A roundup of economic news from around the Web.
- Stimulus: On Econbrowser, Menzie Chinn looks at the CEA’s latest look at the stimulus. “Output is only 1.59% above baseline, while employment is 2.25% above baseline. In both cases, economic activity is above what would be expected on the basis of random chance (with 50% confidence, which is admittedly below the conventional levels used, but is not that far away from what is standard in the VAR literature). Employment is, in this case, 2.92 million above baseline, rather than the 2.07 million found in the CEA analysis. The key deficiency of this “projection” approach is that the difference between predicted and actual is a composite of the (potentially offsetting) effects of all the policies undertaken (monetary policy, regulatory policy, non-ARRA fiscal policy, as well as ARRA) as well as other events (rest-of-world GDP collapse, credit crunch).”
- Bank Tax: On Economix, Peter Boone and Simon Johnson say a tax on banks is fine, but it distracts from the main issue. “Yes, a new tax on these profits will raise money. But it will not prevent a major collapse in the future. There is no use discussing tough regulation when the previous regulators are still in charge, and they refuse to admit they were part of a system that egregiously failed. Mr. Bernankes speech at the American Economic Association 10 days ago was a big step backward for those — like Thomas Hoenig, head of the Kansas City Fed — who want to send a message that there is a new regime in place to stop future crises. One view of regulation is that you can adjust the rules and make it better; with each crisis we learn more, so eventually we can make it perfect. This appears to be the current White House position. There is even mention of the United States becoming more like Canada, in the (mythical) sense that well just have four large banks and a quiet life.”
- Crisis Hearings: The Economist’s Free Exchange blog looks at how moral hazard was baked into the market before the government ever intervened. ” On the one hand, if the financial sector couldn’t conceive of a world in which house prices fell, they might also have struggled to conceive of a world in which the financial sector was troubled enough that even relatively small banks would be shielded from collapse, as was the case after Lehman’s failure. On the other hand, it’s not as though the American government had a track record of standing by while large financial institutions got into serious trouble. And even if big banks didn’t have enough of an implicit guarantee to borrow on the same terms as Fannie Mae, firm leaders may still have seen the advantage — banked on it, really — of becoming large enough to wield significant clout in Washington, and of being a serious economic liability in times of trouble. At this point, however, it’s crystal clear that large banks can expect government assistance, and so firms are almost certainly building their too-big-to-fail status into firm calculations. And that’s something which really has to be addressed, or another crisis will follow fast on the heels of the last one.”
Compiled by Phil Izzo