our current problems might not be quite so bad.

Long-Term Capital was advised by finance quants, or quantitative analysts, who made a number of unsound, esoteric bets, including investments in interest rate derivatives. When Russia’s inability to pay its debts roiled global markets, the fund, saddled with high-leverage and off-balance-sheet obligations, was near collapse.

Because Long-Term Capital owed large sums to banks and other financial institutions, the Federal Reserve Bank of New York organized a consortium of companies to buy it out and cover the debts. Alan Greenspan, then the Fed chairman, eased monetary policy to restart capital markets, which were starting to freeze up. Long-Term Capital’s shareholders were wiped out, but none of the creditors took losses.

At the time, it may have seemed that regulators did the right thing. The bailout did not require upfront money from the government, and the world avoided an even bigger financial crisis. Today, however, that ad hoc intervention by the government no longer looks so wise. With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed — as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed.

Of course, there were many reasons for the reckless lending and failures of risk management that led to the most recent systemic credit shocks. And we have now entered the realm of trillion-dollar bailouts, vast contagion across financial institutions, rapid deleveraging of banks and an economic crisis that some people are starting to compare to the Great Depression.

The Long-Term Capital episode looks small when viewed against all of that. But it was important precisely because the fund was not a major firm. At the time of its near demise, it was not even a major money center bank, but a hedge fund with about 200 employees. Such funds hadn’t previously been brought under regulatory protection this way. After the episode, financial markets knew that even relatively obscure institutions — through government intervention — might be able to pay back bad loans.

The major creditors of the fund included Bear Stearns, Merrill Lynch and Lehman Brothers, all of which went on to lend and invest recklessly and, to one degree or another, pay the consequences. But 1998 should have been the time to send a credible warning that bad loans to overleveraged institutions would mean losses, and that neither the Fed nor the Treasury would make these losses good.

What would have happened without a Fed-organized bailout of Long-Term Capital? It remains an open question. An entirely private consortium led by Warren E. Buffett might have bought the fund, but capital markets might still have frozen because of the realization that bailouts were not guaranteed.

And Fed inaction might have had graver economic consequences, especially if a Buffett deal had fallen through. In that case, a rapid financial deleveraging would have followed, and the economy would have probably plunged into recession. That sounds bad, but it might have been better to have experienced a milder version of a downturn in 1998 than the more severe version of 10 years later.

In 1998, there was no collapsed housing bubble, the government’s budget was in surplus rather than deficit, bank leverage was much lower, and derivatives markets were smaller and less far-reaching. A financial crisis related to Long-Term Capital, however painful, probably would have been easier to handle than the perfect storm of recent months.

The ad hoc aspect of the bailout created a precedent for what has come to be called “regulation by deal” — now the government’s modus operandi. Rather than publicizing definite standards and expectations for bailouts in advance, the Fed and the Treasury confront each particular crisis anew. Decisions are made as to whether a merger is possible, whether a consortium can be organized, what kind of loan guarantees can be offered and what kind of concessions will be extracted in return. So far, every deal — or lack thereof, in the case of Lehman Brothers — has been different.

While there are some advantages to leaving discretion in regulators’ hands, this hasn’t worked out very well. It has become increasingly apparent that the market doesn’t know what to expect and that many financial institutions are sitting on the sidelines, waiting to see what regulators will do next. Regulatory uncertainty is stifling the ability of financial markets to engineer at least a partial recovery.

John Maynard Keynes famously proclaimed that “in the long run we are all dead.” From the vantage point of 1998, today is indeed the “long run.”

We’re not quite dead, but we are seriously ailing. As we look ahead, we may be tempted again to put off the hard choices. But perhaps the next “long run,” too, is no more than 10 years away. If we take the Keynesian maxim too seriously, and focus only on the short run, our prospects will be grim indeed.

Tyler Cowen is a professor of economics at George Mason University.

http://www.nytimes.com/2008/12/28/business/economy/28view.html?pagewanted=print
 

QueEx

Rising Star
Super Moderator
Re: Bailout of Long-Term Capital: A Bad Precedent?

<font size="5"><center>
New jobs numbers portray an economy
in near free fall</font size></center>



McClatchy Newspapers
By Kevin G. Hall
Friday, January 9, 2009


WASHINGTON — The U.S. recession gathered steam in December as employers shed another 524,000 jobs, the unemployment rate leapt half a percentage point to 7.2 percent, the length of the average workweek fell to a record low and job losses were spread widely across almost all sectors of the economy, the government said Friday.

December's unemployment rate was the highest since January 1993, and was up by much more than expected over November's rate of 6.7 percent, according to the Labor Department. The December job losses brought the full-year total to more than 2.6 million.

There was little to cheer in the report from the Bureau of Labor Statistics. Although the December job losses were just a touch higher than the consensus forecast, many analysts think that they'll be revised next month.

Several state employment offices saw their computer systems crash in December with the soaring number of people who were seeking jobless benefits, and this may have resulted in a number lower than it really is.

The Labor Department also revised its employment reports from October and November, noting that job losses in those months were worse than first reported. Employers rid themselves of 423,000 jobs in October, not the originally reported 320,000, and 584,000 positions in November, not the 533,000 first reported by the BLS.

While the steep jump in unemployment and mounting job losses grabbed the headlines, there was even more troubling news buried deeper down in the report. The BLS said that the average hourly workweek for production and nonsupervisory jobs had shrunk 0.2 percent to 33.3 hours. That marks the lowest that this number has registered since the government started compiling these statistics in 1964.

"The message in the decline in hours worked to a record low is that more big job losses are coming," said Mark Zandi, chief economist of Moody's Economy.com, a forecaster in West Chester, Pa. "Employers first cut their employees' hours and then their jobs if business doesn't quickly improve."

It's hard to see how business will improve anytime soon. The December jobs numbers point to an economy in near free fall, as the BLS said 1.9 million jobs had been lost in the final four months of 2008. In all, 11.1 million Americans are thought to be unemployed.

"In December, job losses were large and widespread across most major industry sectors," the BLS employment report said.

Manufacturers shed 149,000 jobs in December and 791,000 for all of last year. The biggest manufacturing losers were metal-makers and companies that make cars and car parts. Construction fell by 101,000 jobs in December and by 899,000 since its peak in September 2006.

Retailers dropped 67,000 positions in December and 522,000 last year, more than half of those jobs lost in the last four months of 2008. Warehousing and transport employment fell by 24,000 jobs in December, while the information industry lost 20,000 positions. Food services fell by 20,000 last month.

Only health care showed robust growth, adding 32,000 jobs in December and 372,000 positions last year. "The decline in jobs across so many industries and occupations is disturbing. There is no safe place in the job market," Zandi said.

In another troubling indicator, the number of involuntary part-time workers, those who want to work full time but can't find such jobs, rose to 8 million in December and increased by 3.4 million for all of last year.

Additionally, the number of long-term unemployed — jobless for 27 weeks or more — rose to 2.6 million in December and increased by 1.3 million for all of 2008. This number essentially doubled as many of the unemployed remained that way for much of the year.

http://www.mcclatchydc.com/251/story/59365.html
 
Last edited:

BoyJupiter

Star
Registered
<font size="5"><center>As U.S. income stagnates,
Democrats reject free trade</font size></center>



112-20070731-FREETRADE.small.prod_affiliate.91.jpg



By Kevin G. Hall
McClatchy Newspapers
August 1, 2007

WASHINGTON — The Democratic-led Congress won’t give President Bush the special authority he needs to negotiate future free-trade deals. The Senate is moving on retaliatory trade legislation against China. The House of Representatives won’t approve deals with three small neighboring Latin American countries. Global trade talks are near collapse.

Washington's mood on free trade hasn’t been this negative in at least two decades, and a pullback is evident. Whether this becomes a full-blown return to protectionism remains to be seen. But for now Americans, and the politicians they elect to represent them, are in no mood to expand international trade.

“For decades we took for granted that everyone agreed with us economists that free trade is good, protectionism is bad. Somewhere along the way, that stopped being the conventional wisdom,” acknowledged U.S. Trade Representative Susan Schwab, in an interview with McClatchy Newspapers. “And whereas the default vote on a trade bill in Congress used to be a ‘yes’ vote, the default vote on a trade bill now in Congress is a ‘no’ vote.” Why? Because lots of people are no longer convinced that a rising tide of trade lifts all boats — and there's evidence to back them up.

For three decades, the richest 10 percent of Americans have been growing even richer much faster than everyone else. Over the past five years, real wages for all the rest of American workers have been almost flat. Many blame globalization.

During a mid-July congressional hearing, Federal Reserve Chairman Ben Bernanke contended that education levels largely determine income inequality. But he was angrily interrupted by Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, who declared, “Mr. Bernanke, that’s simply not true.”

Frank said that the 29 percent of Americans who have bachelor’s and even master's degrees haven't seen real income growth, on average, over the past five years. That's what Democrats in Congress are focused on, he said.

“As long as we have the current situation … you are going to see the kind of gridlock where trade promotion (authority), immigration and other issues don’t go anywhere,” he warned. “And I just urge people … help us diminish inequality or you will have continued economic gridlock."

Frank quoted repeatedly from a new report published by the Financial Services Forum, a think tank run by President Bush’s close friend, former Commerce Secretary Donald Evans. The report was co-written by Matthew Slaughter, a former member of Bush’s Council of Economic Advisers.

The report concluded that “over time, the pressures of global engagement spread economy-wide to alter the earnings of even those not directly exposed to international competition.”

Since 2000, the report said, most American workers have seen meager income growth. Only “a small share of workers at the very high end has enjoyed strong growth in incomes.” This occurred despite strong productivity growth, which in the past raised wages and salaries.

“Real income growth for workers has not been evenly distributed across all workers. That economic reality has an important political” consequence, Slaughter said in an interview.

Small but already negotiated trade deals with Panama, Colombia and Peru are being held up. While those deals wouldn't affect the U.S. economy greatly, given how small those economies are, they're important to those countries and their blockage sends signals worldwide about changing U.S. attitudes.

Meanwhile, Asian nations continue integrating into the fast-growing Chinese economy's sphere of influence.

For now, the only trade-related legislation moving on Capitol Hill tends toward protecting U.S. domestic interests at the expense of opening markets more to competition from overseas.

Last week, the Senate Finance Committee passed, by a 20-1 vote, bipartisan legislation to force the Commerce Department to weigh whether another country is deliberately undervaluing its currency when considering whether to impose unfair trade penalties against foreign goods. The target was China, but that standard could be applied to other Asian nations too.

By the end of September, Congress is expected to pass bills that would expand federal trade-adjustment assistance to a wider array of U.S. workers whose jobs have been lost to overseas competition. These could include engineers, software designers, accountants, call-center agents, even computer-aided architectural designers.

This shift in opinion against a long-dominant presumption that free trade provides broad net benefits to the U.S. economy is rooted not only in the experience of stagnant incomes, but it's also gaining intellectual respectability as economic theory. Alan Blinder, a Princeton economist and a former vice chairman of the Federal Reserve, was a lifelong free-trader, like most economists, until he began looking hard at how globalization is evolving.

Recently he shocked free-trade orthodoxy by warning that modern technology and trade practices will put at risk as many as 40 million American jobs within a decade or two.

Blinder doesn't champion a return to protectionism in the form of tariffs and trade barriers. Instead, he believes that government must do far more to help workers displaced by trade, that the U.S. education system must aim to train people for jobs that can't be performed abroad and that the tax code should give incentives to firms to produce here.

The Financial Services Forum report backs similar solutions as necessary to head off a turn toward outright protectionism, which helped prolong the Great Depression in the 1930s.

Yet with the 2008 presidential election looming and polls showing widespread public anxiety about globalization, neither party’s candidates are trumpeting free trade.

“I think we definitely see evidence of anxiety. We see evidence unfortunately of a politicization of trade and increased partisanship about trade. … It is unfortunate and it does present real challenges,” said Schwab, the U.S. trade representative.

Ironically, all the anguish about trade is occurring when U.S.-made exports are booming. The strong global economy and the dollar's slumping value helped U.S. exports to grow by 6.4 percent from April through June, which is definitely good for U.S. business.

Commerce Secretary Carlos Gutierrez said last Friday that U.S. exports have grown since 2004 at about an 8.3 percent annual rate, thanks in no small part to the Bush administration's free-trade policies. But Democrats are focused more on the lack of income growth among ordinary Americans, and therein lies the rub when Republicans and Democrats seek to set economic policies.

To read the Financial Services Forum report, go to Financial Services Forum , then click on "issues," then on "trade and globalization."

2007 McClatchy Newspapers

http://www.mcclatchydc.com/226/story/18562.html

Props, This article just helped me with an assignment.

BGOL is the shit.
 

Greed

Star
Registered
Whaples, Consensus on the Great Depression

Whaples, Consensus on the Great Depression
Posted on Thursday, January 15th, 2009
By Amity Shlaes

One of the things we’ve been thinking about at the Council is the meaning of the New Deal and its impact on the Great Depression. We also talked a lot about it in my course at NYU/Stern. I get the impression some colleagues believe that the professional consensus is that the New Deal worked, economically. At Newsweek Daniel Gross sounds pretty certain of himself when he mocks those who are skeptical about the New Deal. Daniel writes that I, “George Will, and assorted libertarians cling bitterly to the notion that the New Deal didn’t work, that FDR’s policies of regulatory reform and sharply increased government spending were an abject failure, that the economy didn’t turn around until the day Japanese bombers dropped their payloads on Pearl Harbor. They believe Keynesian-style stimulus didn’t work in the 1930s, so it won’t work now.”

Back in the 1990s the Journal of Economic History published analysis of a survey of economic historians on their opinions about various events in history. (I want to thank the Beacon and Marginal Revolution, who pointed this out to me). This survey was well before the current stimulus was a gleam in President-elect Obama’s eye, or the bailout a gleam in Secretary Paulson’s eye. The author, Robert Whaples, put forward the following proposition in an anonymous survey of randomly selected economic historians. Some were trained more as historians and some were economists.

“Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression.”

A full seventy-four percent of historians disagreed. That’s a high rate of New Deal supporters — but still leaves one in four on the other side, not supporting.

Economists had a different reply. Forty-nine percent of the economists agreed, or agreed with provisos, with the idea that the New Deal made the Depression worse. Fifty-one percent disagreed.

In other words, there’s a big debate over government’s role, and no consensus at all among those who emphasize numbers when they look at this period. The late Arthur Schlesinger (historian, not economist) wrote, quoting someone else, that history is an argument without end, and concluded “that is why we love it so.” That is why most of us love it so, too.

Robert Whaples, the author of that original paper, emailed today with an update. Whaples wrote that in 2007 he did do a random sample of history department members, which is different from economic historians. To this group, Whaples put forward the following statement:

“Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression.”

Here are their responses in percentage terms:
1 (strongly disagree) 35
2 (disagree) 49
3 (neutral) 5
4 (agree) 5
5 (strongly agree) 5

To me this Whaples work suggests that the farther away from econ you get, the lefter you get when it comes to your New Deal take.

What about that the question of whether the war ended the Great Depression? Dan in Newsweek seems to think that’s a nondebatable. But it is debatable. Even members of the new administration provide evidence for that. Check out Christina Romer’s paper which emphasizes monetary policy as the conclusion to the Depression (NBER). Hunting around I see that Tyler Cowen has written about Dr Romer.

http://blogs.cfr.org/shlaes/2009/01/15/whaples-consensus-on-the-great-depression/
 

thoughtone

Rising Star
BGOL Investor
Keep in mind the revisionist rhetoric spewed daily by the opposition.

Paul Krugman Schools George Will On The Great Depression

source: Huffington Post

On ABC's This Week, conservative pundit George Will took up the case against Franklin Roosevelt's New Deal, arguing that it sent confusing signals to capitalists (who apparently might otherwise have pursued lucrative deals in the 1930s market place) and turned a depression into the Great Depression.

Thankfully, Nobel laureate Paul Krugman was around to remind Will of some history -- that the economy improved after the New Deal, and that it was FDR's attempt to balance the budget in 1937 (a move favored now by many conservatives) that then cut into that progress.

<object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/3yAyQV8gOjo&color1=0xb1b1b1&color2=0xcfcfcf&hl=en&feature=player_embedded&fs=1"></param><param name="allowFullScreen" value="true"></param><embed src="http://www.youtube.com/v/3yAyQV8gOjo&color1=0xb1b1b1&color2=0xcfcfcf&hl=en&feature=player_embedded&fs=1" type="application/x-shockwave-flash" allowfullscreen="true" width="425" height="344"></embed></object>
 
Last edited:

thoughtone

Rising Star
BGOL Investor
This is how this thread was started, portraying how conservative economics had this thing under control. So much for quoting right wing republican op ed pieces.:lol:

In this economy, the 'R' word means resilient
Despite major blows, the US sees 10 strong quarters of growth.
By Mark Trumbull | Staff writer of The Christian Science Monitor

Near-record energy prices. Hurricane devastation and displacement. Rising interest rates, with the Federal Reserve expected to raise its short-term rate to 4 percent Tuesday.
It all spells trouble for the US economy, right?

Possibly. Yet for years now, the world's largest economy has shown an impressive ability to absorb shocks and keep rolling ahead.

Among the latest signs are healthy boosts in consumer spending, worker incomes, and the nation's output of goods and services. That output, known as gross domestic product (GDP), expanded at a 3.8 percent annual pace in the third quarter, which includes the immediate aftermath of hurricanes Katrina and Rita, according to the government's preliminary estimate.

The number, stronger than analysts expected, suggests that the economy retains many of the strengths that helped America move through the dotcom bust, the 9/11 attacks, and corporate scandals like Enron with only a mild recession a few years ago.

The economy hasn't yet escaped cyclical swings entirely. But observers say the levers of finance and the gears of production have become better managed, more flexible, and less volatile. And for all its agility, the economy also benefits from gargantuan scale - with some $12 trillion in annual output.

"The US economy is this massive thing," not easily knocked off track, says Brian Wesbury, an economist at Claymore Securities in the Chicago area. Now in particular, he adds, "This economy has tremendous momentum."

Consider this: Last week's news marks the 10th straight quarter of 3 percent or greater growth in annual GDP. That's the longest such streak since the mid-1980s.

In the intervening years, business cycles seem to be getting smoother. The economy's slide in 2001 was so shallow that it has been almost 15 years since GDP has shrunk for consecutive quarters. And with the exception of 1991, you have to look back to 1982 to find a time when the economy was smaller at the end of the year than it was at the beginning.

Of course, an economy with smoother business cycles still endures hardship and challenges. Poverty has persisted even in an era of generally strong growth. Hurricanes this year and last have meant upheaval for millions of people.

Nor is there a guarantee of smooth sailing ahead. With the prospect of high heating bills this winter, consumer confidence as measured by the University of Michigan has plunged in the past two months to well below its 2001 valley.

A slowing housing market and higher interest rates are having an impact, too. Rising home values until now have buoyed consumers, providing a new source of wealth to tap. Meanwhile, low interest rates helped spur consumers to take a higher ratio of debt to income than in the past.

Now, as rates rise, some foresee a large brake on consumer spending.

Yet for all the challenges, economists generally don't see recession clouds on the horizon. Consumer spending rose 0.5 percent in September and incomes went up 1.7 percent, the biggest rise this year, the Commerce Department reported Monday.

"2006 looks like it's going to be a pretty good year," with about 3 percent growth, says Mark Vitner, an economist at Wachovia Corp., a bank based in Charlotte. N.C. "I think there's very little downside risk."

This year's final quarter, he warns, could see some slowing - to about 2.5 percent, he figures.

Many economists expect slower growth, but no decline, in consumer spending. Other components of GDP, such as exports, government spending, and business investment, are also moving higher.

"The biggest mistake of economists over the past 20 years" has been to be too pessimistic, Mr. Vitner says. "We've consistently underestimated growth."

What explains its vitality?

• The shift to a service economy. Some of the more volatile manufacturing industries constitute a smaller share of the economy today. The rise of service industries has given the economy greater breadth and balance.

• Better information and management. A widely held view is that policymakers at the Fed, and business leaders, now have timelier data on the economy. Corporations manage their inventories more wisely. The Fed, while still often criticized, has a stronger reputation for fighting inflation without hurting the economy's natural growth.

• Flexible markets. Fed Chairman Alan Greenspan has repeatedly cited a wave of deregulation as a crucial factor enabling the economy to cushion shocks. In labor markets, growing flexibility has meant ongoing layoffs, but it also has spurred job creation that has kept unemployment low.

• New financial tools. In a recent speech, Mr. Greenspan said that new instruments for spreading risks have helped create "a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter century ago."

• Worker productivity. The rapid growth of labor output per hour in recent years has allowed for stronger economic growth without fueling inflation.

Also, foreign governments and investors are now happy to invest in US bonds, allowing the US to become the world's great debtor. Economists say that imbalance will need to ease eventually.

Still, for all the genuine concerns out there, the "R word" that most economists are using is still resilience, not recession.

As economist Nariman Behravesh of Global Insight puts it, "We seem to be able to absorb serial shocks."

http://www.csmonitor.com/2005/1101/p01s01-usec.html
 

Greed

Star
Registered
News Flash: Economists Agre

News Flash: Economists Agree
By Greg Mankiw
Saturday, February 14, 2009

The recent debate over the stimulus bill has lead some observers to think that economists are hopelessly divided on issues of public policy. That is true regarding business cycle theory and, specifically, the virtues or defects of Keynesian economics. But it is not true more broadly.

My favorite textbook covers business cycle theory toward the end of the book (the last four chapters) precisely because that theory is controversial. I believe it is better to introduce students to economics with topics about which there is more of a professional consensus. In chapter two of the book, I include a table of propositions to which most economists subscribe, based on various polls of the profession. Here is the list, together with the percentage of economists who agree:

1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
2. Tariffs and import quotas usually reduce general economic welfare. (93%)
3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
6. The United States should eliminate agricultural subsidies. (85%)
7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
11. A large federal budget deficit has an adverse effect on the economy. (83%)
12. A minimum wage increases unemployment among young and unskilled workers. (79%)
13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)​

If we could get the American public to endorse all these propositions, I am sure their leaders would quickly follow, and public policy would be much improved. That is why economics education is so important.

Note that the proposition about fiscal policy (#4) does not distinguish between taxes and spending as the best tool for purposes of macro stabilization. Maybe that question should be added in a future poll. I doubt, however, that the answer would make it onto this list of widely agreed upon propositions.

http://gregmankiw.blogspot.com/2009/02/news-flash-economists-agree.html
 

Greed

Star
Registered
This is how this thread was started, portraying how conservative economics had this thing under control. So much for quoting right wing republican op ed pieces.:lol:
So the economy didn't record 10 quarters of growth?

Obviously there is a difference between us. I don't buy into the "Death Spiral" talk and you do. Enjoy your $12 trillion dollars of government spending in less than two years.
 

Cruise

Star
Registered
Re: News Flash: Economists Agre

News Flash: Economists Agree
By Greg Mankiw
Saturday, February 14, 2009

The recent debate over the stimulus bill has lead some observers to think that economists are hopelessly divided on issues of public policy. That is true regarding business cycle theory and, specifically, the virtues or defects of Keynesian economics. But it is not true more broadly.

My favorite textbook covers business cycle theory toward the end of the book (the last four chapters) precisely because that theory is controversial. I believe it is better to introduce students to economics with topics about which there is more of a professional consensus. In chapter two of the book, I include a table of propositions to which most economists subscribe, based on various polls of the profession. Here is the list, together with the percentage of economists who agree:

1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
2. Tariffs and import quotas usually reduce general economic welfare. (93%)
3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
6. The United States should eliminate agricultural subsidies. (85%)
7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
11. A large federal budget deficit has an adverse effect on the economy. (83%)
12. A minimum wage increases unemployment among young and unskilled workers. (79%)
13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)​

If we could get the American public to endorse all these propositions, I am sure their leaders would quickly follow, and public policy would be much improved. That is why economics education is so important.

Note that the proposition about fiscal policy (#4) does not distinguish between taxes and spending as the best tool for purposes of macro stabilization. Maybe that question should be added in a future poll. I doubt, however, that the answer would make it onto this list of widely agreed upon propositions.

http://gregmankiw.blogspot.com/2009/02/news-flash-economists-agree.html

Wow!

The next generation will look back on this and think we were crazy (like looking back at a textbook from the 50s/60s).
 

Greed

Star
Registered
Re: News Flash: Economists Agre

Wow!

The next generation will look back on this and think we were crazy (like looking back at a textbook from the 50s/60s).
You'll have to be more clear. We'll be looked at as crazy because of what economist agree about or that we ignore what economist agree about?
 

Cruise

Star
Registered
Re: News Flash: Economists Agre

You'll have to be more clear. We'll be looked at as crazy because of what economist agree about or that we ignore what economist agree about?

The only thing that makes sense is 7, ending subsidies for pro sports teams (and maybe 6).

Now, for the big question, who sponsored this so-called study of what economists think?

It's hard to believe most ecnomists would believe this. But, it would explain why the money and the economy are wrecked.
 

thoughtone

Rising Star
BGOL Investor
So the economy didn't record 10 quarters of growth?

Obviously there is a difference between us. I don't buy into the "Death Spiral" talk and you do. Enjoy your $12 trillion dollars of government spending in less than two years.

So the economy didn't record 10 quarters of growth?

That is an understatement!

Obviously there is a difference between us. I don't buy into the "Death Spiral" talk and you do.

Ignorance is bliss, especially when you are trying to justify an ideology.

Enjoy your $12 trillion dollars of government spending in less than two years.

No, no. $10.5 trillion of that was accrued by the GOP. And the return of the Iraqi troops has not been factored in to that either.

Revisionism is part of your DNA.
 

thoughtone

Rising Star
BGOL Investor
That was actually funny. What liberal blog did you get that accrued line from?

I use English. What do use use?

source: Associated Press

Sunday November 9, 9:17 PM

THE DEFICIT: A few hundred billion here and there, soon you've added another trillion

Even before an economic slump that may morph into a full-blown recession and the $700 billion financial bailout, Obama wasn't facing a pretty budget picture.

You may not have noticed the news last month that the deficit registered an ugly $455 billion for the budget year that ended Sept. 30. That is a new record in dollar terms but not quite as bad as the deficit Clinton faced when measured against the size of the economy. That is the way most economists prefer to measure deficits and whether they are too big for the nation's fiscal good.

But hold on. The deficit could double in the current year after accounting for the costs of the bailout, further erosion in tax revenues due to the sour economy and a second relief bill exceeding $150 billion.

Something else you may not have noticed: <SPAN style="BACKGROUND-COLOR: #ffff00">The national debt is now about $10.5 trillion, almost double the debt that Bush inherited eight years ago. Last month Congress had to raise the legal limit on the size of the debt to $11.3 trillion to accommodate borrowing to finance the bailout.</SPAN>

With the economy so lousy, the deficit is not a big concern in the near term. In fact, Obama and Democrats controlling Congress are likely to press for new public works spending and other deficit-financed stimulus steps to try to jolt the economy out of its slump.

Over the longer term, however, big budget deficits in the range of $500 billion or more for years on end cannot help but put a crimp in Obama's priority items like his proposed expansion in health care. Otherwise, huge deficits might lead to interest rates too high for the economy's good.

For those reasons _ coupled with the unsustainable demands on Medicare and Social Security as baby boomers retire _ closing deficit simply has to return as an issue.

Actually balancing the budget is probably out of the question in Obama's first term and is not likely to even be a goal. Rather, economic advisers such as former Treasury Secretary Robert Rubin advocate keeping deficits in the range of 2 percent _ or about $300 billion in today's dollars _ of the size of the economy once things stabilize.
 
Top