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China Urges U.S. to Protect Creditors by Raising Debt

July 14, 2011 by Leave a Comment

Officials in Washington are locked in tense negotiations over the government debt limit, which the Obama administration says must be raised from its current level of $14.29 trillion to allow the government to pay its daily bills and service any debt coming due.

Any failure to pay due debt would effectively amount to a default, which, however brief, could shake confidence in the American economy and severely unsettle global financial markets.

Late Wednesday, Moody’s Investors Service sharpened attention on such an outcome by warning that it might cut its top-notch rating for the United States. Moody’s cited a “rising possibility” that no deal would be reached before the United States government’s borrowing authority hits its limit on Aug. 2.

On Thursday, Ben S. Bernanke, the chairman of the Federal Reserve, repeated a warning that a “huge financial calamity” would occur if President Obama and the Republicans could not agree on a budget deal that allowed the debt ceiling to be raised.

In testimony before a Senate committee, Mr. Bernanke said that lawmakers should consider the fragile state of the economy in their negotiations.

“Not passing — not increasing the debt ceiling and allowing — certainly allowing default on the debt would have very real consequences for average Americans,” Mr. Bernanke said, noting that interest and mortgage rates would jump.

“That would also increase the federal deficit because we have to pay the interest on the debt as part of our spending,” he said.

The authorities in Beijing added their voice of concern Thursday, though in more muted terms.

“We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors,” Hong Lei, a foreign ministry spokesman, said in response to questions about the Moody’s report.

The comments echoed those made by officials in Beijing in April, when Standard Poor’s lowered its outlook on the United States from stable to negative because of the country’s high budget deficit and rising government indebtedness.

China holds more than $1 trillion in United States Treasury securities, making it highly sensitive to any developments that could lower the value of those holdings.

During his testimony before Congress, Mr. Bernanke told lawmakers that if the United States did not raise its debt limit, the government would need to prioritize its financial obligations by paying its creditors first and stopping benefits like Social Security payments.

“The assumption is that as long as possible, the Treasury would want to try to make payments on the principal and interest to the government debt, because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy,” he told lawmakers.

Robin Marshall, director of investment management at Smith Williamson in London, said the rating agencies were acting aggressively toward indebted sovereign nations, having failed to foresee the subprime mortgage crisis in the United States, which foreshadowed the current debt explosion.

The current situation, he said, is creating headaches for governments — worried either about where to invest or whether they themselves will be downgraded and face higher financing costs — as well as for investors.

”It raises the question of what is the relevant benchmark?” Mr. Marshall said. “If the U.S. is downgraded, what about Germany, with its increasing liabilities? If you are looking solely at debt-to-G.D.P. levels, you may just be left with countries like Norway, Switzerland and Singapore as triple-A’s.”

In Europe, reaction was muted on Thursday to the threat to the ratings as the European authorities struggled to contain their own debt crisis, which this week threatened to spread from Greece, Ireland and Portugal and engulf the larger economies of Italy and Spain.

European officials have responded to successive downgrades of euro zone ratings — Ireland, for example, was downgraded to junk status this week by Moody’s — by criticizing the grip that the ratings agencies have over investors.

Bettina Wassener reported from Hong Kong and Matthew Saltmarsh from Paris.

Article source: http://www.nytimes.com/2011/07/15/business/global/china-urges-us-to-take-responsible-action-on-debt.html?partner=rss&emc=rss

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Fed Officials Divided on Need for More Monetary Stimulus

July 14, 2011 by Leave a Comment

“A few members noted that, depending on how economic conditions evolve, the committee might have to consider providing additional monetary stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run,” the Federal Open Market Committee said in the minutes of its June 21-22 meeting, released Tuesday in Washington.

“On the other hand, a few members viewed the increase in inflation risks as suggesting that economic conditions might well evolve in a way that would warrant the committee taking steps to begin removing policy accommodation sooner than currently anticipated.”

Policy makers cut their forecasts for growth this year before a July 8 government report showed that employers added jobs in June at the slowest rate in nine months. The Fed chairman, Ben S. Bernanke, said at a June 22 news conference that growth would pick up as energy prices subsided and disruptions of parts from Japanese factories eased, while also leaving the door open to additional stimulus. In their meeting, policy makers also agreed on a strategy for withdrawing record monetary stimulus and adopted a new set of communications guidelines.

A divided Federal Open Market Committee means officials are likely to prolong their low interest-rate policy, said Chris Low, chief economist at FTN Financial in New York.

“The majority view is that they can’t ease because inflation is rising, but at the same time they can’t tighten because the unemployment rate is too high, so they’re on hold,” Mr. Low said.

The minutes show some officials have doubts about whether their policy toolkit has anything more to offer. “A few participants expressed uncertainty about the efficacy of monetary policy in current circumstances but disagreed on the implications for future policy,” the minutes said.

Some members of the committee “saw the recent configuration of slower growth and higher inflation as suggesting that there might be less slack in labor and product markets than had been thought,” the minutes said. In that case, “the withdrawal of monetary accommodation may need to begin sooner than currently anticipated in financial markets.”

The Fed’s Washington-based governors and regional presidents agreed to complete their $600 billion bond-buying program, known as QE2 for the second round of quantitative easing, as scheduled at the end of June.

“The Fed will be watching and waiting to learn more about the economy,” said Michael Feroli, chief United States economist at JPMorgan Chase Company in New York. “One camp is worried about what happens if growth slows more than expected. The other camp is worried about what happens if the rise in inflation isn’t transitory.”

Policy makers also renewed their pledge to hold interest rates “exceptionally low” for an “extended period.” The Fed has kept its target rate in a range of zero to 0.25 percent since December 2008. Mr. Bernanke said at the June press conference the Fed would be “prepared to take additional action, obviously, if conditions warranted,” including the purchase of more Treasury securities.

“Most” committee members said the rise in inflation would “prove transitory” and that over the medium term inflation would “be subdued as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable.”

Article source: http://feeds.nytimes.com/click.phdo?i=b443e0864036ca56b4f295882447991b

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Fed’s 3-Year Rescue Plan Falling Short of Promise

June 22, 2011 by Leave a Comment

That peak now looks like a long plateau. The Fed still is expected to announce Wednesday that it will halt the expansion of its aid programs at the end of June, as scheduled, when it completes the purchase of $600 billion in Treasury securities. But growth is sputtering, and economists now expect that the Fed will leave its $2 trillion of bandages, props and crutches untouched until next year.

The pace of economic expansion has repeatedly fallen short of the Fed’s predictions, and the central bank is expected to lower its eyes once again when its releases a new forecast after a two-day meeting of its policy board, the Federal Open Market Committee.

Economic forecasters, many of whom also thought 2011 would be a more prosperous year, say that they underestimated the impact of the Japanese earthquake on the production of cars and other goods. They also point to a lack of confidence, an elusive concept that basically defines the willingness of consumers and businesses to spend more money than is justified by current circumstances.

“The most important thing I missed is how fragile confidence is. When anything goes off-script, the impact is magnified by this very fragile psyche,” said Mark Zandi, chief economist at Moody’s Analytics.

Ben S. Bernanke, the Fed’s chairman, said this month in Atlanta that the recovery was 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 will again answer questions from reporters Wednesday afternoon, part of a new practice the Fed has initiated to explain its policies and defend its judgments.

Since 2008 the central bank has taken a series of unprecedented steps to arrest the financial crisis and then to restore growth. It is holding short-term interest rates near zero, and has tried to reduce long-term rates by purchasing huge quantities of mortgage-backed securities and Treasuries. The final installment of those purchases is scheduled to take place next week.

Economists do not expect the event to ripple through the economy. The prevailing view is that the impact of the purchases was felt mostly at the time they were announced, based on the total amount the Fed promised to spend, and that markets have not responded to the daily transactions in which the Fed bought those Treasury securities from financial companies.

“Nothing will change on July 1,” said James O’Sullivan, chief economist at MF Global. “Monetary policy will not be that different” because the Fed still will hold the Treasuries on its balance sheet.

Moreover, a number of studies have concluded that the Fed’s efforts have had only a modest impact on the economy. Stock prices have climbed. Corporations have rarely been able to borrow money more cheaply. Mortgage loans have seldom been available at such low interest rates. But companies are hiring few new workers, and people are buying few new homes. Almost 25 million Americans cannot find full-time work, a number that is rising again after declining modestly over the last year.

When the economy faltered last summer, the Fed announced a giant stimulus program. This year, the leaders of the central bank have shown little appetite for another intervention.

Mr. Bernanke and other Fed officials have sought to discourage speculation in recent weeks, arguing that monetary policy cannot address the nation’s fundamental problems, including the collapsed housing market, the federal deficit and trade imbalances with developing nations.

The political backlash against the current round of asset purchases is one reason for the Fed’s timidity. Some at the central bank also see evidence of diminishing returns from additional spending. And the Fed has made clear that it its primary focus is on the pace of inflation, in part because the central bank regards slow, steady price increases as a prerequisite for sustainable job creation.

Last year prices were falling; this year, prices are increasing, and the Fed is frozen as a consequence as it searches for any indication that inflation will exceed its 2 percent speed limit.

“We’re a long way from where we were last summer,” Mr. O’Sullivan said.

The Fed also is waiting to see what Washington will do about its own financial problems. A failure to raise the debt ceiling, the maximum amount the government can borrow, could precipitate a financial crisis. Mr. Bernanke has said that short-term spending cuts could weaken the economy, while a long-term plan to reduce spending could increase growth.

“They won’t rule out anything because they know a lot depends on what the fiscal policy makers do, and that is inherently unpredictable,” Mr. Zandi said.

Article source: http://feeds.nytimes.com/click.phdo?i=73ab58a0809c7a798f0dc50554c2c2dd

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Economic Scene: The Economy Is Wavering. Does Washington Notice?

May 27, 2011 by Leave a Comment

Perhaps the most worrisome number was the one Macroeconomic Advisers released on Wednesday. That firm tries to estimate the growth rate of the current quarter in real time, and it now says annualized second-quarter growth is running at only 2.8 percent, up from 1.8 percent in the first quarter. Not so long ago, the firm’s economists thought second-quarter growth would be almost 4 percent.

An economy that is growing this slowly will not add jobs quickly. For the next couple of months, employment growth could slow from about 230,000 recently to something like 150,000 jobs a month, only slightly faster than normal population growth. That is certainly not fast enough to make a big dent in the still huge number of unemployed people.

Are any policy makers paying attention?

When the economy weakened in the first quarter, Ben S. Bernanke, the Federal Reserve chairman, and Obama administration officials said the slowdown was just a blip and growth would soon pick up. Today, many Wall Street economists are saying much the same thing: any day now, things will improve.

Maybe they will. But the history of financial crises shows that they produce weak, uneven recoveries, with unemployment remaining high for years. That history also shows that aggressive government action — the kind of action Washington took in 2008 and 2009, but not for most of 2010 — can make the situation much better than it otherwise would be.

The latest signs of weakness suggest that policy makers remain too sanguine. It is easy to see how the rest of 2011 could end up disappointing, much as 2010 did.

For one thing, there are specific forces holding back growth. Oil prices, though down in the last few weeks, are still 40 percent higher than a year ago and continue to siphon money away from the American economy to overseas economies. When I filled my gas tank last weekend, it cost $74, more than I think I have ever paid.

The housing market also remains in terrible shape. Europe is still struggling with its debt troubles. State and local governments continue to cut jobs.

These specific problems worsen the broader insecurity of both households and business executives — insecurity that is typical in the wake of a financial crisis. Long after the crisis itself is over, businesses are slow to hire and quick to fire. Thursday’s report on new jobless claims showed that they rose by 10,000, to 424,000, which is not a number associated with a solid recovery.

“Labor market gains may be faltering somewhat,” Joshua Shapiro, chief United States economist at MFR, a New York research firm, wrote to clients after the report’s release.

For households, already coping with miserly wage growth, that is another reason not to spend. The Commerce Department’s updated gross domestic product figures showed that consumer spending grew at an annual inflation-adjusted rate of only 2.2 percent in the first quarter, not the 2.7 percent rate the department initially reported.

The economy does still have some bright spots, and they could grow in coming months, just as policy makers and private forecasters are, once again, predicting. If North Africa and the Middle East do not become more chaotic, oil prices may continue falling. Vehicle production will probably pick up as the parts shortages caused by the Japanese earthquake end. The falling dollar will continue to help American exporters, as well as any domestic businesses that compete with foreign importers.

But there is no doubt that the economy has performed considerably worse in the last few months than most policy makers expected. The situation is now uncomfortably similar to last year’s, when the economy sped up in the first few months only to stall in the spring and summer.

The most sensible response for Washington would be to begin thinking more seriously about taking out an insurance policy on the recovery. The Fed could stop worrying so much about inflation, which remains historically low, and look at how else it might encourage spending. As Mr. Bernanke has said before, the Fed “retains considerable power” to lift growth.

The White House and Congress, meanwhile, could begin talking about extending last year’s temporary extension of business tax credits, household tax cuts and jobless benefits beyond Dec. 31. It would be easy enough to pair such an extension with longer-term deficit reduction.

Any temporary measures will eventually need to lapse, of course. But the current moment remains a textbook time to use them — when the economy is struggling to emerge from the aftermath of a terrible recession. The one thing not to do is to turn to deficit reduction too quickly after a crisis, as Europe is painfully learning.

Almost four years after the mortgage market first began to quiver and unemployment began to rise, Americans are understandably eager for good economic news. But wishing for it doesn’t make it so. You have to wonder whether the people in Washington have learned that lesson yet.

E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt

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DealBook: Greater Power Over Wall Street, Left Unexamined

May 5, 2011 by Leave a Comment

Ben Bernanke did not discuss banking regulation at his first news conference.Doug Mills/The New York TimesBen Bernanke did not discuss regulation at his first news conference.

6:58 p.m. | Updated

The most notable thing about the first news press conference ever of the Federal Reserve chairman, Ben S. Bernanke, last week was what wasn’t discussed: banking regulation.

We hardly need more evidence that the most powerful banking regulator in the world, one that became even more powerful after financial reform was passed, is also the least examined. Mr. Bernanke’s opening remarks were about monetary policy and the economy. When he answered questions, he repeatedly referred to the Fed’s “dual mandate” — to keep inflation low and stable and to maintain full employment for the economy.

But that’s not the Federal Reserve’s true dual mandate. The Fed is indeed the steward of the economy, but it also has to regulate the financial system, making sure banks are safe and sound.

In the years before the financial crisis, the Fed was a miserable failure in that role, a creature of the banks, not a watchdog. The news conference was an opportunity for Mr. Bernanke to demonstrate what the Fed had learned from the crisis about banking oversight. After all, a collapsed financial system does spectacular damage to an economy.

There’s more to discuss about this now than ever. Under the giant Dodd-Frank package, the Fed was given an expanded regulatory role. The new consumer financial products regulator is housed within the central bank. The Fed also now officially oversees investment banks, which it had to rescue during the crisis. Congress broadened the Fed’s remit to cover nonfinancial institutions deemed “systemically important.” Congress created a new role, the “vice chairman of supervision,” to raise the prominence and importance of its responsibility. (It remains unfilled.) Perhaps most important, the Federal Reserve is supposed to play a major role in taking over big banks that fail.

Banking supervision has always been something of a backwater at the Fed. Within the institution, the sexy stuff is monetary policy. That’s where most of the resources and attention goes. The chairman and the board spend a disproportionate amount of their time on it, and monetary policy expertise largely dictates the selection of board members. Many question that mind-set.

“Either expressly or implicitly, the Fed permeates every part of the Dodd-Frank reform,” says Dennis Kelleher, the chairman of Better Markets, a new Washington advocacy group that aims to be a Wall Street watchdog. “Yet there is no indication that the leadership of Fed understands or is undertaking its new role as systemic risk regulator. It’s not on the mind of the Fed chairman.”

Without much public comment, the Fed is making critical decisions about the banks today. It just ran a round of stress tests for the banking system in which most banks came up smelling like roses. Most big banks were allowed to pay dividends and pay back the government’s Troubled Asset Relief Program money. Yet the economy is weaker than the Fed expected, and the real estate market, which makes up the bulk of banks’ exposure, is having a second downturn. What gives the Fed so much confidence that the banks are properly valuing their assets and are adequately capitalized?

For a brief moment back in 2009, it was actually considered bizarre to give the Fed more power. Christopher J. Dodd, then the chairman of the Senate Banking Committee, proposed creating a new financial regulatory infrastructure, stripping the Fed of its mandate.

Sadly, the bill was so dead on arrival it wasn’t clear if even Mr. Dodd supported the Dodd bill. Nonetheless, removing banking regulation from the Fed’s umbrella would have some clear advantages. Monetary policy is a pretty hard job. It might make some sense to split off regulation just to ease the burden.

And monetary policy can be in conflict with banking regulation. A central bank might prefer to shore up investor confidence and move on from a financial crisis without taking punitive action against wrongdoers, thinking that aggressive action might undermine faith in the system. Sound familiar to anyone?

Mr. Bernanke’s news conference was also supposed to be a step toward realizing the Fed’s new commitment to “transparency.”

That’s certainly welcome, but it has only gone so far. Congress repeatedly asked for more information on extraordinary actions taken by the Fed during the financial crisis, but was met initially with stonewalling. The central bank fought a lawsuit initiated by Bloomberg News to release data on what kinds of securities it bought during the financial crisis and from whom. When it lost and was finally forced to release the information, it did so in a fashion that it made assimilating the information difficult.

Earlier this year, when the Fed conducted its second round of bank stress tests, it made less information public than it had in the first round in 2009.

“Regulation needs accountability and transparency, and the Fed is just not set up to be accountable or transparent,” says Mike Konczal, a fellow at the Roosevelt Institute, a liberal think tank focused on financial matters.

The sight of a Fed chairman answering reporters’ questions in declarative English certainly was a departure from tradition. On Thursday, Bernanke is giving a speech on banking regulation. Let’s hope that brings a comparable approach to regulation, which is ultimately far more significant.

Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: jesse@propublica.org. Follow him on Twitter (@Eisingerj).

This post has been revised to reflect the following correction:

Correction: May 4, 2011

An earlier version of this column misspelled the surname of a Roosevelt Institute fellow who was quoted on the Federal Reserve’s accountability and transparency. It is Mike Konczal, not Konzcal. The column also referred incorrectly to Better Markets. It is an advocacy group, not a lobbying group.

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Next on the Agenda for Washington: Fight Over Debt

April 10, 2011 by Leave a Comment

Congressional Republicans are vowing that before they will agree to raise the current $14.25 trillion federal debt ceiling — a step that will become necessary in as little as five weeks — President Obama and Senate Democrats will have to agree to far deeper spending cuts for next year and beyond than those contained in the six-month budget deal agreed to late Friday night that cut $38 billion and averted a government shutdown.

Republicans have also signaled that they will again demand fundamental changes in policy on health care, the environment, abortion rights and more, as the price of their support for raising the debt ceiling.

In a letter last week, Treasury Secretary Timothy F. Geithner told Congressional leaders the government would hit the limit no later than May 16. He outlined “extraordinary measures” — essentially moving money among federal accounts — that could buy time until July 8.

Once the limit is reached, the Treasury Department would not be able to borrow as it does routinely to finance federal operations and roll over existing debt; ultimately it would be unable to pay off maturing debt, putting the United States government — the global standard-setter for creditworthiness — into default.

The repercussions in that event would be as much economic as political, rippling from the bond market into the lives of ordinary citizens through higher interest rates and financial uncertainty of the sort that the economy is only now overcoming, more than three years after the onset of the last recession.

Given the short time frame for action and the prospect of an intractable political clash, leaders in both government and business are already moving to avert a crisis that most likely would be “a recovery-ending event,” as Ben S. Bernanke, the Federal Reserve chairman, testified recently in the Senate. He described a sequence of events that “would cascade through the financial markets,” provoking another credit crisis like that in 2008 and causing interest rates to jump.

Mr. Geithner has been meeting privately with senior lawmakers of both parties to underscore the economic stakes. At the White House, Mr. Obama’s chief economic adviser, Gene Sperling, peeled away from the spending fight in recent weeks to turn nearly full time to developing the administration’s strategy for the debt-limit debate. Central to that, administration officials say, is whether Mr. Obama initiates bipartisan talks on a long-term debt-reduction plan that tackles taxes, military spending and fast-growing entitlement programs like Medicare and Medicaid.

Executives of the nation’s largest financial institutions in recent days met with Mr. Geithner, House Speaker John A. Boehner, Republican of Ohio, and other lawmakers, arguing for the importance of raising the debt ceiling. Jamie Dimon, the chief executive of JPMorgan Chase, told them that his bank had devised contingency plans to protect its global business in the event of a default.

“If anyone wants to push that button, which I think would be catastrophic and unpredictable, I think they’re crazy,” Mr. Dimon said recently at the United States Chamber of Commerce.

The United States is one of the few nations that limits its debt by law, and votes in Congress to raise the ceiling, something that happens every few years, are perhaps the least popular that lawmakers face.

Financial and government leaders alike have grown accustomed to some political brinkmanship over raising the cap, confident that Congress ultimately would do so, usually with the party holding the White House supplying most votes. (So it was that Mr. Obama, as a Democratic senator in 2006, voted against a Bush administration request to raise the debt limit; it passed with mostly Republican votes.)

What makes this year different, people in both parties say, is the large number of Congressional Republicans, including the many newcomers who gave the party a House majority, who are strenuously opposed to government spending, and egged on by the activist Tea Party movement to use the leverage of the debt-limit vote to make their stand.

“We want to see real structural, cultural-type changes tied to this debt ceiling. We’re not interested in a one-off kind of savings, or anything small,” said Representative Mick Mulvaney, a first-term Republican from South Carolina. “There has got to be game-changing kinds of changes to get us to vote for it.”

He dismissed warnings about default as “just posturing,” and said Democrats should bear the responsibility for passing any measure to increase the borrowing limit.

“It’s their debt,” he said. “Make them do it. That’s my attitude.”

In fact, the debt was created by both parties and past presidents as well as Mr. Obama.

Of the nearly $14.2 trillion in debt, roughly $5 trillion is money the government has borrowed from other accounts, mostly from Social Security revenues, according to federal figures. Several major policies from the past decade when Republicans controlled the White House and Congress — tax cuts, a Medicare prescription-drug benefit and wars in Iraq and Afghanistan — account for more than $3.2 trillion.

The recession cost more than $800 billion in lost revenues from businesses and individuals and in automatic spending for safety-net programs like unemployment compensation. Mr. Obama’s stimulus spending and tax cuts added about $600 billion through the fiscal year that ended Sept. 30.

Though the recent standoff that consumed Washington over spending for the 2011 fiscal year ended without a government shutdown, the messy process and 11th-hour settlement have stoked trepidation about the debt-limit fight to come. If Republicans and Democrats found it so hard to compromise over a few billion dollars, the thinking goes, how can they ever come together on a multi-year, multitrillion-dollar plan to cut the debt within weeks or months?

“If I were still Treasury secretary, it would worry the hell out of me,” said James A. Baker III, who served in that office for President Ronald Reagan, during a time when the total federal debt nearly tripled over his two terms. “But it doesn’t worry me as a good Republican, and one who wants to finally see some fiscal responsibility in this country.”

Article source: http://www.nytimes.com/2011/04/10/us/politics/10debt.html?partner=rss&emc=rss

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