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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

Category: Inflation
March 17, 2010 at 9:40 AM

Behind today’s inflation numbers: How close we came to disaster

The unexpected drop in wholesale prices for February is being hailed as a sign that inflation is in check and the Fed can keep interest rates low.

The real lesson from today’s report is what a near-death-experience we had with 1930s-style deflation, arising out of the financial panic and the Great Recession. Deflation, a sustained drop in prices, would have driven the economy into full-out depression. For all his missteps, Fed Chairman Ben Bernanke was right to see deflation as a major threat and expand money supply to combat it.

That said, the Fed’s other sins await atonement: the secret deals with the big banks, the toxic assets hidden away (for now), and the fiasco with AIG and others among the Wall Street boyz. These total into the trillions, they allow continued bad behavior and have prevented unwinding of huge amounts of leverage, and they represent an ongoing threat to recovery. Even necessary and good steps have unintended consequences: Hence, the Fed’s expansion and easy credit policies have pumped the world economy full of hot money going into all manner of plays that have little to do with creating jobs or sustained productive enterprises. Meanwhile, the viability of U.S. debt means the Fed can’t base its interest-rate decisions purely on inflation data. The T-bonds will, after all, have to keep attracting investors.

So, two cheers for Bernanke? One cheer? We’ll see in a few years.

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Comments | More in Bailout, Inflation, Jobs/Unemployment

February 19, 2010 at 10:10 AM

Penalty for early withdrawal? Bernanke dips his toe into raising rates

Top of the News: The Federal Reserve has dipped a toe into its exit strategy from zero interest rates with a quarter-percentage-point increase in the rate it charges banks for emergency loans. So far, Wall Street, which has profited so mightily from the cheap credit — even if many American businesses can’t get loans — is taking the news calmly.

The Fed made the move after the market had closed Thursday; so far this morning, the Dow has avoided a swoon. The central bank has emphasized this doesn’t necessarily foreshadow more tightening ahead, but nobody thinks it can keep rates this low forever. Today’s low inflation report seems to confirm that Chairman Ben Bernanke still has a window of low inflation — so far.

Bernanke is no Alan Greenspan, who held nearly everyone in thrall to the economy’s peril. Partly thanks to Greenspan’s arrogant belief that markets would police themselves, and partly because of Bernanke’s own missteps, the Fed is one more American institution that has been tarnished. Bernanke is also presiding over the kind of tenuous consensus on the policy-setting Federal Open Market Committee that never bedeviled Greenspan. The committee’s deficit hawks are getting restless, abetted by December’s lower appetite for Treasuries by China and Japan. Others realize if the Fed makes a misstep by raising rates too fast, it could send the economy into a double-dip recession.

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Comments | More in Bailout, Banking, Federal Reserve, Inflation, Macro/Big picture, Outlook

February 16, 2010 at 9:45 AM

Seattle Federal Home Loan Bank goes after Wall Street

Top of the News: Americans have waited in vain for prosecutions of the banksters for helping cause the Great Recession through their swindles, ooops, risky bets on exotic securities and derivatives. Now some simple justice may come from lawsuits filed by the Federal Home Loan Bank of Seattle.

According to the Wall Street Journal, the institution has filed 11 suits in King County Superior Court claiming that underwriters misled it about the quality of $4 billion of mortgage-backed securities it bought during the housing boom. The banks include Bear Stearns, now owned by JPMorgan Chase, Goldman Sachs, Morgan Stanley and Countrywide, now owned by Bank of America. It’s demanding that the banks buy back the securities plus interest.

The federally chartered FHLB is one of 12 such institutions set up by the government during the Depression and owned by more than 8,000 banks and thrifts, intended to provide stable credit, especially to savings and loans, and small, rural banks. The Seattle FHLB was badly wounded by Washington Mutual, which accounted for a third of its lending business.

The Seattle bank wants the cases moved to federal court, and they will be closely followed by wronged investors. Read the Journal story here (subscription may be required).

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Comments | More in Banking, Inflation

January 6, 2010 at 10:00 AM

Forecasters see Washington as among best in the West for 2010

Top of the News: Washington gets generally good marks in the new Western Blue Chip economic forecast.

Economists polled by the forecast, based at Arizona State University’s W.P. Carey School of Business, expect personal income here to grow 4 percent and single-family housing permits to increase 32 percent in 2010. Population is seen growing 1 percent. Employment: down 0.2 percent.

It’s among the best in the West. You can check out the comparisons here. The dangers to the scenario (and this is me writing): uncertain national recovery and the ongoing danger of a double-dip recession.

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Comments | More in Banking, Inflation, Midweek Economic Briefing

December 3, 2009 at 9:55 AM

Does Bernanke deserve another term? Do members of Congress?

Top of the News: Should Ben Bernanke get a second term as chairman of the Federal Reserve Board? You can vote below, but we may be asking the wrong question.

After all, many of the worthy senators speechifying and grilling Chairman Ben happily went along with years of deregulation, industry consolidation and lax oversight that helped bring on the worst crash since the Depression. All of them had a chance to reel in the excesses of the past decade, and few even spoke out. Who should keep his or her jobs? Look in the mirror, folks.

Bernanke did many things well, skillfully playing the bad hand he was dealt by Alan Greenspan and the choir at the Church of the Self-Regulating Free Market. His “whatever it takes” strategy arguably prevented another great depression. (The best account of this is found in David Wessel’s In Fed We Trust).

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Comments | More in Bailout, Banking, Inflation

October 2, 2009 at 10:40 AM

Welcome to the ‘new normal’ and President Obama owns it, fairly or not

Top of the News: We are seeing the “new normal” and it doesn’t look pretty. The latest national unemployment rate has risen to 9.8 percent and will probably go higher. Worse, few economists see it going down quickly.

As I reported earlier this week, two veteran economists at Rutgers have looked at the ailing labor market and concluded it will not recoup the jobs lost in this recession until late 2017. “The once great ‘American job creation machine’ fully expired in 2008. It was replaced by the ‘Great American Job Destruction Machine,’ ” wrote James Hughes and Joseph Seneca. Last year was the worst for absolute private-sector job losses since records began to be kept in 1939.

The new normal will include a ‘reduced scale’ financial sector; the end of easy credit; a consumer retrenchment that will “ripple through the economy”; “decelerating” house ownership, and a painful remaking of the commercial real-estate market. I would add: an unpredictable inflation picture, rising energy prices and China’s stunning recovery — or crash.

There will be unpredictable political consequences and instability all around. Never mind that much of the causes of the Great Recession were cooked up in the late Clinton and George W. Bush administrations. And never mind that the economic stimulus undoubtedly is preventing joblessness from being more serious. Many voters will remember the bailout of the banks (begun under Bush). They will ask the Ronald Reagan question: Are you better off today… President Obama will be tested as never before.

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Comments | More in Bailout, Consumer spending, Inflation

October 1, 2009 at 10:27 AM

The Fed tries to convince it will be an effective regulator next time

Top of the News: Fed Chairman Ben Bernanke seemed to offer a softer case today for make the central bank the super-regulator of financial institutions. Now he says there should also be “council of regulators” involved.

Anyone who has read David Wessel’s In Fed We Trust probably comes away with an ambivalent view. On the one hand, the Fed was complacent in the years when the subprime mortgage crisis was building inside the very institutions it was already charged with overseeing. On the other hand, only the Fed had the power and assets to act quickly to keep last fall’s panic from becoming a depression.

The real problem is the total breakdown of regulatory oversight and checks and balances in recent years. Enamored with the idea that the market would police itself, regulators, rating agencies and politicians set aside decades of successful practices, beginning with the Clinton era deregulation of financial services. Meanwhile, the unregulated shadow banking industry grew so fast and complex it had the power to take down the system with its bad bets — and in the end the Fed and taxpayers were forced to save such bad actors as AIG.

About the Fed and regulation(polls)

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Comments | More in Bailout, Banking, Inflation, Stock market

June 12, 2009 at 9:47 AM

What kind of businesses will thrive in this new, new economy?

Top of the News: An entrepreneurial reader asks what kind of business might prosper if we’re headed into a period of inflation.

Historically, the answer is fairly easy: Something connected to real estate, energy, precious metals and certain commodities. Stuff that will keep its value, or even rise, as prices increase and the dollar has less purchasing power.

But that might be advice that’s so ’70s. For example, given the huge distortions left over from the housing bubble, real estate investing is only for the well-capitalized and very patient. And inflation in the 1970s occurred in a world without China as a big player — this time China’s actions will change the game, especially if the Chinese bail out of dollar assets.

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Comments | More in Entrepreneurship, Inflation, Trade

June 3, 2009 at 9:50 AM

Bernanke ever so gently raises deficits and taxes

Top of the News: The markets are sifting Fed Chairman Ben Bernanke’s remarks before Congress today. Bottom line: The economy has slowed its rate of collapse; a few signs of bottoming out have emerged; the Fed is now starting to worry about deficits.

Aware of inflation concerns in the Treasury market and in China, Bernanke made it clear the Fed wouldn’t print money to sustain high deficits indefinitely. “Crucially,” he said, “whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run.”

Pimco’s Bill Gross is not convinced. According to Bloomberg, the founder of the big investment management outfit urged diversifying out of the dollar.

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Comments | More in Inflation, Tax policy

April 15, 2009 at 10:20 AM

Let’s hope Helicopter Ben gets it right

Top of the News: If you were alive in the 1970s, you learned to pay attention to the government’s consumer price report because inflation was so nasty. Every week, it seemed, prices were going up. Not now. For the first time in half a century, consumer prices fell in March compared with the same month the year before.

That’s not good news if the trend continues. Not only does it mean that companies will have to lay off even more people because they can’t sell goods at a profit, it also puts at risk the value of everything based on the dollar, from the scratch in your wallet to all those Treasury securities held by our foreign creditors. It’s called deflation, and it was the scourge of the Great Depression.

So far, most experts are discounting the possibility of deflation — but they were also the ones who said not to worry about the housing bubble. Prominent bear Nouriel Roubini has not been so sanguine, warning earlier this year that deflation was a definite possibility…followed by inflation. So far, however, Bernanke’s Fed has rightly focused on avoiding deflation. Let’s hope Helicopter Ben can get it right. (The nickname comes from a pre-Fed chairmanship speech when this Depression scholar was discussing ways to avoid a 1930s deflation — if worse came to worst, he’d drop shrink-wrapped dollars on pallets from a chopper).

Another troubling report: Factory capacity fell to a record low in March. This means a recovery will have to take up a lot of slack before expansion and hiring is felt in this critical sector.

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Comments | More in Inflation, Macro/Big picture, Tax policy

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