Tuesday, January 11, 2011

Today's Links

1--Economics and Morality, Paul Krugman, New York Times

Excerpt: America is the advanced nation with the least social mobility (pdf), except possibly for Britain. Access to good schools, good health care, and job opportunities depends on lot on choosing the right parents.

So when you hear conservatives talk about how our goal should be equality of opportunity, not equality of outcomes, your first response should be that if they really believe in equality of opportunity, they must be in favor of radical changes in American society. For our society does not, in fact, produce anything like equal opportunity (in part because it produces such unequal outcomes). Tell me how you’re going to produce a huge improvement in the quality of public schools, how you’re going to provide universal health care (for parents as well as children, because parents in bad health affect childrens’ prospects), and then come back to me about the equal chances at the starting line thing....

That doesn’t mean the order we have should be overthrown: the pursuit of Utopia, of perfect economic justice, has proved to be the road to hell, while welfare-state capitalism — a market economy with its rough edges smoothed by a strong safety net — has produced the most decent societies ever known. The point, though, is that anyone who claims that transferring some income from the most fortunate members of society to the least is a vile injustice is closing his eyes to the obvious reality of how the world works.

2--Fed Paper Details Benefits of Asset Purchases, Wall Street Journal

Excerpt: The Federal Reserve’s asset buying program has boosted growth, lowered unemployment and warded off what almost certainly would have been a descent into a deflationary price environment, new research published by the Federal Reserve Bank of San Francisco argues.

The paper, made available on the bank’s website Friday, was authored by the San Francisco Fed’s research chief John Williams, along with Federal Reserve Board economists Hess Chung, Jean-Philippe Laforte, and David Reifschneider. The document attempts to accomplish something many have wanted to see, which is a firm quantification of the impact of central bank’s asset buying program....

These actions have driven the Fed’s balance sheet from around $800 billion at the start of the financial crisis in late 2007, to what the paper’s authors said would be $2.6 trillion by the middle of this year. The central bank embarked on the bond buying effort because it had cut its key overnight rate to zero, and needed a new path to provide stimulus to a weak economy...

“The Federal Reserve’s asset purchases have been effective,” the paper said. The authors estimate the current and projected growth of the balance sheet “will lower the unemployment rate, relative to what it would have been absent the purchases, by 1 1/2 percentage points by 2012.” They added “the asset purchases have probably prevented the U.S. economy from falling into deflation.”...

“Lower long-term interest rates, coupled with higher stock market valuations and a lower foreign exchange value of the dollar, provide a considerable stimulus to real activity over time,” the paper said. The authors reckon the first part of the bond buying effort “is estimated to boost the level of real [gross domestic product] almost 2% above baseline by early 2012, while the full program raises the level of real GDP almost 3% by the second half of 2012.”

That helps the labor market: “Private payroll employment is currently 1.8 million higher, and the unemployment rate 3/4 percentage point lower, than would otherwise be the case.” The impact of the bond buying effort will grow over time, with the economists writing “by 2012, the incremental contribution of the full program is estimated to be 3 million jobs, with an additional 700,000 jobs provided by the most recent phase of the program alone.”

On the inflation front, the paper’s authors write “inflation is currently a percentage point higher than would have been the case if the FOMC had never initiated the program.

3--Deepening crisis traps America's have-nots, Ambrose-Evans Pritchard, Telegraph

Excerpt: The US is drifting from a financial crisis to a deeper and more insidious social crisis. Self-congratulation by the US authorities that they have this time avoided a repeat of the 1930s is premature....

Tiffany’s, Nordstrom, and Saks Fifth Avenue are booming. Sales of Cadillac cars have jumped 35pc, while Porsche’s US sales are up 29pc.

Cartier and Louis Vuitton have helped boost the luxury goods stock index by almost 50pc since October. Yet Best Buy, Target, and Walmart have languished.

Such is the blighted fruit of Federal Reserve policy. The Fed no longer even denies that the purpose of its latest blast of bond purchases, or QE2, is to drive up Wall Street, perhaps because it has so signally failed to achieve its other purpose of driving down borrowing costs.

Yet surely Ben Bernanke’s `trickle down’ strategy risks corroding America’s ethic of solidarity long before it does much to help America’s poor.

Extreme inequalities are toxic for societies, but there is also a body of scholarship suggesting that they cause depressions as well by upsetting the economic balance. They create a bias towards asset bubbles and overinvestment, while holding down consumption, until the system becomes top-heavy and tips over, as happened in the 1930s.

4--Credit card withdrawal, My Budget 360

Excerpt: Banks pull the plug on consumer revolving debt. Credit card debt outstanding contracts from nearly $1 trillion to $800 billion. Bankruptcies on the rise even with tougher bankruptcy laws....

When people talk about the credit bubble they typically refer to the housing bubble and the trillions of dollars of debt secured by real estate. Yet the credit bubble also applies to student loans, government debt, and those pesky wallet hugging credit cards..... The total amount of credit card debt outstanding has contracted vigorously since the debt crisis emerged....

The above chart went from a peak near $1 trillion to the current $800 billion outstanding in revolving debt. Some of this is being paid off but a large part of it is being written off via bankruptcy.....In the end the American consumer is facing a drastically new financial market. Credit card debt never contracted on a year over year basis since 1965 but it did in this crisis. The amount of credit card debt outstanding has fallen nearly 20 percent from its peak only a few years ago. Yet the economy at least measured by GDP has grown...

5--European death-spiral, Satyajit Das, Naked Capitalism

Excerpt: The problems of the banking sector are increasing due to the poor economic conditions. Hitherto largely confined to commercial property, problems are now spreading to the broader economy. Unemployment and lower incomes mean that householders are unable to meet payment obligations on mortgages and other loans. Weak economic conditions have affected businesses, increasing default levels.....

The experience of Greece under the IMF/ EU plan is instructive. While there has been some progress, Greece is struggling to meet its budget targets due to a shortfall in tax revenues, forcing ever more aggressive spending cuts exacerbating Greece’s deep recession. Planned asset sales and structural reforms are unlikely to stabilise public finances. Faced with the unpalatable choice of withholding funding due to non-compliance with the plan or allowing default, the EU/ IMF have continued to disburse funds propping up the economy. The maturity of the bailout package is likely to be extended, acknowledging that it cannot be repaid.

In the absence of strong economic growth, inflation and a massive devaluation, the peripheral economies, such as Ireland and Greece, may be unable to shrink themselves to solvency.....In order to restore solvency, overburdened borrowers must stabilise debt and begin to reduce the level of borrowing. This requires GDP Growth exceeding interest rates, a budget surplus (through spending cuts and/or tax cuts) or a combination of these.

EU/ IMF assistance to Ireland was designed to address the high yields on Irish bonds, which curtailed the State’s ability to borrow. But the 5.80% cost of the bailout debt requires an equivalent growth rate and a balanced budget simply to stabilise debt at current very high levels.

Based on the IMF’s best estimates, there is little prospect of many European countries returning to balanced budgets any time soon. Given the toxic conjunction of high cost of funding, low growth and high starting level of debt, it is near impossible for these countries to contain the spiral to a restructuring of their debt or default.

6--Consumers Are Spending Faster Than Normal, Dean Baker, CEPR

Excerpt: The NYT had another piece suggesting that pessimism about the economy is preventing consumers from spending more. Actually, the current 5.5 percent saving rate is well below the post-war average, which is close to 8.0 percent. With tens of millions of baby boomers approaching retirement with almost no wealth, and many of the politicians in Washington planning to cut back Social Security and Medicare, it would be reasonable to expect the saving rate to rise rather than fall, meaning that consumption will weaken in the future.

7--More Bank Reforms Needed, Economists Say, Wall Street Journal

Excerpt: Global financial reforms that have drawn howls from bankers aren't nearly enough to avert another disaster, said academic economists gathered here for the annual meeting of the American Economic Association.

In recent months, regulators around the world have taken steps toward ensuring banks are able to weather tough times. New international rules will require big global banks to hold more equity to protect their depositors and other creditors. In the U.S., lawmakers have adopted measures intended to rein in risk at big banks and keep closer tabs on potential threats throughout the financial system....

"I just don't think we're doing what we need to do," said Anat Admati, a finance professor at Stanford University. "We've allowed bankers to confuse us into keeping things pretty much the same."...

Banks prefer taking on debt to raising equity, economists say, largely because governments have regularly stepped in to rescue debt holders in times of crisis. That has made borrowing unnaturally cheap—a perverse incentive that would fade if banks had enough equity to make bailouts unnecessary.

"The balance of argumentation leans in the direction of asking not why we should have more capital but why we don't," said Andrew Haldane, executive director for financial stability at the Bank of England....

"The incentive for the banks is to be as big, as systemically dangerous as possible" so the government will have no choice but to bail them out, he said....

Another issue is banks' sometimes excessive reliance on short-term borrowing to finance their activities. Banks such as Lehman Brothers and the U.K.'s Northern Rock failed in part because they couldn't raise money to replace short-term debt coming due. Douglas Diamond, an economist at the University of Chicago, noted that while regulators are requiring banks to keep more cash on hand to cover their debts, they have done little to prevent the kind of short-term borrowing that can lead to trouble.

Tougher rules could push more financial activity away from banks into other areas that don't face the same regulations. The so-called shadow banking sector, which includes everything from hedge funds to derivative markets, already plays a larger role in credit markets than traditional banking.

"You need some way of dealing with the fact that there could be contagious runs in these markets all at once," said Viral Acharya, a finance professor at New York University's Stern School of Business. New financial rules in the U.S. provide regulators with more power to oversee the shadow banking sector, and shed light on it by creating incentives to shift more derivatives trades into places where they can be monitored. But regulators have yet to work out exactly how they will identify dangerous situations in which many players have become exposed to similar risks.

"If you focus only on the big institutions, you really might miss out on this herding-type crisis," said Markus Brunnermeier of Princeton University. "One should not assume that the next crisis will look like the last one." ("Must read")

8-- Are Oil Prices About to Undermine the Recovery? Fed Watch via Economist's View

Excerpt: I could certainly imagine that an abrupt move up in gasoline prices from here could hurt the struggling recovery of the domestic auto sector and dampen overall consumer spending. I do not think it would be enough to give us a second economic downturn, but it could easily be a factor reducing the growth rate....

The sudden rise in oil in 2007, a clear deviation from the trend in the first half of the decade, led to substantial demand destruction, a severe blow to the US economy which at the time was struggling under the weight of the housing meltdown and the financial crisis (and arguably still is). The recent rise in oil appears different, more a reestablishment of the previous trend...

What I more concerned with is the possibility of another sharp spike in prices, such as occurred in 2007-08. A repeat of that incident would once again cripple households, who, after 18 months of recovery, are just barely starting to see the light. The most obvious channel to trigger such a spike is monetary, that the Federal Reserve's large scale asset purchases trigger a disruptive decline in the Dollar....

In short: Energy prices are yet another thing to keep an eye on. Still, recognize the increase to date appears to be more of a return to the recent trends than a disruptive price spike. Not that rising prices won't have consequences, but the trend of the past decade may simply be something we need to learn to live with. Rather than watching the trend itself, be watching for upward spikes from that trend - those would almost certainly translate into something nasty for the still struggling US economy.

9--Setting the Record Straight on Venezuela and Hugo Chavez, Eva Golinger, Global Research

Excerpt: Even though a new president was elected in 1994, constitutional rights remained suspended on and off for years, until the elections in 1998 that brought Chavez to power. Since then, despite a short-lived coup d'etat in 2002, an economically-shattering sabotage of the oil industry in 2003 and multiple attempts against his government during the following years, President Chavez has never once limited constitutional rights nor imposed a curfew on the population. He hasn't ever ordered a state of emergency that would limit rights or shut down any media outlets. He even issued a general pardon in 2007 giving amnesty to all those involved in the 2002 coup, with the exception of individuals directly responsible for crimes against humanity or homicide.

Under the Chavez administration, poverty has been reduced in half, universal, quality free healthcare and education have been guaranteed for all Venezuelans, new industries have been created and more and more political power has been placed in the hands of "ordinary" people who were previously excluded by the elite that ruled the country throughout the twentieth century....

In Venezuela, more than 80% of television, radio and print media remain in the hands of private interests critical of the government. So, despite what some international press claim, there is no censorship or violation of free expression in Venezuela. Calls to overthrow the government or to incite the armed forces to rebel against the state, which would clearly be prohibited in most nations, are broadcast on opposition-controlled television channels with public concessions (open signals, not cable)....

Recently, the Venezuelan legislature passed a law called the Law of Social Responsibility in Radio, Television and Digital Media. The law does not censor internet or any other form of media. What it does do is disallow calls to assassinate the president or other individual, as well as prohibit incitement to crime, hate or violence on web sites operated from Venezuela. This is a standard in most democracies and is a sign of civility. The law also instills on media a responsibility to contribute to the education of citizens. Media have a huge power over society today. Why shouldn't they be responsible for their actions?

Another issue widely manipulated in mass media is the Enabling Act that was approved last month by the Venezuelan parliament. This law gives "decree" powers to the Executive to legislate on specific issues as stipulated in the bill. The Enabling Act does not usurp, inhibit or limit legislative functions of the National Assembly, nor is it unconstitutional or anti-democratic. The parliament can still debate and approve laws as usual within its authority. The Enabling law, which is permitted by the Constitution, was requested by President Chavez in order to provide rapid responses to a national emergency caused by torrential rainfall that devastated communities nationwide at the end of last year and left over 130,000 homeless. The law will not affect any constitutional rights nor impose a "dictatorship" on the country, it is merely a valid, legitimate response to an emergency situation that needs quick solutions....

The opposition bloc has already announced it will seek foreign intervention to help overthrow the government. Not only is this illegal, it's incredibly dangerous. Many of the candidates and most of the parties that conform the opposition in Venezuela have already been receiving millions of dollars annually in funding from several US and international agencies, such as the National Endowment for Democracy (NED) and the US Agency for International Development (USAID), both financed with US taxpayer monies. The stated purpose of this funding has been to "promote democracy" in Venezuela and help build the opposition forces against Chavez. This is a clear violation of Venezuelan sovereignty and a waste of US taxpayer dollars. US citizens: Is this the way you want your hard-earned money to be spent?

This week, opposition leaders will meet with their counterparts in Washington. They have already said their mission is to seek more aid to help remove President Chavez from power. Unfortunately, their undemocratic actions have already been welcomed in the US Capitol. Representative Connie Mack (R-FL), now head of the House Sub-Committte on Foreign Relations for the Western Hemisphere, announced on the first day of Congress that his one goal this year is to place Venezuela on the list of "state sponors of terrorism". And Representative Ileana Ros-Lehtinen (R-FL), now head of the House Foreign Relations Committee, has backed that objective, even going as far as to publicly state she would welcome the "assassination of Fidel Castro or any other repressive leader" such as Hugo Chavez.

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