N.Y. Fed Enlists 13 Investors as Advisers

The Federal Reserve Bank of New York has enlisted 13 people, many of them well-known investors, for its new Investor Advisory Committee on Financial Markets. The group will serve “as a forum for informal discussions on financial, economic and public policy issues” to advise the bank’s president, Bill Dudley, and other officials, the Fed bank said.

The New York Fed already has several advisory groups on the economy, small business and agriculture, international issues and thrift institutions. Unlike the Federal Reserve Board’s Consumer Advisory Council, which was formed by Congress in 1976, the New York Fed’s advisory committee meetings are not open to the public.

With plenty of conspiracy theories floating around concerning decision-making at the central bank, the New York Fed made it clear that its new committee “is solely an advisory group with no formal policymaking responsibilities.”

The initial 13 members of the committee:

-Keith Anderson, CIO, Soros Fund Management LLC
-Nicole Arnaboldi, Vice Chairman of Alternative Investments, Credit Suisse Group
-Louis Bacon, Chairman, CEO and Founder, Moore Capital Management LLC
-William Clark, Director, New Jersey Department of the Treasury, Division of Investment
-Mohamed El-Erian, CEO and Co-CIO, Pacific Investment Management Company
-Garth Friesen, Principal, III Associates
-Gary Glynn, President and CIO, US Steel and Carnegie Pension Fund
-Joshua Harris, Managing Partner, Apollo Advisors LP
-Alan Howard, Director and Co-Founder, Brevan Howard Asset Management LLP
-Glenn Hutchins, Co-CEO and Co-Founder, Silver Lake
-Sander Levy, Managing Director, Vestar Capital Partners
-Morgan Stark, Managing Member, Ramius LLC
-Thomas Steyer, Senior Managing Member, Farallon Partners LLC


“Who Is Killing America’s Millionaires?”

Sneaking in a quick post between new student advising appointments, does recent evidence support that claim that wealthy individuals have been fleeing high tax jurisdictions?:

Who Is Killing America's Millionaires?, by Daniel Gross, Slate: It hasn't been a good recession for the rich. The ... boom was extraordinarily top-heavy..., these are tough times for the wealthy.

As if market forces and malevolent actors weren't enough, the rich are now finding themselves targeted by politicians. Strapped for cash, states, cities, and the federal government are seeking to soak the rich—or at least to make them pay taxes at the same marginal rates as they did in the Reagan years, which many on the right regard as an act equivalent to executing landed gentry. Some politicians have even suggested that we fund health care by slapping a surtax on people with annual incomes of more than $1 million.

This tactic isn't likely to work, in large part because people who make a lot of money are quite effective at swaying public policy. What's more, the wealthy have many defenders who argue that taxing the golden geese will cause them to fly away. In May, the Wall Street Journal op-ed page argued that millionaires fled Maryland after the state legislature boosted the top marginal state income tax rate to 6.25 percent on the top 0.3 percent of filers. ... The Journal uses this ... to warn the federal government and states with progressive tax structures and lots of rich people—New York, New Jersey, California—to heed the lesson. Tax the wealthy too much, and they'll leave.

Such logic makes sense to the Journal's op-ed page staffers, who inhabit an alternative universe in which people wake up in the morning and decide whether to go to work, innovate, or buy a bagel based on marginal tax rates. But if people were motivated to choose residences based solely on high state income taxes, then California and New York wouldn't have any wealthy entrepreneurs, venture capitalists, or investment bankers—and the several states that have no state income tax, which include South Dakota, Alaska, and Wyoming, would be really crowded with rich people. Maybe Maryland's rich folks just had a crappy year in 2008. Robert Frank..., citing data from the Institute on Taxation and Economic Policy, that there's "evidence that [the state's] millionaires didn't disappear because they moved, they disappeared because they are no longer millionaires." ...

Consulting firm CapGemini conducts an annual census of high-net-worth individuals, defined as people with at least $1 million in investable assets, excluding primary residences. "We've been doing this report for 13 years and haven't seen this kind of loss of wealth since we started," said Ileana van der Linde ... at CapGemini... North America saw an 18.5 percent decline in its high-net-worth population, from 3.02 million in 2007 to 2.46 million in 2008. ...

CapGemini's survey contains some interesting geographic wrinkles. High-tax areas like New York and California—places where politicians have been talking about potentially raising taxes on the rich to deal with budget crises—held up better than the national average. ...

Comparative tax havens like Florida, Nevada, and Arizona didn't see an influx of millionaires in 2008. Far from it. In 2008, Las Vegas lost 38 percent of its HNWIs, and Phoenix lost 34 percent. Florida, which has no state income tax and hasn't been talking about one, was a killing field for the rich. The three major metro areas that lost more than 40 percent of millionaires in 2008 were all in no-income-tax Florida—Orlando (42 percent), Miami (42 percent), and Tampa (51 percent). The decline has nothing to do with taxes and everything to do with bursting asset bubbles. ...

Of course, there's evidence that some millionaires have moved out of high-tax states. Bernie Madoff, for example, recently left New York to take up residence in North Carolina.

Michigan Taps Out on Tax Breaks for Economic Growth

The Michigan Economic Development Corporation has given out as many economic development tax credits as it can this year, according to the Detroit News, meaning that for the rest of the year the MEDC can’t give tax breaks to companies willing to move to the state or to local companies that are expanding. This has economic development officials talking doomsday and pushing the legislators to erase the state’s annual limit on tax breaks.

Will the Michigan Economic Development Corp. headquarters be quieter now that tax credits have run out?

“We’re fighting an economic war with other states and we’re out of ammo,” Mark Morante, vice president of policy and legislative affairs for the MEDC, tells the News. MEDC CEO Greg Main uses military speak: “This is unilateral disarmament,” the News quotes him as saying during a press conference in which he announced that MEDC had nothing more to give.

This is the first time we’ve read about an economic development program running out of money and, unfortunately, it’s the sort of first that Michigan (unemployment rate: 15.2%) is getting known for. But while the tapped out tax breaks might be bad news to economic development officials, it would be welcome to many economists.

Here’s the disagreement: Economic development officials say tax incentives create or save jobs and give their state a competitive business climate. But incentives are have vocal opponents among advocates and economists, including Arthur Rolnick at the Minneapolis Fed who testified against such programs to Congress (in the war analogy Mr. Rolnick would be a peace activist). Their argument is these programs often cost more than advertised and drain money from schools, cops, parks and all the other quality of life services that actually make people — and thus, companies — want to move to a particular city or state.

Critics also argue that the vast majority of such deals are for local expansions that would happen with or without tax breaks, rather than luring companies and jobs across state lines. The News article notes one recent MEDC tax credit went to help Quicken Loans Inc. moves its headquarters about 20 miles to Detroit from Livonia. (The company plans to invest $240 million in the project and promises to create 1,800 jobs, the story says.)

Even relocation consultants — who are to companies looking for tax credits as sports agents are to professional athletes — say they don’t take tax credits into consideration until long after a relocation site (or a few final sites, at least) has been chosen. “We counsel our clients to not lead the process with incentives,” said Jack Boyd, of the Boyd Co., a site selection company in Princeton, N.J., in an interview.

The News article raises some similar criticisms about the MEDC program:

Mike LaFaive of the Midland-based Mackinac Center for Public Policy said a study he has done indicates counties where companies have won tax breaks have seen no gains in employment or personal income. “This program doesn’t create jobs, but creates job announcements,” he said, meaning some expansions or relocations never happen and some don’t create the jobs that were promised.

Of course, the problem with tax incentive programs is that — much like bank bailouts or economic stimulus packages — it’s impossible to know what would have happened in its absence. Greg LeRoy, executive director of Good Jobs First and an opponent of tax incentives, says that question might finally be answered if the Michigan legislature (which, like most every state, is facing a whopper of a budget mess) doesn’t raise the cap. “This will become an experiment, a side by side, with the credit available and without,” he says.

Mr. LeRoy adds: “I would not expect deal flow to fall off a cliff; the business basics still apply.”


Fed Staffer Heads to Brookings

The Brookings Institution sent a slew of economists into the government in recent months, from Jason Furman to the White House National Economic Council (after working for the Obama campaign) to Douglas Elmendorf at the Congressional Budget Office to White House Budget Director Peter Orszag (at Brookings before heading CBO). Now it’s getting a couple of additions from the government.

The think tank said today the new co-directors of its Economic Studies program will be Karen Dynan, a Federal Reserve staffer, and Ted Gayer, a Georgetown professor. The program’s director since 2006, Bill Gale, will continue his research at Brookings heading other programs (the Tax Policy Center and Retirement Security Project).

Dynan, who has been at the Fed since 1992, was a senior economist at the White House Council of Economic Advisers from 2003 to 2004. (She’s married to the aforementioned Elmendorf, the Brookings alum who heads CBO.) Gayer, a public policy professor at Georgetown, was Deputy Assistant Secretary for Microeconomic Analysis at the Department of the Treasury in 2007 and 2008. He also was a visiting scholar at the American Enterprise Institute.


Poll: Most Americans Expect Economic Transformation

Seven in ten Americans say that “when the U.S. economy recovers, the way the economy looks and works will be very different from what it was before the recession,” according to a new poll. Baby-boomers, in particular, see it that way, pollster Ed Reilly said.

The poll also found significant skepticism towards government and business, a reflection, perhaps, of the antiestablishment attitude spurred by the recession and financial crisis.

Some 52% said all the things that government at all levels do “create more obstacles for people like yourself to get ahead” versus 38% who said government actions “create more opportunity for people like you to get ahead.”

Asked about companies, 52% of the respondents say they “think only about the short-term view and see employees as a cost that can be reduced if the economy gets bad,” and 40% say companies “do a good job of identifying the most qualified and talents employees… and providing them opportunities for them to advance.”

The pollsters asked Americans what they think is the best way to increase their own opportunity — their efforts, the government’s efforts, or companies’ efforts. Some 40% said their own efforts were the most important. Another 38% said government — but they were divided between those who cited big government as a plus (investing in new technologies and industries, funding training programs) and those who cited small government (tax cuts, deregulation) as a plus. Another 17% cited private-sector companies. Hispanics were particularly persuaded that their own efforts are the most important ones.

The poll, the second in a series, found American see “More promise. But also more peril,” Ron Brownstein, political director of Atlantic Media, a sponsor of the poll said. “Americans believe they are living in an economy of greater volatility that generally offers them more opportunity — but also leaves them exposed to greater risk, with few dependable allies from government or business to help them cope with it. On a turbulent sea, many Americans see themselves swimming alone.”

The poll of 1,200 Americans was conducted by Financial Dynamics International Ltd. of Washington, D.C., for Atlantic Media’s National Journal and Allstate Corp. It has a margin of error of plus or minus 2.8 percentage points.


Systemic Risk Council Vs. the Fed

One of the major sticking points with the Obama administration’s plan to revamp financial regulation is whether more power should be vested in the Federal Reserve or whether a new systemic risk council should be created to monitor financial markets. The Obama team wants the Fed to have more authority in this area and a council to serve an advisory and collaborative role, but many on Capitol Hill are skeptical, as was evidenced yesterday at a Senate Banking Committee hearing.

Geithner is going to have to defend his choices for regulatory reform. (Getty Images)

Some other regulators, including the heads of the FDIC and SEC, are pushing for a more empowered council that can set policy as well. One challenge for Treasury Secretary Timothy Geithner today at a House Financial Services Committee hearing will be to explain why his proposal of empowering the Fed is the best approach rather than spreading power — and ultimately delegating major decisions — to a council.

Here are some views from the Senate hearing Thursday:

Federal Reserve governor Daniel Tarullo
“If you’ve got a council that basically is able to direct everybody to do what the council thinks he ought to do, it’s not that far from the financial services authority mechanism in the U.K. or something like that.”

SEC Chairman Mary Schapiro:
“I believe the most appropriate approach consists of a single systemic risk regulator and a very strong council…I believe that any council must be strengthened well beyond the frameworks set forth in the administration’s white paper…The council should have authority to identify institutions, practices and markets that create potential systemic risks and to set standards for liquidity, capital and other risk management practices at systemically important institutions.”

FDIC Chairman Sheila Bair:
“The more eyes you have looking at this from different perspectives, including the FDIC as a different perspective from the SEC or the CFTC or — or the Fed. So I think bringing those multiple perspectives together is going to strengthen the entity, not weaken it. You are talking about tremendous regulatory power being invested in whatever this entity is going to be. And I think, in terms of checks and balances, it’s also helpful to have multiple views being expressed and coming to a consensus.”

Senate Banking Committee Chairman Christopher Dodd (D., Conn.):
“I’m sort of leaning towards the council approach.”

Sen. Mike Johanns (R., Neb.):
“I tend to favor the council. The idea of the Federal Reserve I think is just fraught with a lot of problems. So at least today that’s — that’s where I’m thinking about this.”

Sen. Mark Warner (D., Va.):
“I strongly, as I made clear, believe that the council’s the right approach.”


Secondary Sources: Remaking America, China, CBO, News From 1930

A roundup of economic news from around the Web.

  • Remaking America: Greg Ip has a great piece in the Economist on the U.S. economy’s expected transition from a consumption-led economy. “The American economy is like a supertanker that, even in calm waters, changes direction very slowly. It is now being forced to do so in a gale. With the help of still sturdy growth in emerging markets America should be able to reorient itself. But come what may, changing direction means losing speed. On the demand side foreign spending is unlikely to compensate for the freewheeling American consumer. On the supply side investment has slumped and will take time to right its course. Pimco’s Mr El-Erian reckons that the transition from consumption to export-oriented expansion will lead to prolonged subpar growth and high unemployment.” Also, check out this great video graphic that goes along with the article.
  • China as Stimulus: Writing for Project Syndicate, Barry Eichengreen says we need to look to China to stimulate the world economy. “If there is going to be more aggregate demand, it can come from only one place. That place is not Europe or Japan, where debts are even higher than in the U.S. – and the demographic preconditions for servicing them less favorable. Rather, it is emerging markets like China. The problem is that China has already done a lot to stimulate domestic demand, both through government spending and by directing its banks to lend. As a result, its stock market is frothy, and it is experiencing an alarming property boom. Through May, property prices were up 18% year on year. Understandably, Chinese officials worry about bubble trouble. The obvious way to square this circle is to spend more on imports. China can purchase more industrial machinery, transport equipment, and steelmaking material, which are among its leading imports from the U.S. Directing spending toward imports of capital equipment would avoid overheating China’s own markets, boost the economy’s productive capacity (and thus its ability to grow in the future), and support demand for U.S., European, and Japanese products just when such support is needed most.”
  • CBO Independence: On his blog, congressional budget office director Douglas Elmendorf defends his agency’s nonpartisan nature. “The President asked me, and other experts in the room, for our insights into possible ways to reduce the nation’s health care spending. The very capable staff at CBO has thought a lot about this subject, and I shared those thoughts with the President. Although the audience was unique, my comments were no different from what we have said publicly on numerous other occasions. The CBO staff and I have offered our thoughts on this subject to the Congress and the public in published reports and letters, and we have discussed them in many meetings with Members of Congress and their staffs of both political parties. Across the range of topics we study, we deliberately spend a lot of time explaining our thinking to policymakers, because we believe that such openness is a responsibility of our agency and can help policymakers to reach better-informed policy decisions. But we never adjust our analysis or conclusions to please our audience (as the reaction to various CBO reports amply demonstrates). CBO will continue to do what it has always done—provide independent, nonpartisan analysis for the Congress, communicate that information as clearly as possible, and provide as much transparency as possible about our methodology and assumptions. A visit to the White House won’t change that a bit!”
  • News From 1930: The latest dispatch from the blog reading the Wall Street Journal for the corresponding day in 1930 sounds awfully familiar. “Market opened with large buy orders for major industrials. Many majors in early trading reached highest point of last week. Buying broadened to rest of industrials in late morning; upward movement continued almost all day. Some short covering seen. Car stocks strong, particularly GM; in spite of generally weak news. Utilities strong; amusement stocks dull. Banks and trusts weak… L.G. Federman, Pres. Interstate Dept. Stores, believes “Business in general hit bottom last month,” and likewise for commodity prices. “Both are now picking up and I am confident the advance will rapidly gain momentum.” .. Second-quarter earnings so far better than expected. Third-quarter predictions are difficult; current business is below second-quarter average; if seasonal pickup does not develop until September, as leading authorities expect, the improvement won’t be reflected in third-quarter earnings.”

Compiled by Phil Izzo


Economists React: ‘Nasty and Disappointing’ U.K. GDP

<em>Economists react to the U.K.'s deeper than expected <a href="http://online.wsj.com/article/SB124842361764178567.html">0.8% contraction in second-quarter GDP</a>.</em> <strong>The ... GDP data are a really nasty and disappointing shock</strong>, with the rate of contraction slowing far less markely than expected. ... The second-quarter performance was dragged down by construction output slumping by 2.2% quarter-on-quarter. [...]


Guest Contribution: The Invisible Hand Isn’t Broken

The free market has gotten a bad rap, but the invisible hand was never meant to be completely unfettered, writes Steven G. Medema, professor of economics at the University of Colorado Denver and the author of “The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas.”

The current economic crisis has led to any number of calls for us to rethink the market system. The meltdown in the financial sector, it is argued, constitutes proof that Adam Smith’s “invisible hand” cannot do the trick. But people may want to think twice before leaping to the ostensible safety of the state.

Adam Smith might say the current crisis is proof the market works.

The idea that the self-interested behavior could be good for the economy did not originate with Smith, but he provided the theoretical ammunition for this view and remains the historical figure with whom it is most closely associated. Smith’s view of things was that businessmen do indeed pursue their self-interest, but that such behavior can redound to the best interests of society as a whole — higher national wealth, lower goods prices for consumers, etc. — if that self-interested behavior is encased within a competitive market environment. This, of course, is Smith’s famous “invisible hand” argument, which has been championed by some as an argument for minimalist government and derided by others as a myth that has been disproved by events.

But as convinced as Smith was of the utility of the market for promoting economic growth attended by benefits that extend across the population, he was not a champion of unfettered markets. Smith wrote at a time when various government schemes of protection established monopolies across the economy, which generated higher prices for consumers at the same time that they enriched the narrow classes of protected businessmen. He advocated the competitive process as an alternative to that system.

Smith saw an important role for the state within the market process. He was well aware that the unfettered pursuit of self-interest had many pitfalls associated with it, and he wrote at length about the need to embed the market system within an appropriate legal and moral environment, even going so far as to recommend legal ceilings on interest rates to prevent banks from lending large amounts of society’s financial capital for the pursuit of excessively speculative ventures.

The more than two centuries since Smith wrote have witnessed much to-and-fro of the debate over the relative merits of market and state. Economists have increasingly recognized the array of areas in which markets fall short of the ideal. But they have also paid increasing attention over the past fifty years to the problems associated with state action. Self-interested behavior extends well beyond the market realm, including to that political. Politicians desire to get elected, and then re-elected, and this leads them to take positions on issues that help ensure their re-election, often at the expense of the best interests of society. The implication of this is that the governmental cure may well be worse than the market disease. Neither market nor state is a panacea when it comes to channeling self-interested behavior in socially helpful directions.

So how does all of this relate to the present economic situation? Consider the meltdown in the housing market. There is no question that self-interested behavior — on the part of consumers, real estate agents, lending institutions, and deregulating government officials (Republicans and Democrats) — has played a major role in getting us into this mess. But is this an argument against the market? Is the invisible hand broken or, worse, a myth?

I would argue that the market performed beautifully here. People respond to incentives in rather predictable ways, and if the market environment sets up incentives for absurd behaviors, people will behave absurdly. The invisible hand does not suggest that all will be well when a bunch of people making $50,000 per year and loaded down with credit card debt buy $300,000 houses with no money down, that making the loans to facilitate this will be profitable in the long run, or that the rest of society will be insulated from the consequences of these actions. The market has done a masterful job of channeling self-interest in socially useful directions for all manner of goods, including housing, for a very long time. But it does not insulate individuals or nations from the effects of stupidity.

What are the lessons in this? I would argue that there are two. First, as Smith noted, the market will only work to the best interests of society if it is enveloped in an appropriate legal and moral environment. The types of checks needed to prevent a recurrence of the current crisis are now quite evident, and they do not imply jettisoning robust markets — a lesson apparently lost on both the left and the right.

Second, the same government that many people expect to save us from this mess helped get us into it in the first place. What justifies the thought that the present administration and our current senators and representatives can do any better than those who helped to create the problems? The dangers associated with the meddling of politicians who believe that they know how best to direct society’s resources are every bit as real as those associated with unfettered self-interest. The various “stimulus” efforts, which are equal parts stimulus, pork, and social policy, are wonderful illustrations of this.

As with most things of any consequence, the devil is in the details. And teasing out how to reform the system in a way that avoids the excesses of the days of go-go markets while steering clear of the pitfalls associated with government management of economic affairs can only be the result of patient, deliberative study.


Paul Krugman: Costs and Compassion

Controlling costs is essential if we want to guarantee health care for all:

Costs and Compassion, by Paul Krugman, Commentary, NY Times: The talking heads on cable TV panned President Obama’s Wednesday press conference. You see, he didn’t offer a lot of folksy anecdotes.

Shame on them. The health care system is in crisis. The fate of America’s middle class hangs in the balance. And there on our TVs was a president with an impressive command of the issues... Mr. Obama was especially good when he talked about controlling medical costs. And there’s a crucial lesson there — namely, that when it comes to reforming health care, compassion and cost-effectiveness go hand in hand. ...

President Obama is trying to provide every American with access to health insurance — and he’s also doing more to control health care costs than any previous president.

I don’t know how many people understand the significance of Mr. Obama’s proposal to give MedPAC, the expert advisory board to Medicare, real power. But it’s a major step toward reducing the useless spending — the proliferation of procedures with no medical benefits — that bloats American health care costs.

And both the Obama administration and Congressional Democrats have also been emphasizing the importance of “comparative effectiveness research” — seeing which medical procedures actually work. ...

Many health care experts believe that one main reason we spend far more on health than any other advanced nation, without better health outcomes, is the fee-for-service system in which hospitals and doctors are paid for procedures, not results. As the president said Wednesday, this creates an incentive for health providers to do more tests, more operations, and so on, whether or not these procedures actually help patients.

So where in America is there serious consideration of moving away from fee-for-service to a more comprehensive, integrated approach to health care? The answer is: Massachusetts — which introduced a health-care plan three years ago that was, in some respects, a dress rehearsal for national health reform, and is now looking for ways to help control costs.

Why does meaningful action on medical costs go along with compassion? ... When health insurance premiums doubled during the Bush years, our health care system “controlled costs” by dropping coverage for many workers — but as far as the Bush administration was concerned, that wasn’t a problem. If you believe in universal coverage, on the other hand, it is a problem, and demands a solution.

I’d suggest that would-be health reformers won’t have the moral authority to confront our system’s inefficiency unless they’re also prepared to end its cruelty. If President Bush had tried to rein in Medicare spending, he would have been accused, with considerable justice, of cutting benefits so that he could give the wealthy even more tax cuts. President Obama, by contrast, can link Medicare reform with the goal of protecting less fortunate Americans and making the middle class more secure.

As a practical, political matter, then, controlling health care costs and expanding health care access aren’t opposing alternatives — you have to do both, or neither.

At one point in his remarks Mr. Obama talked about a red pill and a blue pill. I suspect, though I’m not sure, that he was alluding to the scene in the movie “The Matrix” in which one pill brings ignorance and the other knowledge.

Well, in the case of health care, one pill means continuing on our current path — a path along which health care premiums will continue to soar, the number of uninsured Americans will skyrocket and Medicare costs will break the federal budget. The other pill means reforming our system, guaranteeing health care for all Americans at the same time we make medicine more cost-effective.

Which pill would you choose?

Fed Watch: The Debate Continues

Tim Duy looks at the shape of things to come:

The Debate Continues, by Tim Duy: The debate over the shape of the  recovery continues unabated.  Equities, at least this week, are voting in favor of the V-shaped recovery, with the Dow pushing past the 9,000 mark for the first time since January.  Never one to accept good news at face value, Nouriel Roubini predictably took the opposite position:

A “perfect storm” of fiscal deficits, rising bond yields, “soaring” oil prices, weak profits and a stagnant labor market could “blow the recovering world economy back into a double-dip recession,” he wrote in a research note today. “It is getting more likely unless a clear exit strategy from the massive monetary and fiscal stimulus is outlined even before it is implemented.”

Roubini, chairman of Roubini Global Economics and a professor at NYU’s Stern School of Business, predicted that the global economy will begin recovering near the end of 2009. The U.S. economy is likely to grow about 1 percent in the next two years, less than the 3 percent “trend,” he said.

Roubini based his short-term outlook on the worsening condition of the U.S. housing and labor markets, which he called “inextricably linked.” He said a “weak” job market will contribute to another 13 percent to 18 percent drop in house prices, bringing total declines nationally to as much as 45 percent from their peak.

I would add to Roubini's pessimism that  bond market investors as of yet do not share the optimism of their brethren in the equity side of the industry.  The run up in yields that brought a 4-handle to the 10 year Treasury appears to have been stopped dead in its tracks, and that maturity has pulled back to the mid threes.  If the run-up in yields foreshadowed a burst of optimism in equities, the pull back would suggest that this rally has nearly run its course.

 The challenge here is two-fold.  The first challenge is to determine how much of the recent equity run is attributable to the weight of evidence that indicates the worst of the downturn is behind us.  With the Armageddon trade off the table, some gains were inevitable, just as was the rise in Treasury yields.  The more difficult challenge is the strength and pattern of the subsequent recovery.  To be sure, one should not ignore the possibility of a blowout quarter here and there, as GDP data can bounce quickly to bounces in underlying data such as a stabilization in auto sales.  But will such a bounce reflect fundamental underlying strength?  A slow, jobless recovery - my dominant scenario - would most likely produce the seesaw trading we saw in the wake of the tech bubble crash, a pattern that held until the housing bubble gained full traction.  Such an outcome looks consistent with the sentiment of Federal Reserve Chairman Ben Bernanke in this weeks Congressional testimony:

Despite these positive signs, the rate of job loss remains high and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.

Later, during questioning, Bernanke reiterated: 

What will the recovery look like?  Slow. “The American consumer is not going to be the source of a global boom by any means,” Bernanke says.

Sounds like he tends toward the low end of the FOMC's range of forecasts, and suggests, talk of withdrawal of various monetary accommodation aside,  this looks like a reasonable forecast:

BlackRock Inc., the biggest publicly traded U.S. money manager, recommends buying Treasuries maturing in two to five years on expectations the Federal Reserve won’t raise interest rates this year.

“They still see potential downside risks to growth,” Stuart Spodek, co-head of U.S. bonds in New York at BlackRock, said in a Bloomberg Television interview. “The Fed is not going to tighten. It has referenced keeping rates low for an extended period of time.”

With unemployment rates still headed north, it is tough to see the Fed tightening within the next twelve months, if not longer.  But will the job market surprise us?  No clear indications can be gained from initial unemployment claims data which, although battered by unusual seasonal patterns, overall remains consistent with further drops in nonfarm payrolls.  Indeed, this would be consistent with recent patterns of recession.  David Altig declares:

...I'm quite sympathetic to DeLong's theme that the dynamics of U.S. labor markets coming out of recessions appear to have changed starting with the 1990–91 economic contraction. And it might be hard for many people to argue with DeLong's point that the U.S. economy is likely headed toward another so-called "jobless recovery." But until more facts are in and we're able to look back on what transpired, I think we still, at this point, must reasonably count the current run-up in the unemployment rate as a puzzle.

In the comments from my last piece, reader spencer takes a different perspective, noting that forecasters have tended to underestimate the strength of recoveries, and further notes that recent moderate recoveries have followed atypical mild recessions.  The current recession, however, is more typical of the pre-1990 variety, and, as such could be expected to yield a rapid recovery.  A logical analysis from a long-time observer of business cycles; as always, one should have such an outcome on their continuum of possible events, but I tend not to be particularly sympathetic to the mild recession, mild recovery, big recession, big recovery analogy.  It seems to be that a cursory look at the data suggests something very different is happening in the labor market and thus the strength of recoveries since the early 1980s.  Look, for example at the pattern of durable goods manufacturing payrolls:

FW0724093

Previous to 1990, durable good jobs snapped back quickly, but that began changing after the 1980 recession, first with a muted rebound, than a slow return after the 1990 recession, and then with no return after the 2000 recession.  That lack of rebound alone cost the recovery roughly 2 million jobs - and it seems that if the downturn was only mild, we should have expected these jobs to return.  We will lose another 2 million at least by the time the current downturn is complete.  Does anyone think these jobs are coming back?  Anyone?

Likewise, nondurable goods manufacturing tells an even worse story:

FW0724092

In previous cycles, a rapid bounce, but simply an outright cliff dive since the mid 1990s.  Again, do we think this trend will be reversed in the upcoming recovery?  Another, albeit smaller sector:

FW0724091

To be sure, information services was coming off a bubble, but stability in the sector remained elusive even at the peak of the recent cycle.  

These patterns suggest to me that the last fifteen years has seen intense structural change such that even mild recessions result in permanent dislocations.  I have trouble that in the midst of such ongoing structural change a deeper recession will result in a less permanent dislocation.  No, I suspect many of these jobs are gone for good, placing an additional weight on the job market during the recovery.  Simply put, the danger is that in even a moderate recovery, the remaining expanding sectors will lack sufficient strength to compensate for these permanent losses. 

Anticipating the comments, another way some might describe the patterns in the labor markets during recent recessions is that a variety of economic policy decisions by both Democratic and Republican administrations have had the impact of dismembering the industrial base of the US without encouraging the growth of sufficient replacement jobs, thereby throwing the American middle class under the train.  That, however, is such a dark interpretation, as opposed to say, cheering the efforts of policymakers to lessen the burden of work on Americans by encouraging foreign nations to forsake their own consumption to provide goods for our citizens.  

Bottom Line:  I am not convinced that the equity run up confirms much more than the power of low expectations.  Indeed, the bond market has yet to follow suit (when I would actually expect it to lead the way).  I increasingly think that the debate between V and other shaped recoveries is really a debate over the degree of structural change occurring in the economy.  If you believe this is a typical cycle, and that what was demanded and how it was produced is roughly the same after as before the recession, a V-shaped recovery is your likely candidate.  If you believe that the current recession is simply intensifying a period of intense structural change, than you are looking for a U or L-shaped recovery.  Notably Bernanke, by acknowledging that the US consumer is in no shape to continued its 25 year role as a shaper of global economic trends, seems to be siding with the structural change side of the coin.

“All Stimulus Roads Lead to China”

Should emerging countries, China in particular, intentionally spend more on imports from the U.S.?:

All stimulus roads lead to China, by Barry Eichengreen, Commentary, Project Syndicate: Now that the “green shoots” of recovery have withered, the debate over fiscal stimulus is back with a vengeance. ... It is possible to argue the economics both ways, but the politics all point in one direction. The US Congress lacks the stomach for another stimulus package. ... A second stimulus simply is not in the cards.

If there is going to be more aggregate demand, it can come from only one place. That place is not Europe or Japan, where debts are even higher than in the US – and the demographic preconditions for servicing them less favorable. Rather, it is emerging markets like China.

The problem is that China has already done a lot to stimulate domestic demand... As a result, its stock market is frothy, and it is experiencing an alarming property boom. ... Understandably, Chinese officials worry about bubble trouble.

The obvious way to square this circle is to spend more on imports. China can purchase more industrial machinery, transport equipment, and steelmaking material, which are among its leading imports from the US. Directing spending toward imports of capital equipment would avoid overheating China’s own markets, boost the economy’s productive capacity (and thus its ability to grow in the future), and support demand for US, European, and Japanese products just when such support is needed most.

This strategy is not without risks. Allowing the renminbi to appreciate as a way of encouraging imports may also discourage exports, the traditional motor of Chinese growth. And lowering administrative barriers to imports might redirect more spending toward foreign goods than the authorities intend. But these are risks worth taking if China is serious about assuming a global leadership role.

The question is what China will get in return. And the answer brings us back, full circle, to ... US fiscal policy. China is worried that its more than $1tn investment in US Treasury securities will not hold its value. It wants reassurance that the US will stand behind its debts. It therefore wants to see a credible program for balancing the US budget once the recession ends.

And, tough talk notwithstanding, the Obama administration has yet to offer a credible roadmap for fiscal consolidation. ... We live in a multipolar world where neither the US nor China is large enough to exercise global economic leadership on its own. ... Only by working together can the two countries lead the world economy out of its current doldrums.

I don't think we should count on this happening.

links for 2009-07-24

A Look Inside Fed’s Balance Sheet – 7/23/09 Update


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The Fed’s balance sheet shrunk in the latest week to $2.024 trillion from $2.057 trillion. Direct-bank lending fell under $300 billion for the first time since September 2008, while last week’s $2 billion jump in central-bank liquidity swaps was more than erased by this week’s $22 billion decline. The makeup of the balance sheet continued to shift out of emergency facilities and into Treasurys, agency debt and mortgage-backed securities. The Fed started a program in March to ramp up such acquisitions in order to push down long-term interest rates low. The holdings of all three debt classes increased in the latest week, but purchases of mortgage-backed securities soared, rising by $19 billion to $535 billion, more than a quarter of the total balance sheet.

In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. Every Thursday afternoon, the chart will be updated with the latest data released by the Fed.

In an effort to simplify the composition of the balance sheet, some elements have been consolidated. Portfolios holding assets from the Bear Stearns and AIG rescues have been put into one category, as have facilities aimed at supporting commercial paper and money markets. The direct bank lending group includes term auction credit, as well as loans extended through the discount window and similar programs.

Central bank liquidity swaps refer to Fed programs with foreign central banks that allow the institutions to lend out foreign currency to their local banks. Repurchase agreements are short-term temporary purchases of securities from banks, which are looking for liquidity and agree to repurchase them on a specified date at a specified price.

Click and drag your mouse to zoom in on the chart. Clicking the check mark on categories can add or remove elements from the balance sheet.


Dallas Fed’s Fisher: Mega-Banks Hurt Monetary Policy’s Effectiveness

In a speech today, Federal Reserve Bank of Dallas President Richard Fisher dives into the too-big-to-fail problem by discussing the problems created from giant banks buying other giant banks that were on the verge of collapse during the financial crisis. Some corners of the Fed, of course, played a central role in those marriages to prevent wider financial contagion.

Fisher

“[A]ll the crisis-related acquisitions we have seen may further consolidate financial assets and power into the hands of a few large organizations, leading ultimately to reduced competition and a less diverse and efficient financial sector,” he said at an event for the Fixed Income Forum in California. “The massive government assistance recently provided to large banks may be artificially tilting the competitive balance in favor of large institutions.”

The math: The combined assets of the nation’s four largest banking institutions (all of which received government aid during the crisis) has grown 30% since June 2007, while industry assets outside those four have grown 12%. Bank of America’s base grew 51% from June 2007 to March 2009, aided by its acquisitions of Countrywide Financial and Merrill Lynch. Wells Fargo’s assets grew 138% as it bought Wachovia. J.P. Morgan Chase’s assets expanded 43% with the purchase of Bear Stearns and Washington Mutual. (Citigroup’s assets declined 20% over that period.)

Fisher estimates the top four combined would have shrunk 7% it not for those purchases. The end result: “The acquisitions of troubled banks have worked to perpetuate size concentration in the banking industry,” he explains. The top four now control 44% of industry assets. Removing their recently acquired assets, he says, they’d have 30% of the industry’s asset base. “In using acquisitions to resolve the crisis, we may have unwittingly perpetuated one of its root causes — the too-big-to-fail doctrine.”

With a nod toward Gary Stern, the Minneapolis Fed president who wrote a book on too-big-to-fail earlier this decade, Fisher says: “The only way to ensure a robust financial system is to enforce a system that marries risk-taking to consequences and see to it that the consequences for mismanagement are loss of managerial positions and the capital of shareholders and creditors, including uninsured depositors, rather than a second chance that only further concentrates financial power. The extent and duration of the extraordinary steps taken by those of us at the Fed are complicated by the prolonged existence of financial institutions that fall into this troublesome category.”

In good times, he explains, banks that are too big to fail use leverage and a low cost of funds to grow more rapidly. That boosts expansionary monetary policy. In bad times, however, those banks must shrink their books and swim against the tide of easier monetary policy.

“A weakened financial system with several of these banks will induce a flight to quality, increasing credit spreads and interest rates at a time when the Fed is attempting to do just the opposite. This slows economic growth, reducing asset values and overall wealth as credit availability deteriorates further. An adverse-feedback loop is created, working in direct opposition to the policy efforts of the central bank.”

He continues: “The existence of financial institutions that are too big to fail dramatically impacts the transmission mechanisms of monetary policy. The blockages they create — in credit markets and on balance sheets throughout the economy — compound our travails by making it more difficult to get the timing and dosage of monetary policy — ‘right.’ They reduce the effectiveness of our traditional tools, introducing a need for special liquidity and credit facilities that are difficult to unwind.”


Treasury Proposes Putting a Fed Official on the FDIC’s Board

The Treasury Department inserted a potentially explosive provision in legislative language it sent to Capitol Hill on Thursday as it detailed its plan to reshuffle the authority of federal bank regulators.

Taking a seat at the table? (Getty Images)

Because Treasury’s plan would consolidate the Office of Thrift Supervision and the Office of the Comptroller of the Currency into a new regulator known as the National Bank Supervisor, Treasury had to come up with another entity to sit on the Federal Deposit Insurance Corp.’s five-member board (the head of the OTS and the OCC currently occupy two of the FDIC’s five board seats).

Who did Treasury officials pick for the fifth seat? The Federal Reserve.

The reason is it potentially explosive is because the FDIC and Fed are both proudly (or frustratingly, depending on who you ask) independent, and they clashed several times last year over how best to manage the financial crisis. It could also make things sort of interesting, especially if there is a systemic risk council that includes the FDIC advising the Fed and then the FDIC’s own board including the Fed.

It could also make for other interesting cases. If the FDIC wants to extend extreme assistance to a large, flailing bank, it must have a vote of its board (which would include someone from the Fed), then a vote of the Fed’s board (which would presumably include the same person), and then the recommendation from the Treasury Secretary.

“We would not view it as a conflict for [the Fed] to be” a member of the FDIC’s board, Treasury assistant secretary Michael Barr said on a press call Thursday.


Macroeconomic Models

Robert Skidelsky doesn't always get things completely right. For example, he often talks about "New Classical economics" as if that is the dominant paradigm today, but that term has a very specific meaning and refers to a class of models that is no longer popular in macroeconomics.

Let's back up. The New Classical model had four important elements, the assumption of rational expectations, the assumption of the natural rate hypothesis, the assumption of continuous market clearing that Skidelsky refers to below, and an assumption that agents have imperfect information. The imperfect information assumption was quite clever in that it allowed proponents of this model to explain correlations between money and income without acknowledging that systematic, predictable policy based upon something like a Taylor rule would have any effect at all (put another way, only unexpected changes in monetary policy matter, expected changes are fully neutralized by private sector responses to the policy).

The New Classical model did contribute to the movement in macroeconomics toward microeconomic foundations and to the use of rational agents within macro models, but the model itself could not simultaneously explain both the duration and magnitude of actual cycles, it had difficulty explaining some key correlations among macroeconomic variables, and it was difficult to understand why a market for the absent information did not develop if the consequences of imperfect information were as large as the New Classical model implied. In addition, one of the model's key results that only unexpected changes in money can affect real variables did not hold up when taken to the data (though there are still a few die-hards on this). So the profession moved on.

The New Classical model had replaced the old Keynesian model after it became widely believed that the models' shortcomings were partly responsible for the problems we had in the 1970s, and for the theoretical reasons that will be described in a moment. But while the New Classical economists were having their day in the sun, the Keynesians were quietly working behind the scenes to fix the problems that caused the old Keynesian model to go out of favor (or not so quietly in a few cases). The old Keynesian model had a poor model of expectations - if expectations were considered at all they were usually modeled as a naive adaptive process - and in addition, it was not clear that the relationships embedded within the old Keynesian model were consistent with optimizing behavior on behalf of households and firms. The New Keynesian model solved this by deriving macroeconomic relationships from microeconomic optimizing behavior, and by adopting the rational expectations framework. And they made one other change important change. In order for systematic monetary policy such as following a Taylor rule to affect real variables such as output and employment, there must be some type of friction that prevents the economy from immediately moving to it long run equilibrium value. The friction in the New Classical model is informational, agents optimize given the information that they have, but because the information is imperfect the decisions they make take the economy away from its optimal long-run path.

In the New Keynesian model the friction that gives monetary policy its power to affect output and employment is sluggish movement of prices and wages (generally modeled through something called the Calvo pricing rule, a source of controversy because there are questions about the extent to which this rule is consistent with micro-founded optimizing behavior, though others assert there are rationales for the Calvo structure, e.g. isomorphic relationships to other models, that are sufficient to overcome these concerns).

To me, the New Keynesian model is about as mainstream as they get, so I'm puzzled by the opening to this column that claims modern macro completely embraces fully flexible prices. I think what he has in mind is some version of a Real Business Cycle model where prices are, in fact, assumed to be fully flexible, agents are rational etc. so that actual output is always equal to potential (so there's no need for policy to do anything but maximize the growth of potential output, hence the supply-side orientation of advocates of this approach). And I'm sure we could have a lively debate about which model has more proponents, but to say that mainstream economics subscribes fully to the notion of continuous market clearing when price rigidities are at the heart of a major class of modern models seems to miss the mark (and the assertion that agents are assumed to have perfect information is equally puzzling, they optimize given what they know, but they are not assumed to know everything and the efficient market hypothesis he discusses does not require this).

I don't disagree with the main message of the column that prevention of financial crashes through regulation is better than trying to cure them with policy, though I might quibble with particulars, but as someone who has been an advocate of the New Keynesian model, and quite resistant to pure Real Business Cycle approaches, I wanted to make clear that not all of us believe that assuming fully flexible prices and continuous market clearing is the proper way to model the economy. (A synthesis of the New Keynesian and Real Business Cycle models is what I have pushed in the past, though I'm now reconsidering the types of frictions that ought to be embedded in these models given recent events, and whether the mechanisms for generating bubbles in these structures are sufficient. I am also quite sympathetic to learning models as a replacement for the assumption of strict rationality):

Risky Risk Management, by Robert Skidelsky, Project Syndicate: Mainstream economics subscribes to the theory that markets "clear" continuously. The theory's big idea is that if wages and prices are completely flexible, resources will be fully employed, so that any shock to the system will result in instantaneous adjustment of wages and prices to the new situation.

This system-wide responsiveness depends on economic agents having perfect information about the future, which is manifestly absurd. Nevertheless, mainstream economists believe that economic actors possess enough information to lend their theorizing a sufficient dose of reality.

The aspect of the theory that applies particularly to financial markets is called the "efficient market theory," which should have blown sky-high by last autumn's financial breakdown. But I doubt that it has. Seventy years ago, John Maynard Keynes pointed out its fallacy. When shocks to the system occur, agents do not know what will happen next.

In the face of this uncertainty, they do not readjust their spending; instead, they refrain from spending until the mists clear, sending the economy into a tailspin. It is the shock, not the adjustments to it, that spreads throughout the system. The inescapable information deficit obstructs all those smoothly working adjustment mechanisms ― i.e., flexible wages and flexible interest rates ― posited by mainstream economic theory.

An economy hit by a shock does not maintain its buoyancy; rather, it becomes a leaky balloon. Hence Keynes gave governments two tasks: to pump up the economy with air when it starts to deflate, and to minimize the chances of serious shocks happening in the first place.

Today, that first lesson appears to have been learned... But, judging from recent proposals in the United States, the United Kingdom, and the European Union to reform the financial system, it is far from clear that the second lesson has been learned.

Admittedly, there are some good things in these proposals. For example, the U.S. Treasury suggests that originators of mortgages should retain a "material" financial interest in the loans they make, in contrast to the recent practice of securitizing them. This would, among other things, reduce the role of credit rating agencies. ... The underlying problem, though, is that both regulators and bankers continue to rely on mathematical models that promise more than they can deliver for managing financial risks.

Although regulators now place their faith in "macro-prudential" models to manage "systemic" risk, rather than leaving financial institutions to manage their own risks, both sides lumber on in the untenable belief that all risk is measurable (and therefore controllable), ignoring Keynes's crucial distinction between "risk" and "uncertainty."

Salvation does not lie in better "risk management" by either regulators or banks, but, as Keynes believed, in taking adequate precautions against uncertainty.

As long as policies and institutions to do this were in place, Keynes argued, risk could be let to look after itself. Treasury reformers have shirked the challenge of working out the implications of this crucial insight.

“The Fed is Lending to ‘Foreigners’ instead of Americans!”

All of the people praising Alan Grayson for his gotcha questioning of Ben Bernanke might want to reconsider. Some deserved Economics of Contempt:

Dear God, Alan Grayson is a Tool, Economics of Contempt:  I just saw this video, which shows Rep. Alan Grayson questioning Ben Bernanke during his Humphrey-Hawkins testimony, and was being promoted by Zero Hedge and others a couple days ago. It's embarrassing....for Grayson.

He asks Bernanke about the currency swap lines that the Fed established with other central banks during the financial crisis, which he clearly doesn't understand (although he obviously thinks he does). He harps on the fact that Bernanke doesn't know which foreign financial institutions "got the money." Of course Bernanke doesn't know that. The Fed entered into currency swaps with foreign central banks, like the ECB and the BoE. Who those central banks then lent the dollars to is irrelevant—the Fed doesn't bear the credit risk of loans made by other central banks. The Fed only bears the credit risk of the central banks it established swap lines with, which, obviously, is vanishingly small.

Grayson then focuses on the Fed's swap line with New Zealand's central bank, which is where the wheels really come off the wagon. He apparently thinks a swap is the same thing as a loan, and that the Fed extended $9bn of credit to New Zealanders, which he considers an outrage (the Fed is lending to "foreigners" instead of Americans!). Of course, he doesn't even get his facts right (which is what happens when you hire people with no experience on Capitol Hill as Senior Policy Advisors). The Fed's swap facility with New Zealand central bank is $15bn, not $9bn, and more importantly, NZ's central bank never even drew on its swap line, which has $0 outstanding (pdf):


Grayson arrogantly laughs when Bernanke denies that the expansion of the swap lines on September 18th caused the dollar to rise 20%, which is amusing because the swap lines relieved the extraordinarily high demand for dollars from foreign financial institutions.

The best part of the video is when Barney Frank (easily my favorite Congressman) cuts Grayson off, which draws another of his arrogant laughs. Maybe Grayson should go back to losing millions in Ponzi schemes.

Economists React: Housing No Longer ‘Weakest Link’?

Economists and others weigh in on the month-to-month increase in June existing-home sales.

  • Housing may no longer be the weakest link… Demand has clawed itself back to where it was a year ago, a very nice signal that the market has not only hit bottom but is making its way back. Importantly, demand rose in every region of the country. In the West, which is the poster child for problems, sales were well above what they were a year ago. Yes, many of those purchases were for foreclosed homes, but a sale is a sale. While demand was stronger for condos and coops than signal-family structures, we shouldn’t take much from that. The condo market is more volatile. Meanwhile, sales of single-family homes were actually higher in June than they were in June 2008. The inventory of homes for sales fell a little but is still too high and median prices are down by over 15% for the year. –Naroff Economic Advisors
  • Existing home sales are up in four of the last five months and have climbed by 9% since bottoming out in January. While this is encouraging, there are still two trouble spots. First, the NAR indicated that 31% of all resales in June were distressed properties. That percentage is down from around 50% seen a few months ago, but with one out of every three homes sold being either a foreclosure or a short sale, downward pressure on prices is likely to continue. Second, the disastrous labor market may weigh on potential homebuyers in the coming months, especially with the unemployment rate expected to continue to rise through year-end –Omair Sharif, RBS
  • This is a very good report, as it suggests that the recent momentum in U.S. housing activity may be gathering some traction as U.S. homebuyers take advantage of the very favorable mortgage rates and home prices. Additionally, the numerous incentives contained in the fiscal stimulus package may have also been a very influential factor in the resurgence in sales. In the grand scheme of things though, while we are encouraged by the recent flow of favorable housing sector reports, the considerable headwinds that U.S. households continue to face will likely limit the pace of recovery in the sector. –Millan L. B. Mulraine, TD Securities
  • The bottom line here is that single-family existing sales have risen modestly for three straight months, and that hasn’t happened since late 2004. The level of activity remains hugely depressed and, so far, all that’s happening is a reversal of the post-Lehman drop. The acid test is whether sales can push on beyond the pre-Lehman trend of just under 5 million over the next few months. –Ian Shepherdson, High Frequency Economics
  • While demand for properties at the bottom of the market from first-time buyers is coinciding with supply of heavily-discounted distressed properties (mainly from the sub-prime strata), troubles are lurking further up the food chain. A high and rising unemployment rate is creating problems for many formerly creditworthy homeowners, as will the impending bulge in resets of Prime ARMs and Option ARMS. We look for price pressures to intensify in the middle to upper end of the housing market as these factors begin to prompt increased distressed sales at those price points. Therefore, while much of the impact of the sub-prime disaster on prices at the bottom end of the market may well be behind us, there will be plenty of more pain for higher priced properties. –Joshua Shapiro, MFR Inc.
  • Existing home sales are recorded at the end of the escrow period and therefore lag developments in the new homes market by one to two months. As such, existing home sales in October 2008 reflected buying conditions in August and September 2008, before the Lehman bankruptcy caused a re-intensification of the credit crisis. Therefore, the recent improvement in existing sales provides further evidence that housing demand conditions have stabilized and that the economy is headed for a rebound. –Anna Piretti, BNP Paribas
  • Single-family starts have risen For a second straight month, multi-family units sold at a faster rate than single-family homes but both continue and encouraging upward trend… The stronger sales of multi-family homes helped trim the inventory of unsold condos and coops but the stocks remain too high to provide much incentive for builders to kick up production schedules. The inventory of unsold homes remained elevated at 3.2 million units but the stronger sales rate cut the months’ supply of homes (inventory divided by sales) to 8.9, the lowest this year… Overall, this represents yet another encouraging sign that the housing market is beginning to stabilize. –Nomura Global Economics

Compiled by Phil Izzo


Secondary Sources: Subprime Myths, Regulation, Bernanke Must Go?

A roundup of economic news from around the Web.

  • Subprime Myths: In a commentary at the Cleveland Fed Yuliya Demyanyk writes about common misperceptions about the subprime crisis. “On close inspection many of the most popular explanations for the subprime crisis turn out to be myths. Empirical research shows that the causes of the subprime mortgage crisis and its magnitude were more complicated than mortgage interest rate resets, declining underwriting standards, or declining home values. Nor were its causes unlike other crises of the past. The subprime crisis was building for years before showing any signs and was fed by lending, securitization, leveraging, and housing booms.”
  • Financial Regulation Flaws: Richard Posner is critical of the financial regulatory plan. “The Report’s fundamental weaknesses are its prematurity, overambitiousness, reorganization mania, and FDR envy. Let me start with the last. It is natural for a new President, taking office in the midst of an economic crisis, to want to emulate the extraordinary accomplishments of Franklin D. Roosevelt’s initial months in office. Under Roosevelt, within what seemed the blink of an eye, the banking crisis was resolved, public-works agencies that hired millions of unemployed workers were created, and economic output rose sharply. But that was 76 years ago. The federal government has since grown fat and constipated. The program proposed in the Report cannot be implemented in months or years, or perhaps even in decades—as would be apparent had the Report addressed costs, staffing requirements, and milestones for determining progress toward program goals and had the Report attempted an overall assessment of feasibility. ” In the Journal he objects to the proposal for a consumer protection agency. “
  • Bernanke Must Go?: Writing for the National Review, Mark A. Calabria charges that Ben Bernanke doesn’t understand the crisis and must be replaced as Fed chairman. “Although it’s good that Bernanke was quick to inject much-needed liquidity into the financial system after the housing bubble burst, he did so in a manner beyond the Fed’s traditional monetary-policy role. His pandering to the Left on misguided “consumer protections,” and the absence of any debate over the Fed’s role in the housing bubble, raise serious questions as to whether Bernanke understands the causes of the current financial crisis. We cannot hope to avoid the next financial crisis without a Fed chairman who understands the current one. The time to start looking for that new chairman is now.”

Compiled by Phil Izzo