Or so says Time. With the vast array of unprecedented Fed actions, it is hard to argue with the selection. But this might not be Bernanke’s last selection if inflation picks up. Remember, the award goes for the person who had the most impact, for good or ill.
Politics and policy from inside Washington
Gallup’s chief economist, Dennis Jacobe:
We’ve just gone through the worst financial crisis since the Great Depression, and economies don’t recover from that kind of thing overnight.
What led to this artificiality was that governments and monetary institutions around the world, led by the U.S. Federal Reserve, took unprecedented actions to mitigate the effects of the financial crisis. … In addition, the United States has undertaken an unprecedented amount of spending, ranging from TARP [the Troubled Asset Relief Program] and the auto industry bailout to the stimulus program and expansion of the social safety net. As a result, future federal budget deficits are also going to be unprecedented for years to come. Combined, these fiscal and monetary policies have led to sharp declines in the value of the dollar, a surge in commodity prices, and even serious questions about the role of the dollar in the global economy.
All of this seems to have worked in the short term, and the world economy is much better off in terms of its financial stability than it was a year ago. … A lot of what we’re currently seeing is more of a mirage than reality — and people should be wary of the false signals that may have come from these emergency actions. In a sense, we’ve put the global economy on “steroids” — and we know there will be long-run consequences — but even more importantly, we know these “steroids” are creating distortions in our normal measures of global economic well-being.
“Armchair Economist” Steven Landsburg had a chance to talk with Obama healthcare guru David Cutler of Harvard. His conclusion:
In Professor Cutler’s view, there are three ways to fix things: First, European style rationing, which almost no economist favors (largely because there’s no way to tell whether the government is getting the quantities right). The second option, which Professor Cutler prefers, is revising the payment system to create better incentives. I agree that this would be a very good option if you could figure out how to accomplish it, and I agree that there might be a way to make it work, but I’m not convinced that Professor Cutler (or anyone else) has yet figured out how to do it. The third option is the one I tend to favor—more patient autonomy. I’ve indicated some ways this might work in an earlier post. Professor Cutler is skeptical of this third option on the grounds that—well, he didn’t put it quite this way, but essentially his argument was that a lot of patients are stupid. That’s probably true, and it means that this option is imperfect also.
The great Arnold Kling tosses in his two cents:
My disagreement with Cutler is more than mere gut instinct. Cutler and I might agree that there is overuse of medical procedures with high costs and low benefits. We might agree that incentives affect this. However, Cutler is confident that central planning represents the solution, not the problem. He believes that remote bureaucrats can measure health care quality well enough and implement compensation schemes that are fine-grained enough to achieve significant improvement.
I suspect that he has no administrative experience either in business or government. Suppose that you told him that middle managers in America make many mistakes and often are compensated for doing the wrong things. As an academic, he would think in terms of having experts in Washington design better compensation schemes for middle managers. It would never occur to him that what works in theory fails in practice, because it incorrectly assumes that central planners have superior knowledge and face zero political constraints, and that in a dynamic environment the planners will stay one step ahead of those with an incentive to game the system.
Stu Rothenberg on the Senate Majority Leader:
Finally, I am struck how much Senate Majority Leader Harry Reid’s (D-Nev.) ballot test numbers resemble those of former Sens. Rick Santorum (R-Pa.) and John Sununu (R-N.H.), as well as soon-to-be-former New Jersey Gov. Jon Corzine (D). All three, of course, lost re-election bids.
Since a late July GOP poll, Reid has not exceeded 43 percent in a ballot test against a potential opponent, and he has generally drawn around 41 percent of the vote against his two most likely Republican challengers. His last lead was in a late November 2008 Daily Kos poll in which he had a 46 percent to 40 percent advantage over former Rep. Jon Porter (R), who has since taken himself out of consideration.
I recently had the chance to sit down and chat with Rep. Paul Ryan, a Wisconsin Republican and the ranking GOPer on the House Budget Committee. Ryan’s a rising Republican star (he’ll be just 40 next month), a guy some folks were pushing to be John McCain’s running mate in 2008. If there’s a young Jack Kemp in today’s Congress, he’s it. And if you’re wondering what the 21st century Republican Party will stand for, many of the ideas will probably come from Ryan. Here are some excerpts from our conversation:
Boosting the economy
I would do whatever I could to keep tax rates low and permanent. I subscribe to the [Milton] Friedman permanent income effect. And I believe in the Kennedy-Mundell-Reagan policy mix of low tax rates and sound money. And that also means getting our debt under control.
Look what’s going to hit us in 2011. We are going to have a massive tax increase on labor and capital, and the Fed for sure is going to be tight by then. We are doing kind of a cash for clunkers on the whole economy. We are pulling growth from 2011 into 2010. Economic decision makers are looking at the policy climate, and it is horrendous. Then they read the newspapers and see payroll taxes, pay or play, cap-and-trade and this uncertain regulatory environment. It’s the uncertainty tax. There is this enormous uncertainty being injected into the economy, and everybody is sitting on their hands.
Our government is led by ideologues, and they are bound and determined to implement a social welfare state, a cradle-to-grave entitlement society, a high-tax, high-government-dependency society. And the countries that have gone down that path have higher unemployment, a lower standard of living and more economic stagnation.
If you listened to the healthcare debate [in the House], the leaders of the Democratic party, they all basically said the same thing: This is the third wave of progressivism, we are finally completing the progressive agenda with passage of this bill. They really believe they can finally transform America into something it’s not.
The VAT is coming. They just know they can’t do it before the election. My fear is that the credit markets blow up on us again, we’ll get some shot across the bow by the bond market one of these days. And if the Democrats are still in power, that will bring us the VAT. They will say they have no choice but to do it to save the creditworthiness of the government. It will kind of be like another TARP weekend where the Treasury Secretary and the Fed chairman come to Capitol Hill hyperventilating and out of that comes a VAT. Our government is premeditating a moment like that. But there is another way with real entitlement reform, real tax reform, fulfilling health and retirement security but also paying off our debts and making our economy really competitive.
A deficit commission
I think we should just do our jobs. The way this commission is going to be stacked, I fear, will be for a slow moderation in spending but a big increase in taxes. To really fix this problem, what you’ve got to do is have a defined benefits safety net with a defined contribution system on top. You could design this in different flavors, but that is the gist of what you have to do to wipe these unfunded liabilities off the books.
What I think we are doing here is enshrining “too big to fail” in our system and making a permanent crony capitalist system.
The future of U.S. financial reform seems destined to track closely the path of that other major effort winding its way through Congress, healthcare. As a result, what came out of the House of Representatives with a narrow majority on Friday may be far more ambitious than what the Senate could possibly pass.
So the harshest critics of Wall Street – or the “fat cat bankers”, to use President Barack Obama’s label in a Sunday television interview – will be disappointed by the final result that will probably become law sometime in 2010.
As it stands, the House bill is hardly radical. It doesn’t embrace, for example, the preemptive dismantling of large, interconnected firms. It doesn’t reduce the Federal Reserve’s regulatory reach. It doesn’t restore the law separating commercial and investment banking. It doesn’t even give bankruptcy judges the power to alter mortgages.
But even bits that reformers favor face diminution or elimination. Senate Banking Committee Chairman Christopher Dodd’s more radical proposal to strip the Fed of regulatory oversight and create a single super-regulator has been a total non-starter. Dodd quickly reversed field and instructed committee members to pair off into bipartisan working groups to focus on key issues.
A Consumer Financial Protection Agency for gadfly Elizabeth Warren to lead looks possible, but it will be severely weakened from the House version. A proposed $150 billion bailout fund financed by banks could easily disappear. So, too, could language that would force secured creditors to accept a 10 percent haircut if a financial firm needs a government rescue. As for the Fed, one possible compromise would be for the central bank to monitor systemic risk but leave it to existing agencies to take action.
Prioritizing financial over healthcare reform might have led to a tougher final bill worthy of Obama’s harsh rhetoric. By multi-tasking, however, the White House’s need to get something done before midterm elections will undoubtedly lead to compromise or downright dilution. This is just the sort of unfortunate scheduling Wall Street would understandably celebrate.
As usual, Ed Yardeni is exactly on point:
1) While Washington wants them to lend more, the bank examiners sent by Washington’s regulators are all over them to improve their credit quality and to tighten their lending standards.
2) They also observe that most of the big banks were forced to take TARP money they didn’t need or want last October 2008.
3) The bankers can’t deny that they contributed to the financial mess, but so did the government by pushing them to make subprime loans through the Community Reinvestment Act and by encouraging Fannie and Freddie to purchase these loans. In his recent book titled “The Housing Boom and Bust,” Thomas Sowell carefully documents this sordid tale of corruption in Washington and on Wall Street.
4) One of the main reasons that the banks are not lending is that the Federal Reserve is pegging the federal funds rate at zero. As a result, investors have scrambled to buy corporate bonds at a record pace. So corporations with access to the bond market have been able to raise lots of money. Indeed, many have raised more than they need, and they used some of the proceeds to pay down their bank lines of credit. Less fortunate borrowers are stuck with trying to get loans from their bankers. The problem is that many of them have become less credit worthy because the economy remains weak. The banks already have lots of problem loans and don’t want to make more such loans, especially with bank examiners on their backs.
An average of healthcare polls by Real Clear Politics shows it unpopular by a 53-38 margin. But why are the Ds still pushing hard to get it passed? Byron York analyzes the various motivations after to talking to a Dem strategist:
“In the House, the view of [California Rep. Henry] Waxman and [House Speaker Nancy] Pelosi is that we’ve waited two generations to get health care passed, and the 20 or 40 members of Congress who are going to lose their seats as a result are transitional players at best,” he said. “This is something the party has wanted since Franklin Roosevelt.” In this view, losses are just the price of doing something great and historic. (The strategist also noted that it’s easy for Waxman and Pelosi to say that, since they come from safely liberal districts.)
“At the White House, the picture is slightly different,” he continued. “Their view is, ‘We’re all in on this, totally committed, and we don’t have to run for re-election next year. There will never be a better time to do it than now.’”
“And in the Senate, they look at the most vulnerable Democrats — like [Christopher] Dodd and [Majority Leader Harry] Reid — and say those vulnerabilities will probably not change whether health care reform passes or fails. So in that view, if they pass reform, Democrats will lose the same number of seats they were going to lose before.”
The always insightful Pete Davis opines on the Pew-Peterson debt report at the must-read Capital Gains and Games blog:
It makes a lot of sense to adopt a deficit reduction program now, but to wait to implement it until 2012 to make sure the recovery is well underway. It also makes a lot of sense to avoid specifics that Congress will change anyway. By putting everything on the table and by focusing on the key economic variable, public debt as a percentage of GDP, it would hopefully enlist enough public support to hold political leaders accountable, so our kids don’t end up paying for our fiscal mess.The Peterson-Pew Commission is composed of those who have long labored for deficit reduction. It is co-chaired by Former Representatives Bill Frenzel, Tim Penny, and Charlie Stenholm. They know first hand how difficult it is to craft deficit reduction legislation. They also know how important it is to tackle this problem now, before we end up struggling to maintain our standard of living as we pay enormous interest expense to China with dollars that are worth less and less. Former House Budget Chair Jim Nussle noted, “You don’t want a market-based event to force [a solution].” Former Congressional Budget Office Director Doug Holtz-Eakin noted the entitlement crisis is upon us on top of a weak economy: “What was a three-decade problem is now a one-decade problem” before Medicare and Social Security become insolvent.
When I’m asked how long it may take to restore a balanced federal budget, I note that we started trying to restore balance after the 1980 recession and the 1981 Reagan Tax Cuts in 1982, and it only took us 17 years to reach balance in FY98. That was when the deficit peaked at 6% of GDP. Now it’s at 10% of GDP. We’ll be lucky to reach balance in the next 30 years. Hopefully, I’ll live to see it.
Goldman Sachs has boosted its 4Q GDP outlook to 4 percent from 3 percent, yet continues to believe in the gloomy New Normal. Here’s why:
By our estimates, fiscal policy contributed around 2½ percentage points (annualized) to real final demand growth in the second half of 2009. … The conclusion thus seems to be that fiscal policy has been responsible for most, if not all, of the growth of final demand in the second half of 2009.
While fiscal policy will remain supportive to growth for most of 2010, the size of this boost is set to decline, modestly in the first half and sharply in the second half. (Indeed, our current estimates imply a negative impact in the fourth quarter, although this is obviously subject to new congressional initiatives as the midterm elections approach.) This means that we need an underlying improvement in final demand just to offset the impact of policy through 2010. While we do expect such an improvement, we believe it will be U-shaped rather than V-shaped and hence insufficient to produce an acceleration in final demand growth once the fiscal pattern is taken into account.
Me: Moreover, the firm still thinks job growth will only average 100k a month, not counting census temps. If that number shot up to, say, 250k a month — a level that would really start lowering the unemployment rate, the firm said it might change its view that the private economy was still muddling through at a 2 percent GDP rate without government steroids.