Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.
October 30, 2013 at 11:33 AM
The Federal Reserve’s policy setting Open Market Committee just concluded its two-day meeting. Existing policy will continue. But reading between the lines is instructive. Here are the key sentences from its statement:
“Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated.” Translation: It will be years before we recover the jobs and job growth lost from the recession. We’re doing all we can. Smile.
“Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months.” Translation: Not all these critters carry equal weight. Household spending is partly being sustained by a continued unhealthy rise in consumer credit. Fixed investment isn’t causing much hiring when we compare this stage of the recovery to others. And housing has become so vital that slowing is a big deal.
“Fiscal policy is restraining economic growth.” The obsession with both the administration and Congress with austerity is one of the biggest factors holding back job creation. Worse, the tea-party shutdown and game of default chicken proved both costly and dangerous. (more…)
October 9, 2013 at 1:52 PM
President Obama intends to nominate Janet Yellen as the next chairman of the Federal Reserve. Yellen, an economist and professor emerita at the University of California at Berkeley, is now the vice chairman of the Fed’s board of governors and will become the most important central banker in the world. She said all the right things today in a prepared statement, including:
While we have made progress, we have farther to go. The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they will pay their bills and provide for their families. The Federal Reserve can help, if it does its job effectively. We can help ensure that everyone has the opportunity to work hard and build a better life. We can ensure that inflation remains in check and doesn’t undermine the benefits of a growing economy. We can and must safeguard the financial system.
Here are the most pressing issues she will face if confirmed by the Senate, when she takes office in 2014:
1. Politics. The Federal Reserve was established as a central bank that would be largely insulated from political pressure and for most of its history that’s the way it operated. To be sure, the Fed in the 1970s allowed inflation to get out of control because of subtle pressure from the White House and Congress to emphasize job creation. Now the pressure is out in the open. Members of Congress on the right and the left have criticized the Fed and demanded more accountability, including an audit. Yellen will have to defend the Fed’s independence.
September 13, 2013 at 10:27 AM
Five years ago this weekend, the giant investment bank Lehman Brothers collapsed, ushering in a financial crisis and economic contraction the likes of which hadn’t been seen since the Great Depression. Less than two weeks later, but before regulators decided to back every big financial institution, Seattle’s Washington Mutual was allowed to become the biggest bank failure in American history. Some would say it was pushed, but that’s another story.
Most of the causes of the catastrophe are well-known: Deregulation, “innovations” such as exotic derivatives, shadow banking, securitization of massive numbers of subprime loans, high executive compensation rewarding excessive risk-taking, too much leverage, regulators captured by the industry and a massive bubble enabled by the Federal Reserve. The costs went well beyond those to the financial system. A Federal Reserve Bank of Dallas report estimates that the Panic of 2008 and resulting downturn cost each household between $50,000 and $120,000. Unemployment remains high. Inequality is worse. Beyond the money, trust in institutions and the equal application of the rule of law has been shredded.
In its typical inviting way, Ezra Klein’s Wonkblog offers 13 charts showing what’s fixed and what isn’t five years later. On the Atlantic’s site, James Kwak argues that policymakers have learned little if nothing from the crash. So it’s time for your say:
Read on for some of the best business and economic stories of the week and the haiku…
September 11, 2013 at 10:37 AM
Over lunch this week, a Seattle financial executive told me he believed the market has already priced in the “tapering off” of the Federal Reserve’s massive bond-buying program. Maybe so. It’s an open question as to whether the central bank should change course with the economy growing so slowly and unemployment still high. But Chairman Ben Bernanke seems committed to the move. Overseas, things might not go so well. Stephen Roach, the former chief economist for Morgan Stanley, wrote on Project Syndicate recently that “the global economy could be in the early stages of another crisis” partly because of the Fed.
As I wrote last week, the problem is centered in emerging economies. “Hot money,” short term investments, rushed into nations such as India, Indonesia, Brazil and Turkey because of the artificially low interest rates of the Fed’s QE programs. This allowed for large current account deficits to be cloaked by seeming prosperity. Now, investment is flowing back out with damaging results. Roach writes:
Under the leadership of Ben Bernanke and his predecessor, Alan Greenspan, the Fed condoned asset and credit bubbles, treating them as new sources of economic growth. Bernanke has gone even further, arguing that the growth windfall from QE would be more than sufficient to compensate for any destabilizing hot-money flows in and out of emerging economies. Yet the absence of any such growth windfall in a still-sluggish US economy has unmasked QE as little more than a yield-seeking liquidity foil.
July 26, 2013 at 10:24 AM
Rarely has the speculation about the next Federal Reserve chairman received so much early handicapping — or provoked such acrimony. The White House has floated the trial balloon of Larry Summers, the former Clinton Treasury Secretary and president of Harvard. The other favorite is Janet Yellen, former president of the Federal Reserve Bank of San Francisco and current vice chairman of the Fed’s Board of Governors.
“No more second chances for Larry Summers,” thunders Fed watcher William Greider in the Nation. In addition to being a boorish and failed president of Harvard, Summers as Treasury Secretary helped tee up the financial crisis by backing deregulation. Then he made millions working on Wall Street. An insightful piece in the New York Times looks at the “battle between the California girls and the Rubin boys.” Rubin being Robert, the former Treasury Secretary, head of Goldman Sachs and tier of exquisite tie knots. Yellen, meanwhile, is supported by economists Laura D’Andrea Tyson, chief of President Clinton’s Council of Economic Advisers and Christina Romer, who held the same position early in President Obama’s first term.
Whomever replaces Ben Bernanke will be left to wind down the Fed’s record expansion of the monetary base and more than $3 trillion in assets, while contending with a tepid recovery, high unemployment and a question over whether the Fed will use its new Dodd-Frank powers to rein in the big banks and prevent another panic. Care to make an early vote?
Read on for some of the most interesting econ and business stories you might have missed this week…and the haiku.
June 28, 2013 at 10:49 AM
Worries that the Federal Reserve may end its bond-buying program or even raise its benchmark interest rate helped push the yield of 10-year Treasury notes as high as 2.61 percent this week. In May, it was 1.63 percent. Mortgage rates have followed, with the average 30-year loan rate rising to 4.46 percent from 3.93 percent. It was the biggest one-week increase since 1987. An extra wallop is facing many student-loan borrowers when rates are set to double next week.
The economy is still weak. First-quarter growth in gross domestic product was revised downward to 1.8 percent from 2.5 percent. Many forecasters had expected annualized GDP growth this year of 3 percent. So Fed officials have scrambled to reassure the markets that no sudden moves on interest rates or the bond-buying program are being contemplated. It’s a complicated situation. While no serious inflation is on the horizon — indeed, deflation continues to be a danger — essentially zero rates create losers and winners. Fixed-income investors have often been penalized. The stock market has been powered by Fed hot money all out of proportion with the strength of the economy.
What do you think?
Read on for some of the important stories you might have missed this week and the haiku:
This Week’s Links:
• Emerging markets, hitting a wall | Tyler Cowen/NYT
• The top 0.1 income shares, 1915-2008 (chart) | Miles Kimball
• Why the growth-by-debt status quo is doomed | Zero Hedge
• Ireland falls back into recession despite austerity drive | The Guardian
• What if we’re looking at inequality the wrong way? | NY Times
• What to do with the hypertrophied financial sector | Brad DeLong
• Make banks too small to save | Baseline Scenario
Today’s Econ Haiku:
A bridge to somewhere
Federal money waiting
We jump off the bridge
June 20, 2013 at 10:25 AM
The stock market isn’t happy with the prospect of the Federal Reserve backing off its stimulus of $85 billion a month in purchases of mortgage-backed securities. The hot money from the Fed, along with the rock-bottom borrowing rates for its member banks to get money for “trading,” has been one of the big drivers behind the market’s remarkable post-recession run. Bernanke apparently made things worse with a press conference aimed at transparency, as opposed to former Chairman Alan “Bubbles” Greenspan’s Yoda-like pronouncements.
Greenspan rarely followed the advice of his legendary predecessor William McChesney Martin, who ran the central bank from 1951 to 1970. Martin famously said it was the role of the Fed “to take away the punch bowl just as the party gets going,” Bernanke hinted that his Fed is going to do just that, albeit slowly. The markets are mindful of one Greenspan attempt in 1994, which shocked the system and led to widespread losses and slowing. The difference is that the ’94 move involved raising interest rates from a then record-low 3 percent to 6 percent. Bernanke has pledged that rates will remain at essentially zero until unemployment falls below 6.5 percent. But pulling back on the bond buying, and presumably shrinking the huge money supply, is enough to spook big investors. Or at least cause a period of rebalancing with plenty of instability.
But there’s a back story. The markets are also worried about China, where growth is slowing and the banks and shadow banking system are showing signs of serious trouble. China’s central bank is failing to infuse capital into the system and inter-bank funding is freezing up.
June 13, 2013 at 10:23 AM
Japan’s Nikkei has entered bear territory. Other Asian markets have suffered sell-offs, too. The Dow Jones Industrial Average swooned Tuesday and is staging only a cautious recovery today. The Wall Street Journal’s estimable David M. Wessel wrote, “The tectonic plates of the world economy are shifting, moving the yield on the 10-year Treasury to the highest level in more than a year and shaking financial markets from Tokyo to Mumbai and Johannesburg to São Paulo.” Is the world returning to something like normal, where America grows again, China does a soft landing to slower growth and the Japanese economy can finally find its footing?
Or is it a harbinger of more volatility in financial markets—perhaps the result of a misreading of the Federal Reserve’s policy intentions by the markets or a premature move by the Fed to cut back on easy money—that yields an unwelcome increase in market interest rates before the U.S. economy achieves what Fed Chairman Ben Bernanke once called ‘escape velocity’?
The question of what the Federal Reserve will do is rightfully a preoccupation. Can it make the pivot to slightly tighter money without tanking the markets? And can emerging markets continue to thrive on the “hot dollar” trade now that Treasuries are becoming more appealing? A couple of charts explain what is not happening.
June 5, 2013 at 1:03 PM
The new Beige Book from the Federal Reserve on economic conditions shows a continuation of the slow recovery. “Overall economic activity increased at a modest to moderate pace since the previous report across all Federal Reserve Districts except the Dallas District, which reported strong economic growth.” The Dallas Fed’s better showing is not surprising given the energy boom in Texas, Oklahoma and Louisiana. Real estate and construction showed continued moderate gains. Manufacturing expanded more unevenly.
For the San Francisco Fed’s district, which includes Washington and Oregon, the Beige Book noted a modest expansion from early April through late May:
Price inflation was subdued for most final goods and services, and upward wage pressures were limited overall. Retail sales were a bit soft, while demand for business and consumer services was mixed. District manufacturing activity rose on net. Production and sales of agricultural items increased modestly. Residential real estate activity expanded robustly, and commercial real estate activity trended up, although somewhat unevenly across geographic areas. Contacts from financial institutions reported slight increases in overall loan demand.
May 29, 2013 at 10:29 AM
Laying down some markers to watch now that Memorial Day has passed and summer is almost upon us:
Will the recovery hold and expand? Housing prices are finally making a solid move upward. Consumer confidence is at a five-year high. They’re also taking on more debt again. This morning’s correction notwithstanding, stock prices are surging. Banks recorded their best profits on record. Some of the worst outcomes haven’t happened — a double-dip, eurozone contagion and war on the Korean peninsula. All this translates into a widening of the very slow recovery. On July 31st, the government will release its second-quarter gross domestic product report. Unfortunately this will contain revisions that make the economy seem to be growing faster than it is. The best metric of the strength of the recovery will continue to be unemployment. Eleven million Americans are still without jobs and although corporate profits are at a record, hiring has been fairly weak.
Will the stock market keep rocking? Stocks have been a good investment, especially in companies that came through the recession with healthy balance sheets. And where else could investors put their money with the pitiful returns from fixed-income? The big question is how long the run can last. You’ll find predictions across the spectrum. Average investors are just bystanders in this drama. With high-speed trading and huge institutions driving the action, even small macro warnings might trigger at least a modest correction. The big enchilada will be…
What does the Federal Reserve do? The Fed’s QE-eternity bond purchases and expansion of the money base have been a huge factor in the bull run. How Fed Chairman Ben Bernanke would respond to a real recovery has been for years a hypothetical question. Now it’s becoming smash-mouth real, as in the way today’s rise in Treasury yields has tanked the market. Even though he coined the metaphor, Alan Greenspan was never willing to take away the punch bowl as the party was getting going. Will Bernanke? And if so, how will the Fed’s pivot be handled — and received by the markets. Like much since 2007, this is unknown territory.