MacroScope

Another false start for the U.S. economy?

Since the global financial crisis ripped the floor out from underneath developed world economies, the world’s biggest one has had several false starts nailing the floorboards back in.

Stock markets have moved in almost one direction since their trough in March 2009 – up – but economic growth and job creation have bounced around.

There are some disturbing signs another false start is afoot, but it has become almost taboo to even raise the issue that the U.S. economy, for all of its progress in repairing bank and household balance sheets, may still be at risk.

Since the Fed began cutting back on its $85 billion of monthly bond purchases, the two most important economic releases for financial markets have produced spectacular upsets versus the consensus view – and even the most pessimistic one.

December net hiring collapsed to just 74,000 against consensus expectations of 196,000 – the biggest upset since the U.S. economy had one of its false dawns, in early 2011. It was well below the lowest forecast of 120,000.

from Global Investing:

PIGS, CIVETS and other creature economies…

Given the ubiquity of BRICs and PIGS, it seems everyone else in the financial and business world is attempting to conjure up catchy acronyms to group economies with similar traits. All with varying degrees of success. BRITAIN-WEATHER/

HSBC chief Michael Geogehan has been championing 'CIVETS' to describe Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa as the next tier of developing economies poised for spectacular growth.

Evoking the skunk-like animal blamed for the spread of the deadly SARS outbreak in Asia is not exactly auspicious but then it will probably be less offensive than the porcine moniker for Portugal, Italy, Greece and Spain. The collective term -- with permutations such as PIIGGS to include Ireland and Great Britain among the list of debt-ridden countries -- has been denounced by politicians in Portugal and Spain.

Price level targeting vs inflation targeting

Professor Charles Goodhart of the London School of Economics explains the difference between inflation targeting and price level targeting in the lobby of Jackson Lake Lodge after taking part in an animated discussion of whether central banks should target price levels rather than inflation.

A paper University of California, Santa Cruz economist Carl Walsh presented at the Federal Reserve’s annual mountain retreat suggested that one lesson from the recent financial crisis is that central banks would benefit from the greater flexibility that price level targeting might give them.

A former Fed governor,  Frederic Mishkin, said that while in theory price level targeting may sound attractive, in actual practice it is more difficult to use effectively. One difficulty he cited was in explaining to consumers how it works. 

Bernanke – maybe it’s in the stars

After two years of battling a financial crisis and a deep recession, Federal Reserve officials were able to poke fun at themselves at their annual retreat in Jackson Hole, Wyoming.

Many more people than there are places for want to attend the conference, which draws a number of central banking stars and takes place in a beautiful and remote national park. Kansas City Fed President Thomas Hoening, who hosts the event, said at the opening dinner on Thursday it’s been suggested to him that he open it to more participants.

“But then we’d be too big to feed,” he deadpanned. 

Fed Chairman Ben Bernanke promised at the event two years ago that the central bank would not protect investors from bad decisions, only to later throw emergency lifelines to firms whose collapse might cause widespread damage, making them “too big to fail.”

Will Bernanke be reappointed?

  Policy-makers, academics and analysts from around the world are gathered at a remote lodge in Wyoming’s Jackson Hole this week to reflect on the financial crisis.

    One of the topics of conversation on the sidelines of the conference is whether President Barack Obama will reappoint the chairman of the U.S. central bank — Ben Bernanke — whose term ends early next year.

    

    Two veteran Fed-watchers weigh in: 

    

GLENN HUBBARD, DEAN OF COLUMBIA’S GRADUATE SCHOOL OF BUSINESS

     “I think the bar for replacing Bernanke would have to be very high, in the middle of the crisis he has shown determination to take very bold action and his own knowledge has been very specific and helpful in the crisis.”

from Global News Journal:

Germany’s Finance Minister takes aim at the City

Has German Finance Minister Peer Steinbrueck finally said what many world leaders think but are afraid to say? That the British government won't sign up to meaningful reform of financial markets because it is too worried about what it would mean for the country’s most famous cash cow, the City of London.

 

The City, which accounts for around 35 percent of global foreign exchange turnover, has been a popular target for critics of capitalism for years. But it has rarely been singled out so bluntly as a problem by one of Britain’s close allies.

 

Even for a man not known for holding his tongue, Steinbrueck’s remark on Wednesday that Downing Street was impeding reform because it had “practically aligned” its interests with the City, was unusually undiplomatic. Just days before global leaders meet at a Group of Eight summit in Italy, Steinbrueck suggested the British government was plotting a “restoration” of the pre-crisis order to protect its own interests. The United States, by contrast, was now open to reform, he said.

from Africa News blog:

A tale of two Africas

Good news and bad news for Africa from the latest take on global risks from the World Economic Forum. Not much danger for most of the continent, it says, from an asset bubble burst. That's the good. The bad, of course, is that this is because there are not many financial assets to bubble. In fact, it deems the overall exposure even to economic risks is small because African economies are not particularly tied in to global markets.

Actually, the report shows that there are two Africas. Mapped by their susceptibility for economic and asset bubble trouble, most African countries are bunched together in a low risk range. But another, smaller cluster, including Nigeria and South Africa, finds itself in much more peril and shares space on the WEF risk map with Western and Eastern Europe.

Good news, in a contradictory sort of way.

New committee to save the world

In the late 1990s, when the Asian Financial Crisis was in full swing, Time Magazine dubbed then Treasury Secretary Robert Rubin, his deputy Lawrence Summers and then Federal Reserve Board Chairman Alan Greenspan as “The Committee to Save the World.”

On Saturday, a new committee convened in Washington, only this time the crisis is global, and now there are 20 members. Leaders from the 20 richest countries came together and backed a 10-page plan for the global economic crisis, agreeing on the need for measures to spur growth, better financial market rules and more say for emerging countries.

Sexy stuff, right?

Here’s a sample paragraph:

“Regulators should develop enhanced guidance to strengthen banks’ risk management practices, in line with international best practices, and should encourage financial firms to reexamine their internal controls and implement strengthened policies for sound risk management. * Regulators should develop and implement procedures to ensure that financial firms implement policies to better manage liquidity risk, including by creating strong liquidity cushions. * Supervisors should ensure that financial firms develop processes that provide for timely and comprehensive measurement of risk concentrations and large counterparty risk positions across products and geographies. * Firms should reassess their risk management models to guard against stress and report to supervisors on their efforts. * The Basel Committee should study the need for and help develop firms’ new stress testing models, as appropriate. * Financial institutions should have clear internal incentives to promote stability, and action needs to be taken, through voluntary effort or regulatory action, to avoid compensation schemes which reward excessive short-term returns or risk taking. * Banks should exercise effective risk management and due diligence over structured products and securitization.”

Not gloomy enough

The European Commission has been pretty gloomy about the prospects for European Union economies in recent days. Its latest forecast last week was for the 15 countries of the euro zone to grow by just 0.1 percent next year. For the 27-nation EU as a whole – this time incorporating the likes of Britain, Poland and Sweden – the number was only slightly better at 0.2 percent.  In fact, the Commission said the outlook was bleak. “The horizon,” said Monetary Affairs Commissioner Joaquin Almunia, “is dark.”

Simon Tilford, chief economist at the Centre for European Reform, reckons it may be even darker than the Commission expects. The Commission, he says in an article, has a tendency to be slow to downgrade its forecasts, and much of what it said last week was already looking out of date when released. “The indications of an unprecedented slump in economic activity are multiplying all the time.”

Tilford reckons the forecasts for Germany and Spain — the euro zone’s first and fourth largest economies, respectively – are among the most out of sync. Germany, for example, is seen standing still. But Tilford asks where such strength as even that will come from given the economy’s reliance on exports and a projected dive in global trade volumes. As for Spain, he wonders how a decline in output can be held to the Commission’s minus 0.2 percent with unemployment rising rapidly, industrial production tanking and construction and housing activity collapsing.

No time to wait

Simon Johnson is a former chief economist at the International Monetary Fund and is currently a professor at MIT and a senior fellow at the Peterson Institute for International Economics. Reuters is not responsible for this content and any views expressed are the author’s alone.
 

Senator Barack Obama won the presidency on Tuesday and comes to Washington in January. But before he even takes office, leaders from around the world descend on Washington November 15th for a Group of 20 summit to tackle the global financial crisis.

The US is saying that a statement of principles (or is that platitudes?) and the establishment of some working groups would constitute success.  The Europeans, particularly Messrs. Brown and Sarkozy, want to establish a process that moves towards some sort of new international financial/economic system (“Bretton Woods II” is the jargon), although they are still quite divided on what this would mean in terms of regulation for financial institutions or – the key point – capital flows.  The emerging markets, who will be very important participants, are not yet putting their cards on the table.