Courtesy of the Congressional Budget Office:
My pal Don Luskin gets it just right in the WSJ today: America is wrong on both taxes and trade.
All else being equal, if the Bush tax cuts don’t get extended, that’s a 2.3% hit to 2011 GDP. That means instant double-dip recession, starting at midnight, Dec. 31. … Now to protectionism. Last week the House passed the Currency Reform for Fair Trade Act. … The bill, if passed by the Senate and signed by the president, would mandate that the Department of Commerce take a foreign country’s currency interventions into account in determining whether its trading practices are unfair. In the case of China—the target at which this bill is aimed—Commerce would determine that the amount by which the yuan is allegedly undervalued. … Surely China would retaliate. That makes the bill a nuclear threat of mutual assured economic destruction. If carried out, it would crush trade between China and the United States, which are huge export markets for each other.
As Luskin also points out, a rising yuan is no silver bullet — there’s lots of risk with little potential reward. Along with the tax increases, Washington is amazingly anti-growth right now. Instead, they need to make growth the new government initiative.
Interesting piece by former FDIC head Bill Isaac on the bank bailout:
In truth, customers of money market funds had already been calmed when Treasury issued a 100% guarantee of their money – before TARP was enacted. The FDIC had the authority to reassure depositors under existing law, as was in fact done shortly after the TARP was enacted.
Two weeks after the TARP was enacted, Paulson abandoned the toxic asset plan and announced that the money would instead be used to shore up the capital of banks. I had argued against the TARP in part because I believed capital infusions would support much more new lending than would the purchase of toxic assets. Moreover, I believed capital infusions would be far less costly to taxpayers.
However, the TARP was not needed for capital infusions because the FDIC had existing authority to provide capital to banks. I preferred strongly that the FDIC manage a capital infusion program rather than the highly politicized program Treasury implemented.
Treasury made two egregious mistakes on the capital program and many smaller ones. The first blunder was to order nine large financial institutions – CitiGroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Bank of America, Bank of New York/Mellon, Merrill Lynch, Morgan Stanley and State Street – to accept $125 billion of taxpayer money that most of them did not need or want.
To some extent he adopts the John Taylor theory that it was the chaotic nature of the TARP roll-out that destabilized markets. Yet he also says he was in favor of capital injections.