The big question in Washington this week is whether, in the words of the NYT, we’re going to see “a legislative failure and an economic catastrophe that could ripple through financial markets, foreign capitals, corporate boardrooms, state budget offices and the bank accounts of everyday investors”. In this conception — and I have subscribed to it just as much as anybody else — the sequester is bad, the shutdown is worse, and the default associated with hitting the debt ceiling is so catastrophic as to be unthinkable.
The Fed Whisperer, John Hilsenrath, had a great insidery article yesterday about forward guidance, and about the Fed’s ability — or lack thereof — to effectively signal its future actions. And it was timely, too, coming as it did a day before the official nomination of Janet Yellen as the new Fed chair.
On Thursday I said that the US is not going to default on its bonded debt, even if the debt ceiling is reached: “with Jack Lew (or anybody else, really) as Treasury secretary, you can be sure that debt service payments would be priority number one”.
Matt Levine had an excellent post last week on the bizarre market in credit default swaps on the USA — a market which people only ever look at during times of crisis or potential crisis. The nihilists are out in force today, using this market to confirm their priors, but the problem is that it’s very, very hard to look at US CDS, or to look at the yield on short-dated Treasury bills, and draw anything much in the way of meaningful conclusions.
If you wanted to engineer the strongest possible recovery in the US economy, you would try to create two things. First, and most important, you would want robust jobs growth, with employers adding positions, the unemployed — and especially the long-term unemployed — finding new jobs, and the proportion of Americans with jobs rising steadily. Secondly, you would want to introduce errors into the monthly jobs report. You would try to make jobs growth seem weaker than it really was, and unemployment higher. By doing that, you would keep monetary policy — and market expectations for future monetary policy — as accommodative as possible. That in turn would keep both short-term and long-term rates low, which would provide extra fuel for the recovery.
Neil Irwin is not going to have made many friends in the White House with today’s piece on the problems the Obama administration has with Janet Yellen. It makes the White House economic team seem insular, sexist, and deeply mistaken about what the right and proper role of the chairman of the Federal Reserve Board should be. Worse, there’s every reason to believe that Irwin’s piece is entirely accurate.
Well done to Matt Phillips for finding this fantastic photo, by Reuters’s very own Kevin Lamarque, of Larry Summers, wearing his trademark mirthless smile, eyeing the chairman of the Federal Reserve as though he were an appetizer at the Four Seasons. The photo is four years old, but it’s germane right now, because, as Phillips says, markets seem to be freaking out that the man on the left is going to replace the man on the right.
I have a piece up at Architect Magazine on Cooper Union, and the real (if slim) possibility that it will lose the tax break from which most of its current income flows. Cooper Union will get $18 million this year in “tax equivalency payments” stemming from its ownership of the land under the Chrysler Building — money which would normally flow to New York City in the form of property taxes, but instead gets diverted to Cooper Union for its own uses. Do the math, and that works out to about $18,200 per enrolled student — a much greater subsidy than New York City provides to any of the students being educated at its own colleges.