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Fight Over U.S. Budget Weighs on Shares

September 23, 2013 by

Concerns about the strength of the economy and the potential for a budget fight in Washington pushed the stock market down on Monday.

The Dow Jones industrial average fell 49.71 points, or 0.32 percent, to 15,401.38, while the Standard Poor’s 500-stock index dropped 8.07 points, or 0.47 percent, to 1,701.84. The Nasdaq composite index declined 9.44 points, or 0.25 percent, to 3,765.29.

The Dow jumped 147 points on Wednesday to close at a record after the Federal Reserve decided to keep its huge economic stimulus program intact. But that rally has been wiped out by anxiety over a budget and debt fight in Washington.

Investors initially cheered the Fed’s surprise decision to keep its stimulus in place because the program has helped sustain a bull run in stocks dating to March 2009.

Doubts have crept into investors’ minds, however, because the central bank thinks the economy is not strong enough for it to pull back the stimulus.

William C. Dudley, the president of the Federal Reserve Bank of New York, said on Monday that while the economy was improving, “the headwinds” created by the financial crisis were only easing slowly.

Kate Warne, an investment strategist at Edward Jones, said that while the stimulus looked positive at first blush, “at second blush, it says conditions weren’t as strong as we were previously thinking.” She added: “Markets are now responding to that.”

The Fed is buying $85 billion in bonds each month to hold down long-term interest rates and encourage borrowing and spending.

Financial stocks fell the most among the 10 industrial groups in the S. P. 500 index. Investors sold on concerns that earnings would be hurt by lower trading volumes of bonds and foreign currencies at investment banks.

Utilities were the best performing industry group in the S. P. 500 as investors sought less risky places to put their money.

Nike and Visa, along with Goldman Sachs, also began trading on the 30-member Dow Jones industrial average on Monday, replacing Alcoa, Bank of America and Hewlett-Packard.

The threat of a looming political showdown over the budget also weighed on investors.

The House of Representatives voted to defund President Obama’s health care law on Friday, a gesture that reminded Wall Street that the Republican-led House and the Democratic-controlled Senate are poised for a showdown over spending.

The debt ceiling must be raised by Oct. 1 to avoid a government shutdown, and a potential default on payments, including debt, later in the month.

“There seems to be a higher probability there will be more of a battle over that,” said Scott Wren, a senior equity strategist at Wells Fargo Advisors. “That could inject some volatility into the market.”

Also on Monday, the financial data firm Markit said its so-called flash, or preliminary, manufacturing purchasing managers index for the United States retreated to 52.8 this month from 53.1 in August, confounding analysts’ forecasts for an improvement. A reading above 50 indicates expansion.

Output growth accelerated but new orders slowed, suggesting “production growth is likely to weaken in the fourth quarter unless demand picks up again in October,” said Chris Williamson, Markit’s chief economist.

In government bond trading, the price of the benchmark 10-year Treasury note rose 10/32, to 98 9/32, and its yield fell to 2.70 percent, from 2.74 percent late Friday.

Article source: http://www.nytimes.com/2013/09/24/business/daily-stock-market-activity.html?partner=rss&emc=rss

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DealBook: Treasury to Sell $18 Billion Worth of Additional A.I.G. Shares

September 9, 2012 by Leave a Comment

6:17 p.m. | Updated The Treasury Department said on Sunday that it plans to sell an additional $18 billion worth of shares in the American International Group, more than halving the government’s stake in the bailed-out insurer.

If completed, the offering would be the Treasury Department’s biggest divestiture yet of its holdings in A.I.G. It be nearly double the “re-I.P.O.” of May 2011, in which the government sold $8.7 billion worth of shares.

And it would reduce the government’s stake to well below 50 percent, a long-sought goal for both the insurer and the government. After the offering is completed, the Treasury Department would hold about 23 percent.

As part of the offering, A.I.G. has offered to buy back up to $5 billion of the shares sold. And should demand prove stronger than expected, the offering’s underwriters can expand the size of the sale by $2.7 billion, further reducing the government’s stake.

The latest stock sale is the latest move by the federal government to disentangle itself from one of its most significant bailouts from the financial crisis of 2008, in which A.I.G. received a $182 billion lifeline. The Treasury Department has already announced a number of stock offerings, beginning in May of 2011, that have whittled its stake in the insurer from 92 percent.

And last month, the Federal Reserve Bank of New York announced that it had sold off the final set of risky bonds that it had acquired from A.I.G. as part of the bailout. Collectively, the sale of those securities reaped about $9.4 billion in proceeds for taxpayers.

Treasury’s latest offering is being led by Citigroup, Deutsche Bank, Goldman Sachs and JPMorgan Chase.

Article source: http://dealbook.nytimes.com/2012/09/09/treasury-to-sell-18-billion-worth-of-additional-a-i-g-shares/?partner=rss&emc=rss

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DealBook: New York Fed Receives Reprieve on Libor Request

August 29, 2012 by Leave a Comment

Representative Randy Neugebauer, left, leads the oversight panel of the House Financial Services Committee.Luke Sharrett for The New York TimesRepresentative Randy Neugebauer, left, leads the oversight panel of the House Financial Services Committee.

Congress has eased demands that the Federal Reserve Bank of New York turn over thousands of documents that detail interest rate manipulation at big banks, whittling down the request and granting the regulator additional time.

The reprieve will afford the New York Fed an additional month to comply with the sprawling inquiry, according to people briefed on the matter. Before the delay, the agency was under pressure to meet a Sept. 1 deadline.

The original document request came in July, when the oversight panel of the House Financial Services Committee sought volumes of records about the London interbank offered rate, or Libor, a benchmark interest rate that affects the cost of trillions of dollars in mortgages and other loans.

In a letter at the time, the oversight panel asked the New York Fed to detail its correspondence with employees from the banks that help set the benchmark, which is at the center of a multiyear rate-rigging scheme. The oversight panel, led by Representative Randy Neugebauer, Republican of Texas, also ordered the New York Fed to turn over its internal Libor-related documents and any communication with other government authorities.

In addition to the one-month extension, the subcommittee is narrowing the scope of its request. Lawmakers are planning to seek communication among government authorities and documents circulated internally at the New York Fed, the people briefed on the matter said.

Libor Explained

By steering clear of e-mails from bankers, the inquiry could avoid complicating a wide-ranging criminal investigation. Still, once the initial documents are received, Congress may ramp up its request, one of the people briefed on the matter said.

The New York Fed already produced reams of transcripts this summer involving phone calls its officials had with Barclays. Barclays was the first bank to settle accusations that it tried to manipulate Libor for its own benefit. It reached a $450 million settlement with the Justice Department as well as regulators in the United States and Britain.

Regulators and criminal authorities around the world are investigating more than a dozen other big banks, including HSBC and Deutsche Bank, for their role in manipulating Libor, a measure of how much banks charge each other for loans. Banks are suspected of reporting false rates during the financial crisis to bolster profits and to shore up their image.

The scandal has consumed the banking industry and called into question the New York Fed’s oversight powers. In the case of Barclays, the New York Fed learned in 2008 that the British bank was submitting false rates.

“We know that we’re not posting um, an honest” rate, a Barclays employee told a New York Fed official in April 2008, according to transcripts the regulator released to Congress in July. During the crisis, when high borrowing costs were a sign of poor financial health, banks were artificially depressing the rates to project a stronger image.

But rather than pushing for a civil or criminal crackdown, the New York Fed advocated policy changes to the rate-setting process. The British organization that oversees the rate adopted some of the changes. With the crisis in full swing, the New York Fed moved on to more pressing concerns.

That approach has drawn sharp scrutiny from the oversight panel.

“As you know, the role of government is to ensure that our markets are run with the highest standards of honesty, integrity and transparency,” Mr. Neugebauer wrote in a letter to the New York Fed dated July 23. “Therefore, any admission of market manipulation — regardless of the degree — should be swiftly and vigorously investigated.”

This post has been revised to reflect the following correction:

Correction: August 29, 2012

An earlier version of a caption accompanying this article misstated the role of Representative Randy Neugebauer. He leads the oversight panel of the House Financial Services Committee, not the committee itself.

Article source: http://dealbook.nytimes.com/2012/08/29/new-york-fed-receives-reprieve-on-libor-request/?partner=rss&emc=rss

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DealBook: New York Fed Was Warned About Rate Inaccuracies in 2007

July 13, 2012 by Leave a Comment

1:51 p.m. | Updated

A Barclays employee notified the Federal Reserve Bank of New York in April of 2008 that the firm was underestimating its borrowing costs, following potential warning signs as early as 2007 that other banks were undermining the integrity of a key interest rate.

In 2008, the employee said that the move was prompted by a desire to “fit in with the rest of the crowd” and added, “we know that we’re not posting um, an honest Libor,” according to documents that the agency released on Friday. The Barclays employee said that he believed such practices were widespread among major banks.

In response, the New York Fed began examining the matter and passed their findings to other financial authorities, according to the documents.

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But the agency’s actions came too late and failed to thwart the illegal activities. By the time of the April 2008 conversation, the British firm had been trying to manipulate the interest rate for three years. And the practice persisted at Barclays for about a year after the briefing with the New York Fed.

Friday’s revelations shed new light on regulators’ role in the rate manipulation scandal. The documents also raise concerns about why authorities did not act sooner to thwart the rate-rigging.

I'm pleased that the New York Fed responded to my request in a timely and transparent fashion, Representative Randy Neugebauer said.Andrew Harrer/Bloomberg News“I’m pleased that the New York Fed responded to my request in a timely and transparent fashion,” Representative Randy Neugebauer said.

Among those in the spotlight is Timothy F. Geithner, then the president of the New York Fed, who briefed other regulators about the problems in May and June of 2008. Still, questions remain about whether Mr. Geithner, who is now the Treasury secretary, was aggressive enough in rooting out the problem, a matter he will most likely address in Congressional testimony later this month.

Regulators have faced increased scrutiny in recent weeks, after Barclays agreed to pay $450 million to settle claims that it reported bogus rates to deflect scrutiny about its health and bolster profits. The case is the first major action stemming from a broad inquiry into how big banks set key interest rates, including the London interbank offered rate, known as Libor.

Lawmakers are pressing regulators to explain their actions surrounding Libor. Politicians in Washington and London are worried about the integrity of Libor, which serves as a benchmark interest rate for trillions of dollars worth of loans to consumers and corporations, as well as more sophisticated financial products.

This week, the oversight panel of the House Financial Services Committee sent a letter to the New York Fed seeking transcripts from several phone calls involving regulators and Barclays executives. The New York Fed released documents and e-mails on Friday in response to the request.

“I’m pleased that the New York Fed responded to my request in a timely and transparent fashion. We’re reviewing the documents now, and once we’ve thoroughly examined them, we’ll decide how to proceed,” said Congressman Randy Neugebauer, the chairman of the House Financial Services Subcommittee on Oversight and Investigations.

Mr. Neugebauer added: “As much as $800 trillion in financial products are pegged to Libor, so any manipulation of this rate is of serious concern. We’ll continue looking into this matter to determine who was involved in this practice and whether it could have been prevented by regulators.”

The documents released Friday indicate that Barclays had been notifying regulators about its concerns regarding the accuracy of the interest rate since 2007. In August of that year, a Barclays employee e-mailed a New York Fed official, saying “Draw your own conclusions about why people are going for unrealistically low” rates.

Barclays wrote in a September report, “Our feeling is that Libors are again becoming rather unrealistic and do not reflect the true cost of borrowing.”

But the New York Fed felt at the time that the reports were only anecdotal and did not provide definitive proof of widespread manipulation. At the same time, it was consumed with trying to save the global financial system in the wake of Bear Stearns’s near collapse.

The regulator said in a statement, “In the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and e-mails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor.”

British regulators have said that Barclays never explicitly told financial authorities that it was understating its interest rates.

But the documents produced on Friday call that assertion into question.

“Where I would be able to borrow in the interbank market … without question it would be higher than the rate I’m actually putting in,” the Barclays employee told the New York Fed in the April 2008 conversation.

That same day, New York Fed officials wrote in a weekly briefing note that banks appeared to be understating the interest rates they would pay.

“Our contacts at Libor contributing banks have indicated a tendency to underreport actual borrowing costs,” New York Fed officials wrote, “to limit the potential for speculation about the institutions’ liquidity problems.”

After the April 2008 conversation, the New York Fed started notifying other American regulators, including the Treasury Department. Timothy F. Geithner, then the New York Fed’s president, reached out to British authorities as well, notably Mervyn King, the governor of the Bank of England.

The Bank of England and other British regulators have taken fire from lawmakers in that country over when it became aware of problems with Libor and why it failed to end the misconduct.

In a 2008 memo, Mr. Geithner suggested that British regulators “strengthen governance and establish a credible reporting procedure” and “eliminate incentive to misreport,” according to documents.

By early June 2008, Mr. Geithner and Mr. King had come up with recommendations to fix the Libor calculation process and passed them along to the British Bankers’ Association, the trade group that oversees the interest rate. Angela Knight, the chief executive of the organization, wrote in an e-mail that the New York Fed’s suggestions would be factored into a review of new rules for Libor.

“Changes are being made to incorporate the views of the Fed,” Ms. Knight, who is stepping down from her position at the end of the summer, said in the e-mail. “There is no show-stopper as far as we can see.”

The trade body published its initial findings days after receiving Mr. Geithner’s recommendations, though it did not complete the report until the end of 2008.

The association is now conducting a further review into how Libor is set, though a separate British government inquiry also is being established to improve the governance of the rate after the recent scandal.

Mark Scott contributed reporting

Article source: http://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?partner=rss&emc=rss

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Inside the Fed in 2006: A Coming Crisis, and Banter

January 13, 2012 by Leave a Comment

The officials laughed about the cars that builders were offering as signing bonuses, and about efforts to make empty homes look occupied. They joked about one builder who said that inventory was “rising through the roof.”

But the officials, meeting every six weeks to discuss the health of the nation’s economy, gave little credence to the possibility that the faltering housing market would weigh on the broader economy, according to transcripts that the Fed released Thursday. Instead they continued to tell one another throughout 2006 that the greatest danger was inflation — the possibility that the economy would grow too fast.

“We think the fundamentals of the expansion going forward still look good,” Timothy F. Geithner, then president of the Federal Reserve Bank of New York, told his colleagues when they gathered in Washington in December 2006.

Some officials, including Susan Bies, a Fed governor, suggested that a housing downturn actually could bolster the economy by redirecting money to other kinds of investments.

And there was general acclaim for Alan Greenspan, who stepped down as chairman at the beginning of the year, for presiding over one of the longest economic expansions in the nation’s history. Mr. Geithner suggested that Mr. Greenspan’s greatness still was not fully appreciated, an opinion now held by a much smaller number of people.

Meanwhile, by the end of 2006, the economy already was shrinking by at least one important measure, total income. And by the end of the next year, the Fed had started its desperate struggle to prevent the collapse of the financial system and to avert the onset of what could have been the nation’s first full-fledged depression in about 70 years.

The transcripts of the 2006 meetings, released after a standard five-year delay, clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with shepherding. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.

“It’s embarrassing for the Fed,” said Justin Wolfers, an economics professor at the University of Pennsylvania. “You see an awareness that the housing market is starting to crumble, and you see a lack of awareness of the connection between the housing market and financial markets.”

“It’s also embarrassing for economics,” he continued. “My strong guess is that if we had a transcript of any other economist, there would be at least as much fodder.”

Many of the officials who appear in the transcripts have since spoken publicly about the Fed’s failings in the years before the crisis. But the transcripts provide a raw and detailed account of those errors as they were made. Evidence of problems in the housing market accumulated at each meeting of the Federal Open Market Committee, which sets policy for the central bank.

“We are getting reports that builders are now making concessions and providing upgrades, such as marble countertops and other extras, and in one case even throwing in a free Mini Cooper to sweeten the deal,” George C. Guynn, then president of the Federal Reserve Bank of Atlanta, said at the June meeting.

The committee consists of the governors of the Federal Reserve and the presidents of the 12 regional banks.

“The speed of the falloff in housing activity and the deceleration in house prices continue to surprise us,” Janet Yellen, then president of the Federal Reserve Bank of San Francisco, said in September.

One builder she spoke with, she said, “toured some new subdivisions on the outskirts of Boise and discovered that the houses, most of which are unoccupied, are now being dressed up to look occupied — with curtains, things in the driveway, and so forth — so as not to discourage potential buyers.”

Article source: http://feeds.nytimes.com/click.phdo?i=dacc54d3f145b2794543f6dee1e458c7

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Top Banks Confront Leaner Future by Cutting Jobs

August 29, 2011 by Leave a Comment

Battered by a weak economy, the nation’s biggest banks are cutting jobs, consolidating businesses and scrambling for new sources of income in anticipation of a fundamentally altered financial landscape requiring leaner operations.

Bank executives and analysts had expected a temporary drop in profits in the aftermath of the 2008 financial crisis. But a deeper jolt did not materialize as trillions of dollars in federal aid helped prop up the banks and revive the industry.

Now, however, as government lifelines fade and a second recession seems increasingly possible, banks are finding growth constrained. They are bracing for a slowdown in lending and trading, with higher fees for consumers as well as lower investment returns amid tighter regulations. Profits and revenues are slipping to the levels of 2004 and 2005, before the housing bubble.

“People heard all these things before, but the reality of seeing the numbers is finally sinking in,” said John Chrin, a former JPMorgan Chase investment banker and executive in residence at Lehigh University’s business school. “It’s hard to imagine big institutions achieving their precrisis profitability levels, and even the community and regional banks are faced with the same problems.”

A new wave of layoffs is emblematic of this shift as nearly every major bank undertakes a cost-cutting initiative, some with names like Project Compass. UBS has announced 3,500 layoffs, 5 percent of its staff, and Citigroup is quietly cutting dozens of traders. Bank of America could cut as many as 10,000 jobs, or 3.5 percent of its work force. ABN Amro, Barclays, Bank of New York Mellon, Credit Suisse, Goldman Sachs, HSBC, Lloyds, State Street and Wells Fargo have in recent months all announced plans to cut jobs — tens of thousands all told.

Even as they cut payrolls, banks are exploring ways to generate revenue that could translate to higher costs for consumers. Among the possibilities are new fees for automatic deductions from checking accounts that pay utility and cable bills, according to people involved in the discussions.

SunTrust Banks, a major lender in the Southeast, is already charging a $5 monthly fee to its “everyday checking” customers who use a debit card for purchases or recurring charges. And this fall, Wells Fargo plans to test a $3 monthly usage fee for new debit card customers in five states, on top of its normal service charges, which are $5 to $30 a month. Previously, other big lenders — including Bank of America, Chase and PNC Financial — canceled  rewards programs and altered checking account service charges to blunt the effect of rules curbing overdraft and debit card swipe fees.

Banks have been through plenty of boom and bust cycles before. But executives and analysts say this time is different.

Lending, the prime driver of revenue, has been depressed for several years and is not expected to pick up anytime soon, even with historically low interest rates favorable to borrowers. Consumers are spurning debt after a 20-year binge, while businesses are so uncertain about the economy that they are hunkering down, rather than financing expansion plans.

Making matters worse, the Federal Reserve’s pledge to keep rates near zero into 2013 is eating into profit margins earned on mortgages and other loans, as well depressing investment yields that usually offset fallow periods for lending.

Trading profits have also been waning amid a slowdown in volumes, and Wall Street’s once-lucrative mortgage packaging business is unlikely to bring in the blockbuster fees it earned during the housing boom.

On top of that, the financial regulations enacted by Congress last year are causing banks to add more risk managers and compliance staff — a major outlay for the biggest banks but potentially devastating to small lenders. New rules requiring banks to maintain a bigger cushion of capital to absorb unexpected shocks are also expected to further depress profits.

Article source: http://feeds.nytimes.com/click.phdo?i=5325fe9dda50e59297bf1aefae9f2b28

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Economix Blog: It’s the Aggregate Demand, Stupid

August 16, 2011 by Leave a Comment

DESCRIPTION

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

Today’s Economist

Perspectives from expert contributors.

With the debt limit debate temporarily set aside, the Obama administration is talking about finding some way to create jobs and stimulate growth. But the truth is that there really isn’t much it can do and it knows it. There may be some small-bore things it can do without Congressional action that may help a little, but the operative word is “little.” The only policy that will really help is an increase in aggregate demand.

Aggregate demand simply means spending — spending by households, businesses and governments for consumption goods and services or investments in structures, machinery and equipment. At the moment, businesses don’t need to invest because their biggest problem is a lack of consumer demand, as a July 21 study by the Federal Reserve Bank of New York documented.

The federal government could increase aggregate spending by directly employing workers or undertaking public works projects. But there is no possibility of that given the political gridlock in Congress and President’s Obama’s desire to appear moderate and fiscally responsible going into next year’s election.

That really leaves just consumers as a potential avenue for increasing spending. But that will be difficult as long as unemployment remains high, thus reducing aggregate income, and households are still saving heavily to rebuild wealth, which was decimated by the collapse in housing prices. Saving is, in a sense, negative spending.

Changes in wealth affect spending because people will spend a percentage of their increased wealth. And they are more likely to raise their spending when the wealth increase is perceived to be permanent rather than transitory.

Historically, people have viewed increases in home equity as more permanent than increases in stock market wealth because they know the latter is more volatile. A recent Federal Reserve Board working paper estimated that the long-run increase in spending from an increase in housing wealth may be as high as 9.1 percent per year.

As home prices increased, many people came to believe they had no real reason to save since they could always tap their home equity — which banks were more than happy to help them do — in the event that they needed funds. Thus the personal saving rate fell from 3.5 percent in the early 2000s to just 1.4 percent in 2005 at the peak of the housing bubble.

Home prices roughly doubled between 2000 and 2006, according to the Case-Shiller index, and many homeowners talked themselves into believing they would continue rising indefinitely. Thus they increased their spending and reduced their saving based not only on actual price increases, but also on expectations of future increases.

A prescient 2007 Congressional Budget Office study explained how this would affect spending and growth in the economy. It said that if people were expecting a 10 percent rise in home prices and instead they fell 10 percent, the impact on spending would be equivalent to a 20 percent fall in prices. The budget office estimated that this might reduce growth of gross domestic product by 2.2 percent per year. Since actual home prices have fallen by about a third, this suggests that G.D.P. may be $500 billion less this year than it would be if home prices had simply remained flat since 2006.

One way that the rise and fall of spending can be visualized is by looking at the velocity of money. This is the speed at which money turns over in the economy. When velocity rises, more G.D.P. is produced per dollar of the money supply. When velocity falls, the economic impact is exactly the same as if the money supply shrank by the same percentage.

The chart below comes from the Federal Reserve Bank of St. Louis and shows velocity as the ratio of the money supply (M2) to nominal G.D.P. It rose from 1.85 in 2003 to 1.96 in 2006. It has since fallen to a current level of 1.66. Thus one can say that each $1 increase in the money supply produced almost $2 of G.D.P. in 2006 and only $1.66 today.

Velocity of M2 money supply, expressed as the ratio of quarterly nominal G.D.P. to the quarterly average of M2 money stock. (Shaded areas indicate United States recessions.)Source: Federal Reserve Bank of St. LouisVelocity of M2 money supply, expressed as the ratio of quarterly nominal G.D.P. to the quarterly average of M2 money stock. (Shaded areas indicate United States recessions.)

This suggests that the Federal Reserve could have offset the decline in spending and velocity resulting from the fall in home prices with a sufficient increase in the money supply. And it tried. Since 2006, money supply has increased by about $2 trillion. But velocity fell faster than the money supply increased as households reduced spending and increased saving — the saving rate is now over 5 percent — and banks and businesses hoarded cash.

Nonfinancial businesses are now sitting on close to $2 trillion in liquid assets that could be invested immediately if there was an increase in sales, and banks have $1.5 trillion of excess reserves that could be lent as well.

Fiscal policy could raise velocity and growth by getting money moving throughout the economy. But since that is not feasible, the Fed is the only game in town. Joseph Gagnon, a former Fed economist, says that it should immediately increase the money supply by $2 trillion and promise to keep increasing it until the economy has turned around.

But the Fed is already under pressure to tighten monetary policy from its regional bank presidents, three of whom dissented from last week’s Fed decision to keep policy steady. They fear that inflation is right around the corner. But as the Harvard economist Kenneth Rogoff has argued, a short burst of inflation would do more to fix the economy’s problems than any other thing. One reason is that inflation raises spending by encouraging consumers and businesses to buy things they need immediately because prices will be higher in the future.

The right policy can be debated, but the important thing is for policy makers to stop obsessing about debt and focus instead on raising aggregate demand. As Bill Gross of the investment firm Pimco put it recently: “While our debt crisis is real and promises to grow to Frankenstein proportions in future years, debt is not the disease — it is a symptom. Lack of aggregate demand or, to put it simply, insufficient consumption and investment is the disease.”

Article source: http://feeds.nytimes.com/click.phdo?i=8ce4e978e5f4b1bbd8dd791816e5dc76

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Fed Wants Priority Put On Deficit

June 8, 2011 by Leave a Comment

“Monetary policy cannot be a panacea,” the Fed’s chairman, Ben S. Bernanke, told an audience of bankers Tuesday in Atlanta.

He said that growth remained slow and uneven, but he made no mention of the possibility that the Fed would intervene, noting instead that “a healthy economic future” required a plan to shrink the federal deficit.

William C. Dudley, one of Mr. Bernanke’s top lieutenants, expanded on the same theme Tuesday night, saying that the government needed to balance its books, and that the nation needed to reduce its dependence on borrowing and consumption.

“These are fundamentally structural issues — not cyclical issues; they cannot be tackled primarily through monetary policy,” Mr. Dudley, the president of the Federal Reserve Bank of New York, said in a speech at a Midtown Manhattan hotel. “Instead, monetary policy is mainly a tool for stabilizing the macroeconomy and keeping inflation expectations well anchored.”

Both men emphasized that the Fed had played an important role in helping the economy to recover. And both defended the need for continuation of a series of extraordinary policies meant to encourage growth, including holding interest rates to near zero and maintaining a large portfolio of investments. But the speeches, together with remarks by other Fed officials, signaled that additional interventions were, for now, very unlikely.

The Fed will conclude the planned purchase of $600 billion in Treasury securities at the end of June.

Investors ready to celebrate any sign the Fed might pump more money into the economy sold equities as Mr. Bernanke spoke. The Standard Poor’s 500-stock index ended down slightly after climbing almost 2 percent earlier in the day.

Mr. Benanke’s speech followed related remarks by President Obama, who told reporters Tuesday that he was worried about the rate of growth, but saw no possibility of another recession.

“I am concerned about the fact that the recovery that we’re on is not producing jobs as fast as I want it to happen,” Mr. Obama said. The economy has moved in recent months like a car in heavy traffic, gaining and then slowing, faster again and then suddenly hitting the brakes.

Despite those fluctuations, Mr. Bernanke said Tuesday that he remained confident that the pace of growth was likely to increase during the second half of the year.

He also said that he continued to see no evidence of broad and enduring inflation despite increases earlier this year in the prices of oil and other commodities.

“Over all, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers,” Mr. Bernanke told the International Monetary Conference, a gathering of bank executives.

Mr. Bernanke made clear that recent data had shaken his confidence in the strength of the recovery, which continues to depend on extensive federal support. Mr. Bernanke has said he wants to see evidence of strong and sustained hiring by private firms before deciding that the economy can withstand the loss of that support. On Tuesday, he said that “until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”

The economy has expanded much more slowly this year than the Fed had predicted. Last month private employers added only 83,000 jobs, reducing the average so far this year to about 180,000 jobs a month — barely enough to cut into the numbers of the jobless.

Mr. Bernanke noted that after two years of economic recovery, the net decline in one important measure, aggregate hours worked, remained greater than the peak decline in the same measure during the deep recession in 1981-82.

The Fed has invested more than $2 trillion in a range of unprecedented programs, first to restore the financial system and then to encourage economic expansion. Mr. Bernanke has argued that the policies achieved worthwhile but limited objectives. Internal and external critics, however, describe the results as lackluster and warn that the policies could make it more difficult for the Fed to control inflation.

Those critics have taken a toll. So has internal debate about the efficacy of additional stimulus, which already seems to be yielding diminishing returns. So the Fed’s focus has turned to advocating for broader solutions to broader problems.

“Policy makers urgently need to put the federal governments’ finances on a sustainable trajectory,” Mr. Bernanke said. Such a plan should not impose large spending cuts immediately, he cautioned, but it could produce immediate benefits “by leading to lower long-term interest rates and increased consumer and business confidence.”

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Economix: Super Sad True Jobs Story

May 2, 2011 by Leave a Comment

Today's Economist

Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

What happens when the most successful no longer need the less successful? In Gary Shteyngart’s entertaining new dystopian novel, “Super Sad True Love Story,” low net-worth individuals begin to rebel. Everyone else continues shopping.

A similar (but nonfictional) story seems to be unfolding about jobs.

Once upon a time, economic recovery led to expanded employment of the United States population. Not anymore. The percentage of adults employed has declined sharply during the last two recessions and failed to increase much in their aftermath.

As Alan Krueger of Princeton pointed out, the employment-to-population rate remains at about 58 percent, about the same as in December 2009 and far lower than the peak of 65 percent achieved before the 2001 recession.

The unemployment rate does not provide as clear an indicator of employment trends, because it is strongly affected by individuals’ decisions to drop out of the labor force (which includes only those who are working for pay or seeking paid employment).

As Catherine Rampell reported in a recent Economix post, more than 45 percent of those unemployed in January reported they had been looking for jobs for 27 or more weeks. Many other workers in this situation simply give up and stop looking for paid employment – and thus are not counted as unemployed.

Concerns about the sputtering and laggard performance of the Great American Jobs Machine arose well before the Great Recession. In a terrific overview published by the Federal Reserve Bank of New York in 2005, the economists Richard B. Freeman and William M. Rodgers III reviewed several possible explanations.

While they mentioned job losses due to offshoring as one important factor, they emphasized that displacement effects have been difficult to measure. The possible trade-offs between job creation in the United States and in other countries are even more difficult to quantify.

But a recent article by David Wessel of The Wall Street Journal provided startling evidence of the impact of globalization. His analysis of data from the Commerce Department indicates that major multinational corporations cut their employment in the United States by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.

This is a big change from the 1990s, when those corporations added 4.4 million jobs in the United States and 2.7 million abroad.

Mr. Wessel pointed out: “The growth of their overseas work forces is a sensitive point for U.S. companies. Many of them don’t disclose how many of their workers are abroad. And some who do won’t talk about it.”

Among the chief executives willing to go on the record was Jeffrey Immelt of General Electric, who emphasized that his company goes abroad in search of new markets rather than cheap labor. “Today we go to Brazil, we go to China, we go to India, because that’s where the customers are,” said Mr. Immelt, who is also chairman of President Obama’s Council on Jobs and Competitiveness.

But the motives for multinational disinvestment in the United States seem far less important than the consequences. Globalization weakens the link between economic recovery, increased profits and job creation in the United States.

Macroeconomic models of these relationships based on historical data are increasingly obsolete. As Deepankar Basu and Duncan Foley argued in a recent Political Economy Research Institute paper, the correlation between output growth and employment growth in the United States has declined in recent years.

Foreign-owned businesses may locate in the United States, helping compensate for declining investment by American multinationals. But as all businesses become more footloose, they have less incentive to support public spending on education, health, human services or social safety nets, including unemployment insurance.

Unneeded as workers, the unemployed also become superfluous as consumers and burdensome as citizens.

Cutting unemployment benefits (as was just accomplished in Michigan and is well under way in Florida) becomes just another means of cutting losses.

Super sad no-love story. Wish it weren’t true.

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