Wednesday, September 29, 2010

Today's Best Reads

1--Economics Is not a Morality Play, Paul Krugman, New York Times

Excerpt: But maybe this is an opportunity to reiterate a point I try to make now and then: economics is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished. The market economy is a system for organizing activity — a pretty good system most of the time, though not always — with no special moral significance. The rich don’t necessarily deserve their wealth, and the poor certainly don’t deserve their poverty; nonetheless, we accept a system with considerable inequality because systems without any inequality don’t work. And before the trolls jump in to say aha, Krugman concedes the truth of supply-side economics, that’s not an argument against progressive taxation and the welfare state; it’s just an argument that says that there are limits. Cuba doesn’t work; Sweden works pretty well....

The point is that it would have been much better if the Depression had been ended with massive spending on useful things, on roads and railroads and schools and parks. But the political consensus for spending on a sufficient scale never materialized; we needed Hitler and Hirohito instead.

2--Fed's Lockhart: The Approaching Monetary Policy Decision Dilemma, calculated risk

Excerpt: The circumstances of weak recovery, persistent unemployment, dangerously low inflation, and the policy interest rate (the primary tool of modern monetary policy) at the zero lower bound present a tough analytical challenge.
If action is taken by the Fed, a clear option is to grow the size of the balance sheet since the policy interest rate, for all practical purposes, cannot go any lower. Growth of the balance sheet would be accomplished by a second round of asset purchases (probably Treasury bills and notes) paid for by newly created money. The technical term for this policy is "quantitative easing," and the prospect of more of this approach is being referred to as QE2.

3--Shadow Banks Pose Major Threat to Financial Stability, Mark Thoma, Fiscal Times

Excerpt: The problem is not the traditional type of bank runs your grandparents might have told you about. Rather, modern bank runs occur in the shadow banking system. The shadow banking system includes major investment banks, money market mutual funds such as Fidelity, Vanguard and Schwab, and securities dealers such as those that can be found at JP Morgan, Bank of America and Citigroup.

These banks, which control trillions of dollars in assets – money market mutual funds alone were worth $3.8 trillion in 2008 — serve as intermediaries between borrowers and lenders, and hence function like traditional banks, but they are not subject to the regulations that exist in the traditional sector to protect against problems such as bank runs.

A bank run within the shadow banking sector was at the heart of the 2008 financial meltdown that led to one of the worst recessions in U.S. history, and it’s a problem that could happen again if we don’t take steps to prevent it.

4--Consumer Confidence Index Slips Lower, New York Times

Excerpt: September consumer confidence in the United States slipped to its lowest levels since February, driven by a deteriorating labor market and business conditions, according to a private report released Tuesday.

5--Pledge to America: Short-term Fiscal Restraint and Long-term Fiscal Folly, Michael Ettlinger and Michael Linden, econoblogspot

Excerpt: The “Pledge to America” budget would mean $11.1 trillion in deficits over the next 10 years. By 2020, the federal budget deficit would be 6.3 percent of gross domestic product, the federal debt would exceed 93 percent of GDP, and interest payments on the debt would be more than $1 trillion a year. The budget deficit would be about $200 billion larger in 2020 under the “Pledge to America” plan than it would be under President Barack Obama’s budget, and over the next 10 years deficits would be $1.5 trillion higher than under the president’s budget. The substantial increase in deficits under the “Pledge to America” budget are due to the significant tax cuts that come from extending all expiring tax provisions and the implementation of several new tax cuts.

6--Bank of England’s Posen: Central Banks Should Do More — A Lot More, Wall Street Journal

Excerpt: “In every major country, actual output has fallen so much versus where trend growth would have put us, and trend growth has not been above potential for long enough as yet, that there remains a significant gap between what the economy could be producing at full employment and it currently produces. Thus, policymakers should not settle for weak growth out of misplaced fear of inflation,” he said....

The risks posed by doing too little monetary easing far exceed risks posed by doing too much, he argued, making a case for looking beyond the economic metrics: “There are… some very serious risks if we make policy errors by tightening prematurely, or even if we loosen insufficiently. Those risks are not primarily the potential for a double-dip recession or even of temporary measured deflation. While bad, those situations would still be within the range of short-term cyclical developments, and could be weighed against simple inflationary pressures from monetary policy trying to stimulate too much. The risks that I believe we face now are the far more serious ones of sustained low growth turning into a self-fulfilling prophecy, and/or inducing a political reaction that could undermine our long-run stability and prosperity. Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy’s productive capacity, and by investors to avoid risk and prefer cash. Those tendencies are already present, and insufficient monetary response is likely to worsen them.”

7--We can only cut debt by borrowing, Martin Wolf, Financial Times

Excerpt: My conclusion, then, is the exact opposite of the conventional wisdom with which I began: the only way that the private sector can de-leverage, when large economies are in a post-crisis recession, is for the government to leverage. The economy, as a whole, cannot de-leverage in any other way, other than via accelerated mass bankruptcy, which would certainly deepen the recession, if not create a depression. If the government tried to eliminate its deficit over night, it would have to drive the private sector back towards balance (or achieved a massive shift in the external balance very swiftly). In the context of excessive debt, that is only going to happen if private sector incomes are so squeezed that paying down their debt is no longer feasible. But in this situation, mass bankruptcy and a slump again becomes a likely outcome....

In short, not only can we deal with the private sector debt overhang by increasing the fiscal deficit, but we must do so. It is the only way of avoiding a deep slump and the immense disruption of mass bankruptcy. But this is not to preclude debt restructuring, as well. It is important to develop ways to restructure private debt, too. But, for this to happen, we must be prepared to impose more losses on financial intermediaries and so on their creditors.

Analysis of the economy is not the same thing as analysing a single household. What is true of the latter is not true of the former. The unwillingness to recognise this truth will lead to serious policy mistakes. (Bravo)

8--Most Americans Don’t Think Recession Is Over, Catherine Rampell, New York Times

Excerpt: Nearly three-fourths of Americans — 74 percent — say the economy is still in a recession. That’s a slight improvement from December, when 84 percent of those polled said they believed the economy was in a a recession, but it still discouraging.

9--The former guerrilla set to be the world's most powerful woman, Hugh O'Shaughnessy, The Independent

Excerpt: The world's most powerful woman will start coming into her own next weekend. Stocky and forceful at 63, this former leader of the resistance to a Western-backed military dictatorship (which tortured her) is preparing to take her place as President of Brazil.

As head of state, president Dilma Rousseff would outrank Angela Merkel, Germany's Chancellor, and Hillary Clinton, the US Secretary of State: her enormous country of 200 million people is revelling in its new oil wealth. Brazil's growth rate, rivalling China's, is one that Europe and Washington can only envy.

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