Wednesday, August 11, 2010

Economic Events of the Week

Wednesday – International Trade
Thursday – Jobless Claims
Friday – Consumer Price Index, Retail Sales

Featured Story
An Underreported Counterview on Fed Policy (Arpit Gupta e21 Exclusive)

Washington Update
US Regulators Tighten Control Over Wall Street (Financial Times)

Financial Markets News
Fed Sees Recovery Slowing (Wall Street Journal)
FOMC: Recovery Slower, but Still Intact; Inflation Slows (Wells Fargo)
The Magma Chart (Economix)

Editorials and Commentaries
What's Wrong with Paul Ryan's Plan? (Megan McArdle)
QE 2 (Wall Street Journal Editorial)
Whatever the Deniers Say, Social Security Needs Reform Soon (Washington Post Editorial)

Featured Story

An Underreported Counterview on Fed Policy (Arpit Gupta e21 Exclusive)

The latest transcript from the FOMC reveals a Fed more concerned than before about the downside risk of deflation. The body has affirmed that interest rates will remain low for an extended period of time, and has decided to reinvest the proceeds of agency-backed mortgage backed securities into long-dated Treasury debt. Many of the more extraordinary interventions at the time of the financial crisis are over, but the Fed continues to pay banks a sizable interest rate for holding their reserves. While looser policy during times of crisis is frequently thought to be well warranted, it does raise potential concerns about moral hazard. One skeptic raising these views is Raghuram Rajan, who is widely known for his prescient warnings on the financial crisis, but has continued with a wave of comments on current policy.

Washington Update

US Regulators Tighten Control Over Wall Street (Financial Times)

US regulators have increased their scrutiny of the country’s largest banks in recent months, digging deeper into riskier activities and pushing institutions to conduct more rigorous “stress tests” of their financial health. Wall Street executives say that since the end of the financial crisis examiners from the Federal Reserve, the main banking watchdog, have become tougher and more detailed in their policing of large financial institutions. “They are all over us,” said a senior Wall Street banker. “They want to see a lot more detail and are demanding a lot more information.”

Financial Markets News

Fed Sees Recovery Slowing (Wall Street Journal)

The Federal Reserve, facing an economic recovery that it termed "more modest" than anticipated, said Tuesday it will stop shrinking its huge portfolio of securities by reinvesting the proceeds of maturing mortgages in U.S. Treasury debt. The Fed move is largely symbolic and is unlikely to stimulate the economy significantly. But the shift in the management of its portfolio—and an accompanying statement—underscored Fed officials' concern about the vigor of the economic recovery. It also opens the door for bigger purchases of Treasurys or other securities should the economy falter or the risk of deflation grow, though the hurdle for such action remains high.

FOMC: Recovery Slower, but Still Intact; Inflation Slows (Wells Fargo)

Economic activity “has slowed” according to the FOMC statement. We agree. Household spending is increasing gradually but remains constrained by “high unemployment, modest income growth, lower housing wealth, and tight credit.” Real positive momentum in the economy is reflected in business spending on equipment and software. Nonresidential construction spending continues to be weak and housing starts “remain at a depressed level.” We agree.

The Magma Chart (Economix)

Read any introductory economics textbook, and you’ll learn that the Federal Reserve has three primary benchmarks that it employs to control monetary policy: the federal funds rate, the discount rate and the reserve ratio. Today the Federal Reserve made history by adding a new benchmark: the size of its balance sheet. Now the Fed’s balance sheet has always had some size, of course, but the Fed historically has not set a public target for it. Why is it such a big deal to tell the public that the Fed’s securities holdings are staying steady? Because the Fed’s balance sheet today is very different from what it looked like before the crisis.

Editorials and Commentaries

What's Wrong with Paul Ryan's Plan? (Megan McArdle)

As I think I may have mentioned, I am skeptical of Paul Ryan's roadmap. Not because it's dishonest, but because it's hard. Really hard. As in, I-don't-see-how-it-could-possibly-survive-the-legislative-process hard. Nonetheless, I think it's a really, really important document. Why? Because it is the most honest attempt I've seen by a politician to grapple with the challenges ahead of us. Strike that; it is the only attempt that I'm aware of to grapple with what lies ahead of us.

QE 2 (Wall Street Journal Editorial)

Whatever the Deniers Say, Social Security Needs Reform Soon (Washington Post Editorial)

This year, for the first time since 1983, Social Security will pay out more in benefits than it receives from payroll taxes -- $41 billion. This development is not an emergency, but it is a warning sign. Too soon, this year's anomaly will become the norm. Social Security is not a cause of the current or future debt, but putting it on a sustainable footing is essential to getting the nation's fiscal house in order. Doing so quickly is a condition for making the changes as painless as possible for those who rely on Social Security the most. The debt commission would perform an important service by ignoring the denialists and tackling this topic.

e21: Economic Policies for the 21st Century is a nonprofit, nonpartisan organization dedicated to economic research and innovative public policies for the 21st century. Drawing on the expertise of practitioners, policymakers, and academics, we aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.

2010, e21 - An initiative for 21st Century Economic Policies