MacroScope

Post-Lehman shadows creeping up on German economy again?

Germany's Minister of Finance Wolfgang Schauble speaks during a discussion during the World Bank/IMF annual meetings in Washington

The recent stretch of dire economic data from Germany is starting to bear an unfortunate resemblance to late 2008 – when Lehman Brothers collapsed and the world tipped into the worst recession since the Great Depression.

On a severity scale, a downturn now will probably be nowhere close to the first quarter of 2009 when Germany’s gross domestic product shrank 4.5 percent on the quarter.

Still, Europe’s biggest economy is careening toward a technical recession unless it’s halted by a miraculous upturn in the September data.

An analysis of Reuters polls shows several of four key German economic indicators have come below the Reuters consensus over the past three months, in some cases below even the most pessimistic prediction.

When data start to get this volatile, they sometimes herald a change in the economic cycle. And it’s not always for the better.

Can they kick it? Yes they can

Click here for suggested soundtrack to this blog 

During the recent round of financial crises, policymakers have done a whole lot of “kicking the can down the road”.

The latest is taking place in the United States where a fiscal stalemate between Republicans and Democrats has forced the first partial government shutdown in 17 years.  It has also raised concerns about a U.S. debt default, should the government not meet a deadline this week of raising the debt ceiling. That has kept short-term U.S. interest rates and the cost of insuring U.S. debt against default relatively elevated.

While markets remain convinced there will be a last-minute deal – because the consequences are far to dire for there not to be – their performance has ebbed and flowed with the mixed messages from Washington.

Back when Yellen and Summers had the same boss

With all the back-and-forth in the Yellen versus Summers Fed chair showdown, it’s easy to forget that the two once played for the same team – the Clinton administration.

This incredible photo from the Reuters archive features many of the key players in U.S. economic policy over the last two decades, tracing the arch of the 1990s tech boom, the early 2000s housing surge and the financial crisis of 2008-2009. They include Fed Vice Chair Janet Yellen, then advisor to Clinton, and Larry Summers, then Deputy Treasury Secretary. Both are now seen as leading candidates to replace Ben Bernanke as Fed chair next year.

Also pictured are Treasury Secretary and Citigroup magnate Robert Rubin; budget director and eventual Fannie Mae chief Franklin Raines; chief of staff Erskin Bowles, who became famous for the Simpson-Bowles deficit reduction plan; national economic council director Gene Sperling, currently an advisor to President Barack Obama; and Jack Lew, current Treasury Secretary, who was the deputy director of the office of management and budget.

Big government kept a “contained depression” from being a Great one: Levy

David Levy says he is bullish on the U.S. economy long term. But for now, the country is effectively stuck in a “contained depression,” the chairman of the Jerome Levy Forecasting Center told Reuters during a recent visit to our Washington bureau.

Still, things could have been much worse, says the third generation economist. For Levy, the interventions of a large and proactive federal government prevented a repeat of the 1930s.

In this corrective process, the reason we haven’t had a collapse in profits as we had in the Great Depression is we have – what nobody seems to like very much – a big government that’s stabilizing it by just simply running these deficits and being a much more active lender of last resort.

Inequality and the crisis: the other missing link of macroeconomics?

Ever since an epic financial crisis hit the United States in 2008, mainstream economists, most of whom utterly failed to foresee the oncoming train wreck, have been scrambling to introduce a financial sector dimension to their models. It was a conventional approach that detached the study of financial stability from macroeconomic variables, the narrative goes, that prevented the experts from seeing the build-up of an unsustainable housing bubble that, when it crashed, took down the economy down with it.

Research by James Galbraith, professor of public policy at the University of Texas at Austin, suggests finance is only one blind spot for the economics profession. Another key and increasingly relevant factor in the public debate that has been largely ignored is the issue of inequality. The first chapter of Galbraith’s latest book, “Inequality and Instability,” begins like this:

In the late 1990s, standard measures of income inequality in the United States – and especially of the income shares held by the very top echelon – rose to levels not seen since 1929. It is not strange that this should give rise (and not for the first time) to the suspicion that there might be a link, under capitalism, between radical inequality and financial crisis.

Hitchhiker’s guide to the intergalactic financial crisis

The opening passage of Hitchhiker’s Guide to the Galaxy, Douglas Adams’ cult book, is remarkably apropos for a world caught in seemingly perennial financial crises and turmoil. It reads:

Far out in the uncharted backwaters of the unfashionable end of the Western Spiral arm of the Galaxy lies a small, unregarded yellow sun. Orbiting this at a distance of roughly ninety-eight million miles is an utterly insignificant little blue green planet whose ape-descended life forms are so amazingly primitive that they still think digital watches are a pretty neat idea.

This planet has – or rather had – a problem, which was this: most of the people living on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movement of small green pieces of paper, which was odd because on the whole it wasn’t the small green pieces of paper that were unhappy.

Safe for the 1 percent: FDIC often insures much more than $250,000

That the U.S. Federal Deposit Insurance Corporation (FDIC) insures deposits in people’s bank accounts up to $250,000 is fairly common knowledge. What is less known is that this $250,000 cap is, in many cases, a fiction, because companies and savvy, wealthy depositors can circumvent it, or avoid it altogether.

Two examples of this “the-sky-is-the-limit” insurance are so-called TAG accounts and CDAR accounts. TAG (Transaction Account Guarantee) accounts held about $1.5 trillion as of March 31, according to the FDIC’s latest quarterly banking profile. The accounts pay no interest, so their popularity is derived from their uncapped FDIC insurance which reassures companies who need to keep large amounts of cash at hand to finance inventories and payrolls that their deposits are safe even if something goes wrong at the bank.

The FDIC is funded by the banks it insures. When it closes a bank, it uses money it has already set aside to protect depositors and absorb any losses associated with the failure. TAG accounts were forged in the fire of the 2008 financial crisis by the FDIC, the U.S. Treasury and Federal Reserve Board and unveiled in a joint press conference.

Central bank balance sheets: Battle of the bulge

Central banks across the industrialized world responded aggressively to the global financial crisis that began in mid-2007 and in many ways remains with us today. Now, faced with sluggish recoveries, policymakers are reticent to embark on further unconventional monetary easing, fearing both internal criticism and political blowback. They are being forced to rely more on verbal guidance than actual stimulus to prevent markets from pricing in higher rates.

How do the world’s most prominent central banks stack up against each other? The Federal Reserve was extremely aggressive, more than tripling the size of its balance sheet from around $700-$800 billion pre-crisis to nearly 3 trillion today. Still, the ECB’s total asset holdings are actually larger than the Fed’s – it started from a higher base.

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The Bank of England, for its part, went even deeper into uncharted territory, with its assets as a percentage of GDP surpassing the Fed’s. By the same measure, the ECB has overtaken the Bank of Japan, which has been grappling with deflation for some two decades and started from a much higher level.

When 500 billion euros no longer pops eyes

There was a time when 500 billion euros in cash was truly spectacular.

But investors and speculators hoping for an even more eye-popping cash injection at the European Central Bank’s second and most likely last three-year money operation on Wednesday are likely to be disappointed, based on past Reuters polls of expectations.

"Here, have some cash"

Ever since the ECB started offering cheap, long-term loans to keep cash flowing through banks during the financial crisis, a clear pattern has emerged in the forecasts of money market traders attempting to gauge their size.

They have consistently underestimated the size of a given new loan tender the first time it is offered, only to overshoot on subsequent operations of the same maturity.

Europe’s wobbly economy

Things are  looking a bit unsteady in the euro zone’s economy.  Just ask Olli Rehn, the EU’s top economic official, who warned this week of  “risky imbalances” in 12 of the European Union’s 27 members. And that’s doesn’t include Greece, which is too wobbly for words. 

Rehn is looking longer term, trying to prevent the next crisis. But the here-and-now is just as wobbly. The euro zone’s economy, which generates 16 percent of world output, shrunk at the end of 2011 and most economists expect the 17-nation currency area to wallow in recession this year and contract around 0.4 percent overall. Few would have been able to see it coming at the start of last year, when Europe’s factories were driving a recovery from the 2008-2009 Great Recession. And it shows just how poisonous the sovereign debt saga has become.

Not everyone thinks things are so shaky.  Unicredit’s chief euro zone economist, Marco Valli, is among the few who believe the euro zone will skirt a recession — defined by two consecutive quarters of contraction — in 2012. This year is “bound to witness a gradual but steady improvement in underlying growth momentum,” Valli said, saying the fourth quarter was the low point in the euro zone business cycle.