Author: WSJ.com: Real Time Economics

Economists and investors are justifiably concerned about U.S. consumers’ weighty debt burdens, with some saying it could take years before they’ve shed enough debt to put them in a spending mood again. By one measure, though, they’re looking as financially sound as they have in almost a decade.

The Federal Reserve’s financial obligation ratio tracks how much the average American must cough up every month for rent and payments on credits cards and mortgages, as a percentage of disposable income. The ratio fell to 17.51% in the fourth quarter of 2009, down from a peak of 18.87% in early 2008 and the lowest level since the third quarter of 2000.

The falling ratio isn’t all good news: In large part, it reflects the extent to which people have been defaulting on mortgage and credit-card debt. But it also suggests that U.S. consumers’ mountain of outstanding debt — which stood at 122.5% of annual disposable income as of the end of 2009 — might be more sustainable than its sheer size suggests, particularly if people have used this period of low long-term interest rates to refinance into fixed-rate mortgages.

To be sure, a return to the profligate spending of the boom years wouldn’t be the best foundation for a recovery, and the U.S. government’s growing debts are more than making up for any improvement among consumers. But with their monthly cash flow improving, U.S. consumers might hit the mall again sooner than many expect.

Airlines and hotels raised prices in the fourth quarter of 2009, but costumers responded by cutting their spending on travel.

The Commerce Department reported that prices for passenger air transportation jumped 36% at an annual rate in the fourth quarter after rising 2.4% a quarter earlier. Meanwhile, accommodations costs jumped 3.1% following four quarters of the decline.

Tourism-related industries experienced strong spending gains in the third quarter, which likely encouraged companies to start raising prices after a sharp drop in travel sparked by the recession. But, the price increases may have depressed demand with overall tourism and travel spending dropping 2.3% at an annual rate in the fourth quarter.

Employment at tourism-related industries dropped for the seventh consecutive quarter, but the 2.3% fall represented a slowing rate of decline. There were 8.1 million workers in the industry in the fourth quarter, 47,000 fewer than the previous quarter. All sectors in the industry posted declines.

Last week, President Barack Obama touted a letter sent by economists backing the Democrats’ health-care legislation. Not to be outdone, House Minority Leader John Boehner released his own economists’ letter opposed to the overhaul.

From the president’s letter:

The health care reforms passed by the House and Senate — with recent modifications proposed by President Obama — include serious measures that will slow the growth of health care spending. Putting the brakes on health care spending will take multiple measures, and we must start now. Democratic and Republican experts have proposed many different approaches to “bending the cost curve.” The President’s proposal incorporates a long list of measures that will control rising costs and reinforce each other.

From Rep. Boehner’s letter:

As early as this week, the House of Representatives will vote on the Senate-passed health care bill as well as a reconciliation package making changes to the bill. While Speaker Pelosi asserts that health care reform will create four million jobs, we disagree. In our view, the health care bill contains a number of provisions that will eliminate jobs, reduce hours and wages, and limit future job creation.

The links above include the full list of signatories.

Gross domestic product figures show that in the recent downturn the economy experienced its sharpest contraction since at least the 1940s. But a Federal Reserve economist argues that the recession was even more severe than GDP suggests.

In a paper being presented Friday at the Brookings Panel on Economic Activity, Fed economist Jeremy Nalewaik examined the differences in GDP and a closely-related measure, gross domestic income. GDP measures the output of the economy as the sum of expenditures — consumption, plus investment plus government spending plus net exports. GDI measures total income in the economy.

In theory, the two measures should equal one another, in practice they don’t quite, and Mr. Nalewaik argues that GDI is the better of the two.

He finds that when the Commerce Department’s Bureau of Economic Analysis revises its national income and product accounts, GDP figures move more closely inline with GDI. GDI also appears to have a stronger correlation with other economic indicators, and its recent movement around turning points suggests it more closely tracks the economy.

He notes that GDI fell far more sharply in the teeth of the recession, dropping at a 7.3% annual rate in the fourth quarter of 2008, and 7.7% in the first quarter of 2009. GDP, in comparison, fell by 5.4% and 6.4%. Moreover, while GDP showed the economy began to grow in last year’s third quarter, GDI showed it continued to contract. (Fourth-quarter GDI figures aren’t yet available.)

“[T]he latest downturn was likely substantially worse than the current GDP… estimates show,” he writes. “Output likely decelerated sooner, fell at a faster pace at the height of the downturn, and recovered less quickly than is reflected in GDP… and in conventional wisdom.”

A roundup of economic news from around the Web.

• Economic Politicization: Edward Harrison lament the politicization of economic problems. ” There is more than just a whiff of economic nationalism in the air. Is this not exactly the same spectacle we witnessed in the 1930s? I see all of this as an inevitable consequence of the first truly synchronized global recession since the 1930s. After two plus years of economic stagnation, we’ve reached a point – everywhere it seems – where policy making is increasingly dominated by domestic political concerns. People are fed up with the status quo. They want no more economic pain. And they’re willing to throw the bums out unless this ends. Politicians respond to this sort of thing. And it’s my feeling that this has led people to crawl back into their ideological positions and hold firm.”
• Greenspan and Low Rates: Barry Ritholtz lists 10 bullet points on the effects of low rates leading up to the crisis. “While these rates had myriad effects, lets focus on just two: The impact on Housing, and on global bond managers. Since homes are (typically) a leveraged credit purchase, lowering the cost of that credit has an inverse effect on prices — i.e., cheaper mortgages = more expensive houses. Since most people budget monthly, carrying costs are more important than actual purchase prices. Hence, a big drop in interest rates can cause a spike in home prices, with monthly payments remaining fairly similar. Bottom line: Ultra low rates were the initial fuel sending home prices higher.”
• Taxes and Profits: On the Tax Policy Center’s TaxVox blog, Rosanne Altshuler notes that pharmaceutical companies are earning more profits from abroad and taxes play a big role. “In a recent working paper, Treasury’s Harry Grubert … considers five possible explanations for the dramatic increase in profits abroad: 1) the globalization of sales; 2) the growth in domestic losses; 3) the decrease in taxes abroad and consequent pressure to shift income to low-tax locations to take advantage of those lower rates; 4) the higher growth rate of companies already doing more business abroad at the beginning of the period than other other companies; and 5) changes over the period in how the U.S. taxes international income. Harry’s analysis suggests that it’s taxes and not the globalization of sales that play an important role in explaining the jump in the foreign share of U.S. companies’ profits. Low and falling average tax rates abroad — they fell by about 5 percentage points between 1996 and 2004 — have led U.S. companies to shift their profits overseas. And U.S. tax policy has also played a role.”

Compiled by Phil Izzo

Will it be another jobless economic recovery, like after the last recession? Or will the labor market bounce back strongly, as it did after the downturns of the 1970s and 1980s?

Perhaps it will be a bit of both, concludes a paper being presented Thursday at the Brookings Panel on Economic Activity by economists Michael Elsby of the University of Michigan, Bart Hobijn of the San Francisco Federal Reserve Bank and Ayşegűl Şahin of the New York Federal Reserve Bank.

The labor market languished after the 2001 recession, with job losses continuing until late 2003. That experience, along with the tepid job market recovery following the 1990-91 recession, convinced many economists that something had changed about the economy and that in the wake of modern recessions, job growth was much slower in the past.

But the economists’ research suggests that what was really different about the 1990-91 and the 2001 recessions wasn’t so much that they were modern, but that they were shallow.

Job losses in shallow recessions, they argue, are driven primarily by a slowdown in the rate of hiring, as opposed to layoffs. In severe recessions, job losses have historically been driven by both layoffs and a drop in the rate of hiring, with the drop in hiring persisting longer than the increase in layoffs. The latter appears to be what’s happened this time around.

So there’s a case to be made that the jobs rebound — which many economists expect will begin to register in the March employment figures — will be bigger this time than after 2001.

But the economists also note that the labor market behaved in the early part of the recession much as it did in past recessions, it has begun to look different in the past several months. “The record rise in long-term unemployment… is likely to yield a persistent overhang of workers facing long unemployment spells, slowing the recovery,” they say. The extension of unemployment compensation “is likely to have led to a modest increase in long-term unemployment,” they add.

The long-term unemployed typically have a harder time getting work, so that could make for a somewhat slower jobs recovery.

A roundup of economic news from around the Web.

• Foreclosures: A Chicago Fed paper summarizes some alternative ideas for dealing with home foreclosures now that they’re being spurred more by loss of jobs and income, declining home values and strategic defaults than by unaffordable loan products. Among the suggestions: “1) expanding the use of mandatory mediation between borrowers and lenders; 2) streamlining the Obama administration’s Home Affordable Modification Program (HAMP) process so that loan modifications are made permanent after three months of steady payments; 3) enacting bankruptcy reform that protects primary residences; and 4) imposing a moratorium on foreclosures for people who lose their jobs.” The paper concludes that “the longer it takes to follow through with bold actions, the more families and communities will face economic hardships and the slower and more challenging the road to recovery will be.”
• Zimbabwe: On the Marginal Revolution blog, Alex Tabarrok gives a fascinating Google Earth look at what happened when Zimbabwe forcibly redistributed lush, private farmland (which was predominantly white-owned) to share it with poorer blacks who largely worked on dry, unproductive communal farms. One theory was that the whites had the better quality land. The other was “The Tragedy of the Commons – the farmers on the communal lands did not have the incentives to invest in the land and thus the land eroded and turned to desert… So what happened after the land was redistributed beginning in 2000 and all of it made communal? After reform the land quality worsened everywhere. In particular, note that the blue lakes and ponds on the right became dry and empty as farmers no longer had an incentive to invest in maintaining these resources. The tragedy of the commons.”
• Unemployment Benefits: University of Chicago’s, Casey B. Mulligan, writing on the Economix blog, takes the stance that – even in a recession when demand is exceptionally low – unemployment benefits still deter people from looking for new jobs. He uses data from Pittsburgh in the early 1980s when the unemployment rate was above 10% for two and half years to make his point: “Very few people started working during the two to three weeks prior to the exhaustion of their unemployment benefits…But almost 30 percent started work just a week after their benefits ran out (19 percent started a new job, 10 percent returned to a previous job). ‘Demand’ may have been lacking in Pittsburgh in the early 1980s, but that did not stop unemployed people from responding to the work incentives presented to them by the unemployment insurance program…Unemployment insurance is only a small part of the reason why the labor market has so far failed to restore employment to pre-recession levels. But unemployment insurance is not free: It results in less employment and less output, not more. The real question is whether, and for how long, this price is worth paying to continue a just and compassionate program.”

Economists and other weigh in on the flat reading for U.S. consumer prices in February.

• Core consumer prices are now only 1.3% above their year ago level but have been even weaker in more recent months. Soft final demands with ample slack in the economy and a continuation of the dislocations in the credit markets are disinflationary so core consumer inflation may continue to retreat on a year-on-year basis over the next several quarters. –Steven Wood, Insight Economics
• Overall, the takeaway from this report is simply that despite the strong economic rebound that appears to be taking shape in the U.S., the weak labor market conditions and soft consumer demand backdrop are continuing to keep a tight lid on core consumer price pressures. Moreover, with the recovery in the labor market expected to be only modest, wage pressures should stay contained, further dampening core price pressures. As such, we expect the soft inflation outlook to continue to provide considerable breathing room for the Fed to keep the fed funds rate “exceptionally low” for an extended period.” –Millan Mulraine, TD Securities
• The report indicates that inflation pressures remain subdued, and we believe slack in labor and product markets and soft shelter costs will lead to a deceleration in core inflation prices in the months ahead. Given the subdued inflation outlook, we believe the FOMC will keep the fed funds target at its current low rate throughout 2010. –Sireen Hajj, Crédit Agricole Corporate and Investment Bank
• February’s US consumer prices figures show there is next to no inflationary pressure in the US economy. Deflation may yet emerge as the real risk. –Paul Dales, Capital Economics
• Conventional wisdom is that the recession has created a good deal of slack in the economy leading to a deceleration in core inflation. However, since the housing market appears to be showing signs of some tentative stabilization, shelter costs could soon begin to level off. Thus, while base effects point to some further modest slippage in the yr/yr readings for core CPI over the next few months, the likelihood of any meaningful deceleration in underlying price pressures going forward from here seems quite limited despite a still wide output gap. –David Greenlaw, Morgan Stanley

The twin forces of recession and broad demographic shifts have sparked a return to the multi-generational household, according to this report from the Pew Research Center.

According to the report, about 49 million Americans, or about 16% of the population, lived in a household with at least two adult generations. That compared with 28 million, or 12% of the population, in 1980. That is a reversal from past trends: Between 1940 and 1980, the number of multi-generational households had declined to 12% in 1980 from 25% in 1940.

The Pew report, which was compiled through a combination of Census data and telephone surveys, charts several decades of social and economic trends that have seen American families move apart and back together. Between 1940 and 1980, Social Security and better health allowed more seniors to live alone later into their lives. At the same time, the immigrant population declined as the economy and suburbs boomed, leading to more independent households.

Much of that has reversed. Immigration is a driving force of the economy and the country’s demographics, with whites of non-European ancestry expected to make up less than 50% of the U.S. population by 2042. Asian and Hispanic immigrants, in particular, are more likely to see multi-generational dwellings. Also, people are waiting longer to get married and many of them “consider their childhood home to be an attractive living situation, especially when a bad economy makes it difficult for them to find jobs or launch careers,” according to the Pew Report.

Indeed, these long-term demographic changes have been accelerated by the Great Recession. According to Pew analysis of Census data, 2.6 million more Americans were living in multi-generational households than in 2007 — an increase that has seen across all racial groups. Those findings dovetail with a 2009 Pew Report that found that among 22- to 29-years-olds, one-in eight had suffered a recession-induced move-in after living on their own.

At a forum on the euro and the dollar sponsored by the Dallas Federal Reserve, its president Richard Fisher was asked about his view of former Fed Chairman Alan Greenspan. Fisher said he wouldn’t comment — though he did mention that he had never been able to finish “Atlas Shrugged,” Greenspan mentor Ayn Rand’s paean to capitalism

Fisher

He did, however, name the 2,500-pound red Swiss breeding bull on his East Texas farm “Irrational Exuberance” in reference to Greenspan’s famous 1996 comment that prompted a slump in stock markets around the world.

After the pop of the real-estate bubble and the proceeding financial crisis, Fisher said Greenspan returned a picture of the bull. Inscribed was a note from Greenspan: “Dear Richard: Irrational exuberance is truly a lot of bull,” Fisher said, adding, “It’s in my office if anyone wants to see.”

In the latest update of its cost estimates for Troubled Asset Relief Program, the $700-billion kitty Congress created in 2008 to bolster the banking system, the Congressional Budget Office says the ultimate cost to taxpayers — including investments, grants, and loans completed, outstanding, and anticipated — will be $109 billion.

Much of that stems from aid to American International Group (AIG) — about $36 billion — and the auto industry — about $34 billion. CBO estimates a very small net gain to the government from the Treasury’s purchase of more than $200 billion in shares of preferred stock from hundreds of financial institutions.

The Office of Management and Budget (OMB) estimates that the total cost of the TARP’s transactions will amount to $127 billion. OMB’s estimate is $18 billion higher than CBO’s estimate mainly because of different estimates in the cost of aid to AIG and in the amount expected to be spent by the Home Affordable Modification Program, which provides direct payments to mortgage servicers to help homeowners avoid foreclosure.

The Treasury secretary has the authority to purchase and hold up to $699 billion in assets at one time. CBO estimates that $344 billion of that authorized amount is outstanding or will be disbursed before the program expires on October 3, 2010, including $45 billion that is projected to be used for purposes not yet specified.

“Both CBO and OMB value the TARP’s investments by discounting to the present the projected cash flows stemming from each investment, using a discount rate that captures both the time value of money and the premium that a private investor would require as compensation for the risk of the investment or commitment. The resulting “net present value” is the cost or gain projected for the investment and represents an estimate of its market value,” CBO analyst Avi Lerner said in a post on the CBO blog.

CBO’s estimates on the cost of the pending health-care legislation may not be so cheery.

In honor of St. Patrick’s Day, we thought it was a good time to point out a blog the specializes in economic-themed limericks.

Haiku has a special place in the hearts of economists, but as noted in that post the limerick is a favorite form of ours here at Real Time Economics.

Limericks Économiques, a blog by David A. Lefkovits, posts a daily limerick that focuses on the dismal science and often is linked to the news of the day.

These are a couple of our favorites from the blog:

“I’m afraid,” said Bernanke to Geithner,
“The debt crisis still has lots of bite in ‘er.
Though it may cause some ranklin’
I’ll print lots more Franklins:
We’ll loosen our money, not tighten ‘er!”

Adam Smith saw the growing Wealth of Nations}
In the market’s benign machinations,
But belief in the Hand
Which, Unseen, guides as planned,
May show irrational expectations.

Said Bernanke, stroking his beard,
“This ‘-flation’ is worse than I feared;
All the research I see
Is pointing to ‘de-’;
It’s the ‘in-’ crowd that strikes me as weird.”

One called “Overheard at Goldman Sachs”:
“We assume that you know what you’re doing,
In this ill-advised trade you’re pursuing,
But the opposite bet
That we place on your debt
May eventually hasten your ruin.”

One during Sen. Jim Bunning (R., Ky.)’s filibuster of the jobs bill:
When Senator Bunning demurred
On the jobs bill the Senate conferred,
His friends on the right
Slowly backed out of sight,
‘Til at last the poor Senator concurred.

And this one inspired by a Journal article:
Said the skinflint economist, Betts,
“To the conference we’ll send our regrets.”
Said her mate, “What’s the reason?
The rates are off-season.”
Said Betts: “If they’ll pay for it, let’s.”

Finally, let us offer our own humble contribution:
With Washington stuck in gridlock
And more of our stuff up in hock
Limericks are a sure way
To brighten your day
Just don’t get caught reading them on the clock.

The latest Senate proposal to overhaul financial regulation includes a provision to create a second vice chairman of the Federal Reserve Board in Washington who would be directly responsible for bank supervision.

It’s an unusual proposal that received little attention before draft Senate legislation was unveiled Monday. But it has a strong proponent: Former Federal Reserve Chairman Paul Volcker, who is an economic adviser to President Barack Obama.

Testifying before a House committee, Mr. Volcker said he’s been an advocate of designating one of the Fed governors as a vice chair for supervision to elevate the importance of the role.

“I think you need that continuing focus and clear sense of responsibility so that the attention that the Federal Reserve pays is less subject to maybe ups and downs over time,” Mr. Volcker told the House Financial Services Committee. “Let’s build it into the organization in a way that maybe it hasn’t been built in as conclusively as it should have been in the past.”

Federal Reserve Chairman Ben Bernanke on Wednesday pushed back against a Senate proposal to strip from the Fed oversight of smaller banks by warning House lawmakers that it would narrow the central bank’s focus to giant firms.

“It makes us essentially the too-big-to-fail regulator,” Mr. Bernanke told the House Financial Services Committee. “We don’t want that responsibility. We want to have a connection to Main Street as well as Wall Street.”

The legislative proposal released this week by Senate Banking Committee Chairman Christopher Dodd would make the Fed the supervisor of bank holding companies with assets greater than $50 billion. About 35 firms fall into that group.

Mr. Bernanke said Fed officials are “quite concerned” by the proposal because they want an understanding of firms of all sizes and at all levels. “Smaller and medium-sized banks are very valuable to us,” providing information for monetary policy, for understanding the economy and for financial stability. He reminded lawmakers that small institutions were part of prior financial crises.

Former Fed Chairman Paul Volcker, also testifying at the hearing, called the $50 billion barrier “arbitrary” and warned of the risks from separating out those firms. “We don’t want to single out some institutions as too big to fail. We want a system in which particularly non-bank institutions can fail.”

Mr. Volcker later called the $50 billion threshold “much too low, in my opinion” in determining which firms really would need to be saved.

In a preview of what is likely to be a flurry of amendments from Democrats and Republicans on the bill to overhaul banking rules, Sen. Bernie Sanders (I., Vt.) on Wednesday said he would offer amendments on the Senate floor to “limit credit card interest rates and discourage” secrecy at the Federal Reserve, two populist issues that could roil the congressional debate.

Sen. Bernie Sanders (I., Vt.) (Getty Images)

He said he would also push to create an independent Consumer Financial Protection Agency, as opposed to a proposal by Senate Banking Committee Chairman Christopher Dodd (D., Conn.), which would put a new consumer protection division within the Fed.

The White House would likely oppose most of these measures, particularly the one related to more transparency of the Federal Reserve. But clash over the Fed’s transparency could lead to a messy fight on the Senate floor. Many Republicans and some Democrats have also called for more Fed scrutiny, and a similar provision championed by Rep. Ron Paul (R., Texas) easily passed in the House of Representatives in December.

“As long as the Federal Reserve is allowed to keep secrets about its loans, we will never know the true financial condition of the banking system,” Mr. Sanders said. “The lack of transparency could lead to an even bigger crisis in the future.”

Blacks have always faced higher unemployment rates than whites, but the Great Recession has exacerbated that disparity across demographic lines, including gender, age and education.

A new report from Congress’s Joint Economic Committee looks deep into the Labor Department data and highlights the disparity. Here are some key takeaways:

• The current jobless rate for blacks was 15.8% in February, compared to an overall rate of 9.7%. The broader unemployment rate — the U-6 rate that includes workers who are underemployed and discouraged — shows an even bigger gap. The U-6 rate for whites in February (not seasonally adjusted) was 17.9%, for blacks it was 24.9%.
• College-educated workers with an unemployment rate of just 5% have fared better in this recession than most. But white college graduates face a 4.5% unemployment rate, while 8.2% of black college graduates are unemployed.
• Black men have been hit harder than women, but female heads of household, who bear the sole financial responsibility for their families, face a 15% unemployment rate, compared to 11.6% for all women heads of household.
• Young blacks have the highest unemployment rate of any demographic group. More than 2 out of 5 African American teenagers are unemployed, compared to an overall teen unemployment rate of slightly over 25%.
• Long-term unemployment is an issue for the entire work force, but the problem is particularly pronounced among blacks. Although black workers make up only 11.5% of the labor force, they account for more than 20% of the long-term unemployed, and make up 22% of workers who have been unemployed for over a year. The median duration of unemployment for black workers has risen from less than 3 months before the recession began to almost six months.

See an interactive graphic on the unemployed, by race and gender

A roundup of economic news from around the Web.

• Home Construction: On his blog, Donald Marron looks at whether home construction is bottoming. “Not surprisingly, the chart shows that the number of single-family homes under construction fell off a cliff in early 2006. Almost 1 million new single family homes were under construction in February 2006. Today there are just 300,000. The precipitous decline ended last summer, and housing construction has been essentially flat for several months. Perhaps housing construction has finally found bottom?”
• Financial Regulation: Ed Andrews says that financial regulation isn’t as ugly as it looks. “The bill is full of murky exclusions, exceptions and hair-splitting — usually a red flag that our elected representatives have capitulated to big-money interests and disguised the bombshells behind eye-glazing boilerplate. But there are a lot of genuinely tough changes, and the bill is a lot less ugly than it first appears. The big banks and Wall Street firms are already howling in protest. Front groups like the U.S. Chamber of Commerce, which claim to be looking out for mom-and-pop businesses, are throwing everything they have at it.”
• Liquidity Traps: Paul Krugman looks at how much of the world is facing a liquidity trap. ” what’s the definition of a liquidity trap? How much of the world is in one? There’s a lot of confusion on that point; here’s how I see it. In my analysis, you’re in a liquidity trap when conventional open-market operations — purchases of short-term government debt by the central bank — have lost traction, because short-term rates are close to zero. Now, you may object that there are other things central banks can do, and that they actually do these things to some extent: they can purchase longer-term government securities or other assets, they can try to raise their inflation targets in a credible way. And I very much want the Fed to do more of these things. But the reality is that unconventional monetary policy is difficult, perceived as risky, and never pursued with the vigor of conventional monetary policy… And by that criterion, how much of the world is currently in a liquidity trap? Almost all advanced countries. The US, obviously; Japan, even more obviously; the eurozone, because the ECB probably couldn’t engage in Fed-style quantitative easing even if it wanted to, given the lack of a single backing government; Britain. Not Australia, I guess. But still: essentially the whole advanced world, accounting for 70 percent of world GDP at market prices, is in a liquidity trap.”

Compiled by Phil Izzo

Senior Obama administration officials say the nation’s economic recovery could stall if Congress doesn’t pass a climate bill this year.

The officials warn that investors are so uncertain about the future cost of emitting greenhouse gases that they are sitting on capital rather than pouring it into “clean” technology, new power plants or energy-intensive manufacturing.

The administration has for months been moving away from advocating climate legislation primarily as an environmental issue and toward a jobs-creation argument. But the comments are a marked shift to a stronger rhetoric: fears of prolonging the recession. The White House says spurring “clean,” or low-greenhouse-gas-emitting energy, can help lay the foundation for the 21st-century U.S. economy.

“Right now there’s a lot of money on the sidelines,” said Energy Secretary Steven Chu. “Capital on hold means investments not being made, investments not being made means jobs not being created,” he said at an Export-Import Bank conference last week.

Companies that could capitalize on a carbon-constrained economy, such as General Electric Co., Alstom SA, Areva, Babcock & Wilcox, a unit of McDermott International, Siemens AG, Chesapeake Energy Corp. and First Solar Inc., say policy clarity will focus investment. So do emitting businesses that will need to adapt, such as American Electric Power Co. and BP PLC.

Ambiguity, however, breeds risk, which begets financiers’ reluctance.

The White House is attempting to revive legislation that would effectively curb emissions of greenhouse gases such as carbon dioxide. A bill that passed the House last year stalled in the Senate, and the administration is working to pump life into alternative proposals. However, many lawmakers, officials and pundits say the prospects for a climate bill this year are increasingly dim.

Meanwhile, the Environmental Protection Agency is moving ahead with regulations to cut greenhouse gases under existing law, regulation that industry fears is too blunt and may damage the economy.

But without certainty on how — and how much — greenhouse gases will be curbed, the energy industry has little idea how to factor the potential price of carbon into their cost expectations or even demand. It cuts both ways: Financiers are wary of investing both in conventional as well as new technology.

“The economic team … is very concerned about the chilling effect on investment of not having legislation,” said Joseph Aldy, special assistant to the president for energy and environment, at an event here last week.

The ambiguity of how EPA regulations will affect industry is exacerbating the investment problem, he said. The EPA has said it would delay regulation of the largest emitters, planning to phase in other sources later. The regulations are expected to be challenged, and it’s unclear if, like rules for air pollutants such as sulfur dioxide, they will later be discarded.

“There’s significant concern that as we’re trying to get the economy up and going again, that this kind of uncertainty may stall things some,” Aldy said.

Kevin Walsh, managing director of power and renewable energy at GE Energy Financial Services, said the financing community is “grappling for a steady footing to invest” under policy confusion. Legislation or regulation that puts a price on carbon would be a “shot in the arm” for the low-emitting energy industries. But the failure of lawmakers to pass a low-carbon electricity standard — tied up in the politics of the climate bill — is also arresting investment.

Conventional energy sectors are also affected. Although Congress is increasingly unlikely to pass a climate bill this year, the Energy Information Administration has lowered its forecast for new coal-fired power plants based on a future carbon price risk. The EIA historically bases its long-term forecasts only on existing laws, but this year it factored in a three-percentage point rise in the cost of capital for coal-fired power plants based on the “implicit hurdle” of potential policy.

Senior officials at both American Electric Power and BP have said the planned EPA greenhouse-gas regulations may delay refinery plant modifications and accelerate coal-fired power plant closures.

For example, Bruce Braine, head of strategic policy analysis at American Electric Power, said the Clean Air Act rules are “going to be litigated like crazy.” Without certainty on the rules or flexibility to use market-based programs, many companies are likely to wait for the courts before making modifications, including those that would improve pollution controls.

The White House is also concerned that without the climate bill spur, the U.S. may lose capital and competition for clean energy to countries in Europe and Asia, particularly China.

“People need to realize this is a global market for our capital,” GE’s Walsh said. “Our money is going to go where we see long-term certainty … and if Europe has a better framework, that’s where our money’s going to go,” he said. – Ian Talley

Two meetings, two dissents. Federal Reserve Bank of Kansas City President Thomas Hoenig is taking full advantage of his voting position on the Federal Open Market Committee this year, breaking from his colleagues for the second straight meeting.

Hoenig

The FOMC voted 9-1 to keep its near-zero interest-rate target and maintain its guidance that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” That language will mark its first birthday this week, having been introduced into the statement last year on March 18.

Mr. Hoenig offered a bit more explanation behind his dissent than he did at the January meeting. According to the FOMC statement, he “believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.” (This meeting’s addition: the concerns about financial imbalances and longer-run stability. Translation: If there’s a bubble or runaway inflation, don’t blame me.)

The hawkish Kansas City Fed president is the longest-serving Fed policy maker on the current FOMC, serving proudly since 1991. And, as followers of the Lone Dissenter Club are surely aware, he’s no stranger to dissent. Today marked his 61st vote as a Fed policy maker and his sixth dissent, according to a tally by Wrightson ICAP. For those of you keeping score, that gives him more dissents than any other current Fed policymaker. Dallas Fed President Richard Fisher and Richmond Fed President Jeffrey Lacker have five dissents each to their names, all in the hawkish direction. Mr. Fisher has cast 15 votes on the FOMC and Mr. Lacker has cast 16, so both still have a much greater proportion of dissents in their overall votes.

With Mr. Hoenig breaking from his FOMC colleagues on language, rather than actual rate changes, we may see more dissent over the rest of 2010 as the Fed plans its exit from extraordinary accommodation.

Mr. Hoenig devoted his most recent prepared speech to the nation’s unsustainable fiscal imbalances and the risks of hyperinflation. There, too, he indicated his concerns about the long-term consequences of the Fed’s actions: “The founders of the Federal Reserve … designed our central bank to be responsible for stable prices and long-term growth, and they gave it a degree of independence so that it could carry out this mandate,” he said last month. “The goal of policy cannot be to ‘just get through’ the current challenge, but rather to rebuild the foundation of a stable and prosperous economy, looking to our nation’s long-term future.”

We’ll look for your return here next month, Mr. Hoenig.

The Federal Reserve is bringing its mortgage-purchase program to a close. The Federal Open Market Committee said in a statement after its meeting today that the $1.25 trillion program of buying mortgage-backed securities would be completed, as expected, by the end of March. That will leave investors, homebuyers and the housing sector to watch nervously in the coming months as the industry tries to recover without new support from the Fed.

What did the Fed do for mortgages? The central bank announced in November 2008, in a particularly bleak period the economy, that it would purchase up to $500 billion in mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. It raised that target to $1.25 trillion last March. (It’s also buying $175 billion in agency debt.) The Fed’s stated goal: “to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.” The move lowered mortgage rates by as much as a percentage point and offered new hope for the housing market at a low point.

What is the Fed doing now? The central bank has about $20 billion in purchases to make before reaching its target. Last September, the Fed announced that it would taper the pace of its remaining purchases (toward the $1.25 trillion target) until the end of this month to stretch out its influence on the market. That was a nod to those who believed the flow of purchases by the Fed was key to lowering mortgage rates, rather than the total stock of MBS the Fed planned to buy. With a couple of weeks left, it appears the total stock of purchases is what matters most. Mortgage rates have barely moved higher despite clear indications from the Fed that it wouldn’t be expanding the program this month. In fact, the Fed is letting the mortgage securities roll off its balance sheet as they mature or are prepaid, without reinvesting the proceeds.

What happens next? Even Fed officials would acknowledge a reasonable amount of uncertainty about how the mortgage market will function once its biggest buyer — the central bank — steps aside. Many pension funds, insurers and other institutional investors fled the market once the Fed showed up as a giant noneconomic buyer. (To reach its target, the Fed bought up not only most of the new agency MBS but also existing securities held in portfolios.) As a result, some investors have suggested over the past year that mortgage rates could shoot up by a percentage point as the Fed program ended. But if that’s the case rates should’ve started rising already given the Fed’s signals. Mortgage rates probably will rise somewhat as Treasury yields move higher in the coming months, but the spread between mortgages and government securities may not necessarily expand. (Among the market projections: Barclays Capital expects mortgage rates to rise as much as half a percentage point during the second quarter largely due to rising Treasury yields.)

If the “stock” view is correct — that the Fed’s total holdings matter more than its pace of purchases — then mortgage rates should rise slowly as mortgage securities roll off the Fed balance sheet. The New York Fed’s Brian Sack last week said the Fed projects that more than $200 billion in MBS and agency debt held by the central bank will mature or be prepaid by the end of 2011. That suggests a measured tightening as the Fed balance sheet shrinks naturally over time.

The expiration of the homebuyer tax credit (for contracts signed by April 30) is likely to lead to new calls for Congress to take action to support the housing market in an election year. Even if credit availability for homebuyers improves over the next year, the rise in mortgage rates could raise new concerns about the sector and put new pressure on the Fed to do more for housing. A first possible step would be to reinvest some of the maturing securities to keep the Fed’s MBS stock from declining. But few central bank officials appear inclined today to support such a move.