The Federal Reserve under attack: Poked by pitchforks

 

 

Nov 26th 2009 | WASHINGTON, DC
From The Economist print edition

 

Curbs on the Fed’s independence are advancing through Congress

[Greg Ip] POPULISTS and bankers have been at odds since America’s earliest days. Its first two central banks were shuttered in the 19th century in part because of their perceived closeness to financiers. In the wake of the financial crisis those tensions have bubbled back to the surface. The central bank is again in the cross hairs.

The deficit problem: Dealing with America’s fiscal hole

Nov 19th 2009
From The Economist print edition

Don’t cut the deficit now—but explain how, eventually, you will

Jon Berkeley

 

FOR years America’s fiscal problems had a surreal quality. No one disputed that an ageing population and health-care inflation could bust the budget, but that prospect was decades away and procrastination seemed painless. No longer. A giant hole has opened in the budget because of stimulus, bail-outs and a recession that has savaged economic growth and tax revenue. On current policies the publicly held federal debt, 41% of GDP last year, will double in the next decade (see article). Total government debt will move well above the G20 average. In a few years the AAA rating of Treasury bonds, the world’s most important security, could be in jeopardy.

America’s fiscal deficit: Stemming the tide

Nov 19th 2009 | WASHINGTON, DC
From The Economist print edition

 

Unprecedented levels of government debt may require radical solutions

Illustration by Bill Butcher

[Greg Ip] STUDENTS at National Defence University in Washington, DC, were recently given a model of the economy and told to fix the budget. To get the federal debt down, they jacked up taxes and slashed spending. The economy promptly tanked, sending the debt to higher levels than before. The lesson: “You’ll never get re-elected and you may do more harm than good,” concluded Eric Bee, an air-force colonel who took part in the exercise.

This is the ugly arithmetic of America’s public finances. Recession and aggressive fiscal stimulus have hugely swollen the federal deficit. Stimulus was essential to cushion a collapse in private demand. In spite of that, the economy has barely emerged from recession and unemployment is still rising, feeding speculation that more stimulus is needed. Yet at the same time voters are growing alarmed at the tide of red ink, and it may be only a matter of time before markets do, too.

U.S. Economic Outlook for 2010: Square Root Reversal

Nov 13th 2009
From The World in 2010 print edition
By Greg Ip, WASHINGTON, DC

 

 

America will recover, but too weakly for comfort

The American economy in 2010 will be torn between two opposing forces. The first is that deep recessions usually lead to strong recoveries. The other is that financial crises usually produce weak recoveries. The interplay of these two forces will produce a cycle that resembles not a V, U or W, but a reverse-square-root symbol: an expansion that begins surprisingly briskly, then gives way to a long period of weak growth.

Recessions interrupt the economy’s natural inclination to grow. They create pent-up demand for homes and other goods, and prompt businesses to slash production, payrolls and investment to levels well below what normal sales require. Ordinarily, the deeper the downturn, the more powerful the reversal of those effects. Based on experience, the American economy, which shrank by some 4% over the course of the 2007-09 recession, ought to grow by as much as 8% in its first year of recovery. The unemployment rate, around 10% in late 2009, should drop to about 8%.

That won’t happen. But growth could still beat the consensus forecast of 2.5% in 2010.

The U.S. in 2010: The Fed’s next battle

Nov 13th 2009
From The World in 2010 print edition
By Greg Ip, WASHINGTON, DC

This time, with politicians

How tight is Bernanke’s grip?

In the 1930s the Federal Reserve stood by as the economy sank into Depression. Retribution followed as Franklin Roosevelt concentrated more of its governance in Washington, DC. Today’s Fed, under its chairman, Ben Bernanke, has been hyperactive in preventing another Depression, yet again faces political peril. In 2010 critics in Congress will seek to rein in its independence even as its defenders in the Obama administration push to expand its regulatory powers.