Thursday, March 11, 2010

Economic Events of the Week

Thursday March 11 - Initial Claims Weekly, Trade Balance
Friday March 12 - Advance Retail Sales, Business Inventories, European Union Trade Commissioner begins three day visit to Washington to seek progress on the Doha round of talks

e21 Exclusive
Time for a "Holiday" from Accounting Gimmicks
Upcoming Event: The Shadow Open Market Committee Symposium (March 26th, New York)

Front Page News
Obama Makes Closing Argument for Health Overhaul (Wall Street Journal)

Washington Update
Senate Bill on Finance to Include Agency That Tracks Financial Risk (New York Times)

Financial Markets News
Will the Global Economy Expand in 2010? (Wells Fargo)
Comparing the Federal Reserve's Responses to the Crises of 1929-1933 and 2007-2009 (St Louis Federal Reserve)

Editorials and Commentaries
How to Handle the Sovereign Debt Explosion (El-Erian in Financial Times)
Can Nancy Pelosi Get the Votes? (Barone in Wall Street Journal)
The Long Wave of Government Debt (Scott in voxEU.com)

e21 Exclusive

Time for a "Holiday" from Accounting Gimmicks

For many years, there has been a robust debate about whether the Social Security and Medicare Trust Fund balances actually mean anything if the payroll taxes collected for them were spent rather than saved (as seems intuitive in a trust fund). Today, unfortunately, there appears to be a bipartisan embrace of an even more problematic concept: persistently crediting the Trust Funds with tax revenue that has never even been collected.

Upcoming Event: The Shadow Open Market Committee Symposium (March 26th, New York)

Position papers addressing central bank independence, financial regulatory reform and current monetary policy will be presented by SOMC members Michael Bordo, Charles Calomiris, Gregory Hess, Marvin Goodfriend, Mickey Levy and Bennett McCallum. Audience participation will be encouraged.  Federal Reserve Governor Kevin Warsh will be the keynote speaker.  Please click the link to RSVP.

Front Page News

Obama Makes Closing Argument for Health Overhaul (Wall Street Journal)

President Barack Obama pitched the cost-saving benefits of his health plan Wednesday, and made a campaign-style closing argument for the overhaul in his second trip outside Washington this week. Democrats in Congress are working this week to finalize the legislative package, with votes planned for as early as next week. In addition to rounding up votes, particularly in the House, Democratic leaders must prepare a bill that passes muster with the Congressional Budget Office and the Senate parliamentarian. The White House is pushing for a House vote by March 18, when Mr. Obama leaves for a trip to Asia and Australia. Major Garrett at FoxNews has secured a copy of the 13-slide power point "talking points" presentation used by David Simas, an assistant to Senior White House adviser David Axelrod, to rally House Democrats on Tuesday night.

Washington Update

Senate Bill on Finance to Include Agency That Tracks Financial Risk (New York Times)

Senate Banking Committee members from both parties said on Wednesday that they had agreed to include in their regulatory overhaul bill a new Office of Research and Analysis that would provide early warnings of possible systemic collapses. By standardizing financial instruments and reporting mechanisms, the agency would give regulators a broader view of the health of participants in the financial markets and the potential for problems to spread. The idea’s supporters say that kind of information was lacking in recent years as the housing bubble burst and troubles spread from firm to firm.

Financial Markets News

Will the Global Economy Expand in 2010? (Wells Fargo)

The seizing of financial markets that followed Lehman Brothers’ failure caused the global economy to fall into its deepest recession in decades. By the spring of 2009 industrial production in the 30 countries that comprise the Organisation for Economic Cooperation and Development had plunged more than 15 percent from year-earlier levels. Incredibly, it could have been far worse. Governments in most major countries opened the fiscal taps. One year later, there are clear signs that the medicine is having its desired effects as industrial production in the OECD nations turned slightly positive in December 2009. Unfortunately, however, OECD industrial production remains 12 percent below its February 2008 peak. At its current rate of increase, IP will not return to its previous peak until mid-2011.

Comparing the Federal Reserve's Responses to the Crises of 1929-1933 and 2007-2009 (St Louis Federal Reserve)

This article summarizes the Federal Reserve’s response to the financial crisis of 2007-09 and compares it with the Fed’s response to financial shocks during the Great Depression. First, the article describes the Fed’s actions as the recent crisis evolved. Initially, the Fed focused on making funds available to banks and other financial institutions, but used open market operations to prevent lending to individual firms from increasing total banking system reserves or the monetary base. As the crisis intensified, the Fed drew on authority granted during the Depression to provide emergency loans to distressed nonbank firms. The Fed also lowered its target for the federal funds rate effectively to zero and eventually purchased large amounts of U.S. Treasury and agency debt and mortgage-backed securities. The article shows the effects of these actions on the Fed’s balance sheet, the monetary base, and broader monetary aggregates.

Editorials and Commentaries

How to Handle the Sovereign Debt Explosion (El-Erian in Financial Times)

Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily – and excessively – through the narrow prism of Greece. Down the road, it will be recognised for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects. What we are experiencing is best characterised as the latest in a series of disruptions to balance sheets. Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential.

Can Nancy Pelosi Get the Votes? (Barone in Wall Street Journal)

Are there enough votes in the House to pass the Senate's health-care bill? As of today, it's clear there aren't. House Democratic leaders have brushed aside White House calls to bring the bill forward by March 18, when President Barack Obama heads to Asia. Nevertheless, analysts close to the Democratic leadership tell me they're confident the leadership will find some way to squeeze out the 216 votes needed for a majority. Speaker Nancy Pelosi has indeed shown mastery at amassing majorities. But it's hard to see how she'll do so on this one. The arithmetic as I see it doesn't add up.

The Long Wave of Government Debt (Scott in voxEU.com)

One lasting impact of the global financial crisis is that government debt will remain high for decades to come. Forecasts suggest UK government debt will double to reach 94% by 2011 and US debt will rise to 96%. High debt is seen as a serious problem. As Adam Smith warned more than two centuries ago “the practice of funding has gradually enfeebled any state which has adopted it”. The high levels of government debt have raised concern among policymakers and commentators. But this column argues that markets have financed much larger levels of debt than are currently predicted for the UK and US. Given the enormous financial shock these economies have experienced, they might actually be better off with high debt for a long period of time.

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