January 20, 2022

As Summers’s Odds Rise, Stimulus Easing Is Seen

The jitters even have some analysts betting that a Summers nomination could lead to slower economic growth, less job creation and higher interest rates than if the president named Janet L. Yellen, the Fed’s vice chairwoman.

Businesses raising money and people buying homes and cars all have faced higher interest rates in recent months as the Fed’s campaign to suppress borrowing costs has faltered. The rise in rates reflects optimism that the economy is gaining strength, and an expectation that the Fed will begin to pull back later this year. But a wide range of financial analysts also see evidence of a Summers effect.

Many investors expected that Ms. Yellen would be nominated to replace Ben S. Bernanke as head of the central bank, a choice that would have sent a clear message of continuity. Instead, investors are now trying to anticipate how Mr. Summers might change the Fed.

The unease is the product of a little information and a lot of speculation. Mr. Summers, a Harvard University economist who served for two years as Mr. Obama’s primary economic adviser, has said little about monetary policy in recent years. Investors are left parsing a handful of comments in which he has expressed some doubts on the benefits and concern about the consequences of the Fed’s policies.

“People don’t know what Larry might do,” said Mohamed El-Erian, chief executive of Pimco, the giant bond fund manager. “There’s a lack of a lot of information on Larry’s views. We don’t have enough information to make an assessment, just some second- and thirdhand accounts.”

Some doubts always attend the arrival of a new Fed chairman, but the consequences are particularly freighted at the moment because the Fed’s effectiveness increasingly depends on its ability to reduce uncertainty among investors. The central bank floored its traditional gas pedal five years ago when it pushed short-term interest rates to zero. It has since focused on further reducing long-term interest rates — which determine the cost of most kinds of borrowing — largely by convincing investors that short-term rates will remain near zero.

The sense of uncertainty is heightened by the fact that as many as five of the Fed’s seven governors may be replaced in the next year.

One governor, Elizabeth A. Duke, stepped down at the end of August. A second governor, Sarah Bloom Raskin, has been nominated to serve as deputy Treasury secretary. Mr. Bernanke’s term ends in January, as does the term of a fourth governor, Jerome H. Powell — although Mr. Obama could choose to reappoint Mr. Powell, a Republican who joined the Fed only in May last year and is said to be open to a longer stay. If Ms. Yellen is passed over by Mr. Obama, she, too, could choose to leave even before her term as vice chairwoman ends in October 2014.

Mr. Obama said last month that he would not announce his choice for the Fed’s top spot until the fall, and that he was considering at least three candidates: Mr. Summers, Ms. Yellen and the former Fed vice chairman Donald L. Kohn. But the president’s top economic advisers uniformly support the selection of Mr. Summers. They regard him as a creative thinker and an experienced crisis manager, qualities they value in particular because they expect the Fed may confront difficult choices as it begins to retreat from its six-year-old stimulus campaign.

They also insist that Mr. Summers supports the Fed’s efforts to revive the economy and would continue those efforts.

But Mr. Summers has criticized the Fed’s purchases of Treasury securities and mortgage-backed securities, warning that bond-buying on such a scale could distort financial markets. He said it was “less efficacious for the real economy than most people suppose.” As a result, many investors suspect he would seek to end those purchases more quickly than Ms. Yellen.

Julia Coronado, chief North America economist at BNP Paribas, said last week that the yield on the benchmark 10-year Treasury note already had started to rise as investors price in a Summers nomination. She added that the yield could eventually rise half a percentage point more than if the president nominated Ms. Yellen instead. Ms. Coronado estimated that this Summers effect would reduce domestic economic growth by 0.5 to 0.75 percentage point over the next two years, which could reduce job creation by 350,000 to 500,000 jobs.

A Summers nomination, she wrote, “would come at a cost of higher market volatility and interest rates, and a less buoyant economic recovery.”

Leadership changes at the Fed tend to unsettle financial markets more than changes in leadership at other major central banks, according to a 2007 study by Kenneth N. Kuttner, an economist at Williams College, and Adam S. Posen, president of the Peterson Institute for International Economics. That is partly because the Fed is the closest thing to a global central bank. But it also reflects the outsize role of the Fed chairman, who is less constrained than other central bankers in making policy.

Mr. Bernanke has sought to reduce the chairman’s role, most notably by adopting a 2 percent inflation objective. The Fed also has sought to lock in the course of near-term policy by announcing its intent to hold short-term rates near zero at least as long as the unemployment rate remains above 6.5 percent. But Mr. Posen said that the market turbulence of recent months showed that investors still thought the choice of chairman would determine the course of policy. “This is one of the reasons I don’t believe that forward guidance works,” he wrote in an e-mail, referring to the Fed’s declaration of intentions regarding short-term rates. “There is no way it can be binding on a new chairperson.”

Historically, new Fed chairmen have been able to settle the doubts of investors by acting quickly after taking office.

In the week after President George W. Bush announced Mr. Bernanke’s nomination in October 2005, the yield on the 10-year Treasury note rose to 4.57 percent from 4.39 percent as buyers demanded increased compensation against the risk of higher inflation. Bond yields also rose after Alan Greenspan was nominated as Fed chairman in 1987. Both men moved almost immediately to raise interest rates and bond yields receded.

But Mr. Summers would have no comparable opportunity. The most obvious way to show his commitment to the Fed’s stimulus campaign, at least in the short term, would be to do nothing. “The only thing he can do,” said Ms. Coronado, “is to show more patience.”

Article source: http://www.nytimes.com/2013/09/03/business/as-summerss-odds-rise-stimulus-easing-is-seen.html?partner=rss&emc=rss

A Washington Puzzle: Solving 3 Fiscal Disputes

WASHINGTON — On the endgame for the budget showdown looming in Washington this fall, only this is clear: President Obama thinks Republicans cannot risk another debt crisis or government shutdown, and Republican leaders agree.

That consensus suggests that the odds of an economy-damaging stalemate are relatively low, despite rising jitters in the capital. Yet everything else about how the White House and Congressional negotiators will try to strike a deal, and then coax majorities to approve it, remains opaque.

“Even those of us quite close to it have a hard time saying how the movie ends,” said Representative Chris Van Hollen of Maryland, the ranking Democrat on the House Budget Committee.

The showdown encompasses three interlocking fiscal disputes that will challenge Mr. Obama and his Republican interlocutors to bridge seemingly irreconcilable goals.

Perhaps easiest to resolve is the effort by some conservative Republicans to eliminate financing for the new health care law in return for keeping the government open beyond Sept. 30, the end of the fiscal year. As expected, Mr. Obama is unyieldingly opposed to undercutting his signature domestic policy achievement.

The House Republican leader, Eric Cantor of Virginia, has already rejected the Republican strategy as doomed to fail. Most Senate Republicans have not signed on, and Senator Richard M. Burr of North Carolina has called it “the dumbest idea I’ve ever heard.” Even one supporter, Senator Rand Paul of Kentucky, recently suggested that the threat was simply a tool to provoke negotiations.

A second challenge is determining the fate of the across-the-board budget cuts known as sequestration if Congress avoids a shutdown by extending government funding.

Republicans remain adamant that the level of budget cuts required by sequestration, about $90 billion per year, be continued. But with increasing complaints about the effects of those cuts on the Pentagon and elsewhere — shown by House Republicans’ inability to pass their own transportation spending bill last month — some party leaders want to rearrange the burden of those cuts so that they fall instead on entitlement programs like Medicare and Social Security.

The White House and Congressional Democrats, however, rule out that trade, except as part of a larger long-term deal that also includes new tax increases. And Republican resistance to tax increases, which has precluded such a “grand bargain” in recent years, has stiffened since the Bush tax cuts for top-earning Americans expired at the end of 2012.

The third challenge may be the most worrisome. While sequestration pinches particular constituencies, and a government shutdown would inconvenience millions, economists warn that default resulting from a failure to raise the government’s debt limit could tip the economy back into recession.

That challenge also appears, at least on the surface, the most intractable. Speaker John A. Boehner of Ohio has reiterated that Republicans will not raise the debt limit without offsetting spending cuts.

Mr. Boehner’s demand would require fewer cuts than during the 2011 debt crisis, when the debt ceiling needed to rise by about $110 billion per month to avoid default. That amount has shrunk to around $70 billion, according to the Bipartisan Policy Center, because the top-end tax increases and revenue from a stronger economy have helped shrink the deficit substantially.

But Mr. Obama, burned by the downgrade of the United States debt rating after those 2011 negotiations, insists he will not negotiate on the issue this time, to the bewilderment of some Republicans.

“This is, for me, very, very difficult to figure out,” said Stephen Bell, a longtime Senate Republican budget aide now at the Bipartisan Policy Center.

No formal negotiations have begun, although the White House chief of staff, Denis R. McDonough, has been meeting with a few Senate Republicans in search of common ground.

Congressional aides have also started exploring potential stopgaps. They begin with a temporary extension of government funding to allow budget talks to continue through year’s end.

Article source: http://www.nytimes.com/2013/08/16/us/politics/a-washington-puzzle-solving-3-fiscal-disputes.html?partner=rss&emc=rss

Boeing Jet Returns to the Air, but It’s Only a Start

“We kept on checking the voltage again and again, because we were so nervous,” he said in an interview after the 787 jet landed at Haneda Airport in Tokyo, apparently without incident. “Everything was fine, absolutely fine.”

Mr. Ogami may have gotten over his own jitters, but he and his colleagues at All Nippon, the largest operator of Boeing’s 787 batteries, now must convince an uneasy public of the reliability of the jets — most of which were grounded for three months because of concerns that the batteries crucial to the planes’ sophisticated electrical systems might catch fire.

Even as Boeing and the operators of its Dreamliners move swiftly toward getting the jets back in the air, they now face the delicate task of selling passengers on the idea that the jet is safe, even though engineers have still not figured out what exactly caused batteries to burn on two separate planes earlier this year.

In the past week, regulators in the United States, Europe and Japan — all of which grounded the 787 fleet after those incidents — signed off on fixes to the batteries proposed by Boeing.

Smaller airlines are already moving ahead in reintroducing the jet to their fleets, including Ethiopian Airlines, which used a 787 on Saturday on a two-hour commercial flight from Addis Ababa, the Ethiopian capital, to Nairobi.

But the resumption of 787 flights at All Nippon and Japan Airlines, which together own nearly half the 50 Dreamliner jets Boeing has delivered so far, will prove the real test of whether the modified batteries will eliminate further mishaps.

So both Japanese airlines are being cautious about bringing the Dreamliners back into service, saying they hope to resume scheduled commercial flights only in June. That will give them more time to conduct test flights, retrain their crew and to educate the public about the safety of the improved batteries. (All Nippon said it might introduce Dreamliners on some flights before June, however.)

“It’s up to us to explain how we’ve made these planes safer,” Shinichiro Ito, chief executive of All Nippon and Mr. Ogami’s boss, said at a press conference after flying on the test jet, together with executives from Boeing. “We won’t decide to resume commercial flights until we’re sure our passengers are comfortable with boarding a 787.”

The other airlines that already own 787s are all eager to resume service, although the timing varies. United has scheduled its 787s to start flying domestic routes on May 31 and plans to begin international flights on June 10, from Denver to Tokyo and Houston to London. The airline will then fly its 787s in August from Houston to Lagos, as well as from Los Angeles to Shanghai and Tokyo.

LOT, the Polish national airline, plans to begin commercial 787 flights on June 5 between Warsaw and Chicago. Later, it expects to fly its planes to New York, Toronto and Beijing.

Air India said it hoped to have flights by mid-May. The other airlines that own 787s are Qatar Airlines and LAN of Chile.

But it is in Japan where the 787 has a particularly difficult task in winning back confidence. The Japanese public has been subject to intense coverage of what first appeared to be teething problems of Boeing’s next-generation 787 jet: a cracked cockpit window and a fuel leak.

Then a battery fire on a parked Japan Airlines jet in Boston in January, followed closely by a meltdown of batteries aboard a domestic All Nippon flight, catapulted the story into the nation’s top headlines.

The All Nippon incident, which prompted an emergency landing, has been particularly damaging to the 787’s image in Japan. All day, TV stations played footage of the incident, emergency chutes splayed on the tarmac, with testimony from distressed passengers to boot.

“I was terrified. I didn’t feel alive,” Masaaki Ishikawa, a 40-year-old office worker, told the Sankei newspaper at the time.

Now, some Japanese are understandably worried.

Article source: http://www.nytimes.com/2013/04/29/business/global/29iht-dreamliner29.html?partner=rss&emc=rss

Euro, Stocks Down as Debt Jitters Trump U.S. Data

The rising dollar dragged on commodity prices, with oil, copper and gold all falling, while mixed signals on the global economy kept Asian credit markets subdued.

Data on Friday showed that while U.S. employment growth accelerated last month, euro zone retail sales fell and economic sentiment soured at the end of 2011, pointing to recession in the currency bloc.

“If we didn’t have Europe, this market would be rallying on the back of the U.S. numbers,” said Jamie Elgar, dealer at stockbrokers Burrell Co in Brisbane.

U.S. jobless rate: http://link.reuters.com/vyn85s

U.S. payrolls: http://link.reuters.com/qyn85s

The euro zone crisis: http://r.reuters.com/xyt94s


Worries over Europe intensified with a debt rating downgrade to junk status for Hungary — a member of the European Union but not part of the euro zone — and a report in German magazine Der Spiegel that the International Monetary Fund was losing confidence in Greece’s ability to clean up its public finances.

The euro fell to a 16-month low below $1.2670, and dropped as far as an 11-year low at 97.47 yen. The dollar, currently favoured by investors seeking a safe haven, rose 0.2 percent against a basket of major currencies.

Rob Ryan, FX strategist for BNP Paribas in Singapore, said the single currency was unlikely to see a sustained rebound unless the euro zone’s economic outlook improved, adding that the euro could fall to $1.25 in coming months.

“We need to see the economic data halt its slide and I think we need to see banks start to lend to each other. Neither of those are going to happen overnight,” he said.


With markets focused on concerns about rising borrowing costs in Europe, Friday’s upbeat jobs data failed to perk up U.S. stocks, and the weakness continued in Asia on Monday.

MSCI’s broadest index of Asia Pacific shares outside Japan fell 0.7 percent. The index had finished the first week of 2012 slightly higher, after shedding 18 percent in 2011. Tokyo markets were closed for a holiday.

SP 500 index futures fell 0.4 percent, pointing to a weaker start later on Wall Street, where the U.S. corporate earnings season will kick off when aluminium producer Alcoa reports after the closing bell.

A stronger dollar tends to weigh on commodities that are priced in the U.S. currency, and both precious and industrial metals lost ground.

Copper slipped more than 1 percent to around $7,500 a tonne, while gold fell 0.7 percent, getting close to the $1,600 an ounce level.

U.S. crude oil fell 0.7 percent to below $101, after climbing above $100 a barrel last week as rising tensions between Iran and the West raised fears of supply disruptions. Brent crude dipped below $113 a barrel.

(Additional reporting by Victoria Thieberger in Melbourne and Masayuki Kitano in Singapore; Editing by Kim Coghill)

Article source: http://www.nytimes.com/reuters/2012/01/08/business/business-us-markets-global.html?partner=rss&emc=rss

Just Before Deadline, County in Alabama Delays Bankruptcy Move

The governor of Alabama, who for months told the county to deal with its woes on its own, has been working behind the scenes in recent days on a state-brokered deal to avert what could be the biggest municipal bankruptcy filing in United States history. On Wednesday evening, a proposal was aired to a small group of lawyers for the county in a private meeting, according to one official present.

Hours before a deadline Thursday, the commissioners agreed to delay the vote on a bankruptcy filing for seven more days, while they reviewed the new offer from the county’s creditors. The proposal would reduce the total amount owed and use state backing to bring down the county’s interest rate.

In some ways, the proposal is similar to what was done this month to help Greece, or to resolve New York City’s financial crisis in 1975. Jefferson County would get debt relief through the creation of an independent borrowing authority, whose bonds Gov. Robert Bentley has agreed to guarantee. The authority would issue new bonds to replace the impaired ones that creditors now hold.

“That was the game-changer,” said John Young, a court-appointed receiver on the case, referring to the governor’s willingness to put the state’s own credit on the line. The state legislature would still have to approve the new authority. Municipal securities analysts said they welcomed the state’s involvement, which could help ease market jitters.

Jefferson County’s finances are in such disarray that it cannot currently borrow at any price. But the new borrowing authority would be independent of the county, and the state guarantee would strengthen the authority’s rating even further, Mr. Young said. That would lower its borrowing cost. The reduced costs would benefit Jefferson County residents, whose fatigue and rage over the debt they have to pay reached a boiling point this summer.

Whether Jefferson County’s commissioners will embrace the proposal is unclear. Rate increases are their foremost concern. They said one potential rate schedule being floated would lead to an annual increase of 8 percent in sewer rates for four years or more, an unacceptable level.

The governor’s finance director, David Perry, said the plan included no specific rate schedules, but called for a reduction in debt that could be achieved several ways.

Commissioners also complained that they had been given nothing in writing on Thursday and could not yet properly evaluate the proposal. Commissioner T. Joe Knight said he had agreed to the seven-day standstill out of deference to the governor.

Jefferson County’s debacle began years ago, when it was ordered by a federal court to rebuild its failing sewer system. It had to issue bonds to finance the huge construction costs, and followed consultants’ advice that it lower its borrowing costs by issuing bonds linked to derivatives, which were supposed to protect the county if interest rates rose. The revenues from sewer ratepayers were pledged to pay back the debt.

But the revenue projections were too optimistic, the bond deals were plagued by pay-to-play and bid-rigging scandals, and the complex bond-derivative structures collapsed in the financial turmoil of 2008. The costs ballooned, and now the county owes about $3.2 billion. Some officials who helped with the bond deals have been convicted of corruption charges, and some of the banks have been forced to pay back some of their fees under regulatory pressure. In November 2009, J.P. Morgan made the county a $75 million payment as part of a settlement agreement with the Securities and Exchange Commission. With other federal investigations and prosecutions continuing, county residents are increasingly unwilling to help pay debts incurred amid so much impropriety.

This summer’s flirtation with bankruptcy grew out of a sudden and steep shortfall in the county’s general fund revenues, which are separate from the sewer revenues. In April, the State Supreme Court declared an important county tax unconstitutional on technical grounds, cutting off 44 percent of the county’s discretionary revenues. Despite appeals to the state legislature for help, little was done, and the county had to lay off nearly 550 employees, around a quarter of the workforce, and make deep cuts in services.

As this was happening, Mr. Young, the court-appointed receiver for the sewer system, issued a report recommending a 25 percent immediate increase in the rates paid by households on the system to pay the outstanding bonds. Residents howled in protest, complaining of the previous rate increases and then the county service cuts.

With tensions high, Mr. Young then sent letters to the county, demanding that the $75 million payment from J.P. Morgan be diverted to help shore up the sewer system’s finances.

But the money represented the county’s only cash reserves, and officials saw no alternative but to declare bankruptcy. Just as they were about to file at the end of June, the governor intervened, convincing Mr. Young and the county to declare a standstill period for 30 days.

Frustrated by half-hearted legislative attempts at a solution, the governor had also been informed that the state and its taxpayers could be liable for part of the county’s ballooning debt because the state had been named in the federal order to rebuild the sewer system.

Mr. Young said the governor also had been told by bankruptcy experts that a Chapter 9 filing by the state’s most populous county would spook the municipal bond market, which is already jittery because of an analyst’s prediction of big defaults across the country, and a possible downgrade of the United States’ Treasury’s debt. If the state showed it was unwilling to help Jefferson County, it might unnerve investors considering bonds issued by other Alabama towns and counties, and even the state itself.

“A bankruptcy in Jefferson County would have a negative impact across the whole state of Alabama, and potentially all across the country,” Mr. Young said. The governor issued a statement saying he was “supportive of the seven-day extension” and looked forward to a thorough review of the creditors’ latest offer.

It was not apparent that the new terms would appease county residents, many of whom have started to think, incorrectly, that Chapter 9 would be a good way to walk away from the debt completely. Commissioners said their constituents generally favor bankruptcy, and in interviews with residents around the county, many said bankruptcy should have been declared years ago.

Spotting a reporter leaving the county courthouse on Thursday, a man in a pickup truck yelled out the question on everyone’s mind: “Did they file yet?”

Upon hearing it would take a few more days, the man cursed and drove on.

Mary Williams Walsh reported from New York, and Campbell Robertson from Birmingham.

Article source: http://feeds.nytimes.com/click.phdo?i=b28d66577902f359c696e79213ca2a95