May 2, 2024

You are here: Home / Archives for treasury secretary

News Analysis: Will a Powerful Bank Act the Part?

September 17, 2011 by Leave a Comment

FRANKFURT — The European Central Bank still has plenty of ammunition left in its monetary policy bandoleers. The question is whether it will use it.

The bank provided a clue Thursday when it said it would join with the United States Federal Reserve and three other major central banks in ensuring that hard-pressed European banks have a steady supply of dollar credit.

It was a more cooperative hands-across-the-water attitude than Europe’s main finance ministers displayed on Friday, when they reacted coolly to a bailout policy suggested by the Treasury secretary, Timothy F. Geithner. (American money speaks louder these days than American advice, evidently.)

The bank by agreeing Thursday to let euro zone banks borrow as many dollars as they want, indicated its willingness to deploy “nonstandard measures,” as the bank president, Jean-Claude Trichet, likes to call them.

The deeper issue is how far the bank will be willing to depart from precedent as it tries to hold the euro together. The departure would require the central bank to act much less cautiously than it has so far during the long-running euro debt crisis.

“The E.C.B. can stop this crisis in a minute if they want to,” said Guntram B. Wolff, deputy director of Bruegel, a research organization in Brussels. The bank, he said, could simply overwhelm bond markets by buying huge quantities of debt from Greece, which is effectively insolvent, as well as other countries that have come under attack, like Italy. End of crisis.

Some economists have argued that the bank could buy more than $1 trillion in sovereign debt if it needed to.

But such an action would provoke howls from Germany and countries like Finland, where the bank is seen as having gone rogue because of its relatively modest purchases of debt from a list of countries that also includes Spain, Portugal and Ireland. In those beleaguered countries, meanwhile, the bank is regarded as insufficiently supportive.

The bank is “in a very awkward position of trying to please everybody, which is impossible,” Mr. Wolff said.

Even though Europe’s sovereign debt crisis has mushroomed into a perceived threat to the world economy, the bank has so far been much more conservative than its peers. Worried about the prospect of inflation, the bank has raised interest rates this year, while the Fed and the Bank of England have kept theirs at rock-bottom levels.

The bank also stood on the sidelines while its counterparts in the United States and England flooded their economies with cash by way of so-called quantitative easing.

And the bank’s purchases of sovereign bonds for 143 billion euros, or $197 billion, so far, as part of a program to keep the recipient governments’ borrowing costs under control, is less than asset purchases by the Bank of England — which represents one country while the euro zone has more than 20 nations.

Right or wrong, the restrained policy means that the bank still has considerable firepower in reserve.

“If there is a risk of severe economic fallout, you could see the E.C.B. do more,” said Nick Matthews, an economist at the Royal Bank of Scotland. “There are more options it has not used up.”

The most obvious is the classic central bank tool: manipulating interest rates. The bank has raised its benchmark rate twice this year, bringing it to 1.5 percent from 1 percent. The increases were widely criticized as treating the wrong symptom — incipient inflation rather than depressed growth — especially after euro zone growth promptly slowed almost to nothing.

Some economists are now forecasting that the bank will reverse course on interest rates before the end of the year. And some think that Mr. Trichet may deliver a cut in October, his last month on the job before he retires.

The reasoning is that Mr. Trichet will want to make life easier for his successor, Mario Draghi, currently the governor of the Bank of Italy. Mr. Draghi might have trouble overseeing a rate cut soon after taking office in November because he will be eager to establish his credentials as a hard-liner on inflation.

But apart from interest rates, the bank has other tools it can use, Mr. Matthews pointed out in a recent research note:

¶ To help banks raise money to lend to consumers and businesses, it could resume purchases of commercial banks’ so-called covered bonds, which are generally considered low risk because they are backed by packages of loans as well as the guarantee of the issuing bank. That measure, already used by the bank in 2009, would make sense if banks in France or other countries ran into trouble selling bonds because of worries about creditworthiness.

Article source: http://www.nytimes.com/2011/09/17/business/global/will-the-ecb-use-its-firepower.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Hints of Progress in Europe Cap a Week of Gains

September 17, 2011 by Leave a Comment

The leaders took steps this week to show they were tackling the debt crisis, which has plagued markets for weeks, including coordinated central bank moves to give European banks greater access to financing in dollars.

Timothy F. Geithner, the Treasury secretary, urged European Union finance ministers to leverage their bailout fund to better tackle the debt crisis and to start speaking with one voice, but there was no agreement on what steps to take.

Still, the encouraging headlines out of Europe helped the S. P. 500 post a 5.4 percent gain for the week, its best since early July, and the five-day string of gains was the broad index’s strongest since the end of June.

The Nasdaq composite index registered its best weekly percentage advance since July 2009, reflecting strength in technology shares on Friday. The S. P. tech index rose 1 percent, while the S. P. consumer discretionary index also gained 1 percent.

“The market seems to be a little bit more reassured that support will not allow for a major disruption in Europe,” said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Md.

The Dow Jones industrial average finished up 75.91 points, or 0.66 percent, at 11,509.09. The Standard Poor’s 500-stock index was up 6.90 points, or 0.57 percent, at 1,216.01. The Nasdaq composite index was up 15.24 points, or 0.58 percent, at 2,622.31.

The Nasdaq gained 6.3 percent for the week while the Dow rose 4.7 percent.

Still, major obstacles must be overcome in solving the euro zone’s debt crisis.

Less than 75 percent of private sector creditors have signaled they will take part in a plan to buy back Greek debt, far less than the 90 percent target set by Greece. The shortfall could jeopardize the planned second bailout package for Athens.

Greece’s international lenders said on Friday they would delay a crucial visit to the country next week, and European finance ministers demanded that Athens fulfill its pledges to win further aid.

Among United States stocks, General Electric gained 1.6 percent to $16.33 after forming two new joint ventures in Russia that it said could generate $10 billion to $15 billion in new revenue over the next few years. One of the worst hit stocks, the BlackBerry maker Research in Motion, slid 19 percent to $23.93 a day after it reported a steep drop in quarterly profit and offered little hope of a quick turnaround.

United States economic data showed that consumer sentiment inched up in early September, but that Americans were gloomy about the future with their expectations for the economy falling to the lowest level since 1980.

Interest rates were lower. The Treasury’s benchmark 10-year note rose 8/32, to 100 20/32, and the yield fell to 2.06 percent from 2.08 percent late Thursday.

Article source: http://feeds.nytimes.com/click.phdo?i=5d220f3cf69f171197b162b0f780ef7d

Filed Under: Business News Tagged With: , ,

Advice on Debt? Europe Suggests U.S. Can Keep It

September 17, 2011 by Leave a Comment

Financial officials from the United States, once called “the committee to save the world” after the Asian crisis in the 1990s, now find themselves uttering apologies for the harm caused to the world by the 2008 financial crisis and coating their advice to European countries with the knowing nod of the battle-hardened.

The change in tone was on display here on Friday when Treasury Secretary Timothy F. Geithner made an unusual appearance at a meeting of euro zone finance ministries. Mr. Geithner had been invited to offer some advice on fixing Europe’s sovereign debt and banking problems.

European leaders, who have been slow to react to the root causes of the problem, emerged from the meeting dismissive of Mr. Geithner’s ideas and, in some cases, even the idea that the United States was in a position to give out such pointers.

“I found it peculiar that, even though the Americans have significantly worse fundamental data than the euro zone, that they tell us what we should do,” Maria Fekter, the finance minister of Austria, said after the meeting Friday morning. “I had expected that, when he tells us how he sees the world, that he would listen to what we have to say.”

Such criticism was echoed by other attendees of the meeting, including the finance minister of Belgium, Didier Reynders, who said that Mr. Geithner should listen rather than talk. And Jean-Claude Juncker, president of the finance minister group, said pointedly that European officials did not care to have detailed discussions about expanding their bailout fund “with a nonmember of the euro area.”

To be sure, American officials are aware that they need to tread carefully when advising others, especially now, and they have avoided providing specific plans or proposals.

Instead, they point to recent programs in the United States simply as case studies. On Friday, Mr. Geithner, among other recommendations, encouraged the European leaders to add more firepower to their bailout funds, and described how the United States used leverage in 2008 to help bolster the markets.

The Treasury department said in a statement Friday that “Secretary Geithner encouraged his European counterparts to act decisively and to speak with one voice.” And a Treasury official said the department did not feel he was rebuffed, because he did not have a specific agenda.

In the past, countries with financial problems have not always received the United States’ advice with open arms, at least until they needed financial support. Europe, analysts say, may never need outside support if its political leaders can find a way to use the wealth of nations like Germany to shore up more debt-troubled countries like Italy.

Still, it is hard to argue that the United States is not in a far weaker place to be doling out advice than it was in past crises, especially after the gridlock in August over raising the debt limit.

“We’re in a very different world environment right now,” said Ian Bremmer, president of Eurasia Group, a political consulting firm. “The United States has diminished credibility — it can’t simply tell Europe what to do. And it lacks the political will or means to throw a lot of cash at European troubles, even though they could become American problems very quickly.”

It was unusual for Mr. Geithner to attend an internal meeting of the 17 financial ministers from European Union countries that use the euro. The meeting was held on the first of two days of talks in Poland, and so far European finance ministers are no closer to overcoming hurdles holding up the plan they developed for Greece back in July.

Mr. Geithner did not offer up a fully developed plan or urge one particular action. According to an American official who was not authorized to comment publicly, the Treasury secretary urged Europe to send a strong message to the market by putting up a large enough sum of money to support their debt-ridden nations and banks. He suggested that could be done through the use of leverage — or borrowed money — as the United States did in some programs in 2008. One program, known as TALF, was meant to revive lending in the consumer and small-business markets.

Some Europeans have expressed ideas similar to Mr. Geithner’s for a broader rescue plan. Still, the United States faces a different sort of audience when giving ideas to Europe than it does when facing officials in developing economies.

“In the 1990s, there were lots of countries that would say, that’s working in the United States, how can we copy that?,” said Gary Gensler, who worked at the Treasury in the 1990s and now leads the Commodity Futures Trading Commission. “We’re still very much the leader in financial regulations and in the financial markets, but the 2008 crisis showed we failed. Our financial regulatory system failed and Wall Street failed.”

Countries like Brazil and China have already offered financial aid to Europe. Some policy makers say the United States might even be wise to turn to China as a partner in persuasion.

“Maybe this should be a joint effort,” said Sheila C. Bair, a senior advisor at the Pew Charitable Trusts, who was the chairwoman of the Federal Deposit Insurance Corporation until this summer.

Ms. Bair said it would be helpful for China and the United States to give European leaders the same message. But, she said, referring to the United States’ financial crisis in 2008, “we certainly don’t have clean hands in all this.”

Countries with financial problems do not want outside advice until they need outside money, said Jeffrey Shafer, who was the under secretary for international issues at the Treasury in the 1990s.

“There are different stages in this process, and Europe right now is kind of in a halfway house,” said Mr. Shafer. “The reality is that you get more influence when you are providing support.”

It would be difficult for the Obama administration to persuade Congress to give loans to Europe, analysts say, but there are other options. The Federal Reserve can open its discount window to European banks or, as it has already done, it can use foreign exchange lines. The Treasury could also lend out money from a facility that helps with exchange-rate problems. Or the United States could promote additional aid from the International Monetary Fund.

Even if the United States offered more aid, it is unclear if Europe would want it. Edwin M. Truman, a senior fellow at the Peterson Institute who has worked with Mr. Geithner, said the United States has questions to answer, too. “It’s not just a question of being the scolding school teacher,” he said. “Geithner will also have to give a convincing story that we’re dealing with our problems.”

Article source: http://feeds.nytimes.com/click.phdo?i=15047547d177297b0f5bdc0e1d0530a2

Filed Under: Business News Tagged With: , ,

Europeans Struggle to Clear Hurdles to Latest Euro Rescue Plan

September 16, 2011 by Leave a Comment

They also found themselves at odds with the U.S. Treasury secretary, Timothy F. Geithner, who, after his highly unusual attendance at a meeting of top European officials, warned them that a lack of decisive action could leave “the fate of Europe” to outsiders.

The first of two days of talks in Poland left the European finance ministers no closer to overcoming crucial hurdles holding up their bailout plan for Greece. And it highlighted trans-Atlantic differences over the best ways to revive growth in developed economies and restore stability to the financial markets.

Mr. Geithner suggested increasing the firepower of the euro zone’s bailout fund to help protect banks potentially vulnerable to a default by Greece and other deeply indebted countries, but did not appear to convince European ministers. Conversely, Mr. Geithner opposed a European proposal for a financial transaction tax, the officials said.

Meanwhile Jean-Claude Juncker, president of the group of euro area finance ministers, ruled out any possibility that Europeans might change course and stimulate economic growth, citing this as a significant difference with the Obama administration.

The talks came at a time of continued anxiety in the financial markets, and before a deadline for Greece’s foreign creditors to decide whether to release the next installment of its original bailout.

If Greece does not get its next €8 billion, or $11 billion, in funds scheduled to be released in October, it could have to default on its debts, with potentially devastating consequences for Europe and the global economy.

The fact that Mr. Geithner made the trans-Atlantic journey — just one week after attending the meeting of finance ministers from the Group of 7 countries in Marseille — was seen as a signal of the seriousness with which the United States viewed the European situation.

Meeting in the morning with finance ministers representing the 17 nations in the euro zone, Mr. Geithner suggested that they give the euro zone’s planned €440 billion bailout fund added heft by allowing it to act more like a bank and borrow more freely on the financial markets.

A similar model was used by the United States after the collapse of Lehman Brothers at the height of the 2008 financial crisis. That program, known as TALF, began while Mr. Geithner was still president of the Federal Reserve Bank of New York. Under it, the U.S. Treasury made $20 billion available in seed money that the New York Fed expanded into $200 billion to help revive lending in the consumer and small-business markets by purchasing securities backed by auto loans, business loans and credit card receivables.

“He raised it among other issues but did not press it,” Mr. Juncker said, who added, pointedly, that the euro group was not discussing “an increase or expansion” of its bailout fund “with a nonmember of the euro area.”

The Irish finance minister, Michael Noonan, said Mr. Geithner had been “very succinct” in raising the question. “It’s something he suggested that should be examined by Europe,” he said.

Mr. Geithner spoke first with ministers from euro zone countries and then addressed those from all 27 nations of the European Union. Officials at the U.S. Treasury Department said they would not comment on the details of private discussions. But at a separate business conference in Wroclaw, Mr. Geithner appealed to Europeans to solve the crisis themselves.

“One of the starkest ways to emphasize the importance of Europe getting on top of this,” Mr. Geithner said, according to a transcript of his remarks, “is that you don’t want the fate of Europe to rest in the hands of those who provide financing” to the International Monetary Fund “or who provide financing outside of the I.M.F.”

Maria Fekter, the finance minister of Austria, criticized Mr. Geithner for calling on Europeans to spend more to resolve the crisis while rejecting the idea of a small financial transaction tax to raise revenue from traders in the stock market.

“He conveyed dramatically that we need to commit money to avoid bringing the system into difficulty,” Ms. Fekter said. But when European officials, including the German finance minister, Wolfgang Schäuble, countered by suggesting the United States join Europe in adopting a transaction tax as a way to also promote more market stability, Mr. Geithner “ruled that out,” she said.

There was also a clear gap over who is primarily to blame for the current economic troubles plaguing both the United States and Europe.

Article source: http://www.nytimes.com/2011/09/17/business/global/europeans-struggle-to-clear-hurdles-to-latest-euro-rescue-plan.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Suskind’s ‘Confidence Men’ Details Recession Dissension

September 16, 2011 by Leave a Comment

The book, by Ron Suskind, a former Wall Street Journal reporter, quotes White House documents that say Mr. Obama’s decisions were routinely “re-litigated” by the chairman of the National Economic Council, Lawrence H. Summers. Some decisions, including one to overhaul the debt-ridden Citibank, were carried out sluggishly or not at all by a resistant Treasury secretary, Timothy F. Geithner, according to the book.

Mr. Suskind quotes from two memos for the president in which Pete Rouse, a senior White House aide, wrote, “There is deep dissatisfaction within the economic team with what is perceived as Larry’s imperious and heavy-handed direction of the economic policy process.”

A copy of the book, “Confidence Men: Wall Street, Washington, and the Education of a President,” published by HarperCollins, was obtained by The New York Times before it officially goes on sale on Tuesday. The White House declined to comment on Mr. Suskind’s account, which he said was based on interviews with more than 200 people, including the president.

The book does not contain major revelations, but it offers a portrait of a White House operating under intense pressure as it dealt with a cascade of crises, ranging from insolvent banks to collapsing carmakers. And it details the rivalries among figures around the president, including Mr. Summers; Mr. Geithner; the former chief of staff, Rahm Emanuel; and the budget director, Peter R. Orszag.

In this rough-and-tumble environment, the book reports, female staff members often felt bruised. At a dinner with Mr. Obama in November 2009, several top female aides — including Anita Dunn, who was the communications director, and Christina Romer, the chairwoman of the Council of Economic Advisers — told the president about being talked over in meetings by male colleagues or cut out altogether.

Ms. Romer, the book says, once passed a note to Mr. Summers threatening to walk out of a dinner with Mr. Obama and outside economists after the president polled his guests for their recommendations but failed to recognize her.

“It was lighthearted. It was not me threatening to walk,” Ms. Romer said in an interview from Berkeley, Calif., where she is a professor at the University of California. “My God, who would walk out on the president?”

Mr. Summers, who has returned to a teaching position at Harvard, did not immediately comment.

In the book, Mr. Geithner denies that he obstructed any presidential directive. A senior Treasury official said a government restructuring of Citibank would have occurred only if the Treasury had been left with a significatnt ownership stake in the bank after it emerged from the crisis.

The book claims that Mr. Obama pushed out two of his closest aides, Robert Gibbs, the press secretary, and David Axelrod, his senior adviser, earlier than planned in a housecleaning after the midterm elections.

Mr. Axelrod said he had long planned to leave the administration after two years. “I had an ironclad agreement with my wife that I would do two years, and everyone knew it,” he said. Mr. Gibbs said he had contacted Robert Barnett, a Washington lawyer who helps public officials land private-sector jobs, in October to begin planning his future since he intended to leave the White House early in 2011.

Article source: http://feeds.nytimes.com/click.phdo?i=dc5953c6e8ccc0e99ca4eb676f242825

Filed Under: Business News Tagged With: , ,

Italian Bond Sale Gets Tepid Response as Debt Crisis Festers

September 13, 2011 by Leave a Comment

Amid a growing sense that Europe’s response to the debt crisis lacks coordination and conviction, the United States Treasury Secretary Timothy Geithner will make a rare if not unprecedented appearance at a meeting of European finance ministers, to be held Friday in Wroclaw, Poland. The trip will be his second across the Atlantic in a week, following the Group of 7 session in France last weekend.

“Clearly the U.S. Treasury is disappointed with the direction of the European debt crisis and is looking for action, before further sections of the banking system are drawn in and a global financial crisis is re-visited,” Chris Turner and Tom Levinson, strategists at ING, said in a research note.

President Barack Obama, in a meeting with Spanish-speaking journalists in Washington, reportedly called on euro-zone leaders to show markets that they are taking responsibility for its debt crisis.

“In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective co-ordinated fiscal policy,” EFE, a Spanish news agency, quoted Mr. Obama as saying.

The German chancellor Angela Merkel, meanwhile, sought to dampen fears surrounding Greece — where the debt crisis began and which is having trouble meeting the conditions for its second bailout.

“The top priority is to avoid an uncontrolled insolvency, because that wouldn’t just hit Greece and the danger that it hits everyone, or at least a number of other countries, is very big,” Mrs. Merkel said in a radio interview, according to Bloomberg News. “I have made my position very clear: that everything must be done to keep the euro area together politically, because we would very quickly face a domino effect.”

While the immediate problems revolve around Greece, much-bigger countries like Italy, which is equally overstretched, have been losing market confidence as well, creating even greater worries.

On Tuesday, the Italian Treasury sold €3.9 billion, or $5.3 billion, of a new 5-year bond at an average yield of 5.6 percent. That compared to a rate of 4.93 percent the last time securities of a similar maturity were sold on July 14. Demand at the auction was 1.28 times the amount on offer, compared with 1.93 times at the last sale.

Analysts said demand was disappointing and that the European Central Bank had been seen by traders to be buying Italian bonds around the auction as part of their program of asset purchases to stable volatile markets.

The yield on 10-year Italian bonds was around 5.7 percent on Tuesday, again approaching the 6 percent level that is considered to be unsustainable — and that prompted the E.C.B. to intervene and start buying Italian and Spanish debt on Aug. 8. Spanish bonds were trading at around 5.3 percent.

Greece’s 10-year bond yields rose 48 basis points to 24.03 percent, after earlier climbing to a euro-era record of 25 percent as concerns about a near-term Greek default increased

European stocks declined, but were off their early lows, as French banks were again punished by investors amid concerns about their exposure to high-yield European debt and ability to finance themselves in dollars. U.S. futures dropped, while Asian shares were little changed.

At midday, the Euro Stoxx 50 slid 1.4 percent and the CAC-40 shed 2 percent in Paris.

Reports of a meeting last week in Rome between Finance Minister Giulio Tremonti and the chairman of China Investment Corp., Lou Jiwei, were confirmed by Mr. Tremonti’s office on Tuesday, news agencies reported.

Citing unnamed Italian officials, media reports have suggested that the Italian government was preparing additional measures to cut debt and that the country was discussing sales of its debt to cash-rich China.

Those reports were greeted with skepticism by analysts, who have seen Italy announce new measures — and then apparently backslide on them — over the summer. China’s purchase of bonds during the crisis from other euro-area countries like Spain and Portugal also had limited effects.

“Purchases of Italian bonds or other Italian assets by China’s sovereign wealth fund would buy Italy some time, but that is all,” Robert O’Daly, economist at The Economist Intelligence Unit, said. “As seen with the E.C.B.’s purchases of €40 billion to €45 billion worth of Italian government bonds in August the effect was temporary.”

He said that to restore confidence the Italian government would “have to put aside its internal wrangling to implement the program of fiscal austerity presented to Parliament on September 1st and at the same time come up with a coherent medium-term strategy to improve the country’s dismal economic growth performance.”

But he added that “does not seem likely to happen” given the differences within the ruling coalition.

Article source: http://feeds.nytimes.com/click.phdo?i=320f941de9b29b256dfc8e89dc53497a

Filed Under: Business News Tagged With: , ,

Economix Blog: Do Congress and the White House Deserve an AA+ Rating?

August 12, 2011 by Leave a Comment

DESCRIPTION

Uwe E. Reinhardt is an economics professor at Princeton.

There now appears to be general agreement that the downgrade issued a week ago by Standard Poor’s on the “Political Risks and Rising Debt Burden” of long-term United States debt was not a statement on the probability of default on Treasury bonds at all. Instead, it appears to have been intended as a reminder that something has gone seriously wrong with the style of governance put in place by the Founding Fathers.

Today’s Economist

Perspectives from expert contributors.

Whether the current style of federal governance deserves the second highest grade S.P. assigns (AA+) can, of course, be debated. I would be more inclined toward a plain B rating, that is, the governance equivalent of a junk bond.

Be that as it may, one manifestation of the decay in the federal style of governance has been the discovery that American voters can be pleased by providing them with a growing array of government services and financial transfers and by underwriting these with deferred taxes — that is, current deficits. The deferred taxes are to be paid off by generations not yet born or still too young to vote.

In the words of Doug Elmendorf, current director of the Congressional Budget Office, in a presentation last year, “The United States faces a fundamental disconnect between the services that people expect the government to provide, particularly the benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services.”

To make politicians comfortable with this approach to governance, a theory was needed that “deficits don’t matter.” That theory reportedly was proposed by Vice President Dick Cheney to Paul O’Neill, then Treasury secretary, who in late 2002 had protested the Bush administration’s evident addiction to debt. A fascinating account of the debate surrounding this proposition can be found in Jonathan Weisman’s “Reagan Policies Gave Green Light to Red Ink” in The Washington Post, written in 2004.

The economics profession did not entirely endorse Mr. Cheney’s theory; neither, however, did it line up against it. Instead, as usual, it had a nice intra-professional, two-handed debate on the issue, accompanied by learned papers. Then, as now, the pronouncements of macroeconomists add up to confusion.

The footprints of this new style of federal governance can be seen in the following chart, which is featured in updated form year after year in the Congressional Budget Office’s well-written long-term budget outlook.

Source: Congressional Budget Office

It is instructive to reflect on this chart, along with the two charts shown below. The data for those charts can be found in Table B-79 of the Economic Report of the President, February 2011.

The first shows the gross federal debt as a percentage of gross domestic product from 1976 to 2011. It is the most inclusive measure of the Treasury’s obligations, which ultimately are, of course, the obligations of the American taxpayer. The colors of the bars indicate presidential terms.

Source: Economic Report of the President, February 2011

The gross federal debt includes debt owed to other government accounts — for example, the Social Security Trust Fund, the Medicare Trust Fund and other retirement or government trust funds. Cash surpluses accumulated in these funds are invested in Treasury securities.

Of the total gross federal debt of $13.6 trillion in 2010, $4.6 trillion was owed by the Treasury to these government trust funds and only $9 trillion to the public, which included international investors (47 percent), domestic private investors (36 percent), the Federal Reserve (9 percent) and state and local governments (8 percent).

The next chart shows how the fraction of publicly held debt as a percentage of total gross federal debt has fluctuated over time. Note again that purchases by the Federal Reserve of Treasury debt, of which there have been many in the past few years, are counted as debt held by the public rather than intra-governmental debt.

Source: Economic Report of the President, February 2011

Readers of this blog will draw their own inferences from these three charts. My own is that recklessness in United States fiscal policy is not a recent phenomenon, especially if one considers the devastating effect that the recession, starting in 2007-8, has had on federal tax revenues, now at a historical low as a percent of G.D.P., and on federal spending, now at a historical high. In fact, the federal deficit for 2009 had been projected by the Congressional Budget Office at $1.2 trillion even before the current administration moved into the White House.

The problem is much less the current budget deficits, which can be explained by the current recession, but that budget balance does not seem to be in sight long after the recession, we hope, is over.

It is that problem that the White House and the Congress must solve. We must hope that care for the nation’s future — evidently now taking a holiday — will return someday soon to their minds and souls. Perhaps then they will merit an AA+ rating.

Article source: http://feeds.nytimes.com/click.phdo?i=fbeaeae9c9545d7cc9e07563b671cdea

Filed Under: Economy News Tagged With: , ,

Economix: Doing Away With the Debt Ceiling

August 1, 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.

Almost 10 years ago, I testified before the Senate Finance Committee that the debt limit should be abolished. Among the others who testified that day, including Treasury Secretary Paul O’Neill, no one supported my position.

Today’s Economist

Perspectives from expert contributors.

What we have seen, currently and in the years since that hearing, is that for any politician to deny the validity of the debt limit is effectively to support unlimited debt, something no member of either party can afford to be accused of.

The negotiations leading up to Sunday night’s announcement that President Obama and Congressional leaders of both parties had reached a deal to cut trillions of dollars in federal spending over the next decade makes the case against the debt limit that much stronger. We now know that it is a powerful mechanism for political extortion.

Unless the party holding the White House has a comfortable majority in the House of Representatives and at least 60 seats in the Senate, raising the debt limit is going to remain a means by which the minority party can impose its demands on the majority.

Even if the Treasury avoids default on government debt this week, we will inevitably have to go through the same political drama the next time the debt limit runs out and every time thereafter. And sooner or later the shoe will be on the other foot, as Democrats hold the debt limit hostage against a Republican president.

Unfortunately, the option of just letting the debt limit expire is not available. It is permanent law and can be abolished only by repeal or by a ruling by the Supreme Court that it is unconstitutional. Note that the law does not impose a deadline at which the debt limit runs out; rather, the limit is a dollar figure that must be amended when the gross federal debt reaches it. The date when the limit is breached is a function of Treasury’s cash flow and expenses.

The Constitution grants Congress the power to “borrow money on the credit of the United States.” Before World War I, it had to authorize each and every Treasury bond issue and its precise terms. During an era when the federal budget was usually balanced, this was not a huge problem.

But with the unprecedented borrowing needs of the First World War, Congress ceded to Treasury the power to decide when and under what terms it would borrow, subject only to an overall dollar limitation.

While politicians and the general public believe that the debt limit is an important constraint on national indebtedness, not one iota of evidence supports this belief. Economists have been making this point repeatedly for more than 50 years. In 1959, Marshall Robinson of the Brookings Institution came to this conclusion in a book-length study of the debt limit:

On the record, the debt ceiling experiment has failed. Although at times the ceiling has clamped down on government spending, it has not prevented the long-term growth of debt. Indeed, there is some evidence that reactions to its short-run pressure may ultimately contribute to the growth of debt.

Before 1974, it was plausible to argue that there was some virtue in having a debt limit because it forced Congress to acknowledge the consequences of deficit spending from time to time. But that year, it enacted the Congressional Budget and Impoundment Control Act, which requires Congress to enact a budget resolution annually that specifies an appropriate level for the deficit and the debt.

Consequently, a separate vote on the debt limit is at best superfluous. As the General Accounting Office put it in a 1979 report:

The implementation of the Congressional Budget and Impoundment Control Act of 1974 has brought into question the need for the Congress to consider the debt ceiling separately from the budget process.

This fact led Alan Greenspan, then chairman of the Federal Reserve, to recommend abolition of the debt limit in 2003 testimony:

In the Congress’s review of the mechanisms governing the budget process, you may want to reconsider whether the statutory limit on the public debt is a useful device. As a matter of arithmetic, the debt ceiling is either redundant or inconsistent with the paths of revenues and outlays you specify when you legislate a budget.

Mr. Greenspan’s point is crucial: the decision to run a deficit and increase national indebtedness is made by Congress when it votes to cut taxes, create entitlement programs and enact appropriations that will necessarily cause spending to be higher than revenues – not when it raises the debt limit.

As the Congressional Budget Office put it in a 2010 report:

By itself, setting a limit on the debt is an ineffective means of controlling deficits because the decisions that necessitate borrowing are made through other legislative actions. By the time an increase in the debt ceiling comes up for approval, it is too late to avoid paying the government’s pending bills without incurring serious negative consequences.

It is nothing but grandstanding for members of both parties to vote routinely for legislation that they know will create deficits and then profess shock and horror that the debt limit must be increased as a consequence. Even Captain Renault in “Casablanca” would be offended by such hypocrisy.

Historically, raising the debt limit was mere political theater giving cover to Congressional double-talkers because everyone knew that it would be increased. But that is no longer a foregone conclusion now that a significant number of Republicans in both the House and Senate believe that default on the debt is preferable to deficit spending.

Indeed, many say publicly that they will never support a debt limit increase under any circumstances and will even filibuster one, asserting that default would actually be a good thing because the budget would be balanced overnight.

For these reasons, the debt limit must be abolished. While that is extremely unlikely at this time, it is nevertheless necessary. As the computer eventually learned in the movie “War Games,” the only way to avoid disaster in this sort of game is not to play.

Article source: http://feeds.nytimes.com/click.phdo?i=1ed573e41706d7155b33181696bd3492

Filed Under: Economy News Tagged With: , ,

Economix: An Inconvenient Precedent for the Debt Crisis

July 26, 2011 by Leave a Comment

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

Last night, President Obama and the House speaker, John Boehner, gave dueling speeches on how to fix the deficit. One line from Mr. Boehner’s speech confused me:

Here’s what we got for that spending binge: a massive health care bill that most Americans never asked for. A ‘stimulus’ bill that was more effective in producing material for late-night comedians than it was in producing jobs. And a national debt that has gotten so out of hand it has sparked a crisis without precedent in my lifetime or yours.

The wording is a little ambiguous, but it appears that the “crisis without precedent in my lifetime or yours” refers to the current stalemate over the debt ceiling and the resulting threat of default.

With all due respect to Mr. Boehner, there is a precedent for this, and it was in his lifetime.

Mr. Boehner was born in 1949. In 1979 there was a showdown over raising the debt ceiling, and the country came within hours (not days) of defaulting on its obligations. In fact it actually did temporarily default on some of its obligations, although that seems to have been because of technical difficulties because discussions ran so close to the wire.

Brady Dennis of The Washington Post wrote a nice summary of this event earlier this month:

Congress had been playing a game of chicken with the debt limit, raising it to $830 billion — compared with today’s $14.3 trillion — only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history.

That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May.

“You hear a lot of people say, ‘The government never defaulted.’ The truth is, yeah, they did. … It might have been small, it might have been inadvertent, but it happened,” said Terry Zivney, a finance professor at Ball State University who co-authored a paper on the episode titled “The Day the United States Defaulted on Treasury Bills.”

Article source: http://feeds.nytimes.com/click.phdo?i=da61f2f5c0835c8d50fbf104078e884b

Filed Under: Economy News Tagged With: , ,

Former Ohio Attorney General Picked to Lead Consumer Agency

July 17, 2011 by Leave a Comment

Mr. Cordray came to national attention for his aggressive investigations of mortgage foreclosure practices while he was attorney general. He had already joined the watchdog agency, which starts formal operations on Thursday, as the leader of its enforcement division.

“Richard Cordray has spent his career advocating for middle-class families, from his tenure as Ohio’s attorney general to his most recent role as heading up the enforcement division at the C.F.P.B. and looking out for ordinary people in our financial system,” Mr. Obama said in a written statement. He will formally announce the nomination on Monday.

The decision to pass over Ms. Warren — who conceived the bureau, championed its creation and orchestrated its establishment for the last year as a White House adviser — reflects political realities.

Her candidacy was passionately supported by liberal members of Congress and consumer advocacy groups. But she never won the full support of the president or his senior advisers, particularly the Treasury Secretary, Timothy F. Geithner, in part because of her independence and outspokenness, which at times put her at odds with the administration.

Also, since last year Mr. Obama has been trying to rebuild relations with the business community after the fights early in his term over health care and financial regulations. And Republicans have vowed to block her nomination because they say that her criticisms of the banking industry showed a lack of fairness.

Putting a director in place is critical because the agency will not gain the full measure of its powers until the Senate confirms a nominee. The agency will be able to supervise the compliance of banks with existing laws, but the Dodd-Frank financial legislation that created the agency dictates that it cannot write new rules or supervise other financial companies without a director.

Republicans made clear on Sunday that they were no more likely to confirm Mr. Cordray than Ms. Warren. Forty-four Republican senators have signed a letter saying they would refuse to vote on any nominee to lead the bureau, demanding instead that Democrats agree to overhaul the agency’s management structure to replace a single leader with a board of directors.

“Until President Obama addresses our concerns by supporting a few reasonable structural changes, we will not confirm anyone to lead it,” Senator Richard Shelby, the Alabama Republican who is the ranking member on the Banking Committee, said Sunday in a written statement. “No accountability, no confirmation.”

That position was reiterated Sunday by a spokesman for the Senate minority leader, Mitch McConnell of Kentucky, who sent reporters a copy of the letter written by Senate Republicans. “The White House has not yet addressed the need to bring accountability and transparency to the bureau,” the spokesman, Don Stewart, said.

The administration has had little success in persuading the Senate to confirm nominees for a number of other financial regulatory posts, although several recent appointments are pending. Mr. Cordray joins a queue that includes the proposed leaders for two banking regulators, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, and two board members for the Securities and Exchange Commission. About a dozen positions remain vacant.

Mr. Cordray did, however, receive a quick endorsement from Ms. Warren.

“Rich has always had my strong support because he is tough and he is smart — and that’s exactly the combination this new agency needs,” she said in a statement on Sunday. “His work and commitment have made it clear that he will make a stellar director.”

Some of Ms. Warren’s supporters also gave him a reluctant thumbs-up.

“Elizabeth Warren was the best qualified to lead this bureau that she conceived — and we imagine Richard Cordray would agree,” said Stephanie Taylor, a consumer advocate who led an online campaign that collected 350,000 signatures on a petition calling for the president to nominate Ms. Warren. “That said, Rich Cordray has been a strong ally of Elizabeth Warren’s, and we hope he will continue her legacy of holding Wall Street accountable.”

Mr. Obama devoted many more words in his written statement to Ms. Warren than to Mr. Cordray, thanking her “not only for her extraordinary work standing up the new agency over the past year, but also for her many years of impassioned leadership, and her fierce defense of a simple idea: Ordinary people deserve to be treated fairly and honestly in their financial dealings.”

Article source: http://feeds.nytimes.com/click.phdo?i=ff7b1fed84c4b1befdb7bc64c826eb36

Filed Under: Business News Tagged With: , ,
« Previous Page
Next Page »