Get ready for the “Great Immoderation”
– James Saft is a Reuters columnist. The opinions expressed are his own –
The recession will soon be dead, laid to rest alongside the idea of the “Great Moderation”, a set of hopeful assumptions that underpins expectations about economic growth and asset valuations.
This, when investors, bankers and executives ultimately realise it will cause them to pull in their horns, take less risks and be less willing to pay high prices for assets.
Economists, observing that since the 1980s recessions have been mild and short and expansions long and robust, developed the theory that better economic management, namely cutting rates in the aftermath of bubbles, globalisation and, get this, improvements in financial markets, had led to a sort of best-of-all-possible-worlds “Great Moderation”, in which economic volatility fell and with it the risk premia required for holding financial assets.
This little theory has, needless to say, come somewhat unstuck during the current downturn which has been great but far from moderate.
This raises the uncomfortable possibility that the last 25 years of good times were just a bit of luck, or even worse, an artificially engineered consumption binge with central banks and governments playing a role similar to what Chicago tavern keepers used to do — opening up early so last night’s patrons can have a quick nip to take the edge off on the way into work.
It’s a debate which is far from academic and its outcome will influence much more than the actions of central bankers and regulators.
Iran sanctions and wishful thinking
– Bernd Debusmann is a Reuters columnist. The opinions expressed are his own –
So what’s so difficult in getting Iran to drop its nuclear program? All it needs is a great American leader who uses sanctions to break the Iranian economy so badly that popular discontent sweeps away the leadership. It is replaced without a shot being fired.
That simplistic solution to one of the most complex problems of the Middle East was part of a keynote speech greeted with thunderous applause by 6,000 delegates to the annual policy conference of the American Israel Public Affairs Committee (AIPAC). The speaker: Newt Gingrich, a former speaker of the U.S. House of Representatives and a likely Republican presidential candidate in 2012.
In the fourth month of the administration of President Barack Obama, who favors talking to America’s adversaries rather than ousting them, the Gingrich prescription sounded like a throwback to the days when neo-conservatives predicted that the U.S. troops invading Iraq would be pelted with flowers and sweets. Wishful thinking at its finest.
But in panel discussions and forums at AIPAC, one of the most powerful lobby groups in the United States, the idea of sharply tightened sanctions had plenty of proponents. The preferred lever: cutting off gasoline supplies to Iran, which relies on imports for around 40% of its domestic consumption.
On the final day of the conference this week, several thousand AIPAC activists converged on Congress to press their representatives for passage of pending legislation to sanction companies that sell, ship, finance or insure gasoline exports to Iran. Firms that continued dealing with Iran would be banned from doing business with the U.S.
Would an additional layer to a stack of sanctions imposed since 1995 get the Iranians to drop what the West insists is work toward a nuclear bomb? There is no reason to believe it would. There is every reason to believe more sanctions would inflict hardship on the Iranian people.
State control of media and indoctrination since birth? Wow, they sound exactly like the USA!
How about leaving Iran alone? Why shouldn’t Iran have a nuclear program, since Israel is nuclear-armed? Why not tell Israel that a price for persuading Iran to give up its nuclear program is for Israel to give up all its nuclear arms and stop making more?
China economic forecasts: go herbal or Western?
–Wei Gu is a Reuters columnist. The opinions expressed are her own–
Which would you believe when it comes to diagnosing the health of China’s economy — the pulse-taking of the herbal doctor or the lab tests of Western medicine?
Beijing’s leaders are like the herbal doctors, using creative metrics such as power output and shipping indexes that can give a relatively accurate snapshot of manufacturing activity.
Private-sector economists, by comparison, believe in more mainstream data such as money supply and fixed asset investment even though they might not be completely useful in measuring a transitioning economy such as China.
Going by the latest economic indicators, the pulse shows the body is still listless, while the lab test is showing signs of a recovery to health. The last time this happened to China was in 2001, when the world was about to emerge from a brief recession.
It turns out that — like the debate over Western versus Eastern medicine — both methods have their pros and cons. And their relative advantages may be shifting as China itself changes.
SPECIAL INSIGHT
“China should invest more in tangible goods like gold and other commodities which they luckily are doing right now to a certain degree.”
Well now, could and would, China use US debt instruments to invest in these ‘more tangible goods like gold…’
One way to sink the USS Ship of Debt! And it’s environmentally safe given that the debt is highly toxic and makes swine flu appear more as a mild cold.
Two cheers for the walking wounded
– Mark Hannam is a guest columnist, the views expressed are his own. He formerly worked at the Bank of England and Barclays. He is currently chairman of Fair Finance, a microfinance company –
Some banks have come out of the financial crisis in better shape than others. We should encourage them rather than lump them together with the failures.
Public anger at the recent failings of many of our leading banks, while justified, is not a sound basis for future policy. The temptation facing policy makers — that of failing to distinguish between better capitalized, better managed banks and under-capitalized, poorly managed banks — should be avoided.
The period leading up to the financial crisis was characterized by an insufficient differentiation of risk in the financial markets. Across many asset classes risk premia were compressed to such an extent that the difference in price between low-risk and high-risk assets was insufficiently wide.
Prices are signals and in the past few years they have signaled incorrectly.
Public policy that treats all banks as if they were the same perpetuates the problem of erroneous signaling: JP Morgan does not have the same problems as Citibank; Barclays’ prospects are not identical to those of RBS.
The stress tests in the U.S. — however crude and dubious in methodology — are likely to demonstrate this. We can and should distinguish between those banks that benefit from general government support for the financial system and those that require specific government intervention to remain solvent.
I think that the challenge will be to keep the banking industry from going back to its old ways of not checking out investments, and relying on past history(Good old boy mentality) in order to maximize profits. In order to get stability into the banking system the government must demand that the banks have a long term business plan, reachable goals, and also remove pressure from Wall Street on maximizing short term profits. Banks would also be required to improve due dilligence on investments before purchase, slow down loan approvals, and spread the customer base for investments. We can ill afford another wild ride down the slippery slope of maximizing short term profits.
Lessons from Jack Kemp
– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. —
Jack Kemp, who died on May 2 at the age of 73, lived the American dream as the football star who was elected to the House of Representatives. He had the vision to translate his intellectual ideas into the practical tax cuts, housing vouchers, and enterprise zones that sparked not only the Reagan revolution in America but also similar economic revolutions in many countries around the globe.
Jack Kemp spent his life as a champion of the little guy, the forgotten man, the person left behind in a world too busy to care. It is easy to look to other way and ignore the cries of the weak and the helpless. Jack Kemp could have done that. But Jack Kemp always stopped to listen. And when he listened, he stood up for the downtrodden.
His economic plan for America had a consistent theme: help the little guy. For Kemp, that meant letting him prosper and getting the government off of his back. That would work in America, and that would work around the world. Kemp spent much of his career trying to get oppressive governments off the backs of the forgotten.
Take the Soviet Union, for example. Today, almost 20 years after its demise, we can see from hindsight that the system was doomed. Yet in the early 1970s it was not obvious.
In 1974, four years after Kemp was first elected to Congress, he was a co-sponsor of the Jackson-Vanik amendment that called for eliminating trade negotiations and all scientific, educational, and cultural exchange missions with the Soviet Union until the country restored freedom. The Soviet Union was crushing dissent at home and sending refuseniks to die in gulags. Jack Kemp heard and stood up for the forgotten Russians. The Jackson-Vanik amendment was passed and signed by President Gerald Ford in 1975.
Jack Kemp kept his eye on the Soviet Empire and the people it crushed. In 1978, he introduced a resolution urging the U.S. Olympic Committee to hold the 1980 Summer Olympic Games outside the Soviet Union. The next year, it was a resolution urging the Soviet government to “end the oppression of Jews in the Union of Soviet Socialist Republics.” It would have been easy to look the other way. Jack Kemp didn’t.
Thanks to Jack Kemp, who was often ridiculed, the world is a better place. Thank you for remembering him and for reminding us.
President Obama’s three percent solution
– Jonathan R. Hoganson is the deputy executive director of the Technology CEO Council, a public policy advocacy group that includes the CEOs of Intel, HP, Dell, Applied Materials, EMC, Motorola, Micron Technology and IBM. He previously was the legislative director for Rep. Rahm Emanuel and policy director for the House Democratic Caucus. The views expressed are his own. –
A few years from now, when our economy has regained its stride, we may look back to a little-noticed announcement last Monday that spurred the resurgence. Amid swine-flu hysteria and First 100 Days hoopla, President Obama quietly announced a commitment to spending three percent of the U.S. GDP on science research and development.
This is a profoundly important step, but if we are to continue to lead the world, the United States must also develop a comprehensive policy to foster innovation. For too long, the United States has lived in a “next month” mindset when it came to our economy. This short-termitis has led to sub-prime lending, credit card debt and a general lack of long-term planning. And in no place has this been more evident than in the sciences.
For the past decade our spending on research and development has been anemic at best, and beginning in 2005, federal funding of academic research actually began to decline. This was happening at the same time our overseas competitors were increasing their commitment. For example, China has increased its R&D spending by an average of 17 percent each year in an effort to catch and surpass developed nations’ spending.
Currently, the United States ranks seventh among developed countries in R&D spending as a ratio of its GDP. Is that a recipe for continued economic and technology leadership?
There is, in fact, a direct correlation between R&D and scientific leadership. As the commitment to science ebbed, so did the U.S. share of worldwide patents and research articles in peer-reviewed journals. And R&D has been proven to catalyze economic growth and enable comparative advantage for developed companies and economies.
Now is the time to make technology and innovation a cornerstone. In the last three months we have made a good start, making broadband, health-care information technology and green tech key components of the stimulus package. The president has proposed a 10-year extension of the R&D tax credit to give businesses the incentive to continue to invest in cutting-edge technologies and products. By advancing these initiatives, we are developing the foundation of a national innovation strategy, but Congress must work with the president to advance a comprehensive strategy.
We do need research and development, but not at the government or college lab level. We need it where it is pointed toward a useful product or service. Just funding positions so someone can publish something moves at a snails pace. We need incentives for innovation and patents in order to recover from the serious production and brain drain on the country. We have serious environmental and energy problems and these cannot be solved by government research.
New BofA chairman must prove independence
– Jonathan Ford is a Reuters columnist. The opinions expressed are his own –
Shareholders in Bank of America must be hugging themselves at their sheer audacity. They have plucked up the courage to say boo to Ken Lewis, the bank’s all-powerful chairman and chief executive.
A shareholder vote on April 29 forced Lewis to relinquish the first of those roles to an “independent chairman”. This role will now be taken by Walter Massey.
Their celebration, however, should be muted. Massey doesn’t seem very independent. He has been a director of BofA since 1998 and therefore participated in all the contentious decisions the board took during Lewis’s tenure as CEO, especially the financially crippling acquisitions of Countrywide Financial and Merrill Lynch.
So shareholders should put Massey under pressure to demonstrate whose side he is really on. And here are two suggestions as to how they might go about this.
First, shareholders should insist that the board cut Lewis’s compensation now that he has given up part of his responsibilities. Lewis has a base salary of $1.5 million, and notched up a further $275,000 in compensation last year, largely for personal use of a corporate jet. That could easily come down by a third or more.
Second, Massey and the board should conduct an independent review of the disastrous Merrill acquisition. In particular, he should get to the bottom of the dispute between BofA and former Merrill chief John Thain about the payment of $3.6 billion in accelerated bonuses to Merrill bankers. If Lewis has abused his position or lied, he must go at once.
If the leadership in North Korea can’t pretend (even under a communist system) that the props in place are noting more than a hereditary monarchy in disguise, how can a corporation pretend to bow to the wishes for independent (meaning outside the established board of directors) by merely playing musical chairs amongst themselves?
This is not capitalism, free market leadership or even remotely democratic. It’s just another sad example of a corporado/politician/religious leader wrapping themselves in a corporate chater/flag/bible to justify activities that are a blatant abuse of the trust and responsibility of their position.
Don’t dare object, or their own homespun version of McCarthyism will lable and ruin you. Just shut up and let them raid the cookie jar until the money they loot is printed into worthlessness.
A chink of light for the euro zone
– James Saft is a Reuters columnist. The opinions expressed are his own –
Even without a huge fiscal boost or a hell-for-leather central bank, Europe could have a recovery, albeit a tepid one, on the cards by the end of the year.
Recent forward looking economic data is still grim, but hides within it the seeds of a rebound, as the absolutely brutal fall in manufacturing over the past six months burns itself out.
The euro zone’s economic situation is still dire and it still faces outsized risks; its banking system must deleverage and has the potential for disastrous losses while it remains unclear who in the world exactly is going to be buying enough goods to stoke a sustained recovery.
But nothing goes in the same direction forever, and absent a health or banking disaster it is reasonable to expect positive surprises from demand as the year wears on.
As those who are betting on a recovery are generally backing U.S. growth, that surprise when it comes could give a nice boost to European markets.
“There is good convincing evidence that the inventory cycle in the euro area is turning favorably,” said Aurelio Maccario, chief euro zone economist at UniCredit Group.
“their banks bigger?” “Asian competition for what is less?!” “their was generally less of a bubble!?” Demographic forces given the same weight as fleeting consumer/investor sentiment measures? Sounds like someone and his bottle of bourbon tried to meet a last-minute deadline.
Drugs, elephants and American prisons
–Bernd Debusmann is a Reuters columnist. The opinions expressed are his own–
Are the 305 million people living in the United States the most evil in the world? Is this the reason why the U.S., with 5 percent of the world’s population, has 25 percent of the world’s prisoners and an incarceration rate five times as high as the rest of the world?
Or is it a matter of a criminal justice system that has gone dramatically wrong, swamping the prison system with drug offenders?
That rhetorical question, asked on the floor of the U.S. Senate by Virginia Senator Jim Webb, fits into what looks like an accelerating shift in public sentiment on the way that a long parade of administrations has been dealing with illegal drugs.
Advocates of drug reform sensed a change in the public mood even before Webb, a Democrat who served as secretary of the Navy under Republican Ronald Reagan, introduced a bill last month to set up a blue-ribbon commission of “the greatest minds” in the country to review the criminal justice system and recommend reforms within 18 months.
No aspect of the system, according to Webb, should escape scrutiny, least of all “the elephant in the bedroom in many discussions … the sharp increase in drug incarceration over the past three decades. In 1980, we had 41,000 drug offenders in prison; today we have more than 500,000, an increase of 1,200 percent.”
The elephant has ambled out of the bedroom and has become the object of a lively debate on the pros and cons of legalising drugs, particularly marijuana, among pundits on both sides of the political spectrum, on television panels and in mainstream publications from the Wall Street Journal to TIME magazine.
I have several reasons why Marijuana should be legalized, and I will list them along with nay sayers, you decide who’s logic is better.
First and foremost, I want you all to know why Marijuana was criminalized, and how it became public enemy number 1. In 1937 there was a tax act that was introduced and passed which taxed the growers of Marijuana to pay an outlandish tax per gram to grow the crop. This in turn developed into the tax stamp known today. Those whom couldn’t provide a stamp for their marijuana, they were encarcerated. Now think about this for a second. This was the thirties, who smoked pot back then? Minorities, and the U.S. government knew that, and they knew no one could pay a tax on a crop they didn’t grow, thus made them a criminal. Now fast forward, 1972 Richard Nixon declared WAR on DRUGS in America. Is it me, or didn’t he resign from office from accusations of abuse of power? And, we as Americans still placed ourselves behind him in support for it, which leads me to believe we didn’t know what we were supporting at the time.
Now lets take some nay sayers comments toward legalization.
“Marijuana legalization will lead to an increase in pot-smoking among teens and young adults.”
This in fact is a scare tactic, and I almost want to punch whomever says this because it is a backwards point. See what no one wants to see is that it is already prevalent amonge teens, and young adults. They can’t get alcohol without ID, but a drug dealer doesn’t care, he just wants his money. Remove the dealer from the picture, and place the drug in the hands of liquor stores, then you will at least reduce the amount of teens whom have ready access to it at anytime.
“Legalization will send the wrong signal to our children.”
Well this leaves no room for error doesn’t it? What signal does it send to our children? Well first off if parents were more involved with their childrens lives, then whether the drug is illegal or legal wouldn’t make a difference. In fact, if it was legal they would know that the have to be a grown-up to do those things, and if you taught your children right they wouldn’t mess around with it in the first place, even if they did it isn’t going to kill them.
“Pot smoking leads to mental illness”
This has been proven to be false. Pot doesn’t in anyway cause any form of mental illness. If you smoked pot and later found out you were mentally unstable, that is because you were already unstable or had some a preexisting condition you were unaware of. Anyone whom says different either made it up, an idiot splurring lies, or both.
“pot is a risk to public safety.”
Well that is a legitament concern, but one that is clouded in lies. Liquor is dangerous, but the choice to consume it is one that we hold proud in America, but the choice isn’t ours if we want to consume something that wont kill us eventually? Making a drug illegal makes it dangerous. Moreover, it takes the authority away from the police, and places it into the hands of outlaws. Legalizing Marijuana will project some other health concerns, but they are far from the same risks as alcolhol. To me, it’s completely illogical, and unAmerican to keep the prohibition for pot.
So in closing, we are a nation that was founded under priciples of basic freedoms. The choice to smoke pot is a basic priciple of freedom, and one that doesn’t need to be trampled on by people who can’t stay out of other people’s business. If someone wants to responsibly consume it in the privacy of their own home, then we as their neighbors shouldn’t care as long as their right to do so doesn’t infringe on your right to breath clean air.
Lets keep this debate a logical, and reasonable one. I can’t stand it when someone’s only arguement is “drugs are bad mkay.”
Legalize it, tax it, and free it.
Uncertain Fed support sinks bonds
– John Kemp is a Reuters columnist. The views expressed are his own –
The bond market’s adverse reaction after the Fed announced no new asset purchase facilities or bond buyback programs highlights the fundamental difference between interest rates and quantitative easing (QE).
Rate cuts provide ongoing support for an indefinite period until the Federal Open Market Committee chooses to reverse them. In contrast, QE programs provide a one-off, time-limited boost that has to be continually reapplied to have the same effect.
With interest rates a decision to leave rates alone represents “no change” in policy; with QE, a decision to leave the scale and duration of the buyback program unchanged is a “tightening”.
QE is time-limited because it drives up bond prices and cuts yields only as long as buybacks continue, or are expected to do so. Once planned buybacks have been completed, or are not expected to be extended, the market will revert to its natural clearing equilibrium. Repeated doses of QE are needed just to keep yields unchanged.
This creates something of a dilemma for policymakers in both the United States and the United Kingdom. The Bank of England’s program to buy 75 billion pounds worth of government and corporate bonds will be completed in mid-June. The Fed’s program to buy $300 billion of medium and long-term U.S. Treasury securities finishes in September.
Once the current round of purchases are complete, both central banks will have to decide whether to embark on another one (intensifying criticism about inflationary financing of public debt) or end it (triggering a sharp yield increase).
This helps clarify that there is no such thing as a free lunch. If the Fed buys debt issued by Treasury then the end result is that it transforms the effective maturity of that from long term to short term. This is hardly a sustainable long term position.
Well James, I am glad that this is simply a ‘recession’ and that it appears to be coming to an end. It is nice to know that the bank stress tests were such a success despite the fact that the test was ‘rigged’ from the start. Read Dr Martin Weiss on this. It is also interesting that banks are so strong that they do not have to mark derivatives etc mark to market but can value them at what they like. I wonder why the market value is not correct? Oh it is a simple thing called insolvency.
Well I am off to fantasy island now James to pump this market and spend my money. No doubt I will meet you there James, along with the CNBC crew and a whole pile of other economists etc. Great days are coming-NOT!