Mereja

Author: WSJ.com: Real Time Economics

  • Kansas City Fed’s Hoenig: Rising Debt Could Spark Economic Crisis

    The U.S. government must take action now to prevent a rising public debt from sparking the next economic crisis, Federal Reserve Bank of Kansas City President Thomas Hoenig said Tuesday.

    In a prepared speech entitled “Knocking On The Central Bank’s Door,” Hoenig warned that the U.S. central bank may come under political pressure to finance the rising debt, a move that could bring higher inflation.

    “Fiscal policy is on an unsustainable course. The U.S. government must make adjustments in its spending and tax programs. It is that simple,” Hoenig said.

    “If pre-emptive corrective action is not taken regarding the fiscal outlook, then the United States risks precipitating its own next crisis,” he added.

    President Barack Obama earlier this month unveiled his $3.8 trillion budget for the coming fiscal year, which raises taxes and cuts spending, but which will still leave the U.S. with $8.5 trillion in added debt over the next decade.

    The increasing public debt poses a threat to the Fed’s goals of keeping inflation in check and ensuring long-term economic growth, Hoenig said.

    The Fed official signaled that hyperinflation–which occurs when consumer prices rise so quickly that a currency becomes worthless–was a possibility in the U.S. To those who say it could never happen in America, Hoenig said people should be reminded that “the unthinkable becomes possible when the economy is under severe stress.”

    Hoenig said Germany’s harsh experience with runaway inflation after World War I should be remembered.

    When named president of the Kansas City Fed in 1991, Hoenig said his 85-year old neighbor gave him a 500,000 German mark note. The neighbor told him that, in 1921, the note would have bought a house. In 1923, it wouldn’t even buy a loaf
    of bread. The neighbor said, “I want you to have this note as a reminder. Your duty is to protect the value of the currency.”

    “That note is framed and hanging in my office,” Hoenig said.

    As a more-recent example, the Fed official cited Argentina’s case, in which the president of the Latin American country recently forced out the head of the central bank because he wouldn’t transfer reserves to repay Argentinean debt. Hoenig said inflation in Argentina, currently running near 8%, “will almost certainly increase.”

    Hoenig is a voting member of the Fed’s policy-making arm, which last met at the end of January when officials again vowed to keep interest rates at a record low for an extended period due to low inflation and high unemployment.

    A Fed veteran who has disagreed previously with the Federal Open Market Committee, Hoenig is concerned that the huge stimulus pumped into the economy by the government to fight a severe recession may stoke inflation.


  • Secondary Sources: Volcker Rule, Reg Reform, State Budgets

    A roundup of economic news from around the Web.

    • The Volcker ‘Idea’: Former vice chairman of the Federal Reserve Board, Alan Blinder gives his take on the Volcker rule in the WSJ, saying “…I am waiting to see if what is really the Volcker ‘idea’ can be translated into a workable Volcker rule. It is devilishly difficult to draw bright lines between proprietary trading and trading, hedging, and market-making on behalf of clients. Mr. Volcker himself said that ‘you know it when you see it,’ suggesting an analogy with pornography. The problem is, often you don’t. Furthermore, the firms that take the biggest proprietary trading risks are not banks at all—or at least not real banks, with depositors and all that. (I am not naming names.) Yet some of these firms are too big to fail, whether we like it or not. If they gamble and lose big, we taxpayers may find ourselves on the hook again, which is why we need resolution authority. So I’m waiting for the details of a fleshed-out Volcker rule. After that, we’ll see if anyone can convince 60 senators of its wisdom.”
    • Financial Reform: On the New York Times’ op-ed page, Henry Paulson explains his financial regulatory reform solution: “First, we must create a systemic risk regulator to monitor the stability of the markets and to restrain or end any activity at any financial firm that threatens the broader market. Second, the government must have resolution authority to impose an orderly liquidation on any failing financial institution to minimize its impact on the rest of the system. Together, these two reforms will enable the regulatory system to better prevent the kinds of excesses that fueled our recent crisis, restore market discipline and keep the failure of a large institution from bringing down the rest of the system… My preference is for the Federal Reserve to be the systemic risk regulator, because the responsibility for identifying and limiting potential problems is a natural complement to its role in monetary policy. Congress, however, seems to be moving toward having a council of regulators perform this function. While that is not my preference, I believe a council can be workable if it is led by either the Treasury secretary or the Fed chairman, and is structured to ensure that strong decisions are reached quickly in a crisis.”
    • Strained States: A new PEW report looks at some of the ways the Great Recession may have changed states, both short and long-term. “States have weathered the ups and downs of 10 economic slumps since World War II, but none with the scope of the Great Recession. Its toll can be measured with a big number: the more than $300 billion in budget gaps states have faced since the start of the recession in December 2007…The recession is amplifying pressures on elected officials to make essential long-term changes so states can live within their means yet still educate children, keep people safe and create jobs. But 2010 is an election year, and politicians seeking another term may be loath to tackle such volatile issues as reforming the tax structure or public employee pensions for fear of backlash to higher taxes or reduced retirement benefits. The typical pattern after a recession is to muddle through until the economy recovers, then return to cycles of increased spending when revenue goes up. But officials in a number of hard-hit states will not have that option this time because of the gravity of the downturn.” In the long-term, it’s possible “that the recession will impose permanent changes in the size of government and in how states deliver services, who pays for them and which ones take priority in an era of competing interests.”


  • Who is Vito Constancio?

    The nomination of Portuguese central banker Vitor Constancio to be the next European Central Bank vice president in May has made the top ECB job, which opens in October 2011, German Bundesbank chief Axel Weber’s to lose, ECB watchers say.

    Constancio, 66, brings an extensive political resume that Weber–whose background before joining Bundesbank was almost entirely academic–lacks. Constancio had budget posts in the 1970s and was a member of parliament in the 1970s and twice in the 1980s. He has headed the Bank of Portugal since 2000, and did a stint in the post in the mid-1980s as well.

    Though there’s no official quota system for doling out top ECB and EU posts, there’s long been thought to be a preference for north-south, big-small balance. That bodes well for Weber, since Portugal’s a small country from the south it would tend to favor a large country from the north, like Germany.

    There’s another factor, ECB watchers say: Constancio is thought to be among the most dovish of ECB members (meaning he’s more likely to worry about growth than inflation), in contrast to the hawkish Weber.

    Economists at Royal Bank of Scotland rate the ECB’s 22 governing council members according to a hawk-dove scale. Constancio is among the seven doves on the council. Weber is one of only three hawks (along with Luxembourg’s Yves Mersch, who was passed over for the number two ECB slot). ECB President Jean-Claude Trichet is considered neutral.

    In early 2009, when some ECB officials were arguing that the scope for further rate cuts was “limited” with the main policy rate at 2%, Constancio said 2% was “not necessarily the limit” and that officials had to be “cautious regarding the risks of inflation falling too low.” The ECB eventually cut all the way to 1%, where the refi rate still stands.

    In a recent speech, Costancio said he expects the Portuguese economy to grow very modestly this year with a pick up in inflation (to 2% from 1% in 2009) , but he cautioned, “The risks are on the downside for economic activity and inflation.”

    One top European finance minister cautioned against assuming the Constancio pick means a cakewalk for Weber. “Germany will have to fight” to get Weber the ECB post, Luxembourg’s finance minister Jean-Claude Juncker reportedly said Tuesday.


  • After the Tape: Factory Activity is on an Upswing

    This column, which originally ran as the Ahead of the Tape, has been updated with the actual figures.

    The recovery in U.S. manufacturing appears to be gaining steam.

    After a week of trans-Atlantic scrutiny on the faltering European economy, attention is now shifting back toward the U.S. as investors look for reassurance that the recovery in the world’s biggest economy still is in gear.

    Nerves were calmed somewhat Tuesday morning when the Federal Reserve Bank of New York released its survey of regional manufacturing activity, a volatile but timely gauge of factory output that has been in positive territory now for seven months through February.

    The index jumped to a reading of 24.9 in February, sharply above the 16 forecasters expected, from 15.9 in January.

    The broader rebound in U.S. manufacturing activity has been one sign that the economic recovery is gathering strength, despite high unemployment and a still-weak housing market. In January, the Institute for Supply Management’s gauge of national factory activity rose to 58.4, its highest level in six years, from a low of 32.5 in December 2008.

    That strength should be corroborated Wednesday when the Federal Reserve’s report on production at U.S. factories, utilities and mines is expected to show an overall gain of nearly 1% in January, the most since August, when the cash-for-clunkers program helped to boost output by 1.3% from the prior month.

    A rebound in U.S. and foreign demand for manufactured goods is driving the sector’s strength. Surprisingly strong January retail-sales figures, released last week, suggest U.S. consumer spending could gain nearly 3% this quarter, after 2% in the fourth quarter. Companies have moved swiftly to rebuild inventories to match that demand, and manufacturing employment in January rose for the first time in three years.

    The brightening jobs picture was echoed in Tuesday’s Empire State survey: In response to a series of special questions, some 64% of respondents expected their companies’ workforce to increase in the year ahead, while just 10% predicted declines in the number of full-time workers.

    On Thursday, the Federal Reserve Bank of Philadelphia is expected to report its sixth month in a row of regional manufacturing expansion, according to economists surveyed by Dow Jones.

    There is a risk that the recent spell of unusually cold and snowy weather could temporarily halt the sector’s rebound and depress results. Mother Nature, it seems, may be the only force strong enough to keep the industry from plowing ahead.


  • What Keeps Australian Central Bankers Up at Night?

    Reserve Bank of Australia assistant governor Guy Debelle gave a speech Tuesday on the global financial situation and glossed over “recent jitters” in the sovereign debt world (i.e. Greece). His big worry is the mountain of U.S. bank loans tied to commercial property, such as apartments, hotels, offices and warehouses.

    Mr. Debelle, head of the RBA’s financial markets group, said the recession’s effect has yet to hit a big chunk of the U.S. banking system.

    “We are still yet to see the full impact of the weakness in the North Atlantic economies on the loans on the books of financial institutions. The bulk of the losses to date by these institutions have been write-downs in the value of securities held on their books. While these write-downs have been absorbed, albeit with some difficulty and with substantial capital raisings, given the size of the output contraction, one would expect that we are not all that far advanced in the adverse credit cycle that normally accompanies recessions. For the North Atlantic economies, this was a big recession which, combined with large falls in both commercial and housing property prices, should result in large loan losses.”

    He lauded the stress tests the Fed and Treasury performed on the 19 largest financial institutions in May 2009, but Mr. Debelle expressed concern about the small and medium sized banks that didn’t get stress tested:

    “This lower tier, which is a sizeable share of the US financial sector, has loan portfolios which are very regionally concentrated with a sizeable weighting to commercial property. The experience of previous cycles indicates that the commercial property cycle takes a long time to unfold, and we may have some way yet to travel. These problems in the banking system will almost certainly hinder credit provision in the US, particularly to the [small and medium sized enterprises] sector, which doesn’t have the direct access to capital markets that larger corporates have.”

    He said the public may be surprised by how this plays out:

    Even though one might be relatively confident that the major financial institutions have the ability to absorb the loan losses still to come, there may also be a concern that there could be an adverse effect on public confidence, should these institutions report further quarterly losses. The general public might well be surprised that losses are continuing to occur, given the sizeable public sector support that has already been provided.

    Australia is in much better shape, and it has increasingly tied its economic fate to Asia, where the banking systems are strong. He said:

    There is a marked contrast between the balance and nature of the risks in Asia and the North Atlantic. While the near-term risks may be on the downside in the US and Europe, they would appear to be on the upside in Asia. The interplay between the contrasting fortunes of these two parts of the world is likely to be the critical factor in determining the evolution of the global economy, and Australia is now more tied into one than the other.


  • ECB Horse Race: Germany’s Weber in the Lead

    Axel Weber, current head of the Deutsche Bundesbank, is likely to be picked by European governments to succeed Jean-Claude Trichet when his eight-year term as president of the European Central Bank ends in October 2011, according to a survey of 27 economists.

    The survey, conducted by Bloomberg News, found 24 of the 27 economists surveyed are betting on Weber.

  • Germany’s Weber Seen in ECB Race — Blunt-Spoken Bundesbank President, Known as Hawk, Is Among Contenders for Chief After Trichet


  • Economists: The Future A Bit Brighter

    Economic forecasters surveyed quarterly by the Federal Reserve Bank of Philadelphia are a bit more optimistic about the long-run, even as they predict near-term growth too slow to bring unemployment down quickly.

    The forecasters currently expect the U.S. gross domestic product to grow 2.70% per year, adjusted for inflation, over the next 10 years, up from 2.56% in the survey conducted a year earlier. Growth in productivity, or output per hour of work, is now expected to average 2.0%, up from the previous 1.9%. forecast (and much slower than recent spectacularly fast productivity growth.)

    Investors will fare better than the economists feared during the depths of the recession in the first quarter of 2008. They revised up their forecasts of the return on financial assets, with the exception of three-month Treasury bills. The forecasters see the S&P 500 returning 7.00% per year over the next decade, up from 6.50%, and 10-year Treasuries returning 4.95%, up from 4.85%. The forecasters expect that three-month Treasury bills will return 3.0% per year over the next 10 years.

    The forecasters surveyed by the Philly Fed see the unemployment rate, now at 9.7%, remaining high and averaging 9.4% in the first quarter of 2011. They expect GDP to grow at an inflation adjusted annual rate of 2.7% over the next five quarters.

    Long-Term (10-year) Forecasts (%)

    First Quarter 2009 Current Survey
    Real GDP Growth 2.56 2.70
    Productivity Growth 1.90 2.00
    Stock Returns (S&P 500) 6.50 7.00
    Bond Returns (10-year) 4.85 4.95
    Bill Returns (3-month) 3.00 3.00


  • Secondary Sources: NHSTA’s Flaws, America Looking Better, An Age of Thrift

    A roundup of economic news from around the Web.

    • Regulatory Capture: Daniel Kaufmann of the Brookings Institution draws parallels between the shortcoming of auto-safety regulators in the Toyota case and the failures of bank regulators. “Without absolving Toyota of its share of responsibility, it is necessary to probe further on the National Highway Transportation Safety Administration’s role in this safety debacle. Having recently looked at the abdication by financial regulators, such as the Securities and Exchange Commission and Office of Thrift Supervision, of their financial regulatory and oversight role, a review of emerging evidence from the media raises some parallel questions about the NHTSA. Namely, was the NHTSA merely asleep at the wheel? In dealing with Toyota, did it fall into a lull because it viewed the carmaker as ‘too-large-and-successful-to-do-wrong’? Did it suffer from management deficiencies and soft leadership, and/or from budgetary as well as know-how limitations in an industry undergoing fast technological change? No doubt, all these factors may have contributed to the subpar performance of the NHTSA to varying degrees,” he writes.
    • America The Beautiful: Maybe Japan’s quality-manufacturing prowess isn’t all it was cracked up to be in light of Toyota’s woe, says Daniel Gross of Slate. “Japan was supposed to have a huge competitive advantage in high-quality manufacturing. Well, not so much,” he writes. And maybe the European model, celebrated just a few months ago because the recession produced fewer layoffs there than in the U.S., isn’t quite so attractive. “The bonds that tie Europe together are coming asunder because of the travails of its less economically robust members. As Greece struggles to cope with high debt and a dysfunctional political system, it is threatening to drive a stake into the heart of the European monetary union,” he adds.
    • The Thrifty American: In another of their “Staff Position Notes” series, International Monetary Fund economists predict that American consumers will spend less and safe more well after the current crisis ends. “U.S. household consumption declined sharply in late 2008, marking a departure from the trend of a steady increase in U.S. consumption as a share of income since the 1980s. Combining econometric and simulation analysis, we estimate that this departure will be sustained beyond the crisis: the U.S. household consumption rate will likely decline somewhat further from its current level, as the saving rate rises to around 6% of disposable personal income (from nearly 5% in 2009). Compared to the pre-crisis years (2003–07), this saving rate implies a decline in U.S. private-sector demand on the order of 3 percentage points of gross domestic product.”


  • Goldman Sachs Tells Fed To Start With Rate Hikes

    Most handicappers believe that when the Federal Reserve starts to tighten policy, it will begin by moving assets off its balance sheet and follow that with interest rate increases.

    Goldman Sachs‘ economists aren’t so sure after congressional testimony by Fed Chairman Ben Bernanke this week. The bank now believes the sequence of the central bank’s exit could be the opposite of the consensus view.

    The Federal Open Market Committee “would do its successors a great favor by making the first step of monetary tightening an interest-rate increase instead of a reserve drain,” Goldman economist Ed McKelvey told clients. He cautioned this is a very long-term call, because “we don’t expect or advocate (rate hikes) anytime soon–not in 2010 and probably not in 2011 either.”

    The key to Goldman’s argument is a power gained by the Fed in late 2008. Since that time the Fed has had the ability to pay banks interest on the reserves they hold at the central bank. Policymakers believe this tool gives them considerable control over financial system liquidity, as banks park reserves at the Fed in pursuit of guaranteed returns. Officials say the interest on reserves power means huge levels of bank reserves aren’t inflationary, because while banks may be flush with liquidity, it’s not being put into the broader economy.

    In his testimony Wednesday, Bernanke said that the interest on reserves tool stands a good chance of supplanting the overnight fed funds rate as the central bank’s focus in a coming tightening cycle. Instead of targeting the funds rate–currently close to zero percent–the Fed would state its new interest on reserves rate target. Bernanke also said the Fed may set targets for bank reserve levels as well, in another departure from the current regime.

    The way Goldman sees it, tightening policy this way would be as good as efforts to drain liquidity by asset sales. Interest on reserves should control the balance sheet’s inflationary potential as well as getting securities off the Fed’s books, either by selling or temporary means. “In the absence of either significant inflation expectations –on the part of consumers as well as traders–or a sudden increase in bank lending, we think the FOMC should resist pressures to drain reserves in significant volumes,” McKelvey wrote.

    Many economists expect the Fed to follow a different path. They believe that the Fed wants to unload assets before hiking short term rates. Comments from some central bankers support the view. The argument goes it will take some time to shrink a more than $2 trillion balance sheet, so starting there makes sense.

    St. Louis Fed President James Bullard said in media interviews this week asset sales could start in the second half of the year, with interest rate hikes put off until 2012.

    Goldman’s interest rate outlook is different from many others on Wall Street, who reckon interest rate hikes could come at some point over the latter half of the year. With the economy recovering modestly, there’s a growing appetite to see monetary policy back away from levels set during the darkest days of the financial crisis. Short-term rates could rise a percentage point or two and still remain stimulative of growth, many economists believe.


  • Economists React: Spending Improves But Consumers Are Cautious

    Economists and others weigh in on the increase in retail sales.

    • Retail sales rose in January and the January levels for headline, core, and core ex-gasoline spending are above their Q4 levels. This suggests that consumer spending continued to grow at the beginning of the year. Consumers continue to spend, albeit cautiously, amid high unemployment, relatively sluggish income growth, and tight credit. – Steven Wood, Insight Economics.
    • On balance, this was not a bad result for January sales, though it falls far short of a convincing display of consumer demand strength. [First quarter] consumer spending will have to build on these figures if it is to achieve the 2.0% or so growth we are currently forecasting. And that is far from in the bag. – Rob Carnell, ING Bank
    • We wrote last month that we advised against looking at either the November or the December results for retail sales in isolation because an increased emphasis on “Black Friday” and “Cyber Monday” sales in November and lousy weather in late December likely played havoc with spending patterns relative to past norms and thus made the seasonal adjustment task a more vague exercise than usual. January’s better results in large part represent a bounce from an understated December, and they too should not be viewed in isolation. – Joshua Shapiro, MFR
    • The momentum in retail sales growth picked up over the last three months, although the bulk of the acceleration was due to the gain in sales in November. Nonetheless, in fits and starts, consumer spending continues to advance at a moderate rate and we estimate, based on January sales data, that real [consumer spending] in the month will be 2%–2½% ahead of the fourth-quarter average at an annual rate. – John Ryding and Conrad DeQuadros, RDG Economics
    • A point of strength in the report came from a 1.2% jump in electronic and appliance stores. This follows a 3.5% drop in December. Food services and drinking places saw a sales gain of 0.8% in January. Non-store (online) retailers which have been posting solid gains over the past four months gained 1.6% in January.
    • Consumers remain cautious, but a decline in the unemployment rate and an improvement in general sentiment seems to have injected some life into consumer spending which we anticipate to improve in the coming months. – Sireen Hajj, Calylon Crédit Agricole
    • Despite the moderate gain in retail sales, the tone of the report is very favourable, and it suggests that U.S. consumers have regained their appetite for spending (after the modest dip in December) and have continued to hold their side of the bargain. In the coming months, with the economic recovery appearing to gain further traction and the labour market likely to begin creating new jobs on a consistent basis, we expect consumer spending to remain supportive to growth. Even so, it will be some time before we can expect personal consumption expenditures to be the primary driver of the U.S. economic rebound. — Millan L. B. Mulraine, TD Securities
    • January’s performance is actually quite encouraging given that a weak December result, harsh weather last month, and a lack of winter inventory on the shelves all pointed to another sub-par performance. As the month progressed, however, chain store reports noted better shopper traffic and consumers willing to spend on full-priced items rather than simply sharply discounted goods. Both of these signs suggest that despite the fact that consumers continue to face many headwinds, they are beginning to feel somewhat better about their financial situation. – Omair Sharif, RBS
    • This pace is most unlikely to be maintained… because peoples’ cashflows are surely not enough to support it, and access to credit remains severely constrained. Still, for now this is a decent start to Q1. – Ian Shepherdson, High Frequency Economics
    • While we are not expecting the consumer to come roaring back in the near-term, improvements have been quicker than expected considering the still-distressed state of the labor market. – Adam York, Wells Fargo Securities.
    • The underlying components of the report offered an even more positive tone than the headline statistics. Core retail sales – which strips out autos, gasoline and building materials – rebounded by 0.8% after declining by 0.3% in December. Core retail sales are up 5.3% over the last three months at an annualized rate, an indication of robust growth in household consumption. As recently as August 2009, the three-month growth rate in core retail sales was still negative. We believe that fiscal stimulus – in particular more generous unemployment insurance benefits – deserve much credit for the sustained growth in consumption. — Zach Pandl, Nomura Securities


  • Asia’s Exposure to Europe’s Woes

    Europe’s debt troubles could damage Asia’s economies in a very basic way: depressed demand for exports.

    Most analysts this week have downplayed Asia’s exposure to debt problems in Greece and its southern European neighbors. And the European Union deal announced Thursday to backstop Greece could stave off the worst.

    On the surface, it seems right that there are no Greece-like sovereign debt problems in Asia. Asia’s government balance sheets outside Japan and Vietnam are in good shape, with about $5 trillion of foreign-exchange reserves backing up economies that have manageable budget deficits and limited borrowing from abroad. Local banks are better capitalized and solid economic growth should keep default rates low.

    But there’s more to fear than just a sovereign default contagion spreading down the Silk Road. Asia’s real worry is that Europe’s debt woes will drag down the Continent’s economic recovery, dampening demand for Asian goods. A weak euro doesn’t help Asia either, as it becomes more expensive for Europeans to buy Asian products.

    Rob Subbaraman, economist at Nomura in Hong Kong points out in a research note that the “quid pro quo of avoiding a full-blown financial crisis [in Europe] is weaker economic growth.”

    And of course, a full-blown European financial crisis isn’t very good for economic growth either. Mr. Subbaraman lays out a negative scenario where Germany and France are saddled with southern Europe’s debts, hurting output throughout the region. Because southern Europe’s euro denominated nations can’t devalue their currencies to remain competitive, “it is conceivable that to support these economies, a new form of protectionism takes place, whereby countries such as France and Germany buy more goods from them at the expense of Asian exports.”

    So how exposed is Asia to Euro-Zone trade? Quite a bit. It’s not as much as to the U.S., but there’s little doubt a wider European slump would hammer Asia.

    Vietnam, already the sickman of Asia with its devaluing currency and inflation problems, counted on exports to the euro-Zone for 8.9% of its GDP in 2009, according to Nomura.  Exports to the U.S. were 13.1%. China’s exports to Europe were 3.6% of its GDP, compared to 4.7% for its exports to the U.S. Hong Kong and Singapore, important trading centers, counted on Euro area exports for 13.2% and 11% of GDP respectively.

    Fears of a European slowdown hurting Asia aren’t theoretical. The EU reported today that euro-zone growth rose a weaker-than-expected 0.1% in the fourth quarter. Italy and Spain both shrank in the fourth quarter, perhaps a sign inventory restocking is over, and that the recovery – at least in Europe –  is running out of steam.


  • Q&A: IMF’s Blanchard Thinks the Unthinkable

    The International Monetary Fund’s chief economist, Olivier Blanchard, is thinking what for the IMF is the unthinkable. Should inflation be higher? Should regulation be used to fight asset bubbles? Should new social spending programs be put in place to fight downturns? Mr. Blanchard says such a rethinking is necessary because the global financial crisis showed how complacent policy makers had become. The IMF plans to release a paper, “Rethinking Macroeconomic Policy,” outlining the thoughts of Mr. Blanchard and IMF economists Giovanni Dell’Ariccia and Paolo Maruo on Friday.

    Mr. Blanchard, who taught earlier at Massachusetts Institute of Technology, discussed his views the Wall Street Journal’s Bob Davis. Below is an edited transcript.

    What was the goal of your exercise?

    Blanchard: We were trying to force people to rethink a number of things. I was in a good position to think what had gone wrong and what we could do better. The larger goal is to indicate the International Monetary Fund is able to think too.

    You suggest that before the global recession, policy makers had become too complacent and relied too much on a single tool, monetary policy.

    Blanchard: Yes. Even monetary policy had become extremely simplified. There was sense all we had to look at the policy interest rate and that was it. We thought we had come to a level of detail. That wasn’t quite right.

    The most striking suggestion you make is that nations should consider aiming for a higher rate of inflation,

    Blanchard: Before the crisis, if you talked to policy makers, the idea of being stuck at zero interest rate would have struck them as very unlikely. That happened in Japan. But most people convinced themselves that the Japanese didn’t know what they were doing.

    Now we realize that if we had a few hundred extra basis points to rely on, that would have helped. We would have had to rely less on fiscal policy. So it would have been good to start with a higher nominal rate. The only way to get there is higher inflation.

    Policy makers have generally chosen a 2% (inflation rate target). But there was no very good reason to use 2% rather than 4%. Two percent doesn’t mean price stability. Between 2% and 4%, there isn’t much cost from inflation.

    So should we change the inflation target?

    Blanchard: If I were to choose inflation target today, I’d strongly argue for 4%. But we have started with 2%, so going from 2% to 4% would raise issues of credibility. We should have a discussion about it.

    What’s an inflation level we should fear?

    Blanchard: When you get to high numbers – 10% and above– people see uncertainty. They don’t know to know what’s gong to happen. You don’t how to plan from retirement.

    Would you need to get an international agreement among central bankers on a higher inflation target?

    Blanchard: Going international would increase credibility. It’s probably not needed but it would be helpful.

    You also suggest a much bigger role for financial regulation to handle macroeconomic problems.

    Blanchard: If there are things going wrong in financial markets, don’t try to use interest rate to kill bubbles. The collateral damage is just too much. Central banks should be in charge of (financial) regulation. The central bank should have these (regulatory) tools at their disposal.

    Another area that you say is ripe for change is automatic stabilizers, which are government programs that increase spending or reduce taxes during economic downturns, such as unemployment insurance.

    Blanchard: Automatic stabilizers weren’t designed to stabilize the economy. They were designed for other purposes (such as social equity or helping individuals). We should be thinking of automatic stabilizers which are designed to stabilize the economy.

    An example is a cyclical investment tax credit. It would come into effect when economic activity slows down. Companies would get it automatically without Congress having to vote on it.


  • Economists: Fed Independence Survives Bernanke Confirmation Battle

    Despite last month’s bruising confirmation battle, Federal Reserve Chairman Ben Bernanke and the central bank’s independence came out relatively unscathed, according to economists in the latest Wall Street Journal forecasting survey.

    Federal Reserve Chairman Ben Bernanke. (Getty Images)

    “Bernanke will do what he thinks is correct for the long run success of the U.S. economy,” said Paul Kasriel of The Northern Trust.

    Just one economist of the 50 who answered the question thought that the Fed’s independence from political interference was significantly undermined by the confirmation fight in the Senate. Bernanke was eventually backed by a bipartisan vote of 70-30, the lowest ever number of ayes for a Fed chairman. Twenty-nine economists said independence was slightly undermined by the fight.

    But economists in the Journal survey grade Bernanke higher than President Barack Obama and Treasury Secretary Timonthy Geithner on his handling of the economy, and his scores (an average of 78 out of 100 and median of 85) are unchanged from July, the last time the Journal asked the question. Obama and Geithner by contrast both saw their marks decline over that period.

    “The urge to scapegoat Bernanke and Geithner on their handling of the crisis by Congress is reprehensible,” said Diane Swonk of Mesirow Financial. “They may have made mistakes, but I can’t think of anyone who would have handled the avalanche of problems that hit us any better.”

    Respondents expressed more concern about a proposal by Rep. Ron Paul (R., Texas) to audit the Fed. “Obama should veto any legislation that works to curtail the Fed’s indepence, even if it has little teeth. Election years make for lousy policy choices by Congress,” Swonk said.

    Separately, the economists weighed in on the proposed “Volcker rule” that seeks to separate financial institutions’ proprietary trading from commercial banking. Most economists said the rule will somewhat reduce the chances that a systemically important firm would fail. Some 22% of respondents said it won’t have any effect and 18% said it will make matters worse.


  • Dodd, Corker Share Views on New Financial Regulation Talks

    Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and Sen. Bob Corker (R., Tenn.) spoke separately with the Wall Street Journal Thursday about their new agreement to negotiate directly over new rules to regulate financial markets. This came less than a week after Mr. Dodd said he had reached an “impasse” with the panel’s ranking Republican, Richard Shelby of Alabama. Mr. Dodd said he asked Mr. Corker on Tuesday night if he wanted to negotiate directly, and that Mr. Corker said he wanted to think about it. The two met Wednesday — in the blizzard on Capitol Hill — and agreed to start discussions.


    Dodd interview:

    What does this agreement with Corker mean?

    Dodd: “It’s a real positive shot. Over the 30 years in the Senate, in every major effort I’ve been involved in, I’ve always felt it was important substantively and politically to have a partner on the other side…Bob Corker has expressed a real interest in the subject matter. I say this respectfully about my friend Dick Shelby – people have different perspectives…I sort of felt we weren’t getting anywhere. Things had stalled…We were stalled, we weren’t getting from the talking points to drafting and putting a bill together…There has to be a willingness on the other side…or it’s the sound of one hand clapping, and nothing happens except a lot of speeches and a lot of fingerpointing…I’m excited about Bob Corker willing to take on this job. I admire his courage and willingness to step up.”


    Do you think Sen. Corker has the ability to bring other Republicans with him?

    Dodd: “I think if we do our jobs and do a good job there will be others who will want to join our effort.”

    Can differences be bridged on consumer issues?

    Dodd: “I believe so, and we’re probably not to do it to the satisfaction of anybody. To some it may be too strict, to others not strict enough…At the end of the day, Bob and I and other members of the committee have to put a bill together…we’re going to write a bill together which is the only way this process works.”


    Sen. Corker interview:

    How did this come together?

    Corker:     “We had talked the night before on the phone. I wanted to think about…what framework I felt would be constructive. We met at 2 or 2:30 [p.m.] and agreed that we would try to negotiate a bipartisan financial reform bill. I called the Republican leadership immediately to let them know of my plans. Our staffs met yesterday by conference call…who knows if we’ll be successful. Obviously this puts me in a little bit of an awkward place, but I do think that financial regulation is something that needs to be dealt with.”

    What will be some of the goals?

    Corker: “I think every American wants us to have a resolution mechanism in place, so it’s not in the situation again where citizens across this country are bailing out a large institution. I don’t think that’s something that meets anybody’s standards…At the very minimum we need to do that…Obviously there are some issues surrounding derivatives. There are some issues we are going to have to deal with on consumer protection. That has to be done with an appropriate balance…That will probably be the toughest issue…In business I used to always leave the stickiest issues to last. Let’s figure out what we agree upon first. Let’s build some trust among members.”

    How do you think the reaction will be among other Republicans on the committee?

    Corker: “I think that members of the committee know that I’m sound philosophically. I think they know that…I don’t know what the response is going to be. We’ll see how that plays out.”


  • Secondary Sources: Snow Work, Long-Term Unemployment, Nordic Model

    A roundup of economic news from around the Web.

    • Snow Work: On the Economist’s Free Exchange blog, Ryan Avent looks at some of the potential economic benefits from the snow storm. “Much of the ‘lost’ business will simply be done after the snow melts (and a lot of business was ramped up before the closings in expectation of the impending storms). Many, many of the people who have been unable to get to work have nonetheless been able to do their jobs from home. As Mr Pearlstein points out, many hourly workers can’t make up the earning opportunities they lost. On the other hand, the snow has created earning opportunities were there weren’t any before; in Washington the snow economy is in full force, as able-bodied citizens offer to shovel walks and clear driveways for a modest sum. Individuals with plows are pouring in from the relatively snow-deprived north to make a few bucks moving snow. Meanwhile, other typical, variable urban costs are significantly reduced during the down period. Crime figures across the Washington metro area have tumbled. Building owners across downtown Washington are saving a bundle on energy costs this week.”
    • Long-Term Unemployment: Via Mark Thoma, Stephen Gordon of the Worthwhile Canadian Initiative blog looks at similarities in long-term unemployment in the U.S. and Canada in the 1990s. “The more I look at the US, the more I see unpleasant parallels to Canada’s experience of the 1990’s – what Pierre Fortin called The Great Canadian Slump. Even after we emerged from the worst of the 1990-91 recession, we still had to deal with a large current account deficit, out-of-control government deficits and significant NAFTA-induced sectoral shifts. The outlook for the US is depressingly similar, although their sectoral shifts are associated with re-allocating resources away from construction and finance.”
    • Nordic Model: On voxeu, Thorvaldur Gylfason, Bengt Holmstrom, Sixten Korkman, Hans Tson Söderström and Vesa Vihriälä look at how the Nordic countries have held up during the financial crisis. ” Is the Nordic model an asset or a liability? The global crisis has seen GDP in the region decline by between 4.5% and 7%. This column argues that the Nordic model, with its welfare state and high rate of investment in human capital, can, properly implemented, be part of the solution.”

    Compiled by Phil Izzo


  • Snowverkill Creates Headache for Economy Watchers

    As noted yesteday, the Mid-Atlantic blizzard is likely to impact jobs reports, but the weather isn’t likely to have as large an impact on gross domestic product this quarter, which forecasting firm Macroeconomic Advisers estimates is running 3.1% at an annualized rate after 5.7% growth in the fourth quarter.

    Some industries are even benefiting from a “snowstorm stimulus” of sorts. Hotels are jammed with travelers. Supermarket shelves were cleared ahead of the storm as households stocked their pantries and purchased batteries.

    At Barbour Inc., a maker of heavy-duty jackets and sportswear based in Milford, N.H., “we could be doing even better right now if we had more inventory available,” says Tom Hooven, the company’s general manager. But high demand means the company hasn’t had to discount its winter gear as much, so profit margins are fatter.

    The blizzard is proving a boon to some industries and a stumbling block for others. But it’s a universal headache for those trying to gauge the recovery.


  • Dallas Fed’s Fisher: ‘We Still Have Work To Do’

    On a day when the head of the Federal Reserve said it isn’t the time to take away stimulus from the U.S. economy, he got some support from another central bank policy maker.

    Federal Reserve Bank of Dallas President Richard Fisher said “there remain many roadblocks that must be overcome before we will be able to breathe easy again.” Central bank actions that have provided liquidity to markets “have led to a resumption of private credit flows and a reduction in private sector borrowing costs.” That said, “we still have work to do,” even as policy makers must begin the process of figuring how to eventually unwind its current slate of policy efforts, the official said.

    Fisher isn’t a voting member at this year’s Federal Open Market Committee meetings. At the last gathering in late January the interest rate setting body maintained its current near-zero percent interest rate policy and pledged to keep it that way for an extended period, as a modest recovery forms in the absence of inflationary pressures. Most economists believe it will not be until the middle of the year or later before the Fed contemplates raising rates.

    In testimony Wednesday, Fed Chairman Ben Bernanke told Congress the central bank has “promoted economic recovery through sharp reductions in its target for the federal funds rate and through purchases of securities. The economy continues to require the support of accommodative monetary policies.”

    Fisher said he is “sympathetic” to the view the central bank should stop pledging to keep very low interest rates in place for an extended period. Kansas City Fed President Thomas Hoenig had dissented at the late January FOMC meeting, believing the Fed no longer needs to make that pledge.

    Fisher also said the unexpected improvement in the January unemployment rate may not be sustained, and he explained it will be a long slow process of recovery for hiring in the U.S.

    The official also said he’s confident the mortgage market will be fine after the central bank ends its purchase of housing-related bonds in March. The effort to buy $1.25 trillion in mortgage securities, which ends in March, was a “deliberate attempt to impact the markets, to keep rates in all private markets lower,” and “it succeeded,” Fisher told an audience in Dallas.

    Currently the spread — or difference — between Treasury securities and mortgage debt is “abnormally low,” the official said. “As we have announced we would terminate that program it hasn’t expanded very much. That indicates, possibly, the markets are much healthier than they were before, so we did our job.”

    The Dallas Fed chief’s speech was largely about the scary financial situation facing the U.S. government. It was also an argument against congressional efforts to change how the Fed operates. But Fisher did have a few things to say about the economy.

    “We are slowly clawing our way back from the edge of what could have been a repeat of the Great Depression,” he said, adding “we are seeing some signs of improvement” on many fronts, “however hesitant they might be in the incipient stages of a recovery.”

    Fisher said the two “significant obstacles” holding back consumers and businesses are “widespread concern” about government deficits, along with fears over congressional efforts to “politicize the Federal Reserve.”

    As he has before, Fisher says the nation’s political class must put aside its partisan difference and do something meaningful about eliminating the sea of red ink.

    Fisher cautioned Congress that it needs to keep its hands off the Fed, and that attempts to audit the central bank’s monetary policy-making ability will only lead to bad economic outcomes.

    “When fiscal authorities turn to monetary authorities to monetize their debts, the result is inevitably financial disaster,” Fisher said. “It is important that the Federal Reserve be left to do its job and no more,” he said, adding “a great and powerful economy cannot create the conditions for sustainable, noninflationary growth if its central bank is governed by a politicized monetary authority.”

    Fisher admitted the very low rates set by the Fed during the middle of the last decade played a part in creating the financial crisis. But “this does not mean, however, that those who dwell in the political realm should try to ‘fix’ the problem by throwing themselves into the monetary mix.”

    “I would advise the Congress to leave well enough alone,” Fisher said.


  • Greece, Goldman Spat Over Deficit Figures

    Greek finance ministry officials can be forgiven if they’re a little touchy when it comes to the accuracy of their budget figures. Massive revisions to deficit estimates by Athens last fall helped trigger the ongoing crisis in Greek finances that is expected by many to end with some form of bailout by the European Union in coming weeks.

    On Wednesday, Goldman Sachs sent out a research note, based on December figures from the Greek finance ministry, suggesting that Athens might have to revise up its 2009 deficit from 12.7% of GDP to as high as 16%. Goldman economists spotted what they saw as a EUR6 billion addition to spending in December, taking the deficit for the year up to EUR37.9 billion from less than EUR30 billion previously. “It is a stunning revision to make,” Goldman economists wrote.

    The Greek finance ministry pushed back hard Wednesday, saying it “categorically refutes information circulating today of an alleged revision of the 2009 state budget deficit figures.”

    The data cited by Goldman refer to the “cash” balance, which includes settlement of hospital debts totaling EUR1.2 billion. Other payments, like bank transfers, count toward the public debt but not the deficit.

    The latest figures, Athens said, are “in full compliance with the estimate of the government deficit” established in the 2010 stability program. Economists at J.P. Morgan weighed in on Greece’s side, saying the numbers “do not imply another revision” to the deficit. The monthly cash balance numbers are different from the definition used in European budget rules. And they include the hospital debts that accrued in the past and other payments that may not be part of the 2009 deficit.

    Still, the fact that Greece felt compelled to refute one economic research report is a sign of the times in Europe these days.


  • Strikes, Lockouts Hit Record Low in 2009

    There were just five major strikes or lockouts last year — the lowest number since the Labor Department first started collecting such data in 1947.

    The five lockouts or strikes last year spanned 13,000 workers and accounted for 124,000 lost workdays, both of which were also lows for the series, the Labor Department said Wednesday. In 2008 there were 15 such incidents that idled 72,000 workers for 1.95 million days lost.

    Prior to 2009, the lowest number of strikes and lockouts was 14 in 2003.

    That doesn’t necessarily mean there were fewer strikes, though. The Labor Department’s data track strikes and lockouts that involved 1,000 or more workers. But there are many labor unions that consist of fewer than 1,000 employees, said Kate Bronfenbrenner, a labor expert at Cornell University.

    “We have increasingly smaller workplaces in the U.S.,” Ms. Bronfenbrenner said. “That data is not capturing where the strikes are.”

    Over the years union organization has spread to service-sector fields that aren’t likely to include 1,000 or more people, such as unions among health-care professionals, janitors and security guards.

    Other factors, such as a poor economy and a decline in private-sector union membership, may also have contributed to the drop in strikes and lockouts. Union membership among private-sector employees declined 10% last year as overall employment fell. Membership rose slightly among public employees.


  • Snow Likely to Make Mess of Jobs Reports

    The snowstorm that’s keeping people from Washington D.C. to Gary, Ind. hemmed in at home could make a mess of the February employment report.

    Employment reports won’t be as pretty a picture. (Associated Press)

    The storm has hit during the week that the Labor Department’s Bureau of Labor Statistics takes its monthly snapshot of employment among households and employers nationwide. Since the storm has kept a large number of people from work, it could push up the unemployment rate, and lower the count of how many people are working.

    The Labor Department says it won’t start getting a sense of what the snowstorm will do to the jobs numbers until next week when the data starts coming in. When the jobs report comes out on March 5, a Labor Department spokesman says it will likely include a comment on the snow’s effect.

    Looking at what large snowstorms in 1994, 1996 and 2007 did to the jobs count, Deutsche Bank economist Joe Lavorgna reckons that the payroll count could fall by 90,000 workers. As a result, he estimates that there will be 35,000 jobs added in February, rather than the 125,000 he had penciled in. If the underlying trend isn’t as positive as Mr. Lavorgna thinks, that could make potential gains into another month of declines.

    While the snow will make the jobs report look worse, it will the Labor Departments weekly initial jobless claims numbers look better. That’s because it will be harder for the newly out of work to slog their way down to the unemployment office. Wall Street forecasters, who use the claims figures to come up with estimates for the monthly payrolls figures, will have an either tougher time than usual, notes Nomura economist Zach Pandl.

    “It’s really going to be a confusing picture,” he says.