Author: WSJ.com: Real Time Economics

President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein in Excesses and Protect Taxpayers

WASHINGTON, DC- President Obama joined Paul Volcker, former chairman of the Federal Reserve; Bill Donaldson, former chairman of the Securities and Exchange Commission; Congressman Barney Frank, House Financial Services Chairman; Senator Chris Dodd, Chairman of the Banking Committee and the President’s economic team to call for new restrictions on the size and scope of banks and other financial institutions to rein in excessive risk taking and to protect taxpayers.

The President’s proposal would strengthen the comprehensive financial reform package that is already moving through Congress.

“While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse,” said President Barack Obama. “My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.”

The proposal would:

1. Limit the Scope-The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit. .

2. Limit the Size- The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

In the coming weeks, the President will continue to work closely with Chairman Dodd and others to craft a strong, comprehensive financial reform bill that puts in place common sense rules of the road and robust safeguards for the benefit of consumers, closes loopholes, and ends the mentality of “Too Big to Fail.” Chairman Barney Frank’s financial reform legislation, which passed the House in December, laid the groundwork for this policy by authorizing regulators to restrict or prohibit large firms from engaging in excessively risky activities.

As part of the previously announced reform program, the proposals announced today will help put an end to the risky practices that contributed significantly to the financial crisis.

Warren Buffett tells CNBC’s Becky Quick:

Buffett

QUICK: Ben Bernanke is looking for this reconfirmation. Should he be reconfirmed?

BUFFETT: If I could vote twice, I would. He should be, I mean, he did a magnificent job over this period. Now, everybody can do it somewhat better. We could sit here and armchair quarterback him, but when I look back at particularly September and October of 2008, he took some extraordinary actions that, if they hadn’t been taken, willingness to act like that, and even stretch his authority some. But he did what you do, and we talked about it being an economic Pearl Harbor, he did what should have been done in response to that Pearl Harbor. And I think he’s done a stellar job.

QUICK: What happens if he’s not reconfirmed? What’s at risk?

BUFFETT: Well, just tell me a day ahead of time so I can sell some stocks. (Laughs.)

The White House’s plan on Thursday to propose stricter limits on the size and trading activities of big banks is only the latest in a long list of curbs or proposed limits on Wall Street from Washington in the last year. Here are some other examples.

1) Jan. 14, 2010 — The White House proposes that large financial companies pay a fee to repay any taxpayer losses from the Troubled Asset Relief Program.

2) Dec. 16, 2009 — Sens. Maria Cantwell (D., Wash.) and John McCain (R., Ariz.) propose reinstating the Depression-era Glass Steagall law, which would build firewalls between commercial and investment banking at U.S. banks. That law was repealed in 1999.

3) Dec. 11, 2009 — The House of Representatives passes a bill that would require large financial companies to finance a $150 billion fund to pay for future failures of large financial companies. The bill would also require large banks to face tougher consumer protection rules, pay more in fees, and the government would have the power to break up large banks if they posed a threat to the broader economy.

4) Dec. 6, 2009 — President Obama slams Wall Street in 60 Minutes interview. “I did not run for office to be helping out a bunch of fat cat bankers.”

5) Oct. 22, 2009 — The Federal Reserve proposes new standards for incentive pay at banks, and pledges to conduct more scrutiny of the pay plans at the countries largest banks.

6) May 22, 2009 — The Federal Deposit Insurance Corp. imposes a new policy that forced large banks to pay higher fees for deposit insurance.

7) May 7, 2009 — Federal regulators publish results of stress tests into the country’s largest banks, despite the objections of many banks and even some government officials. The results find that 10 banks need a bigger capital cushion to continue lending in a stressed banking environment.

8) Jan. 17, 2009 — The White House proposes new rules for all financial companies, including the requirement that large national banks face scrutiny from state regulators for consumer protection rules.

Many people will be watching (some, perhaps, nervously) as the Senate votes on an amendment Thursday afternoon that would essentially shut down the Troubled Asset Relief Program.

The amendment, authored by Sen. John Thune (R., S.D.) would end Treasury’s ability to spend unobligated TARP funds immediately and would also lower the national debt ceiling to correspond to any repaid TARP assistance after the date of enactment. Many Republicans are expected to support the amendment, which lawmakers are trying to add to a broader bill that would raise the debt limit. It’s unclear how many Democrats might sign on as well.

A roundup of economic news from around the Web.

• Jobs: Paul Krugman laments that a jobs-creation tax credit was never implemented. ” CBO gives pretty high marks to a job-creation tax credit, which is something a number of people, especially at EPI, have been calling for for a while. I endorsed the idea a couple of months ago, believing that it was one of the few measures Congress might pass that could actually have a noticeable impact on employment at relatively low budget cost. But the idea was never taken up, and my understanding is that this was due to skepticism on the part of those SAOs. Now maybe they were right — but CBO disagrees. And given where we are now, shouldn’t the White House have tried to do something about jobs?”
• Globalization: On voxeu, Ashoka Mody looks at which countries did best in the financial crisis. ” Virtually no country was untouched by the crisis. But which countries saw the sharpest declines in GDP – and why? This column shows that those with higher growth rates before the crisis fell harder while relatively closed economies were somewhat insulated. In contrast, the relationship between current account deficits and the decline in growth rates is fuzzier.”
• John Taylor: Big Think interviews economist John Taylor. “I don’t think quantitative easing at this point would effectively smooth the recovery. I think right now, based on historical experience, the interest rate is about where it is, it’s not that we don’t need a lot of quantitative easing. We’ve had some and I think the job of the Fed now is to bring it back. They’re talking about doing that, which is good. But I think, for me, the most important thing now for policy to have a good recover is to reduce this tremendous amount of uncertainty that exists with both monetary policy and fiscal policy and the uncertainty for monetary policy is, we don’t know how rapidly the quantitative easing will be reversed. We don’t know what’s going to happen with interest rates. There is a lot of questions there. So I’d say, get back to the things that were working during the great moderation period, the ’80’s and ’90’s primarily, and that means letting interest rates rise appropriately and reducing the amount of quantitative easing; getting back to where it was through most of policy of the ’80’s and ’90’s.”

Compiled by Phil Izzo

Originally posted on China Real Time Report.

China reported continued rapid economic growth in the fourth quarter of 2009, but also a pickup in consumer-price inflation to its fastest rate in the year. That’s heightening the debate over the next steps the government should take. Economists weigh in below:

“The time for stimulus is over, the time for tightening has begun. …Another strong performance from fixed asset investment, steady growth in retail sales, and a surprise turnaround in exports in December mean that the Chinese economy is now firing on all cylinders. At the same time, CPI data for December shows inflationary pressure returning, earlier than expected, to the Chinese economy.” -Tom Orlik, Stone & McCarthy Research Associates

“Growth strengthened from 6.2% year-on-year in Q1 to 10.7% year-on-year in Q4. The sting in the tail is that inflation has tracked that growth profile higher over the course of the year. …After a year of sequential producer and consumer price deflation, both the CPI and PPI moved into positive territory in December. Looking through the base effect, price pressures appear to have a reasonable degree of autonomous momentum, both increasing by 1.0% month on month. It is difficult to identify factors that will slow the pace of increase in prices over the course of 2010.” –Glenn Maguire, Societe Generale

“We remain sanguine about general price inflation. Headline CPI did jump last month, to 1.9% from 0.6% in November and -0.5% in October. But the important factors are that 92% of the CPI increase was from food, and much of the food increase was due to a big year-on-year jump in vegetable prices, which we think was due to the base effect and short-term weather issues. We continue to expect CPI to average 3% for the year, and we don’t expect Beijing to panic about CPI. Remember that rate hikes won’t bring down the cost of veggies.” –Andy Rothman, CLSA

“Today’s data [is] suggesting that tighter policy is just around the corner as Beijing seeks to prevent the economy from overheating. Current policy settings were put in place to deal with the emergency conditions facing China in early 2009, but the strong recovery shown in the data clearly point to a winding back of stimulus. We have already seen some initial steps in the direction of tighter policy, but higher policy rates and a stronger currency will also be part of the package…an early tap on the brakes would be better than allowing the economy to accelerate too quickly, forcing Beijing to slam on the brakes at a later date.” –Brian Jackson, Royal Bank of Canada

“The current rapid increase in prices will exacerbate inflation expectations and in turn boost actual price levels. …The actual rate of inflation is close to 2% and will continue to rise in the future. Economic growth continues to speed up while industrial output growth continues to rebound and export growth exceeds expectation. Continued economic recovery and higher than expected inflation will result in an earlier policy exit.” Zhu Jianfang and Hu Yifan, Citic Securities

“Our relatively benign forecast of 2010 CPI inflation of 3.5% rests on the assumption that the government will tighten policy, especially monetary policy, decisively in time. Recent policy measures…might have created an impression that financial conditions have been tightened in January. However, it is important to realize that these measures only came after an extraordinarily large amount of loans have been made in a very short time span in the first two weeks of January. In sequential terms, financial conditions have been loosened sharply at the beginning of 2010 compared to 2H2009 instead of being tightened. Our main concern for policy is insufficient tightening instead of over-tightening.” -Yu Song & Helen Qiao, Goldman Sachs

“The GDP figure was accompanied by rising inflation…Officials will thus be rightly concerned that household inflation expectations, which are not well-anchored, are now worsening. Rapid credit growth in the first few weeks of January will only add to inflationary concerns. Fears of a housing bubble also persist as tightening measures introduced last year are not especially onerous. The risk is that the State Council will not tighten sufficiently raising the risks of overheating or a bubble in 2011.” –Ben Simpefendorfer, Royal Bank of Scotland

The White House said President Barack Obama won’t abandon his desire to see a new consumer financial protection agency included in regulatory overhaul legislation, dousing speculation that the proposal may be watered down or eliminated.

President Barack Obama (Associated Press)

“Financial reform has to include a consumer protection agency,” White House spokesman Robert Gibbs said Wednesday.

The Wall Street Journal had reported last week that Senate Banking Committee Chairman Christopher Dodd (D., Conn.) may scrap the idea of creating a separate Consumer Financial Protection Agency as part of a sweeping financial-sector overhaul bill. Dodd has approached Republicans about possibly beefing up consumer protections within an existing agency and ditching the idea of a new agency, which is fiercely opposed by the banking industry.

Gibbs said Obama won’t back down.

“People on Capitol Hill need to understand, that the president is not going to compromise because lobbyists tell somebody that we shouldn’t have an agency that protects consumers,” the spokesman said. “That’s something the president’s not willing to give up. ”

Speculation about the fate of the regulatory revamp intensified after Democrats lost their 60-seat super majority in the Senate on Tuesday, when Republican Scott Brown won a special election to replace the late Edward Kennedy.

Dodd and Obama met Tuesday at the White House. Gibbs said the president made his stance on the consumer agency clear.

“Clearly financial reform is going to take and play a bigger role in what happens legislatively in the next several months, ensuring that we have honest rules of the road going forward; that we’re not rewarding excessive risk; that we have an independent agency that protects and looks after consumers,” Gibbs said.

When the head of one of New York’s top unions was named chairman of the Federal Reserve Bank of New York’s board last year, more than a few observers’ jaws hit the floor.

After all, what was the head of a union, a man who represents everyday working stiffs, doing at the helm of the regional central bank most entwined with Wall Street? Never mind that the board of any Fed regional bank is not involved in any meaningful level of policy making. New York AFL-CIO President Denis Hughes’s appointment was a head-scratcher that led to conspiracy theories.

Now in yet another ironic twist: At a time of intense populist anger at the central bank, Hughes is one of its strongest defenders. Congress, angered by the Fed’s inability to spot the financial crisis and by its subsequent bailout efforts, is looking to clip policy makers’ wings in big ways. In response, the labor leader laments how poorly the central bank is understood and says he fears for the institution’s future.

Hughes, who spoke Wednesday at a Partnership for New York City event that also featured an address by New York Fed chief William Dudley, admitted his current perch is a “schizophrenic role.” The problem, as he sees it, is that many in the general public believe the Fed “does not work for them” and is instead a stooge for the financial sector.

Given the extraordinary interventions and bailouts the Fed has been involved in since late 2007, it’s not a crazy thought, the official allowed. But Hughes says by helping create stability on Wall Street, the Fed has in fact been “a system that’s worked very well” for the nation as a whole.

As congressional knives come out for the Fed, Hughes says “there is a real danger” that a misguided Congress, supported by an angry public and uninformed news media, will do something that “will change the Federal Reserve system in a way that will make it inefficient” in its role of creating stability. It’s possible that by the time Congress is done, the Fed could even be “irrelevant,” Hughes said.

Hughes’s appreciation of the Fed followed Dudley’s speech, in which the New York Fed president defended the central bank’s conduct during the financial crisis. Dudley also warned that congressional efforts that could see monetary policy making audited and banking supervisory activities moved out of the central bank could threaten the Fed’s ability to keep inflation low and growth moving higher.

Other participants in Wednesday’s event offered similar sentiments. From former Fed governor and current TIAA-CREF leader Roger Ferguson to insurer Metlife head C. Robert Henrikson and Sullivan & Cromwell’s H. Rodgin Cohen, all agreed that a paramount threat to the future of the financial system is the possibility that the Fed could be stripped of important and valuable powers by those who don’t see the good the institution can do.

Right now, the Fed’s fate is undecided. Financial reform efforts are shrouded in uncertainty. The vigor to pass auditing legislation has been surprising strong. The new year could prove a defining chapter in the Fed’s nearly century-long history.

Federal Reserve Bank of New York President William Dudley flagged the uneven recovery of the financial system Wednesday, in comments that also said central bank policy was aimed at trying to help that healing process continue.

“The capital markets have recovered” but “the banking system is still under quite a bit of strain,” Dudley said. For banks, “it is a healing process, it will take some time,” and that’s “one of the reasons why we have our monetary policy setting where it is,” Dudley said.

The official was speaking as part of a discussion held by Partnership for New York City. His comments followed formal remarks in which the policy maker argued attempts by Congress to audit the Fed’s monetary policy decisions and take away regulatory powers could ultimately make the institution less effective at helping the economy.

Dudley’s post speech remarks — he’s also vice chair of the interest rate-setting Federal Open Market Committee — were wide ranging.

The official said Fed efforts to bring Wall Street compensation in line with banks’ risk profiles were still ongoing. He noted it was “very unfair” to see so many bankers being well paid given high unemployment and bank bailouts. But the official added “there’s been a lot of movement in the right direction” and over time it appears likely compensation levels will be more appropriate.

Dudley also said he is cautious about attempts to separate banks from some of their riskier activities, and worried that putting certain activities outside the financial safety net will only push financial firms to go there, to avoid oversight.

What’s more, “I’d be careful to say hedge funds should be excluded from oversight” as they now are, Dudley said. While hedge funds were not the drivers of the current financial crisis “there’s no reason why they might not cause problems in the future,” which argues for oversight now.

Dudley also said when it comes to dealing with asset market bubbles that can cause greater economic stress, he’s less concerned about the difficult process of spotting trouble, than finding a way to deal with the problem.

The official said he’d like to see the development of tools that could address excessive leverage, or borrowing by participants in the financial sector. Leverage amplifies market up and downturns, and the reduction of this borrowing is a big reason explaining why financial markets have been under such stress.

For the past couple of years, the International Monetary Fund has been thumping its chest that it has changed and is ready to take the lead on global economic issues.

A report by the IMF’s independent evaluation office, which is charged with critiquing the institution, suggests the IMF still has a long way to go. Only a minority of officials in the richest, most powerful countries, found the IMF’s analyses “compelling,” the evaluation group found.

IMF staffers working on rich countries were also frustrated. When analyses were critical, the rich countries “discouraged” IMF staffers from talking to the press, according to the evaluation group. “A desire (reinforced by [IMF] management) to avoid displeasing the authorities, was a fact of life for staff working on the advanced countries, and a challenge to the independence of their analysis,” the reports said.

Government officials of some the world’s poorest countries had a higher opinion of the IMF’s work, meanwhile, with at least 70% of the officials surveyed rated their interactions with the IMF as “effective or very effective,” the report said.

But in the poorest countries, the legacy of heavy-handed IMF loan programs, when the IMF pushed borrowers to privatize and slash spending, continued to tar the Fund’s reputation. Government officials in some of those countries complained that the IMF continued to be inflexible and had “bitter complaints about Fund interactions, many of which related to major program interruptions” or delays in debt relief, the evaluation group said.

The report was based on surveys sent to government officials and social- action groups in 30 wealthy countries, including the U.S., Germany, Japan, Britain, and 77 poor nations, including Bolivia, Nigeria and Vietnam. IMF staffers working on these countries were also sampled

The surveys, along with some interviewing, largely took place between November 2008 and April 2009, the evaluation group said, and covered IMF programs and advice made between 2001 and 2008, with “special attention” on 2007 and 2008

Since the interviews were completed the IMF was assigned to analyze whether the economic policies of the Group of 20 wealthy and large developing nations would produce sustainable global growth. Given the IMF’s weakness in handling big wealthy countries, that could be a problem. John Hicklin, a spokesman for the evaluation group, said that the lesson for the IMF is that it must “rise to the occasion” and “upgrade the international dimension of its work.”

In a statement, IMF Managing Director Dominique Strauss-Kahn said that “promoting candor in [IMF] staff’s assessments is critical.”

With the poor countries, the IMF is making headway, the reports found. Officials from two countries said the IMF had been aided them in renegotiating debt, while a third said the IMF had been “extremely helpful” in getting nations to resume aid, the evaluation group reported.

About half of the officials surveyed in the poor nations said the IMF’s willingness to consider different approaches had improved over the past two years. Most of the specific complaints, said the evaluation group, involved IMF loan programs or policies between 2002 and 2004.

A roundup of economic news from around the Web.

• Budget Panel Jackie Calmes writes in the New York Times that history suggests a proposed commission on the budget should be viewed with skepticism. “Washington’s shelves are full of unheeded commission reports gathering dust. Yet after more than a quarter-century, the supposed success of the 1982-83 Greenspan Commission to save Social Security continues to inspire calls for bipartisan panels. But just in time for the latest debate, the unpublished posthumous memoir of a central figure on the Greenspan panel, Robert M. Ball, a former Social Security commissioner, has emerged to challenge the conventional wisdom about its achievement. In a sprightly account promoted by former staff members from both parties, Mr. Ball calls the Greenspan Commission a failure. As he tells it, only a willingness to compromise by the two principal antagonists of the time — Ronald Reagan, the Republican president, and Representative Thomas P. O’Neill, the Democratic House speaker — made it possible for Mr. Ball and a few others to salvage from the deadlocked panel a deal that raised payroll taxes and trimmed benefits enough to keep Social Security solvent.”
• Inflation Concerns: On Econbrowser, Jim Hamiltion talks about long-term inflation fears. “I think the separation between monetary and fiscal policy has become increasingly blurred. I maintain that the keys to preventing a resurgence of inflation in the U.S. are (1) credible and responsible commitment from Congress that it is not going to allow the debt-to-GDP ratio to continue to balloon over the next decade, and (2) a return of the Federal Reserve to a primary focus on controlling the money supply rather than trying to target particular yield spreads.”
• Greek Tragedy: Martin Wolf of the Financial Times looks at the complications from Greece’s struggles. “Given the horrendous difficulty of all alternatives, I am sure the effort will be made to tough it out for as long as possible. That will also be the case elsewhere. All will be forced to accept lengthy recessions. But in the absence of either strong demand elsewhere in the eurozone or a weaker exchange rate, both of which depend on decisions by the European Central Bank, the competitive disinflation route to prosperity seems highly likely to fail. Some countries may find themselves stuck in long-term stagnation. Meanwhile, the eurozone as a whole, having lost its erstwhile internal demand engines, must now hope for faster growth of net exports. So do countries hit by the financial shock, such as the U.K. and U.S.. So, too, does recession-hit Japan. So, not least, does China. Either the rest of the world has a spending binge, or these countries — which make up 70 per cent of the world economy — are going to be disappointed.”

Compiled by Phil Izzo

By Nicholas Winning

David Blanchflower, a consistently dovish former member of the Bank of England’s Monetary Policy Committee, or MPC, says the rate-setting body missed the U.K. recession entirely and should be disbanded.

“It is now my view that the MPC’s days are numbered, certainly in terms of its remit and probably its membership,” he wrote in a column published in current affairs magazine the New Statesman Tuesday. “After the [general] election we are going to have to reconsider who sets monetary policy.”

Blanchflower said inflation targeting didn’t protect the U.K. from the greatest economic shock of our lifetimes. The MPC’s focus on the consumer price index as a measure of inflation also excluded the major variable that was increasing a lot – house prices, he said.

“The MPC missed the recession entirely,” he said. “The recession was much deeper because of their failure to act. The MPC was asleep at the wheel. Its inability to communicate adequately what quantitative easing is supposed to do suggests it has learned little.”

Blanchflower said targeting CPI alone no longer has credibility. The U.K. should have a system closer to the U.S. Federal Reserve’s broader remit which takes into account employment, stable prices, and moderate long-term interest rates, he said. “The last thing we need is for interest rates to rise any time soon,” Blanchflower said. “Inflation is going to jump in the short term because of the VAT increase, but will then fall back sharply.”

Official data released Tuesday showed the U.K.’s annual inflation rate, as measured by the consumer price index, posted its largest jump on record to 2.9% in December from 1.9% in November due to a cut in value-added tax, a drop in oil prices, and pre-Christmas discounting in stores in the final month of 2008.

Blanchflower is no stranger to MPC or BOE criticism. In December, he accused Governor Mervyn King of keeping “vital” information from him at the height of the financial crisis, in the aftermath of the collapse of Lehman Brothers. Earlier, he said and the three other external members of the MPC weren’t kept in the loop during the crisis. “We were not told what was happening to British banks such as Northern Rock, Royal Bank of Scotland, Lloyds, Bradford & Bingley or Alliance & Leicester. Or to U.S. banks such as Lehman Brothers or Bear Stearns.”

The suburbs are home to America’s largest and fastest growing poor population, according to a report released today by the Brookings Institution.

The increase reflects continued population growth in the suburbs in addition to the aftermath of the housing bust and the longstanding woes in the manufacturing sector.

The country’s largest metro areas saw their poor population grow by 25% between 2000 and 2008, according to the report, faster than primary cities and well above the poverty growth in small cities and rural areas. “As a result, by 2008 large suburbs were home to 1.5 million more poor than their primary cities and housed almost one-third of the nation’s poor overall,” the report says.

Part of this is simple math. The nation’s suburban population grew 12.5% between 2000 and 2008, compared with 3.9% in primary cities and 2.4% in rural America. Meantime, over the past decade cities have attracted young professionals and empty nesters that tend to be wealthier and whiter.

Suburbs and so-called “exurbs” — outer lying areas that sit beyond the suburbs but have lots of urban-bound commuters — also have a large manufacturing presence and were ground zero for the housing boom and subsequent bust. This Wall Street Journal story looked at a block in Palmdale, Calif. — an outer lying city in the Los Angeles area — where people are defaulting on mortgages and then renting similar homes for less money.

From the Brookings report:

• Midwestern cities and suburbs experienced by far the largest poverty rate increases over the decade. Led by increasing poverty in auto manufacturing metro areas — like Grand Rapids and Youngstown — Midwestern city and suburban poverty rates climbed 3.0 and 2.2 percentage points, respectively. At the same time, Northeastern metros — led by New York and Worcester — actually saw poverty rates in their primary cities decline, while collectively their suburbs experienced a slight increase.
• In 2008, 91.6 million people — more than 30% of the nation’s population –fell below 200% of the federal poverty level. More individuals lived in families with incomes between 100% and 200% of poverty line (52.5 million) than below the poverty line (39.1 million) in 2008. Between 2000 and 2008, large suburbs saw the fastest growing low-income populations across community types and the greatest uptick in the share of the population living under 200% of poverty.
• Western cities and Florida suburbs were among the first to see the effects of the “Great Recession” translate into significant increases in poverty between 2007 and 2008. Sun Belt metro areas hit hardest by the collapse of the housing market saw significant gains in poverty between 2007 and 2008, with suburban increases clustered in Florida metro areas — like Miami, Tampa, and Palm Bay — and city poverty increases most prevalent in Western metro areas — like Los Angeles, Riverside, and Phoenix. Based on increases in unemployment over the past year, Sun Belt metro areas are also likely to experience the largest increases in poverty in 2009.

Metro Areas with Significant Change in the Share of Suburban Poor, 2000 to 2008

Source: Brookings Institution

For many years now, emerging economies like China and India have been able to draw business from the developed world by promising multinational companies cheap labor. A new report by the Conference Board shows the competitive threat is taking on a new dimension: Workers in emerging markets aren’t only cheap, their productivity is growing by leaps and bounds.

The Conference Board compared productivity trends across 111 countries and found an upsurge in output per worker in developing economies while developed country productivity slows. Between 2005 and 2009, for instance, the research group finds output per worker in emerging economies grew at a 5.9% annual rate. In the U.S. it grew at a 1.5% annual rate during the same period, while it grew 0.8% in Japan and 0.5% in the Euro area. In each of the developed markets, worker productivity slowed while it sped up in developing economies.

Emerging economies are charging ahead on one especially important measure of worker productivity called “total factor productivity,” which teases out productivity improvements that come from firms investing in new technology or hiring better-educated workers. What’s left is a pure measure of workers and firms learning to operate more efficiently. In emerging economies, TFP rose at an annual rate of 2.4% from 2005 to 2008, compared to 0.2% in advanced economies.

Bart van Ark, the Conference Board’s chief economist, sees two reasons for the productivity gains. First, he says, poorly run firms in emerging markets are shutting down and being replaced by more efficient firms. Second, many firms are opening up with capacity to produce on a large scale and as these economies grow swiftly firms are reaping benefits from these “economies of scale.”

“This raises their competitive strength, as it helps these countries to match higher costs, such as rising wages, by their ability to lower costs and prices through efficiency gains,” the report concludes.

Last year was an especially difficult one for developed economies, especially Europe. Output per worker hour grew at a much faster rate in the U.S. (2.5%) than in Europe (-1.0), the Conference Board estimates. But it came at the expense of huge job losses in the U.S. Slow productivity growth in Europe in 2009 portends an especially slow jobs recovery in 2010. Mr. van Ark expects the U.S. job rebound to be a long, slog too.

Click here for more data from the Conference Board.

In a bid to soften congressional criticism, Federal Reserve Chairman Ben Bernanke on Monday invited the Government Accountability Office to audit the central bank’s involvement in the U.S. rescue of American International Group Inc.

In a letter to Acting Comptroller General Gene Dodaro, Bernanke said the Fed would provide “all records and personnel necessary” for the auditing arm of Congress to review the rescue.

“To afford the public the most complete possible understanding of our decisions and actions in this matter, and to provide a comprehensive response to questions that have been raised by members of Congress, the Federal Reserve would welcome a full review by GAO of all aspects of our involvement in the extension of credit to AIG,” Bernanke wrote.

The letter comes as the Fed faces increasing heat on Capitol Hill from its actions involving the insurer since the September 2008 bailout. A House committee plans to hold a hearing next week on AIG’s payments of more than $62 billion to trading partners — using government funds — in the months after the firm’s collapse, even though those counterparties would’ve received far less if AIG had gone bankrupt. Fed officials say they had little leverage in the matter.

The invitation from Bernanke does not change existing policies about congressional reviews of the Fed. The GAO already has authority to review the central bank’s involvement in the AIG bailout, along with other company-specific rescues by the Fed and Treasury Department.

Bernanke and other Fed officials in recent months have said they welcome reviews of company-specific rescues and the financial integrity of its lending programs. But they’re fighting legislation that would broaden GAO authority to review the Fed’s monetary policy and internal deliberations about setting interest rates.

The GAO released a report last September, a year after the Fed-led rescue, suggesting it was too early to tell whether AIG could repay the government, which has provided $182 billion in support for the company.

Read previous GAO reports on AIG.

Originally posted on Washington Wire

Sen. George Voinovich, the retiring Ohio Republican, will be meeting with President Barack Obama this morning with a single mission: To talk the president out of an executive order creating a commission to tackle the budget deficit.

The commission is expected to be the centerpiece of a fiscal 2011 budget blueprint, out Feb. 1, that will be swimming in red ink. Voinovich, along with more than a dozen other senators, wants to create the commission with legislation, not the stroke of a presidential pen. That way, the commission’s mandate would have the force of law, and that mandate can force an up-or-down vote on the commission’s recommendations in Congress. An executive order cannot force a vote, and therefore, the senator believes, will be toothless.

“He’s going to drive home the need to do this legislatively,” according to a source close to Voinovich.

It will be a tough sell. The White House is convinced such a commission cannot get through Congress. House Speaker Nancy Pelosi (D, Calif.), House Appropriations Committee Chairman David Obey (D, Wis.) and House Ways and Means Chairman Charles Rangel (D, N.Y.) have adamantly opposed what they see as yielding congressional authority to an appointed body. And Senate Minority Leader Mitch McConnell (R, Ky.) has begun expressing qualms about the commission legislation that Voinovich backs, written by Senate Budget Committee Chairman Kent Conrad (D, N.D.) and Sen. Judd Gregg (R, N.H.).

A roundup of economic news from around the Web.

• Fed Regulation: Felix Salmon makes the case for why the Fed should regulate banks. “Anybody else given broad regulatory authority — and someone needs to have it — would need to work hand-in-glove with the Fed in any event, especially when it comes to questions such as the Fed paying interest on reserves. And there’s no particular architectural reason not to give the Fed those powers — objection to the idea comes overwhelmingly from the fact that this Fed has made so many mistakes that people don’t trust it to do the right thing in future. But the fact is that if you try to build a bank regulator from scratch, it will take decades to find its feet and learn from its mistakes. The Fed, with any luck, has reached that point now. Let’s give it regulatory authority, and cross our fingers it uses them wisely.”
• Green China: On voxeu, Matthew E. Kahn and Siqi Zheng look at China’s environmental influence. “China’s economic growth has profound environmental implications. This column estimates the household carbon emissions of China’s major cities. Even in China’s most polluting city, per household emissions are just one-fifth of those in San Diego, the greenest city in the U.S.”
• Helping Haiti: Tyler Cowen of Marginal Revolution offers way to help Haiti. “1. Repeal tariffs on Haitian sugar and lower remaining restrictions on Haitian garment imports. 2. Give expedited approval, in terms of food safety rules, to the importation of Haitian mangoes. 3. Set up a Term Loan Auction Facility for Haitians, or alternatively apply quantitative easing to the market for Haitian mud cakes. It’s worked for every other macro problem. Alternatively, get out the helicopter, I have heard worse ideas. Stabilize Haitian nominal GDP! 4. Find someone from the government to give a radio address. 5. In Port-Au-Prince and environs, define squatter’s rights. 6. Invite Haitians to occupy the empty homes in the run-down parts of New Orleans. 7. Set up nearby charter cities which would welcome Haitian migrants. 8. Redefine the mission of Guantanamo to help Haiti.”

Compiled by Phil Izzo

The spike in U.K. annual inflation in December highlights the risk that the huge amount of spare capacity in the economy will have a smaller damping effect on prices than Bank of England policy makers expect.

Official data Tuesday showed that annual inflation jumped to 2.9% in December from only 1.9% in November, marking the largest increase since the official data series began in 1997. That was well above the BOE’s 2.0% target and beat analyst expectations that it would be 2.5%.

While the acceleration in inflation was fueled by several special factors, analysts said the figures raised the likelihood that the BOE won’t extend its quantitative easing policy of buying assets with freshly created central bank money when it reaches its £200 billion target in February.

“Today’s inflation number provides a rare glimpse at inflation undistorted by sales tax changes and shows that inflation has been more persistent in the UK than expected given the scale of economic downturn,” said David Page, U.K. economist at Investec Securities.

The inflation figures rattled financial markets, sending sterling to a fresh four-month peak against the euro, and pushing up yields on UK government bonds. It also spurred U.K. Prime Minister Gordon Brown to stress that the jump had been expected and was likely to be temporary.

“I don’t think we should read too much into one month of figures,” Mr. Brown said at a regular press conference. “Generally, Britain has had over the last 12 to 13 years a low inflation environment that has made possible low interest rates.”

While the figure was significantly higher than analysts had expected, they said the upward move was likely to be temporary, with the large amount of spare capacity in the economy set to damp pricing power, meaning that monetary policy should remain loose for some time.

The ONS said that reflected the government’s temporary cut in the sales tax in December 2008, to 15% from 17.5%, no longer bearing down on prices, as well as the fact that oil prices and early sales also cooled prices a year earlier.

The BOE has said inflation could rise sharply to above 3.0% early this year, which would force Governor Mervyn King to write an explanatory letter to the government.

While the central bank says it will disregard what it expects to be a temporary upward move, policy makers will be alert to any signs that public inflation expectations are becoming de-anchored or that the spare capacity in the economy isn’t damping pricing power as much as thought.

The latest research from the International Monetary Fund offers some encouraging news on China’s push to lower its extraordinarily high national savings rate and move toward a more consumption-driven economy.

The new paper (http://www.imf.org/external/pubs/cat/longres.cfm?sk=23533.0) by IMF staffers Steven Barnett and Ray Brooks – formerly of the fund’s office in Beijing – offers statistical evidence that the increased government spending on healthcare in recent years does actually encourage Chinese households to consume more. “Higher government health spending seems to reduce the need for precautionary saving and frees up households’ ability to spend on other goods and services,” they write.

The government now is taking a variety of measures (http://online.wsj.com/article/SB126282687863718925.html) to try to boost consumer spending, not all of them welcomed by outside economists. The IMF paper supports a view long expressed by the fund and other international agencies: that rebuilding a social safety net is one of the best ways to encourage a higher level of Chinese consumer spending over the long term. The authors say the healthcare overhaul announced in early 2009 should help boost consumption as well as improve health.

Read more on the Real time China Report blog.

AARP, the association for seniors, poses that question to luminaries and ordinary folk in the new issue of its AARP Bulletin.

Among the answers:

“When my patients go back to talking about how much they hate their mother, rather than how much they hate the government for getting them into this financial mess.” —Carole Lieberman, psychiatrist, Beverly Hills, Calif.

“When my commission is more than I pay my baby-sitter.” —Kelly Brockington, high-end retail saleswoman, New York

“When I no longer count mail-in rebates as income.” —Nancy Lombardo, comedian, New York

“When the car ads on television replace those for depression meds.”—Tom Pryor, director, Small Business Development Center for Enterprise Excellence, Fort Worth, Texas

“When I become first in line at the stroke of noon at our local thrift shop and the pickin’s are more like they were two years ago. Ohhhh, we used to get some gooood stuff.” —Joy Cadden, handbag designer, Millville, Del.

How will you know the recession is really over?