Thursday, March 17, 2011

Today's links

1--Nuclear Watchdog IAEA Confirms Partial Meltdown of Reactors 1 to 3, News Core via Information Clearinghouse

Excerpt: The UN's nuclear watchdog the IAEA warned Japan's nuclear crisis was "very serious" Wednesday as Tokyo resorted to increasingly desperate measures to cool overheated reactors and fuel pools at the stricken Fukushima plant.

International Atomic Energy Agency (IAEA) head Yukiya Amano confirmed reactors No. 1, No. 2 and No. 3. had partially melted down. He added that Japanese authorities had also reported concerns about the spent nuclear fuel pools of reactors No. 3 and No. 4.

The deep tanks contain used fuel rods which are extremely radioactive and normally kept immersed in cooling water. Unlike the fuel rods that are used in the reactor vessel, the spent rods are not surrounded by a steel-and-concrete containment vessel. If water in the pools evaporated, the spent rods would be exposed to the air and radioactive material would be released into the atmosphere.

2--US housing construction plunges, Yahoo News

Excerpt: Construction of new homes in the United States plunged in February to near record lows and building permits hit bottom, official data showed Wednesday in a dismal report on the ailing housing market.

Housing starts fell to an annual rate of 479,000, down 22.5 percent from January, the Commerce Department said.

That number was the lowest since April 2009, when the economy was still mired in the worst recession since the 1930s Great Depression.

In April 2009, housing starts were a rate of 477,000, the weakest pace since tracking of the data began in 1959. Economists at the time had estimated that it was the slowest pace in new housing construction since the 1940s.

Housing activity was not expected to pick up any time soon, according to the new data....Building permits sank to a record annual rate of 517,000 in February, a decline of 8.2 percent from the January level, the department said.

That was the smallest number of permits in records dating back to 1960

3--UN Calls Emergency Meeting as Japan Nuclear Crisis Deepens, Bloomberg

Excerpt: The United Nations’ nuclear agency will call an emergency meeting to discuss the crisis in Japan as a breach at the stricken Fukushima Dai-Ichi plant increased the risk of a radioactive leak.

IAEA Chief Yukiya Amano is flying to Tokyo to talk with authorities today and will return for the meeting as soon as possible, he told reporters in Vienna yesterday. It will be the first extraordinary meeting of the agency’s 35-member board since his election to succeed Mohamed ElBaradei two years ago.

The containment vessel of Dai-Ichi’s No. 2 reactor may have been breached yesterday, and pressure in the chamber fell “substantially,” said Masahisa Otsuku, a Tokyo Electric Power Co. nuclear maintenance official...

4--Stock Market Slumps Again on Nuclear Worries, New York Times

Excerpt: With investors on a hair-trigger over Japan’s nuclear crisis, stock markets in the United States and Europe ended sharply lower again Wednesday as traders tried to gauge just how bad the financial fallout from the stricken nuclear reactors could be.

The Standard & Poor’s 500-stock index and the Nasdaq have both given up their gains for the year.After a rebound in Japanese stocks during the Asia trading session, markets seemed calmer in early trading in Europe and the United States. But they tumbled by mid-morning in New York, apparently unnerved by comments by a European Union official.

The European Union energy commissioner G√ľnther Oettinger said told lawmakers in Brussels that the Fukushima Dai-Ichi nuclear power was “effectively out of control.”

“In the coming hours, there could be further catastrophic events,” he said, according to Bloomberg News. That assessment was based on information from the European Union, the union’s mission in Tokyo, the International Atomic Energy Agency and media reports, he said.

“This spooked the markets,” an analyst at Brown Brothers Harriman, Marc Chandler, said.

5--Yes, We’re In A Liquidity Trap, Paul Krugman, New York Times

Excerpt: Some comments on various blog posts ask what evidence we have that liquidity trap economics is any different from normal economics. Um, the answer is staring us in the face: the failure of interest rates to rise despite very large budget deficits.

If you had told most people, back in 2007, that the federal government would soon be running budget deficits in the vicinity of 10 percent of GDP, most of them would have predicted soaring interest rates. In fact, quite a few people did predict just that — and in some cases lost a lot of money for their investors.

But it hasn’t happened. Short rates have stayed near zero; long rates have fluctuated with changing views about the prospects for recovery, but stayed consistently below historical norms. That’s exactly what those of us who understood liquidity-trap economics predicted, right from the beginning.

I don’t know what more evidence you could ask for. After all, interest rates are what the liquidity trap is all about.

6--Policy Still on Autopilot, For Now, Tim Duy, Fed Watch via Economist's View

Excerpt: Of course, despite indications data is actually heading in the direction of the dual mandate, the size of the output gap, high unemployment, and weak wage growth all argue against tightening policy in any way, shape, or form. Hence the current large scale asset program continues unabated. I still believe the calendar argues against any deviation from this plan. Even if incoming data strongly surprised on the upside, by the time the Fed was able to assess such data and act, the policy would be nearly at an end. Changes would be essentially pointless.

Bottom Line: Monetary policy continues on autopilot – they still plan that QE2 will end as expected at which time policymakers will turn their attention to policy normalization, setting the stage for a rate hike in 2012. Watch for signs that the downside risks (oil, Japan, Europe, etc.) are evolving in such a way that they are impacting actual data, with the weak reading on consumer confidence being a cautionary tale. But if the data holds up, with steadily improving labor markets and improving inflation measures, the next test for monetary policy will be the end of QE2. Will markets falter in the absence of a steady drip of monetary policy?

7--Guess which policy your central bank will pursue, Dean Baker, The Guardian

Excerpt: Remarkably, IMF policy still doesn't seem to allow for the possibility that somewhat higher rates of inflation might actually be the best path under some circumstances. Many of the speakers seemed still to believe that the policy of inflation targeting, in which central banks target a 2.0% inflation to the exclusion of all other concerns, is the best route to pursue. This certainly seems to be the practice at the European Central Bank, as well as at many other central banks around the world.

This should have populations everywhere rising up with their pitchforks. Inflation targeting has led to an enormous economic and human disaster, likely costing the world more than $10tn in lost output and leaving tens of millions of people unemployed. If this experience is not enough to discredit a policy, it is difficult to imagine any possible set of events in the world that could lead the inflation targeters to change their minds.

In this respect, the arguments set out in the IMF conference should be useful for political purposes – even if they have little immediate effect on the conduct of central banks or the policy prescriptions of the IMF. The fact that many of the world's most prominent economists, including even the chief economist at the IMF itself, can make policy prescriptions that are essentially ignored by those conducting policy, provides more evidence that policy is not being guided by neutral individuals seeking the best outcome.

This is yet more evidence that the central bankers and others directing policy place the interests of the financial sector at the centre of their concerns. For the financial industry, a modest rise in the inflation rate would genuinely be bad news, reducing the value of their assets and the real value of their interest income. In order to ensure that the major banks of the world do not have to deal with this situation, the central banks are prepared to force tens of millions of people to remain out of work.

If we had real democracies, the central bankers who couldn't do their job would be the ones out of work right now.

8--Stocks Drop on Nuclear Fears, Wall Street Journal

Excerpt: The Standard & Poor's 500 index ended the session in negative territory for the year, as stocks plunged on worries that Japan's nuclear crisis would end in reactor meltdowns and a radiation catastrophe.

The stock market's swoon dragged all three major U.S. indexes into negative territory for the year for part of the afternoon. The Dow Jones Industrial Average, down as much as 300 at one point, finished 242.12 points lower, or 2.04%, at 11613.3, while the Standard & Poor's 500-stock index ended down 24.99, or 1.95%, at 1256.88. The Nasdaq Composite fell into the red for 2011 and stayed there, closing down 50.51, or 1.89%, at 2616.82.

"There's just a complete vacuum here in terms of credible information on the status of the nuclear situation in Japan," Phil Orlando, chief equity strategist at Federated Investors said. "Japan trumps everything for everyone right now [and] every investment decision is made through the prism of what is going on in Japan."...

Volume was robust, with about 5.2 billion shares changing hands in late afternoon New York Stock Exchange composite volume. The Chicago Board Options Exchange Volatility Index, or VIX, soared as much as 29% intraday in a sign of the market's anxieties.

In the U.S., disappointing data on housing starts showed the steepest monthly drop in nearly 27 years and new building permits set a record low, an indication that the battered sector continues to be a source of weakness for the economy.

But the crisis in Japan, plus renewed tensions in the Middle East, set the tone of trading....

"Everyone's nervous about Japan," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Genuity. "There's concerns about a complete nuclear meltdown. Now it's starting to look like a panic situation."

9--Economic consequences of disaster, The Economist

Excerpt: FOR all the horrifying images and news out of Japan, the consensus seems to be that the economic consequences will be small. This, after all, seems to be the lesson of other disasters. If so, then the sell-off in global markets in recent days is overdone.

But this assessment fails to capture an important reason disasters can be economically debilitating. Damaged infrastructure, lost capital stock and lost output are only part of the cost, and not necessarily the largest; there is also the uncertainty surrounding how big those costs will ultimately be. The risk of damage from a hurricane that hits the American southeast is relatively quantifiable because we have had so many. Earthquakes and nuclear disasters are, individually, rare; in combination, they are unprecedented. Any investor or business watching events unfold in Japan is groping to quantify the ultimate impact: how much infrastructure has been damaged? How many people will have to be evacuated? How long will the disruptions last? In econo-speak, Japan’s disaster is an example of Knightian uncertainty....

In financial market terms, a disaster raises risk premiums; that’s why risk-free bond yields fall and equity earnings yields rise (i.e. price-equity ratios fall). That raises the bar for new investment, so in the real economy, people pull back from such investment. Anyone contemplating a major project with any connection to Japan, or perhaps any big project at all, is going to think twice. The cost of postponing an investment is relatively small. But add those decisions up across millions of businesses and households, and the impact can be rather large. Economists are not good at quantifying such effects. It was difficult to assign a large impact on American GDP from Europe’s sovereign-debt crisis last year, yet there seems little doubt that it (and perhaps the BP oil spill) played an important part in the mid-year economic slowdown....

My colleague and Brad DeLong think the fall in Treasury yields shows increased demand for government debt and could therefore justify the issuance of more. I think the policy response to a fall in Treasury yields depends on the reason. If yields are falling because of increased expectations of deflation and decreased expectations of private sector demand, then more government borrowing could be justified.

If it is purely a panic-driven demand for the most liquid risk-free paper available, then a temporary increase in government debt issuance would be appropriate. In the past, the Federal Reserve has loaned out more of its own portfolio and Treasury has conducted spot auctions of bonds and T-bills amid a particular acute squeeze on existing supply. When the squeeze is over, the issuance is unwound.

However, if, as may be true in this case, yields are falling because the equity risk premium has risen, then the best solution should be to address the source of risk. After 9/11 the best solution was, ultimately, to take out Al Qaeda’s havens in Afghanistan. The best solution now would be to contain Japan’s nuclear disaster. (I know, easy for me to say.) Once that’s done, uncertainty will fade, risk premiums will decline, and the world can begin to quantify the ultimate costs of this disaster.

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