Author: WSJ.com: Real Time Economics

The Census Bureau added 48,000 employees in March, but the number was smaller than expected and there are much greater numbers on the horizon.

The 48,000 total was double the combined total for the previous two month, according to the Labor Department, but so far the government has only added a small fraction of the more than one million workers who work on the census.

If you look past trends, the Census hiring peaks in the second quarter of the census year. This census will be bigger than any other, and researchers are already fretting that the surplus of vacant housing wrought by the depressed real estate market will require more and more hours from part-time census workers.

The 48,000 increase last month was less than the March hiring during the previous two censuses. In March 1990 the Census added 53,000 jobs; the Census hired 95,000 in March 2000. Since 1990 the largest month-over-month growth in Census workers was the 348,000 hired in May 2000 (225,000 were shed the following month).

Debt from Fannie Mae and Freddie Mac shouldn’t be considered sovereign debt, but there should be no doubt about the U.S. government’s support for the two firms, Treasury Secretary Timothy Geithner said in a recent letter to a U.S. House lawmaker.

Treasury Secretary Timothy Geithner (Getty Images)

Geithner, responding to a letter from to Rep. Scott Garrett (R., N.J.), said debt from the two government-sponsored enterprises isn’t the same as U.S. Treasurys, but that support for the two firms “is crucial in helping to stabilize the housing market and the overall economy. The Treasury’s actions regarding the two firms, which have been under government control since September 2008, “should leave no uncertainty about Treasury’s commitment to support Fannie Mae and Freddie Mac,” Geithner wrote.

“The Administration will take care not to pursue policies or reforms in a way that would threaten to disrupt the function or liquidity of these securities or the ability of the GSEs to honor their obligations,” Geithner wrote.

The question of what to do with the two firms has been a growing issue in Washington, where the Obama administration and Congress are already focused on overhauling regulation of U.S. financial markets. Geithner and administration officials hope to move regulatory overhaul legislation through Congress before tackling the future of the two mortgage finance firms, though the administration will begin seeking public comments on the housing finance system beginning April 15.

Economists and others weigh in on the strong jump in jobs and sideways move in the unemployment rate.

• The most salient insight to be gleaned from these data is the net gain excluding weather and census effects, and that is positive. Despite the distortions in these data, the labor market definitely improved in March, and the trend in the payroll statistics is decidedly positive. The March nonfarm payroll data was slightly weaker than expected and the revision to the prior two months, January and February, was positive. –Ray Stone, Stone & McCarthy
• Today’s employment report is, in our opinion, quite good, although not without its drawbacks. Income growth continues to be lackluster, complicating the spending picture in the immediate future. However, should job growth prove sustainable, incomes will catch up to spending patterns, thus validating the improvement we’ve seen in the first quarter. Simultaneously, it is quite worrisome to see the ranks of the long-term unemployed swell further. There is concern surrounding the skillset of these individuals and the longer they are out of the workforce, the further their skills erode. However, this action shouldn’t be entirely surprising given the fallout in the construction, manufacturing, housing and financial sectors. Indeed, nearly 52% of people are classified as “not on temporary layoff.” That is to say, more than half the unemployed are not getting their jobs back. –Dan Greenhaus, Miller Tabak
• Many of the jobs created were temporary: temporary workers represented 40,000 jobs, and federal government temporary workers for the Census increased by 48,000. Although the government Census jobs are the result of a unique situation, private sector temporary workers are some of the first hires as an economy begins to see improvement in its employment. –Jason Schenker, Prestige Economics
• The lower-than-expected headline gain in March was due to far fewer census workers being hired (48,000). So far this year, just 72,000 census workers have been added to the government’s payroll (versus 139,000 over the comparable period in 2000). Census hiring typically accelerates sharply in the spring (workers must be hired to go door-to-door, following up with those households that did not return their questionnaires). In total, more than 800,000 temporary census workers could be hired by mid-year (note: most will be off the government’s payroll by October). Just because the hiring didn’t show up in March doesn’t mean it isn’t coming. –Michelle Girard, RBS
• Good Friday is apparently a good release date for the U.S. employment report. The last time, the BLS published the employment report on a Good Friday was in April 2007. Back then, nonfarm payrolls rose another strong 239,000 and the unemployment rate fell to a cyclical low of 4.4%. While the overall economic situation couldn’t be more different this time, today’s employment report is the strongest in more than two years. –Harm Bandholz, Unicredit
• A significant turning point for the labor market. The headline came in a little short of consensus, but there were less Census workers and more private jobs than expected. Hefty upward revisions and solid hours and income details. A weather-related bounce is probably flattering March’s strength but the trend is still unquestionably one of progress. –Jay Feldman, Credit Suisse
• Today’s employment numbers underscore the tepid nature of the recovery. Make no mistake, firms are finally hiring… Still, firms are not yet confident enough to commit to new hires and the amount of hiring is a far cry from what is needed to cut into the problem of long-term unemployment. –Steven Blitz, Majestic Research
• Weaker than expected report, although many of the underlying details were stronger than the headline reading. For example, net upward revisions to Jan/Feb payrolls amounted to 62,000. Also, the add-on from census workers was only 48,000 (vs an expected +100,000). And, the household survey showed another sharp gain in employment which helped to hold the jobless rate to 9.7%. There is no way to make a precise determination of the weather-related influence on the data over the past couple of months, but the evidence — including the massive swing in the “not at work due to bad weather” series (135,000 in March vs 1,031,000 in Feb) and the gyrations in construction employment — suggests that our original estimate of 100,000 is probably close to the mark. –David Greenlaw, Morgan Stanley
• Jobs grew 162,000 in March with important signals of improvement in services (trade/transportation, business services, leisure & hospitality) and manufacturing (up 3 months in a row) sectors. –John Silvia, Wells Fargo
• Particularly encouraging was the increase in hiring in the service sector, which always lags the overall recovery. We attach particular importance to hiring in the trade and transport sector which are leading indicators of a resurgence of growth. Recent manufacturing data strongly suggest that increasing production should stimulate future job growth and three consecutive months of new hiring in the trade and transport sector do provide a useful leading indicator that the economy should see a modest boost in private sector employment going forward. –Joseph Brusuelas, Brusuelas Analytics
• The broader U-6 unemployment rate moved up another tenth of a percentage point to 16.9%, as the ranks of part-time workers who would prefer full-time employment rose last month. Clearly, it will take a long time before the labor market feels normal again, as this figure implies that one in six adults is currently underemployed. – Aaron Smith and Ryan Sweet, Moody’s Economy.com
• Until this month, the most that we could say was that it looked like job growth was about to turn the corner. Now it seems to have done so. But it will be a long slog to bring down the unemployment rate. The unemployment rate was steady at 9.7% this month (rounding down from 9.749%!), but the labor force rose faster than employment. As potential workers see jobs being created, some who had given up will come back into the labor force, slowing the unemployment decline. –Nigel Gault, IHS Global Insight
• The third increase in jobs in the past five months indicates that the labor market has begun to stabilize. The increases were broad-based with 60 percent of the industries hiring. Manufacturing has turned the corner adding 45,000 jobs so far this year. More than 58 percent of the manufacturers have increased employment along with more overtime and hours worked. Temporary employment, a good sign of an improving labor market, continues to increase. –Sung Won Sohn, Smith School of Business and Economics
• While the labor market continues to improve , it is doing so at a relatively slow pace. Moreover, with cost-cutting remaining a key part of many corporate business plans, we continue to believe that sustained private sector job gains will follow a moderate trend rather than prove to be a mirror image of the steep cuts that took place on the downside. –Joshua Shapiro, MFR Inc.

Compiled by Phil Izzo

The government’s March jobs report showed strong gains over recent months. Despite additional census jobs, the report was slightly weaker than expected, but with stock markets closed for Good Friday, the report’s full impact will be more apparent next week.

The U.S. jobless rate was unchanged at 9.7% in March, flat from the previous month, but the government’s broader measure of unemployment ticked up for the second month in a row, rising 0.1 percentage point to 16.9%.

The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Though the rate is still 0.5 percentage point below its high of 17.4% in October, its continuing divergence from the official number (the “U-3″ unemployment measure) indicates the job market has a long way to go before growth in the economy translates into relief for workers.

The 9.7% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things.

The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

A U-6 figure that converges toward the official rate could indicate improving confidence in the labor market and the overall economy. This month pushes convergence even further away.

Even if today’s employment report shows the job market turning around, it’s probably too early for senior executives to feel safe in their corner offices.

This recession has been tougher on top executives than its predecessors, and the pain isn’t necessarily over, says Doug Matthews, president and COO of outplacement and career management firm Right Management.

“The recession has filtered all the way up,” says Mr. Matthews, who has been helping senior executives find new jobs for about 27 years. He estimates he’s seen about 15% more executives at vice-president level or higher lose their jobs over the past year than in the other recessions he’s seen — and those include the whopper of 1982-1983, when the unemployment rate exceeded 10%.

With many companies still struggling to meet the earnings targets they set for senior management, the heads could keep rolling. “Clients are telling us they need to see what first-quarter results look like, and that they may even have to cut further,” says Mr. Matthews.

To be sure, the outlook for senior executives with experience at major companies isn’t all that bad. Outplacement experts say people with demonstrated management skills tend to find jobs at the same or often a higher salary, even in the current economy, though the search can take a while.

That’s not the case for lower-level workers whose skills can’t be transferred to jobs in other industries. “The gap between the highly sought-after talent and those who don’t have the education and the skills is growing much larger,” says Mr. Matthews.

Economists and investors hoping for a big gain in U.S. payrolls tomorrow could be disappointed.

As Real Time Economics has previously noted, there are reasons to expect a surge in jobs when the Labor Department releases its March employment report tomorrow. Indeed, a consensus estimate compiled by Dow Jones Newswires sees an increase of 200,000 jobs last month. That follows a decline of 36,000 in February and would mark only the second month of job gains in more than two years.

That outsized gain is expected to come from a combination of three factors: 1) A payback from weather effects last month; 2) temporary census hiring; and 3) underlying growth in the jobs market. No. 3, the most important factor for the long term, is also expected to be the smallest contributor.

Goldman Sachs breaks out the potential this way: +100,000 from a weather bounceback, +75,000 from census hiring and +25,000 from underlying net hiring.

Let’s look at each in turn.

Weather Bounceback: Last month, the White House Council of Economic Advisers noted that the weather likely subtracted a net 100,000 jobs from U.S. payrolls in February, an effect it says should be reversed this month.

Most estimates of the weather effect are based on the Northeast blizzard of January 1996. But given changes in the way people work and the idiosyncrasies of the employment survey, there’s no guarantee the latest blizzard will have a similar impact on the jobs count.

The Labor Department conducts the survey for one pay period a month, and a person must have been out of work for the entire pay period – and not be paid for the time missed – to count as unemployed. The Labor Department says that 51% of the survey respondents are paid weekly and would be most susceptible to weather-related pay disruptions. But it doesn’t have that ratio for 1996. If more people were paid weekly 14 years ago, the weather could have had a bigger effect at the time. Meanwhile, human-resources technology has changed a great deal from 1996. It’s possible a shift to more automation would have fewer people fall off the payrolls.

One possible indication of a subdued weather effect comes from a separate report on the private-sector jobs released by ADP. Last month, the ADP number was extremely close to the official Labor Department number, despite the fact that it counts jobs differently: People not at work due to weather remain on the roll even if they aren’t paid. To be sure, that doesn’t prove a muted weather effect, as the numbers have diverged substantially in the past — in November ADP reported a decline of 125,000 private-sector jobs and Labor posted a gain of 75,000.

Census hiring: One sure sign of job growth this year is going to come from temporary government hires to conduct the 2010 census. Through May of this year, some one million people will be hired, though most will complete their jobs before the end of the year.

Estimates for the number of census hires that will be recorded in March have jumped around, but Goldman’s estimate of 75,000 additional jobs is now looking close to the mark. Goldman notes that testimony delivered last Thursday by Robert Goldenkoff of the General Accountability Office suggests that only about 100,000 temporary hires were on the government payroll as of mid-March, and the census added about 24,000 employees in January and February.

Underlying net gains: The most important number in the jobs report will the be the gains, if any, absent the census and weather effects. Economists have seen signs for months that the U.S. is getting ready to start adding jobs. The number of job losses has moderated substantially from 2009, and additions appear to be coming soon. Indexes in both the Institute for Supply Management manufacturing and nonmanufacturing surveys have shown expansion, and last month services and manufacturing sectors added jobs in February. Meanwhile, the number of Americans filing claims for unemployment benefits remains elevated but has fallen back to precrisis levels.

But there are still some caveats. Construction continued to shed jobs in February, and while the federal government is adding jobs, cuts are still coming hard and fast from state and local employers. On Thursday, Challenger, Gray & Christmas reported that the number of announced job cuts rose in March largely on the back of state and local government layoffs.

Gains outside the census will be the first sign the labor market is recovering, but small increases aren’t a huge help for major underlying unemployment. The economy needs to add about 100,000 jobs each month just to keep up with new entrants to the labor force, let alone start making a dent in the millions of people who have lost their jobs since the recession began in 2007.

From the BLS:

The Bureau of Labor Statistics is introducing a new way for you to learn about our data and reports! Join us on Friday, April 2, 2010 from 9:30 to 10:30 a.m. EDT, for the Bureau’s first live Web chat. BLS subject matter experts will take your questions on national employment and unemployment data, with a particular focus on the figures for March that will be released that morning at 8:30 a.m. EDT. We will answer as many questions as possible during the allotted time. To join the discussion on the morning of April 2, go to www.bls.gov/chat. Questions also can be submitted in advance through that link. We look forward to talking to you!

A top Federal Reserve official reiterated Thursday the central bank is facing no urgency in tightening monetary policy.

The current economic recovery “is likely to be quite muted compared with past recoveries,” said Federal Reserve Bank of New York President William Dudley. “The substantial amount of slack in productive capacity that exists today will likely only be absorbed gradually,” the official said, which indicates “trend inflation, at least over the near term, should remain very low.”

That led the official to reiterate what was said at the March Federal Open Market Committee, where the central bank pledged to keep rates low for an “extended period.” Most private sector economists believe the Fed will not raise its overnight target rate, which now rests at essentially 0%, until sometime in the summer, perhaps even later.

Dudley’s comments came from the text of a speech to be given in Lexington, Va., as part of the Washington and Lee University H. Parker Willis Lecture in Political Economics.

The official is also the vice chairman of the interest-rate-setting FOMC, and he spoke one day before the release of the hotly anticipated March jobs report. Many economists believe the combination of an underlying improvement in hiring coupled with weather-related factors and gains due to government census jobs could actually produce a notable jump in payrolls for last month.

That said, the jobs report will be tricky, because it will be hard to know how much of an improvement is merely temporary. Currently, the Federal Reserve expects only a modest rate of improvement in hiring, as growth accelerates slowly. This environment is not expected to heat up already calm price pressures, which leads policy makers to believe they can keep rates low for many months to come.

Still, the recovery is leading officials to form plans on how they can exit from all the support they’ve given the economy over the course of the financial crisis, and the central bank just completed its effort to buy $1.25 trillion in mortgage securities.

Dudley noted in his speech “we need viable exit strategies from this recent period of monetary and fiscal policy stimulus” and he said the Fed has been “working hard to ensure that we have the tools in place so that we can be effective in tightening monetary policy when the time is right, even with an enlarged balance sheet.”

Dudley’s comments suggest the official is not expecting to see much from hiring for some time. “The unemployment rate remains unacceptably high,” although because “output has begun to expand again…we appear to be on the verge of seeing sustained growth in employment,” he said.

But because the gap between the economy’s actual and potential growth rates remains so large, he’s not worried that the force that normally motivates the Fed to increase rates–higher inflation–will show up anytime soon.

“Relatively sluggish growth implies that the output gap will be closed very gradually,” Dudley said, which “suggests that inflation pressures will stay subdued.” He added, “longer-term inflation expectations remain well anchored” and are “broadly consistent with my views on the appropriate inflation goal.”

As Dudley surveyed the U.S. economic landscape, he said only business investment “is in a position to be a true locomotive of growth,” and even then, it won’t be a strong driver of activity.

The official said that fiscal stimulus is running out, and “is slowly shifting from an expansive policy back toward restraint.” Dudley added “recent data on the housing sector indicates that the recovery has stalled.” Meanwhile, “the U.S. trade balance is likely to change little over the next year or two, and, thus, will be relatively neutral in terms of its impact on growth.”

The central banker devoted part of his speech to evaluating the persistent imbalance of capital flows in the U.S., which have for decades seen the nation run a deficit with the rest of the world.

Dudley was not alarmed by where the U.S. is now, saying “despite the large flow of foreign saving into the United States, our international financial position does not appear precarious at the present time.” That’s because as much capital as the U.S. absorbs it also has large investments overseas, which generate more income than foreign investments in the U.S. do.

What’s more, “low interest rates minimize the cost to the United States of our substantial negative net debt position,” Dudley said. He also explained that “a decline in the dollar…would boost our net investment income balance.”

The recession of 2007 may have felt like a once-in-a-lifetime disaster, but it’s just the latest shock in what has become a more volatile world for the typical American household, according to a leading expert on household finances.

In a new article published by the Brookings Institution, senior fellow Karen Dynan says that the ups and downs in household income have become about a third larger between the late 1960s and the middle part of the 2000s. What’s more, the share of households experiencing big drops in income — of 50% or more — has also increased, to about 12% in the mid-2000s from about 7% in the late 1960s.

For much of that time, U.S. consumers have done an impressive job of preventing those fluctuations from affecting their spending, which has grown relatively smoothly. That’s likely related to the growth of financial tools like credit cards and home equity loans, which allow people to compensate for falling incomes by borrowing more — a practice that got out of hand during the credit boom, as subprime lending penetrated some of the more economically depressed parts of the U.S.

Now, though, Ms. Dynan’s findings have bigger implications. As lenders pull back in the wake of the financial crisis, U.S. households could have a harder time riding out the ups and downs in their income. As a result, the spending patterns of U.S. consumers — whose purchases make up about two thirds of the U.S. economy and about a fifth of global demand — could also become more volatile.

As Ms. Dynan puts it: “It remains to be seen … whether the recent financial crisis will permanently change the availability of credit in a way that undoes the (relative) stability of household consumption.”

Fasten your seatbelts.

Fred Bergsten, director of the Peterson Institute for International Economics, is a long-time free trader. He advocated forcefully for the North American Free Trade Agreement and has pushed for tighter trade relations with China and the rest of Asia.

Fred Bergsten, director of the Peterson Institute for International Economics (Bloomberg)

But when it comes to China’s foreign-exchange policies, he’s up in arms. He wants the Obama administration to name China a “currency manipulator” — a decision Treasury must make by April 15 — and bring a case against China at the World Trade Organization. Essentially, he argues, China’s currency policies act as an unfair trade subsidy.

He talked with the Wall Street Journal’s Bob Davis about his proposal. Below is an edited transcript.

What are the chances the Obama administration will take your advice?

Bergsten: The administration has looked at it carefully, but the U.S. Trade Representative’s legal people have doubts they could win the case. Even so, it would highlight the issue and highlight the shortcomings of current economic system. The International Monetary Fund (which reviews foreign exchange policies) has no teeth; the WTO does. (A win at the WTO can authorize a country to apply tariffs on imports.)

What do you hope to accomplish by making this proposal?

Bergsten: I want to shine a spotlight on China in all available multilateral forums. That would galvanize multilateral pressure on China and get them to move. It would also expose weaknesses in the system.

What would happen if the administration moved along the lines you propose?

Bergsten: There would be real battle between the U.S. and China to get allies. The U.S. should try to get as many allies as possible to join a petition to the WTO. China probably would try to line up its allies too. You’d have a political battle in a WTO context

Would these tactics make it more or less likely that China would revalue its currency?

Bergsten: I think that in the short run, it would be a little less likely. But one or two or three months out, it would be more likely. China wouldn’t want to have long period where there are multilateral cases against it.
In ‘X’ months down the road, based on internal considerations, they’ll let the currency rise. Short run, they’d huff and puff.

Global manufacturing activity strengthened across the globe in March, led by a strong gain in the U.S. as Greece was the only country registering a contraction.

A global index produced by J.P. Morgan rose to a 70-month high of 56.7 last month, compared to 55.4 in February. Despite expansion in the euro zone, the strength of growth is spread out. Ireland and Spain moved into expansionary territory this month. Separately, Russia continues to lag, just barely registering growth for the second month in a row.

Manufacturing Activity, by Country

Click on the top of any column to resort the chart.

Sources: WSJ Research

A roundup of economic news from around the Web.

• Manufacturing: MIT hosted a forum on manufacturing where experts looked at new ways for America to make things. “But what form will new kinds of manufacturing take? At an MIT roundtable discussion on Monday titled “The Future of Manufacturing — Advanced Technologies,” more than a dozen of the Institute’s faculty shared converging ideas about how to reinvigorate America’s goods-producing businesses. The roundtable followed a broader campus forum hosted by MIT President Susan Hockfield on March 1, in which faculty members, some of whom also participated in Monday’s discussion, offered ideas about how to strengthen America innovation and thus its overall economy. These meetings are part of a larger effort by MIT to contribute the Institute’s expertise in emerging technologies and innovation policies to the national effort to revitalize the American economy.”
• Budget Austerity: The Economist looks at the risks of budget austerity. “Reducing debt burdens to pre-crisis levels may make some sense. It would ensure the costs of the crisis were not passed on to future generations. It would leave governments with more fiscal room to deal with recessions to come. And it would ensure that higher government debt did not crowd out private investment, which could lower future growth. The fund reckons that the 35-percentage-point increase in rich countries’ debt could raise borrowing costs by two percentage points. Unfortunately, there is little rigorous evidence in support of a target of 60%, let alone for reaching it quickly. In the past some countries’ public-debt ratios have been higher than they are today and they have often fallen slowly. Andrew Scott of the London Business School points out that Britain’s debt burden rose from 121% of GNP in 1918 to 191% in 1932 and did not return to its 1918 level until 1960. In a recent study Carmen Reinhart and Ken Rogoff find that public-debt burdens of less than 90% of GDP have scant impact on growth, but they do see a significant effect at higher ratios. That argues against a single number for all. With the world’s biggest sovereign-bond market and trusted institutions, America will be able to carry a higher public-debt burden than Greece.”
• Libertarian Plagues: Jeffrey Miron presents the top ten plagues according to libertarians. “1. Liberals; 2. Conservatives; 3. Politicians; 4. Federal imposition of economic and social policies on states; 5. The inflation tax; 6. The Alphabet Soup of Government Agencies (FTC, FHA, IRS, SEC, CPSC, DOJ, etc); 7. Entitlement Programs; 8. Anti-Vice Laws; 9. Regulatory takings; 10. Matching socks.”

Compiled by Phil Izzo

World trade talks have been on the backburner for months as responses to the recession have taken center stage. Patrick Thomas, the U.K. Embassy’s policy adviser for trade and agriculture, says that are gains sitting on the table just waiting to be realized. Thomas blogs at http://blogs.fco.gov.uk/roller/economic.

Last week, trade officials met at the World Trade Organization in Geneva to “take stock” of the state of negotiations in the current trade round, the Doha Development Agenda (DDA). The results were disappointing, if not unexpected. The talks remain stuck with no clear path to conclusion.

To say that the DDA has been a hard road would be an understatement. Talks are now in their ninth year. Critics claim that the world economy has passed the DDA by, that its ambition has been sapped by the maze of compromises needed to keep 153 countries at the table, and that world leaders lack the political will to bring it to fruition.

Criticisms aside, there are clear gains sitting on the table waiting to be taken. Here in the United States, President Obama has announced an ambitious plan to double exports in five years through the National Export Initiative (NEI). The DDA would be an excellent complement to the NEI by opening new markets for US businesses. And further, the Peterson Institute has estimated that the current offers in the DDA could increase U.S. GDP by $38.7 billion.

The DDA would be the largest global trade deal ever negotiated. It would include all 153 members of the World Trade Organization and significantly boost global trade, adding at least $150 billion to the world economy each year through robust tariff cuts and agricultural trade reform. A good chunk of this would go to developing countries — it is, after all, a “development” agenda. It would also give us a global insurance policy to guard against future protectionism. What is more, the DDA represents a great commitment to openness and to the credibility of the WTO, arguably one of our best-performing multilateral institutions, where smaller countries can ensure that the larger ones play by agreed rules. As Lord Mandelson, Britain’s Business Secretary, wrote recently, “It’s also an opportunity for the big emerging economies to show they are not just passive beneficiaries of tariff cuts – that they can and should be expected to play a full role in freeing global trade just as they are taking their rightly place around the G20 table”.

To be sure, even though a multilateral deal is the best way to liberalize trade, world leaders have also continued to look for additional ways of opening markets. Last October, in the teeth of the economic recession, the European Union and South Korea concluded nearly two and a half years of negotiations and initialled a bilateral free trade agreement. The deal is expected to be ratified this year, and when it goes into effect it will cut 97% of tariffs on trade between South Korea and the EU, saving European exporters €1.6 billion each year and creating up to €19 billion in new market access for them. And the EU is not stopping there: negotiations are under way for ambitious free trade deals with India and the ten members of the Association of South East Asian Nations.

Still, it is worth remembering that while the EU-Korea FTA is the second-most ambitious bilateral agreement ever negotiated (behind NAFTA), it pales in comparison to the potential impact and gains from a successful conclusion to the multilateral DDA.

At a session on financial sector governance, former Federal Reserve Chairman Paul Volcker said that bank directors weren’t mainly responsible for the bad decisions made by financial firms— management was.

Part of the problem is that top managers are paid too much, he told a conference organized by the Center for Strategic and International Studies, so changing incentives doesn’t make a big difference. “If you’re making $20 million a year, it doesn’t matter if you spread it out over one year, three years or five years,” or have provisions to claw back some of the pay later on.

Part of the problem is that top managers are too frequently blind to the moral dimension of their jobs. He derided the idea that “the more you make, the more qualified you are.”

“There’s a loss of pure pride in profession,” Mr. Volcker said.

Another part of the problem is the complexity of the instruments financial firms peddle and the decisions they make.  Directors are often at a loss to keep up, he said. Mr. Volcker recommended that boards hire groups of experts to advise them on new products, mergers and other issues, though he doubted that most companies would approve the expense.

“Management will reject it,” he said. “They don’t want alternative sources” of expertise.

Another recommendation: don’t let corporate compensation experts advise board compensation committees. Invariably, Mr. Volcker said, the experts recommend paying top managers higher than the average for the industry.

What exactly should Congress ask the Federal Reserve do and what should be done by other arms of the government? It’s a question Congress is contemplating now as it rewrites the rules of finance in light of the wrenching financial crisis.

Writing in the March 2010 issue of the American Economic Association’s Journal of Economic Literature, Alan Blinder — a Princeton economist who was for a time vice chairman of the Federal Reserve Board — says the Fed should “monitor and regulate systemic risk because preserving financial stability is (a) closely aligned with the standard objectives of monetary policy and (b) likely to require lender of last resort powers,” which the Fed holds uniquely. Siding with Fed Chairman Ben Bernanke, Blinder says the Fed should supervise large financial institutions because they are so integral to systemic risk.

So what should the Fed surrender? “We can take away the Fed’s responsibilities for consumer protection, for supervising small banks and for enforcing the CRA [the Community Reinvestment Act],” he says. Such changes, he notes, would reduce the Fed’s range, influence and headcount – a point not lost on the presidents of the regional Fed banks who have been vociferously arguing that holding onto small banks is important.

Blinder argues such changes are wise because making the Fed the overarching guardian of financial stability would make the Fed bigger and more powerful at a time when “some people have argued, with some cogency, that the Fed has too much unchecked power already.”

Originally posted on Washington Wire.

The congressional panel investigating the financial crisis announced the witness list for next week’s much-anticipated three-day hearing focusing on who’s to blame for the subprime lending fiasco.

Former Federal Reserve Chairman Alan Greenspan highlights the list of witnesses, as expected. He’ll be the first witness to face the Financial Crisis Inquiry Commission on Wednesday — and the only witness from the Fed. He’s likely to be grilled over the central bank’s decision not to tighten up on the loose lending standards that many banks and mortgage companies were employing in the years leading up to the collapse. Defaults on poorly-documented subprime mortgages undermined the value of many mortgage-related securities, and helped trigger the broader financial crisis in 2008.

Greenspan already has cited the Fed’s decisions on lending standards as his biggest regret from the meltdown. He has said he thought the markets would be sufficiently vigilant to minimize the risk themselves. But the growing practice of securitizing mortgages into increasingly complex instruments apparently diluted accountability among lenders and investors, and encouraged poor risk management.

Read the rest of this post on the original site.

The end of the Federal Reserve’s mortgage buying program should be calm as private markets are poised to fill the void, Federal Reserve Bank of Atlanta President Dennis Lockhart said Wednesday.

Lockhart

The Fed’s $1.25 trillion mortgage buying program, which it kicked off during the worst of the credit crisis to help markets and the economy, ended Wednesday, and the mortgage market was under a bit of pressure. Lockhart said that mortgage rates should continue to remain attractive to homebuyers at around or a little above 5%, which has been historically attractive.

“The ceasing of our purchases should have a relatively light effect,” Lockhart said, and rates should stay in place and “should continue to help stabilize the housing sector. The effect on the housing sector should not be adverse.”

Lockhart, currently a non-voting member of the interest rate-setting Federal Open Market Committee, made the remarks in answers to audience questions following prepared remarks he delivered at a business leaders luncheon here.

In other comments, Lockhart said that he is confident that when the time is right, the Fed will be able to effectively drain reserves from the system and shrink its balance sheet.

In his prepared remarks, the central banker pointed to employment as a “daunting economic challenge.” He noted that there are signs the worst has past and labor markets are headed in the right direction. But he acknowledged these markets remain weak, and said the recovery still has a long ways to go.

Lockhart said monetary policy remains accommodative, but added that it is possible interest rates will need to be tightened before the jobless rate has found a satisfactory level.

Recent U.S. bond market volatility indicates a day may be coming where government deficits may become as important a variable for monetary policy as economic data.

Right now, most believe low inflation, modest growth and a slow improvement in hiring means the Fed can take its time raising interest rates. But the government’s profligacy could change that view, bending the rate outlook in new directions.

The harbinger of future trouble emerged last week, when investors pushed Treasury yields higher. Investors want more compensation for buying such epic amounts of debt. They may also want higher returns, given the added risk that Treasury will have trouble paying back all that it’s borrowed at a time when the subject of government finance is raising questions.

While 10 year Treasury yields remain historically low at 3.88%, there’s fear it could go up, potentially by a lot. The problem for the Fed? Higher borrowing costs across the economy that could potentially imperil the recovery.

“It’s definitely a concern, and it’s probably only going to get more acute as time goes by,” warns Stephen Stanley, chief economist with Pierpont Securities, a newly started bond trading firm.

Why yields rise is central to understand how the Fed will react. If they are driven higher by supply forces alone, central bankers may want to counter the drag by keeping short term rates low for even longer than they now envision. What’s more, a real supply-driven jump in yields could conceivably put the Fed back in the mortgage buying business, in a bid to keep the housing market from being strangled.

Higher bond yields could also force the Fed to hike rates, too, if the gains signaled rising worries about inflation. Markets could send that signal if inflation-indexed Treasurys were priced for more price risk as long term Treasury yields rose. Economists warn that scenario could force the Fed to raise rates, even if it meant blunting a recovery, so important to central bankers is keeping inflation in check.

“This is going to be a difficult balancing act” and the toughest situation is where the “slippery slope” of inflation expectations comes into play, said Ray Stone, of Stone & McCarthy Research Associates.

So far, the inflation doomsday outlook seems unlikely. Actual inflation is low, and measures of expectations remain moderate. The Fed is seeking to bolster that confidence by flagging how it will unwind its current monetary policy stance, even as that action lies some time away. A number of officials have also been steadfast and said they will not monetize the debt by buying Treasurys en masse.

To keep the worst from happening, the government needs to play a role, too. Fed officials have become more vocal on the deficits. It’s the long run they’re worried about: structural issues signal long term problems that must be tackled, lest markets start punishing the government.

In a speech earlier this month, Federal Reserve Bank of New York President William Dudley called for the government to offer a plan for a return to sustainable borrowing levels. He warned what the government is doing now is risky because it is exposed to the shifting sentiments of bond investors, who are fickle.

“Once confidence begins to erode, it can do so very quickly,” Dudley said. “It is very unlikely that the time when market sentiment turns most adverse would also be the most attractive time to have to tighten fiscal policy,” he warned. Officials need to get ahead of the curve and show how they’ll get back to lower deficits now, Dudley cautioned.

A roundup of economic news from around the Web.

• Productivity and Jobs: Dean Baker says productivity surges doesn’t explain the death of jobs. “While productivity growth has been strong over the last year, growing by 5.8 percent from the fourth quarter of 2008 through the fourth quarter of 2009, this is common for a period of recovery. Productivity grew at a 6.9 percent rate in the four quarters from the first quarter of 2001 to the first quarter of 2002, a 5.4 percent rate from the third quarter of 1982 to the third quarter of 1983, and a 4.6 percent rate from the third quarter of 1974 to the third quarter on 1975. The rapid productivity growth seen in the last four quarters is a typical pattern at the end of a recession, it does not explain the lack of job growth in this recovery compared with the rapid job growth in prior recoveries. The difference is rather explained by the relatively weaker growth in this recovery.”
• Mortgage Debt: Richard K. Green looks at mortgage debt and aging. “In 1989, average household income among 45-54 year olds was $39,934; average mortgage debt outstanding among those who had debt was $39,300, so the ratio was about one-to-one. In 2007, average household income among 45-54 year olds was $83,100; average mortgage debt outstanding among those who had debt was $154,000, so the ratio was just under two-to-one. In 1989, the share of households in the age group with a mortgage was 58.3 percent; in 2007 it was 65.5 percent. The only good news: interest rates have dropped from about 10.5 percent to 5 percent. So in 1989, an average income household that wanted to amortize an average mortgage in 15 years would need to pay 14 percent of gross income to do so; in 1989 it would need to spend 19 percent. So putting this all together, the ratio of debt service to income for amortization by retirement has increased by (.19*.655/.14*.583)-1 = 52 percent. Not good, but not quite as bad as I thought, either.”
• Political Evolution: The left-leaning oktrends blog uses online dating data to produce some interesting charts on political affiliation and economic affiliation. “Conservatives are strongly pro-life. But the economic liberals have widely distributed views. A solid portion of the Democratic economic base actually sides with Republicans on this issue… While the two conservative curves are nearly congruent, the liberals ones are totally different. The takeaway, the Republican advantage, is this: economic conservatives and social conservatives agree, while the liberal halves of these spectra don’t. Furthermore, the purple overlap — in a sense “the swing vote” — is largely on the conservative side!”

Compiled by Phil Izzo