The Great Debate

The Federal Reserve’s decision to move to a kind of quantitative neutrality is a tacit admission that it, or rather that the United States, is in a political bind that makes a bold response to a deteriorating economy difficult.

Despite reams of evidence that conditions are worsening — much of it cited in the statement the Fed made as it left rates on hold — the U.S. central bank made only a token gesture; announcing that as mortgage-related debt it holds on its balance sheet comes to term and is repaid it will replace it  with new, mostly long-term, Treasuries.

That keeps its quantitative easing policy essentially static, a strategy dubbed “quantitative neutrality” by Northern Trust economist Asha Bangalore.

So, given that key measures of inflation are trending towards zero, that businesses are reluctant to hire, that corporations and banks alike are sitting on cash and that the outlook for the recovery, if indeed we want to call it that, is dimming, why such a feeble response?

In the end monetary policy has to have a political consensus behind it, and there is arguably less of that now than at any time in my 20 years of following markets.

It is time for the United States to stop trading with China and ban Americans from travelling there. Why? Look at the U.S. Department of State’s most recent annual report on human rights around the world.

“The (Chinese) government’s human rights record remained poor and worsened in some areas,” the report notes. “Tens of thousands of political prisoners remained incarcerated (in 2009).”

U.S. relations with Egypt should also be frozen, because “the government’s respect for human rights remained poor, and serious abuses continued in many areas…Security forces used unwarranted lethal force and tortured and abused prisoners and detainees, in most cases with impunity.”

- Darrell M. West is Vice President and Director of Governance Studies at the Brookings Institution.  He is the author of the forthcoming Brookings Institution Press book, Brain Gain:  Rethinking U.S. Immigration Policy. The opinions expressed are his own -

Michelle Obama is a hit at home and abroad but she will come under particular scrutiny this week as she embarks on her first solo trip outside the U.S., visiting Mexico. How she performs on this diplomatic mission will be closely watched because she is not just the president’s wife, she is the most prominent ambassador for her husband’s foreign policies.

Such trips are not a small undertaking, and they can carry more weight than might be expected.

-Bernd Debusmann is a Reuters columnist. The opinions expressed are his own-

The project involved more than 2,500 scientists. It cost $ 10.5 billion between 1983 and 2009 and it included one of the most bizarre scientific tasks of all time: evaluate whether nuclear waste stored deep inside a Nevada desert mountain would be safe a million years into the future.

That was the safety standard set in September, 2008, by the Environmental Protection Agency (EPA) as a condition for allowing nuclear waste to be stored deep in the belly of the Yucca Mountain, 95 miles (155 km) from Las Vegas, long the subject of political debate and a fine example of nimbyism (not in my backyard).

The vastly complex computer models and simulations experts launched to figure out whether Yucca Mountain would be a safe environment in the year 1,000,000 and beyond ended before there was a scientific conclusion.

The reality of  'political economy'  is something that irritates many economists -- the "purists", if you like. The political element is impossible to model;  it often flies in the face of  textbook economics;  and democratic decision-making and backroom horse trading can be notoriously difficult to predict and painfully slow.  And political economy is all pervasive in 2010 -- Barack Obama's proposals to rein in the banks is rooted in public outrage; reading China's monetary and currency policies is like Kremlinology; capital curbs being introduced in Brazil and elsewhere aim to prevent market overshoot; and British budgetary policies are becoming the political football ahead of this spring's UK election. The list is long, the outcomes uncertain, the market risk high.

But nowhere is this more apparent than in well-worn arguments over the validity and future of Europe's single currency -- the new milennium's posterchild for political economy.

For many, the euro simply should never have happened --  it thumbed a nose at the belief that all things good come from free financial markets; it removed monetary safety valves for member countries out of sync with their bigger neighbours and put the cart before the horse with monetary union ahead of fiscal policy integration. But the sheer political determination to finish the European's single market project, stop beggar-thy-neighbour currency devaluations and face down erratic currency trading meant the  currency was born and has thrived for 11 years.

Ben Bernanke in peril and the Volcker crackdown on proprietary trading by banks show two truths of the current dispensation: there is no effective hedge against politics and the reflation trade rests on fragile foundations.

Neither of these realities is particularly good for financial markets and neither is going away any time soon.

Both, too, are utterly related not just to each other, but to the Senate election in Massachusetts which installed a Republican into what had been a Kennedy seat, in the process terrifying Democrats who fear they will be sunk by association with a set of policies perceived to be favoring Wall Street.

– John Kemp is a Reuters columnist. The views expressed are his own –

President Barack Obama’s proposed curbs on bank size and proprietary risk-taking will be criticised for being vague, hard to implement, and focusing on issues that were only part of the cause of the recent crisis.

But the president should ignore self-interested counsels of perfection from the industry that aim to preserve the status quo. The plan is good politics, and good policy.
On the political front, the plan is a belated attempt to reposition the administration and congressional Democrats. It aims to channel the popular revolt that washed away Democrats in New Jersey and Virginia last autumn and now in Massachusetts.

- John Kemp is a Reuters columnist. The views expressed are his own -

The Republican Party’s stunning special election victory in deep-blue Massachusetts has killed any lingering prospect of passing cap-and-trade legislation in 2010, and with it international negotiations to produce a binding climate accord before the end of the year.

With no chance of U.S. action in the short term, emerging markets such as China and India are under no pressure to accept mandatory emissions reduction targets. If climate legislation is eventually revived in the United States, in 2011 or beyond, it may come back in the form of a carbon tax rather than a permit trading program.

TO RETREAT OR REINFORCE?
Perhaps the most important decision any general has to make is when to stand and fight, and when to beat a retreat in order to fight another day. The Massachusetts special election to fill the Senate seat left open by the death of Edward Kennedy confronts President Barack Obama with a similar strategic choice.

- John Parkinson is Senior Lecturer in Politics at the University of York, specialising in democratic theory and comparative democratic institutions. In a previous life he was a facilitator, internal communications and public relations consultant. The opinions expressed are his own. -

Last weekend 200 randomly-selected citizens got together in London for a “deliberative poll” to sort through ideas for transforming British democracy. Judging by the organizers’ blog – at www.power2010.org.uk – the participants were blown away by the experience, as ordinary people always are when they take part in serious discussion on big political questions. It’s brilliant stuff to be part of, and there should be more like it, I think.

However, there is more – much more – to “deliberative democracy” than deliberative polling.