Thursday, November 20, 2008
Is the US too big to fail?
Why are investors rushing to purchase US government securities when the US is the epicentre of the financial crisis? Carmen and Vincent Reinhart, in "Is the US too big to fail?" attribute the paradox to key emerging market economies’ exchange practices, which require reserves most often invested in US government securities. America’s exorbitant privilege comes with a cost and a responsibility that US policy makers should bear in mind as they handle the crisis.This column attributes the paradox to key emerging market economies’ exchange practices, which require reserves most often invested in US government securities. America’s exorbitant privilege comes with a cost and a responsibility that US policy makers should bear in mind as they handle the crisis.
Bankers' strike
A responder to Krugman's post "Corporate cost of borrowing"writes:
Sigh. Yes, things are getting uglier. And, Paul, with all due respect and admiration, you have been missing the point by failing to analyze where we are in the crash-contraction-depression dynamic. You are running ahead to policy from, say, 1934.
We currently have a bankers’ strike (perhaps a tragic “I can’t help myself” strike, but still a management strike), which is acting exactly like a huge set of bank runs. The depression comes later; this is the contraction. Policy for the depression is not yet relevant; nor is a Keynes-Friedman debate.
Again, the FDR-era RFC physically replaced recalcitrant bank managers with Federal officers. Why is this not on the table? Couldn’t we cushion the contraction to some important degree by not choking off viable businesses access to capital? Remember, just-in-time finance was not in vogue in 1930. Our contraction is different. The bank strike kills good businesses; the demand recoil fully ices the deadly cake.
These bank managers–or their Federal agent replacements–simply have to write the “Yes We Can” lending memos or this is going to get much, much worse. Will some (some, a few, not “all” as some hysterics think) of the loans go bad? Of course, but so what? Compared to a further cascade of catastrophic failures it is simply not a big deal.
Economists fighting an irrelevant civil war while ignoring live policy options from history: Tell me how this is helping anything.
No offense I hope. And best of luck to all in these times.
–Jim in MN
Sigh. Yes, things are getting uglier. And, Paul, with all due respect and admiration, you have been missing the point by failing to analyze where we are in the crash-contraction-depression dynamic. You are running ahead to policy from, say, 1934.
We currently have a bankers’ strike (perhaps a tragic “I can’t help myself” strike, but still a management strike), which is acting exactly like a huge set of bank runs. The depression comes later; this is the contraction. Policy for the depression is not yet relevant; nor is a Keynes-Friedman debate.
Again, the FDR-era RFC physically replaced recalcitrant bank managers with Federal officers. Why is this not on the table? Couldn’t we cushion the contraction to some important degree by not choking off viable businesses access to capital? Remember, just-in-time finance was not in vogue in 1930. Our contraction is different. The bank strike kills good businesses; the demand recoil fully ices the deadly cake.
These bank managers–or their Federal agent replacements–simply have to write the “Yes We Can” lending memos or this is going to get much, much worse. Will some (some, a few, not “all” as some hysterics think) of the loans go bad? Of course, but so what? Compared to a further cascade of catastrophic failures it is simply not a big deal.
Economists fighting an irrelevant civil war while ignoring live policy options from history: Tell me how this is helping anything.
No offense I hope. And best of luck to all in these times.
–Jim in MN
Price-level targeting
Real rates are not declining inspite of the Fed's best effort. The high real rate is troubling to many, including Krugman and Mankiw. Mankiw proposes a way for the Fed to manage expectations, in the hope this will lower the real rate.
Here is one idea. Suppose the Fed cuts the federal funds rate once again to, say, 25 basis points. More important, at the same time, the Fed announces a target path for the price level as measured by the core CPI. The price path might be, say, an increase of 2 or 3 percent per year. The Fed promises not to raise the fed funds rate over the next 12 months and, after that, will keep the funds rate at that low level as long as the price level is significantly below its target path.The credibility of the promise is paramount. To get long-term real interest rates down, the Fed needs to convince markets that it will vigorously combat deflation, and that if deflation happens in the short run, the Fed will reverse it by subsequently producing extra inflation. A credible promise of subsequent price reversal after any deflation ensures that long-term expected inflation stays close to the inflation rate implied by the Fed's target price path. Monetary economists will recognize that this policy is price-level targeting rather than inflation targeting.
Here is one idea. Suppose the Fed cuts the federal funds rate once again to, say, 25 basis points. More important, at the same time, the Fed announces a target path for the price level as measured by the core CPI. The price path might be, say, an increase of 2 or 3 percent per year. The Fed promises not to raise the fed funds rate over the next 12 months and, after that, will keep the funds rate at that low level as long as the price level is significantly below its target path.The credibility of the promise is paramount. To get long-term real interest rates down, the Fed needs to convince markets that it will vigorously combat deflation, and that if deflation happens in the short run, the Fed will reverse it by subsequently producing extra inflation. A credible promise of subsequent price reversal after any deflation ensures that long-term expected inflation stays close to the inflation rate implied by the Fed's target price path. Monetary economists will recognize that this policy is price-level targeting rather than inflation targeting.
Friday, November 7, 2008
Obama's historic victory
The Economist has this on Obama's historic victory.
AMERICA has been painfully conditioned by its past two presidential elections. It was bitterly divided into red and blue states with only a handful in the middle, decided by a handful of votes. On the night of Tuesday November 4th Barack Obama, the Democratic presidential candidate, scrambled the assumptions that have governed American politics for half a generation. An intriguing and—to many—inspiring politician, he will take office in January from the most unpopular president in modern time.
When Mr Obama gave a speech that made him famous, in 2004, decrying “blue states” and “red states”, it seemed unlikely that he would be the one to bridge the divide. But the scale of his victory in this election is substantial: he won at least 333 electoral-college votes and will probably do well in the popular vote, too.
New Hampshire, beloved of John McCain for his primary victories there in 2000 and 2008, went for Mr Obama. Then fell Pennsylvania, a big state where Mr McCain had tried his last strategy. He had hoped to raise economic and personal worries about Mr Obama, then to snatch the state from the Democrats and hold down losses elsewhere. It did not work. Ohio has voted with every Republican candidate to win the White House since Lincoln. When that state went for Mr Obama, the election was, in effect, over. Other formerly Republican states such as Iowa and New Mexico went tumbling Mr Obama’s way. Eventually Florida fell for Mr Obama, too, giving him a substantial victory.
The economy seems to have been crucial to his win. George Bush won re-election in 2004 by emphasising “God, gays and guns”. Hillary Clinton racked up big wins against Mr Obama among the economically distressed but socially conservative “Reagan Democrats”, including many in Ohio and Pennsylvania, painting Mr Obama as an out-of-touch elitist. On election day this week, however, Mr Obama was able to attract such supporters. However much Republicans tried to scare voters about Mr Obama’s old relationship with his anti-American preacher and a passing association with a 1960s terrorist, voters were more concerned about their wallets. They also punished the incumbent party heavily, despite the self-styled “maverick” status of its standard-bearer, Mr McCain.
Mr Obama will have a friendly Congress. The Democrats have padded their majority in the House of Representatives. More symbolically, many Republican brand names were defeated in the Senate: Elizabeth Dole in North Carolina, John Sununu in New Hampshire and Jim Gilmore in Virginia. It seems most unlikely, however, that the Democrats will manage to get 60 seats in the Senate, the number needed to break Republican filibusters. Mitch McConnell, the Senate’s Republican minority leader, just held on to his seat in a tough race in Kentucky.
Mr Obama survived a myriad of onslaughts, notably on his lack of experience and on his elitist and “celebrity” status. But he ran a calm and disciplined campaign, and most importantly managed to assure voters that he would be a safer leader in a time of financial and economic anxieties. Mr McCain, in contrast, fumbled when he mishandled his response to the economic turmoil of the past few weeks. Mr Obama also succeeded in persuading young people and black people to vote. Along with those sceptical working-class whites, and the traditional Democratic bases on the east and west coasts, Mr Obama constructed a comfortable winning coalition.
America has not shifted greatly to the left. Mr Obama, especially with his big Democratic majority in Congress, will have to manage expectations carefully. Democrats will want big pushes to the left. But Mr Obama knows that Bill Clinton lost his congressional majority after two years because he overreached in that direction.
But all that is to come. On Tuesday night celebrations were expected in Chicago, and elsewhere, as America prepared to welcome the first black president-elect of a country born with the ugly birthmark of slavery. It is a remarkable, and historic, achievement.
AMERICA has been painfully conditioned by its past two presidential elections. It was bitterly divided into red and blue states with only a handful in the middle, decided by a handful of votes. On the night of Tuesday November 4th Barack Obama, the Democratic presidential candidate, scrambled the assumptions that have governed American politics for half a generation. An intriguing and—to many—inspiring politician, he will take office in January from the most unpopular president in modern time.
When Mr Obama gave a speech that made him famous, in 2004, decrying “blue states” and “red states”, it seemed unlikely that he would be the one to bridge the divide. But the scale of his victory in this election is substantial: he won at least 333 electoral-college votes and will probably do well in the popular vote, too.
New Hampshire, beloved of John McCain for his primary victories there in 2000 and 2008, went for Mr Obama. Then fell Pennsylvania, a big state where Mr McCain had tried his last strategy. He had hoped to raise economic and personal worries about Mr Obama, then to snatch the state from the Democrats and hold down losses elsewhere. It did not work. Ohio has voted with every Republican candidate to win the White House since Lincoln. When that state went for Mr Obama, the election was, in effect, over. Other formerly Republican states such as Iowa and New Mexico went tumbling Mr Obama’s way. Eventually Florida fell for Mr Obama, too, giving him a substantial victory.
The economy seems to have been crucial to his win. George Bush won re-election in 2004 by emphasising “God, gays and guns”. Hillary Clinton racked up big wins against Mr Obama among the economically distressed but socially conservative “Reagan Democrats”, including many in Ohio and Pennsylvania, painting Mr Obama as an out-of-touch elitist. On election day this week, however, Mr Obama was able to attract such supporters. However much Republicans tried to scare voters about Mr Obama’s old relationship with his anti-American preacher and a passing association with a 1960s terrorist, voters were more concerned about their wallets. They also punished the incumbent party heavily, despite the self-styled “maverick” status of its standard-bearer, Mr McCain.
Mr Obama will have a friendly Congress. The Democrats have padded their majority in the House of Representatives. More symbolically, many Republican brand names were defeated in the Senate: Elizabeth Dole in North Carolina, John Sununu in New Hampshire and Jim Gilmore in Virginia. It seems most unlikely, however, that the Democrats will manage to get 60 seats in the Senate, the number needed to break Republican filibusters. Mitch McConnell, the Senate’s Republican minority leader, just held on to his seat in a tough race in Kentucky.
Mr Obama survived a myriad of onslaughts, notably on his lack of experience and on his elitist and “celebrity” status. But he ran a calm and disciplined campaign, and most importantly managed to assure voters that he would be a safer leader in a time of financial and economic anxieties. Mr McCain, in contrast, fumbled when he mishandled his response to the economic turmoil of the past few weeks. Mr Obama also succeeded in persuading young people and black people to vote. Along with those sceptical working-class whites, and the traditional Democratic bases on the east and west coasts, Mr Obama constructed a comfortable winning coalition.
America has not shifted greatly to the left. Mr Obama, especially with his big Democratic majority in Congress, will have to manage expectations carefully. Democrats will want big pushes to the left. But Mr Obama knows that Bill Clinton lost his congressional majority after two years because he overreached in that direction.
But all that is to come. On Tuesday night celebrations were expected in Chicago, and elsewhere, as America prepared to welcome the first black president-elect of a country born with the ugly birthmark of slavery. It is a remarkable, and historic, achievement.
October employment report.
The October employment data has reignited fear that things are going to get vey bad. According to the Bureau of Labor Statistics (BLS), nonfarm payroll employment fell by 240,000 in October. BLS also report that job losses over the last 3 months totaled 651,000. In October, the unemployment rate rose from 6.1 to 6.5 percent, and the number of unemployed persons increased to 10.1 million.
WSJ has more on the latest figure. Click here.
"Today’s jobs report offers more evidence that the economy is in the midst of a downturn that will not only be deeper than the recessions that ended in 1991 and 2001, but may approach, or perhaps surpass, the severity of the long recession that ended in 1982."
WSJ has more on the latest figure. Click here.
"Today’s jobs report offers more evidence that the economy is in the midst of a downturn that will not only be deeper than the recessions that ended in 1991 and 2001, but may approach, or perhaps surpass, the severity of the long recession that ended in 1982."
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