James Pethokoukis

Politics and policy from inside Washington

The Fed more unpopular than the IRS

Jul 28, 2009 13:54 UTC

Ben Bernanke isn’t just campaigning for his own reappointment — though that certainly is part of what’s going on. He is also bolstering the public image of the Fed, which could use some help:




I don’t think anyone could credibly argue that Bernanke should not be re-appointed. He’s done a great job,is genuinely motivated to do the right thing, is the foremost authority on the US Depression & all the permutations. He has held his own in Congressiional hearings — maybe even found his sea legs in that forum. Who knows, maybe he’ll throw out a smart ass answer to some of the boob questions next time ;-)

It boils down to a basic intelligence test. The most critical aspect for America ( and actually the world) is the Fed’s independence. Any other appointment from the current administration, at this juncture, would seriously compromise at the least,the appearance of independence. They may as well nominate Rob Blagojevich or some other bagman.

Larry Summers’s track record (Clinton admin. & Harvard) is crapola and it appears the bubble the Obama admin. floated very early (remember the rumblings right after the election?) on that nomination have popped. Triste ;-)

It seems pretty likely that anyone else the current administration would appoint would be their tool, perhaps with the “appearance” of being independent but with no juice.

Next, and really important, we’ve only seen Bernanke’s opening salvo. Yes, it was a big one, but just as criticsa, he has intimated a plan to relax the quantitative easing. This is the tricky, perhaps surgical part and not a job for the ham fisted or politically indebted.

This decision is really easy, if it’s not Bernanke, we should all worry — alot.

Posted by Siobhan Sack | Report as abusive

Candidate Bernanke hits the campaign trail

Jul 27, 2009 19:36 UTC

JamesPethokoukiscrop.jpgIf Ben Bernanke were running TV ads, taking polls and holding town hall-style meetings, it wouldn’t be any clearer that he’s conducting an explicit reelection campaign for another four-year term as Federal Reserve chairman come next January. Oh, wait a second, he just did hold an unprecedented town hall meeting. And it was one worthy of a presidential candidate charming primary voters in Iowa.

At the Kansas City Fed last night, Bernanke answered a couple dozen questions from 190 area residents for a three-part public television broadcast. Like a veteran politico, he tossed out the occasional platitude (“The best way to have a strong dollar is to have a strong economy”), railed against Washington (“I don’t think the American people want Congress running monetary policy”), gave a riveting and heroic personal narrative (“I was not going to be the Federal Reserve Chairman who presided over the second Great Depression”), and got downright folksy when talking about too-big-too-fail (“When the elephant falls down, all the grass gets crushed as well”).

Message to America: Ben Bernanke, a pharmacist’s son from Dillon, South Carolina, feels your pain. Now it’s not as if previous Fed chairmen haven’t campaigned for another four-year hitch. But the usual modus operandi is to curry favor with the Electorate of One — the president — who will be doing the renominating. And the precise mechanism has been a growth-friendly monetary policy.

Of course, the Fed has already been, to use Bernanke’s town hall phrase, “putting the pedal to the metal” to bolster the fragile economy and financial system. And that’s sure been to Wall Street’s liking. A Reuters poll last month found that economists rated Bernanke at eight out of 10 for his handling of the financial crisis.

But Bernanke’s smart to try and also get Main Street on his side. Obama, for instance, might prefer a more dovish Fed chair, such as San Francisco Fed President Janet Yellen, who’ll worry more about unemployment than inflation as the 2010 and 2012 elections near. Bernanke’s pushback against Obama’s proposals for a consumer financial protection agency is also another sign of his independence.

Plus, the president could desire to make more diversity history by nominating the first woman Fed chair — while leaving it to aides to rip Bernanke in background briefs to reporters. (“He was part of the Fed team that left rates too low for too long and failed to regulate Wall Street.” “Remember, he called the mortgage crisis a $100 billion problem.” “Bernanke was way too slow to ease in 2007.”) What’s more, Bernanke has to worry about a Congress where populists in both parties have been critical of his role in providing bailouts to Wall Street banks and AIG, as well as Bank of America’s takeover of Merrill Lynch.

So if Bernanke wants to keep his job, the PR campaign should continue. More TV interviews like the one he did on 60 Minutes in March. Maybe a televised town hall meeting in each Fed district. How about a Chairman’s Blog? And if we start heading into November and Obama still hasn’t renominated him? Two words: Oprah Winfrey.


To say that Mr. Bernanke is campaigning for himself personally is a gross mischaracterization.
Mr. Bernanke is campaigning for the Federal Reserve to keep its job.
The Fed is under pressure from HR1207 & S604. Audit the Fed then End it.

Posted by A. Fisher | Report as abusive

Are corporate profits about to take off?

Jul 27, 2009 18:42 UTC

Jim Paulsen of Wells Capital Mangement points out that companies have cut to the bone in preparation for near-depression. This could result in some spectacular profit numbers ahead (and check out the chart below) — assuming no near-depression:

Second quarter earnings reports have reflected this new trend where a number of companies have thus far surpassed earnings estimates even though sales remain weak. As economic recovery brings renewed top-line growth, corporate profits may continue to amaze and outpace expectations during this recovery. Chart 4 illustrates a fairly good “leading indicator” (by one year) of profit growth based on profit leverage. The dotted line is the multiplicative sum of the business productivity index, the labor unemployment rate and the factory unemployment rate. Essentially, when businesses focus on “rightsizing” (by improving productivity and purging payrolls and factory capacity), about one year later, corporate profits have tended to rise. The dotted line leads profit growth (solid line) by one year and currently forecasts about a 45 percent advance in nonfinancial profits in the coming year! Did the surge in fears produced by the subprime debt crisis cause U.S. businesses to act in ways
which may now lead to a “profit leveraged” bull market?



I understand rightsizing leading to an increased bottom line, but so far there is no indication of a top line growth; and the top line growth is the only indicator of a growing economy. We’re far from it and it appears everyday we’re closer to a jobless recovery [jobless stabilization].

Posted by Hank Reardon | Report as abusive

A quick look at Chimerica/Americhina

Jul 27, 2009 14:33 UTC

Here are three chart to give a feel for the current state of the US-China economic relationship (via the econ team at Action Economics):




Prof. Copper and the V-shaped recovery

Jul 27, 2009 14:03 UTC

Ed Yardeni takes note:

The S&P 500 is one of the ten components of the Index of Leading Economic Indicators. It seems to be forecasting a robust V-shaped economic recovery. This has got to be the most contrary scenario of all right now. Everybody is hung up about the anemic outlook for employment. I am too. So what is the S&P 500 seeing out there? How about yet another global bubble boom? This one is led by China, where M2 was up 28.5% y/y in June. Professor Copper seems to agree with this outlook. The price of this basic metal rose to $2.52 a pound at the end of last week, the highest since October 7, 2008. China’s Dow Jones Shanghai Composite is up 53% since March 6, well ahead of the S&P 500. It actually bottomed on November 4, 2008, and is up 122% since then to 383.78. That’s certainly an impressive meltup. Even more impressive would be if it recovers back to its record high of 588 on October 16, 2007. Anything is possible in a bubble.

China’s tax-cut success story

Jul 27, 2009 14:00 UTC

Chinese and American officials meet today in the latest edition of the “strategic dialogue” between the two nations. Here is an interesting 1998 take from Alvin Rabushka of the Hoover Institution about the role of tax policy in China’s economic ascent.

In 1978, the late Chinese leader Deng Xiaoping launched economic reforms that set China on a path of rapid growth. … Deng’s reform package included the establishment of coastal economic zones, increased investment by foreigners, liberalized trade, and a free market in agriculture. But the application of supply-side tax policy was the main component. In 1978, total government revenue consumed about 31 percent of GDP. Deng’s policies reduced China’s tax burden relentlessly, year in and year out. By the end of 1995, the tax burden had fallen to 10.7 percent of GDP, a cut of more than 20 percentage points, or two-thirds in relative terms.

Tax cuts fueled the privatization of the economy. Deng’s policy of massive tax reduction shifted one-fifth of all resources from government hands to the emerging town and village enterprises and private firms, which productively used those resources. The private sector grew faster than the country’s 10 percent annual average. Since the government didn’t tax away the private sector’s prosperity, the fruits of growth were plowed back into expanded activity. This had a snowballing effect, speeding the transformation toward private ownership.



You are forgetting something very important; in opening agriculture to the free market, China has essentially impoverished the vast majority of its rural populace… we’re talking about 700m (out of 900m) living in third world conditions. While it’s true, the boom in major cities like Shang’hai is staggering, it has come at an equally staggering price of basic humanity. And I think that is the fundamental problem with conservative thinking… the overall economic bottom line is more important than overall standards of living. There needs to be balance between the two – that’s the whole basis of society! – and China, and America, certainly are not striking a proper balance now. Yes, taxes are high, but if not for the high taxes it is very possible to imagine starving masses in the street seeking ‘justice’ re: French Revolution. I don’t want to sound so nihilistic, but there I think it’s closer than a lot of us like to believe. Leave taxes, trim fat, shut down lobbying, and pay off debts – THAT is a longterm solution, not cutting taxes to nearly nothing and hoping for the best.

Posted by the Shah | Report as abusive

More on the dangerous dollar …

Jul 24, 2009 20:15 UTC

It is the last part of this bit from Brad DeLong that really caught my attention (bold is mine):

The fact is that the approporiate fiscal policy for the U.S, right now is to pass: (a) a bigger stimulus over the next two years, (b) a standby tax increase to return the federal budget to primary surplus by 2012, and (c) devout and lengthy prayers that confidence in the dollar doesn’t collapse and send interest rates on U.S. Treasuries above the economy’s growth rate–in which case the situation changes from its current value of “dire” to “catastrophic.”


The reality is that we are approaching a SDR world. Which is how it should be.

However, the talk of a devalued dollar is premature. Relative to other world currencies, the dollar is actually strong considering the current environment. While there is pressure, the $ has been rather resilient in the face of a credit crisis compounded by a downturn, volatility and uncertainty. SE Asia and Latin America were not so lucky.

I don’t think Obama will devalue the dollar. China’s reserves are safe. Remember, that the US has top credit-worthiness because, excepting global disaster, it will not default.

This is still a serious correction, that has annihilated global wealth. We should take a lesson from this event. The future will require more precise policy analysis and flexibility in execution, when dealing with economic cyclical variations. The embrace of the boom times, should be accompanied by the tempering of the bust.

Posted by Greg | Report as abusive

Healthcare reform has to pass because … because … well, it just has to is all!

Jul 24, 2009 19:40 UTC

Ezra Klein does his gosh-darned best to help restore momentum to healthcare reform, which he is sure people will love to bits if only it passes:

Democrats know full well that there are two plausible outcomes to the health-care reform process. Health-care reform will fail, dealing a huge blow to the Democratic Party and giving Republicans tremendous momentum as we enter the 2010 campaign season. Or health-care reform will pass, and Democrats will criss-cross the country touting the largest legislative accomplishment in decades. Republicans may still attack them on the plan. But attacking a historic legislative success is a whole lot harder than attacking a historic legislative failure. Republicans know that, which is why they want to kill the bill. Democrats know it too, which is why they won’t let them.


lol, keep on reaching there ezra…. Too bad they see it as just a political matter.

Posted by jason | Report as abusive

GOP healthcare alternative? It’s pretty flawed, too

Jul 24, 2009 17:54 UTC

Ugh. So House GOPers have put out their alternative to ObamaCare. It’s really more of a statement of principles with a few numbers. Yes, it is  a good idea to level the playing field between those who get their insurance through their employers and those who buy it on their own. But this is the part that put me back on me heels:

Strengthens employer-provided health coverage by helping the 10 million uninsured Americans who are eligible, but not enrolled in, an employer-sponsored plan get health care coverage. The plan does this by encouraging employers to move to opt-out, rather than opt-in rules.

Employer-based covering should be scrapped, not strenghthened. (In fact, doing so really is key to reform.)  The great Arnold Kling gives five good reasons why:

  • The cost of health insurance is disguised from consumers, because firms do not report what they pay in premiums. Workers are under the illusion that their health coverage is inexpensive, and if they subsequently find themselves having to obtain their own health insurance, they are offended by the cost and instead choose to go uninsured.
  • Workers who are concerned about the availability of health insurance may suffer from “job lock.” They might wish to leave their job for self-employment, pursuit of formal education, an opportunity with a smaller firm, or early retirement, but the potential loss of health insurance is a deterrent.
  • Workers may not enjoy the range of insurance choices that they would have if health insurance were not negotiated for them by employers. For example, if they could choose their own insurance, some workers might elect coverage with higher co-pays and deductibles but lower premiums, in order to have more cash income.
  • Because employer-provided health insurance is subsidized through the tax system, the benefits accrue relatively more to high-income workers.
  • Workers who are fired or laid off can find themselves without health insurance at a point where they can least afford to be uninsured.

    A tax incentive to have some sort of medicial saving plan
    could make the diffrence…Save more early for old age. 401k for medicial? I see it as a way to phase out social security and reduce our dependance on goverment and vica versa. Insurance could come down like car insurance. Parents would cover their kids at birth so no prexisting conditions, even better before conception. Still didn’t see anything about tort reform..NO plan can work without that!

    Posted by Tom | Report as abusive

    Is Obama playing politics with the dollar?

    Jul 24, 2009 16:59 UTC

    A weak dollar is not always a bad thing. Stocks are up 43 percent from their March lows while the greenback is off 11 percent against major currencies. Scott Grannis explains the correlation:

    As panic set in late last summer, people all over the world flocked to the dollar as a safe haven. People stopped spending money, stockpiling it in the form of currency and in the form of higher money balances. … It all reached a head in early March of this year, as fear of massive deficits and massive tax increases paralyzed financial markets. Since that time, everything has reversed. The economy avoided the catastrophe many had feared, and Obama’s legislative agenda has stalled and his approval ratings have plunged. People have stopped accumulating dollar currency and money deposits, and so spending is starting to ramp up. The economy is starting to come back to life.

    But economist David Rosenberg of Gluskin Sheff has begun to worry (this is the second time he has written about it this month) that a weaker dollar is starting to reflect a plan by the White House to send it lower to give the economy a short-term boost, as well as the political fortunes the Obamacrats:

    [US Dollar Index futures are] starting to break down, and the moving averages are moving down across the board. Meanwhile, the commodity complex and the commodity-based currencies are on fire. The Kiwi is at a nine-month high; the Rand at an 11-month high and the Loonie at a seven-week high. Meanwhile we saw sugar, wheat, corn, cotton and gold all rally significantly yesterday. As we said before, the last policy shoe to drop, which may be dropping already, is the dollar.


    China has over $2000 billion in foreign exchange reserves, guess who’s not going to be amused about this policy.