Wednesday, July 13, 2011

Today's links

1--Media Culpa? Coverage of Jobs vs. Deficit, New York Times

Excerpt: In May, the National Journal published a report on economic coverage in the five largest newspapers in the country by print circulation: The New York Times, The Wall Street Journal, The Los Angeles Times, USA Today and The Washington Post. They did this by searching for the words “unemployment” and “deficit” (excluding articles that also used the words “Europe,” “European,” “Greece” or “Greek”). This was not the most scientific (or comprehensive) study ever conducted, but it did show that over the last two years, the number of articles on “unemployment” had fallen while those on the “deficit” had exploded.

One can argue about the extent to which policy makers guide news coverage, and whether news coverage guides policy makers. Whichever way (or ways) you think that relationship works, it appears that both Washington and news organizations have been emphasizing long-term debt reduction over near-term job growth.

That balance may change, though, in light of Friday’s weak employment report, and as more workers exhaust their jobless benefits.

2--One monetary policy, different economic impacts, VOX

Excerpt: The ECB monetary policy controls directly nominal short-term rates, that are obviously common in the Eurozone, but investment and consumption decisions, and therefore growth, depend on the real yield of long-term bonds, which is now very heterogeneous across different EMU countries (Black 2010).

As long-term yields are affected by national fiscal fundamentals and the market sentiment that might determine contagious spillover of local fiscal diseases, the same monetary impulses reach the different national economies in very different ways.

High long-term yields negatively affect consumption and investment, and those countries who are in the highest need of growth to help fiscal stabilisation are those most penalised by the current situation. As a matter of fact, growth differentials have emerged between Germany and the rest of Europe that are particularly sizeable for the high-yield countries.

The existence of a common currency has prevented the emerging growth differentials from being compensated by exchange-rate movements and therefore countries with more severe fiscal sustainability problems are now experiencing higher unit labour costs and loss in competitiveness that makes the prospects for stabilisation of their public deficits and debt even bleaker.

Conclusion: Learning to live with differentials

Long-term yield differentials are here to stay for some time, as they are very persistent by their nature and there is clearly a lot of uncertainty on the timing and the nature of the solution to the Eurozone crisis. It is very urgent that fiscal authorities of state members take bold action to restore convergence of long-term yields in Europe.

The optimality and the sustainability of a common monetary policy with different impact on the economies of member states fostering further divergence is, at least, highly questionable.

3--Manufacturing deficit fear, Dean Baker, Guardian

Excerpt: Pursuing a plan to kill social security, politicians are relying on a credulous public and compliant media to ramp up debt panic...

How about that $14.3tn figure for the debt ceiling? That's a really big number, really scary. So is just about every number connected with the United States budget. We are a huge country with a huge economy. Competent reporters would focus on this being about 90% of US GDP.

Is that big? Well, the debt to GDP ratio was over 110% after the second world war. The United Kingdom had debt to GDP ratios of more than 100% for much of the 19th century, as it was establishing itself as the world's pre-eminent industrial power. Japan has a debt to GDP ratio of more than 220% of GDP and can still borrow in financial markets long-term at interest rates of less than 1.5%.

So, what's the problem? The politicians who want to cut social security and Medicare obviously want the public to believe that there is a huge problem and – due to the incompetence of the media – they have managed to instill fear throughout the nation about this massive non-problem....

In the same vein, when a politician asserts that social security is going bankrupt and that there will not be anything left for her children or grandchildren, serious reporters would ridicule her for being ignorant of the social security trustees projections. These projections show that even if nothing is ever done to change the programme, future beneficiaries will always be able to collect a higher benefit than current retirees. The "nothing there for our children" would be treated as a serious gaffe, sort of like then Senator Obama's comment before the Pennsylvania primary about working-class people being bitter and clinging to guns and religion. The difference is that the social security comment has direct relevance for policies that affect people's lives.

When a politician complains about President Obama's taxes strangling the economy, reporters should ask them whether they know that taxes are less of a burden on the economy now than at any point since the second world war.

4--Our National Jobs Emergency, Alan Blinder, Wall Street Journal

Excerpt: The fraction of the population that is employed (58.2%) is now lower than it was when the recession officially ended in June 2009 (59.4%). The share of the unemployed who have been jobless for more than six months is now a stunning 44.4%. In a strong labor market, that number would be in the teens. I could go on.

All this adds up to a national jobs emergency. Tragically, however, it is not being treated as such. When is the last time you heard one of our national leaders propose a serious job-creating program?

The operative word here is "serious." Every day brings new proposals to slash government spending. But as I noted on this page last month, those are ways to kill jobs, not create them. As a matter of fact, despite all the cries of "big government" or even "socialism," public-sector employment has been falling.

Over the past two months, while private businesses were adding a measly 130,000 new jobs to their payrolls, governments at all levels were shedding 87,000 workers. Looking over a longer period, public employment at all levels is down by 522,000 jobs over the last two years. Does that make sense in a jobless recovery?...

5--Trade Deficit increased sharply in May to $50.2 billion, Calculated Risk

Excerpt: The Department of Commerce reports:
[T]otal May exports of $174.9 billion and imports of $225.1 billion resulted in a goods and services deficit of $50.2 billion, up from $43.6 billion in April, revised. May exports were $1.0 billion less than April exports of $175.8 billion. May imports were $5.6 billion more than April imports of $219.4 billion.

The petroleum deficit increased in May as both prices and the quantity of oil imported increased. Oil averaged $108.70 per barrel in May, up from $103.18 per barrel in April, and up from $76.95 in May 2010. There is a bit of a lag with prices, and import prices will probably be a little lower in June.

The trade deficit with China increased to $24.96 billion, so once again the deficit is mostly oil and China.

6--Are We About to Repeat the Mistakes of 1937?, Bruce Bartlett, New York Times

Excerpt: Some economists are getting very nervous. With the economy in a fragile state, it may not take much to bring on another recession. Even a small amount of fiscal or monetary tightening may be enough to do that.

It is starting to look like 1937 all over again. As the table below indicates, the economy made a significant recovery after hitting bottom in 1932, when real gross domestic product fell 13 percent. The contraction moderated considerably in 1933, and in 1934 growth was robust, with real G.D.P. rising 11 percent. Growth was also strong in 1935 and 1936, which brought the unemployment rate down more than half from its peak and relieved the devastating deflation that was at the root of the economy’s problems.

By 1937, President Roosevelt and the Federal Reserve thought self-sustaining growth had been restored and began worrying about unwinding the fiscal and monetary stimulus, which they thought would become a drag on growth and a source of inflation. There was also a strong desire to return to normality, in both monetary and fiscal policy.

On the fiscal side, Roosevelt was under pressure from his Treasury secretary, Henry Morgenthau, to balance the budget. Like many conservatives today, Mr. Morgenthau worried obsessively about business confidence and was convinced that balancing the budget would be expansionary. In the words of the historian John Morton Blum, Mr. Morgenthau said he believed recovery “depended on the willingness of business to increase investments, and this in turn was a function of business confidence,” adding, “In his view only a balanced budget could sustain that confidence.”

Roosevelt ordered a very big cut in federal spending in early 1937, and it fell to $7.6 billion in 1937 and $6.8 billion in 1938 from $8.2 billion in 1936, a 17 percent reduction over two years.

At the same time, taxes increased sharply because of the introduction of the payroll tax. Federal revenues rose to $5.4 billion in 1937 and $6.7 billion in 1938, from $3.9 billion in 1936, an increase of 72 percent. As a consequence, the federal deficit fell from 5.5 percent of G.D.P. in 1936 to a mere 0.5 percent in 1938. The deficit was just $89 million in 1938.

7--Profits Climb to 51-Year Mean as S&P 500 P/E at Crisis Level, Bloomberg

Excerpt: Earnings growth in the Standard & Poor’s 500 Index is climbing back to the average rate since the 1960s as the U.S. economy recovers, even with equity valuations stuck near credit-crisis levels.

Companies in the S&P 500 are poised to boost net income by 19 percent in 2011, including a 13 percent gain in the second quarter, according to analyst estimates compiled by Bloomberg. The gain will push profits back in line with their average increase of 6.9 percent over the last 51 years, data compiled by Brockhouse & Cooper Inc. and Bloomberg show. At the same time, the index is trading for 13.5 times projected 2011 earnings, 7.8 percent less than the average since the start of 2006.

The gap between earnings and shares is bolstering bulls who say equities will keep rallying as prices catch up to profits. Skeptics say reduced stimulus spending, Europe’s debt crisis and China’s efforts to curb inflation signal the 99 percent rally in the S&P 500 since March 2009 has gone too far. A report showing employers in the U.S. added 83 percent fewer jobs in June than economists projected heightened concern the economy is slowing.

“The fact that valuations have not returned to normal is simply that people are prejudiced against stocks,” said David Kelly, who helps oversee about $445 billion as chief market strategist for JPMorgan Funds in New York. “Earnings growth has been spectacular. People who are buying stocks today are buying an undervalued asset.”

8--Italy yesterday, Spain today, The Big Picture

Excerpt: Selling pressure continues this morning, though somewhat less intensely than yesterday according to US futures.

Following the news out of Italia on Monday, we move this morning to Espain! Spain’s budget deficit may be more than twice as large as had previously believed. Reuters reports that 6 Spanish banks have failed the Stress Tests, adding to pressure on European markets and the Euro This is leading to concerns that the true state of regional finances is far worse than the previously believed levels. European markets got rocked — as of this writing, they are down 2%, but off of the lows of 3.5%. One analyst noted “the Euro continues to decline, but remains grossly overvalued.” The Euro broke the 140 level — its at 1.39, the lowest levels since March of this year.

What might that downgrade look like? Does the move Awful to Terrible change many bond holders views?

Markets in the US had an ugly day yesterday — whether it was overdue or in reaction to Italy is almost beside the point. Reaction to the news was pretty ugly, and as we have learned over the years, market reaction is more significant than the underlying blah blah blah.

9--Do You Believe in Magic?, Paul Krugman, New York Times

Excerpt: But haven’t we tried a huge fiscal expansion? No, we haven’t. The ratio of spending to GDP is up because GDP has fallen and safety net programs like unemployment insurance and Medicaid are covering more people — that is, what we’re looking at isn’t stimulus, it’s the consequences of the slump.

The point is that realizing that there’s a lot you can do to reverse a short-term slump isn’t magical thinking — it’s what basic macroeconomics, what we learned through hard thinking and hard experience, tells us. Rejecting all that may sound judicious, but it’s actually an act of intellectual amnesia.

The key point here is the difference between raising the economy’s long-run growth rate, which is very hard, and increasing demand when the economy is operating below potential, which isn’t hard at all.

10--News Corp Targeted Former PM Gordon Brown: Hacked Police, Medical Records; Obtained Bank Information, Naked Capitalism

Excerpt: The latest revelations in the widening News International scandal are simply stunning. “Uneasy lies the head that wears the crown” is apparently as true now as it was in Shakespeare’s day. The idea that a news organization would have the audacity to target a head of state a Cabinet member and later PM over a decade, as News International papers the Sun and the Sunday Times did with Gordon Brown, and not with the usual tools of invective and gossip, but via the theft of personal information, raises the scandal to a whole new level.

It’s bad enough to monitor cell phone calls. The state of cell phone security is a disgrace, as our Richard Smith points out. One of my clients (a media company!) refuses to discuss deals or corporate strategy on mobile phones for that very reason. Per the Guardian, the decade-long campaign against Brown included:

Repeatedly obtaining data from his bank account

Hacking into his accountants’ computer to get his tax fiilngs

Fooling his attorneys into providing details from his legal records

Purloining family medical records (which led to the publication of information about Brown’s ill infant son)

Suborning a police officer to scrape national police computer records

Several issues bear noting:

There is no way to pretend this sort of lawbreaking and invasion of privacy was not News International policy. This took place at two separate papers, the Sun and the Sunday Times....

Journalism’s primary purpose is to hold power to account. This purpose has been perfectly inverted. Columnists and bloggers are employed as the enforcers of corporate power, denouncing people who criticise its interests, stamping on new ideas, bullying the powerless.

11--Sheila Bair's parting shot, Washington Post

Excerpt: The truth is, some of us did see this coming. We tried to stop the excessive risk-taking that was fueling the housing bubble and turning our financial markets into gambling parlors. But we were impeded by the culture of short-termism that dominates our society. Our financial markets remain too focused on quick profits, and our political process is driven by a two-year election cycle and its relentless demands for fundraising.

I’ve had a unique vantage point during my five-year term as chairman of the Federal Deposit Insurance Corp., from the early failure of IndyMac Bankto the implementation of reforms designed to ensure that no conglomerate ever again is deemed “too big to fail.”

Now that I’m stepping down, I want to sound the alarm again. The common thread running through all the causes of our economic tumult is a pervasive and persistent insistence on favoring the short term over the long term, impulse over patience. We overvalue the quick return on investment and unduly discount the long-term consequences of that decision-making....

Our decades-long infatuation with financing our spending through ever-growing debt, in the private and public sector alike, is the ultimate manifestation of short-term thinking. And that thinking, particularly in business and in government, is actually getting worse, not better, as we look for solutions to put our economy on a sounder footing....

Mortgage brokers and the issuers of mortgage-based securities were typically paid based on volume, and they responded to these incentives by making millions of risky loans, then moving on to new jobs long before defaults and foreclosures reached record levels.

Such arrangements gave rise to the acronym IBG-YBG(“I’ll be gone, you’ll be gone”), a watchword for short-termism in the mortgage industry during the boom.....

I was among the few at that time advocating for widespread loan modifications as an alternative to foreclosure, which was leading to more displaced families, larger declines in home prices and more devastating losses for investors. But mortgage servicers, also typically paid according to volume, had neither the financial incentive nor the willingness to devote resources to a change in strategy. Their under-investment in servicing has led to a huge inventory of foreclosed properties and mounting litigation that is likely to cost them far more than any savings they achieved by cutting corners....

Government assistance to financial institutions took a variety of forms, amounting to a total commitment of almost $14 trillion by the spring of 2009....

While those actions were necessary to prevent an even bigger economic catastrophe, we still have not addressed the No. 1 cause of both the crisis and the subpar recovery we are in: a stubborn refusal to deal head-on with past-due and underwater mortgages.

It’s time for banks and investors to write off uncollectible home equity loans and negotiate new terms with distressed mortgage borrowers that reflect today’s lower property values. It is true that this would force them to recognize billions in mortgage losses — losses they mostly stand to incur anyway over time. But it will eventually be necessary if we are to clear the backlog and end the cycle of defaults, foreclosures and falling home prices that continues to hold back the economic recovery on Main Street....

Responsible policies are promptly vilified if they involve the slightest hint of short-term sacrifice. For instance, common-sense efforts to raise large bank capital requirements and to require issuers of mortgage securitizations to bear some portion of the loss when securitized loans go bad are resisted by the industry, which claims that such measures will raise the cost of credit and could derail the economic expansion.

But credible research shows that these requirements will lead to only a modest increase in the cost of credit, accompanied by a large improvement in economic performance over the long run because of a lower frequency and severity of financial crises....

There are signs that suggest the public is already moving toward embracing thrift, at least in terms of personal finances. Total household debt is down by as much as 10 percent from pre-crisis levels, while the personal savings rate has risen to its highest level in more than 15 years.

It’s true that consumers who save more and borrow less won’t contribute as much to economic growth in the short run. But surely we have learned by now that there are limits to what excessive spending and borrowing can do for long-term economic growth and stability.

Our financial system is still fragile and vulnerable to the same type of destructive behavior that led to the Great Recession. Unless all of us — households, financial leaders and politicians — are willing to make some short-term sacrifices for longer-term stability, we are at risk of another financial crisis that will be just as bad, if not worse, than the last one.

No comments:

Post a Comment