Not liberal or conservative, just incoherent

IN ITS updated global forecast released this morning, the IMF warns against “premature and incoherent exit” from government support for the economy. “Incoherent” nicely describes the policy debate in Washington. Partisans have aimed their poison at the Federal Reserve and at the government’s fiscal policy choices but what, exactly, do they want? The logical implications of their complaints are contradictory at best and dangerous at worst.

The Fed discovers Hyman Minsky

 

Free Exchange Jan 7th 2010, 13:47 by The Economist | WASHINGTON

[Greg Ip] BEN BERNANKE’S meticulous argument on why the Fed’s monetary policy did not cause the housing bubble left largely unanswered a more interesting question: if low interest rates didn’t cause it, what did?

For that, you should read the Fed staff working paper that formed the basis for most of Mr Bernanke’s speech. It’s interesting not just for its content but what it says about how the Fed’s view of the world and how its mission may be changing.

The Worst Ideas of the Decade: Housing Prices Always Rise

by Greg Ip

[Washington Post Outlook Section, Dec. 20, 2009]

Countless delusions and mistakes brought on our financial crisis, but none did as much damage as the belief that home prices never go down.

People have long seen real estate as a safe investment. The notion is intuitive – the supply of land is limited, and the population is always growing – and until 2007, national home prices had not fallen significantly since the Great Depression.

Yet at the start of this decade, this belief became the lynchpin of an entire investment philosophy, as survivors of the dot-com bubble sought a refuge for their money.

What if Lehman had not failed?

The original article is linked here.

Economics focus

What if?

Sep 10th 2009
From The Economist print edition

If Lehman had not failed, would the crisis have happened anyway?

Illustration by Jac Depczyk

 

[Greg Ip] IN AUGUST 2008 Kenneth Rogoff, a Harvard University economist, briefly rocked world stockmarkets when he warned a conference in Singapore: “We’re not just going to see midsized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one—one of the big investment banks or big banks.” A month later, in the early hours of September 15th, Lehman Brothers filed for bankruptcy.

Rebalancing the world economy: America: Dropping the shopping

The original article is linked here.

By Greg Ip

Jul 23rd 2009 | WASHINGTON, DC
From The Economist print edition

Can America wean itself off consumption? The first of a series on how the world’s four biggest economies must change to ensure sustainable global growth

GENERAL ELECTRIC has historically been a manufacturer, but in the long boom leading up to the financial crisis it became more like a bank. Half its profit came from its finance arm, GE Capital, which among other things had a lucrative business issuing mortgages and credit cards to American consumers. GE’s chief executive, Jeffrey Immelt, now talks like a man chastened. With GE Capital acting as a drag on the company, he vows that in the future finance will be a smaller part of the company. In its place GE touts its manufacturing and exporting prowess. Mr Immelt boasts of record aircraft engine orders at the Paris Air Show in June, none of them to American airlines.

Like GE, the entire American economy is at an inflection point. For decades, its growth has been led by consumer spending.

Central banks:The monetary-policy maze

 The original story is linked here.

 

Apr 23rd 2009 | WASHINGTON, DC
From The Economist print edition

 

 

The simple rules by which central banks lived have crumbled. A messier, more political future awaits

Illustration by Derek Bacon

 

IN THE world that existed before the financial crisis, central bankers were triumphant. They had defeated inflation and tamed the business cycle. And they had developed a powerful intellectual consensus on how to do their job, summarised recently by David Blanchflower, a member of the Bank of England’s monetary policy committee, as “one tool, one target”. The tool was the short-term interest rate, the target was price stability.

This minimalist formula fitted the laissez-faire temper of the times. A growing array of financial markets could price risk and allocate credit efficiently. Central bankers had merely to calibrate their interest-rate tools and all other markets would automatically adjust. Central banks still cared about financial stability and full employment, but could argue these were best served by stabilising prices—without, if you please, interference from politicians.

 

The financial crisis has upended all that.

Greenspan had the power: should he have used it?

The original post is linked here.

ALAN GREENSPAN’s defence of the Federal Reserve in the formation of the housing bubble restates a familiar argument—it raised short-term interest rates but long-term interest rates did not follow, and housing is most sensitive to long-term rates. His proof includes the fact that long-term rates were low worldwide, and that many countries had bigger housing bubbles than America. The housing bubble’s source must therefore be global.

I agree with this analysis but I don’t agree that it exonerates the Fed.

Assessing financial innovation

14:36 GMT +00:00

From Free Exchange. The original post is linked here.

 

AS A believer in free markets I’m inclined to believe that whatever innovation our kinetic and energetic innovators come up with is, until proven otherwise, welfare enhancing. Even if it becomes the subject of an investment mania that ends in tears. For all the money lost in its bursting, the internet bubble almost certainly accelerated by many years the development, diffusion, and adoption of many useful consumer technologies which are benefitting us today.

But the case for the welfare enhancing benefits of financial innovation is tougher to prove.

Silver Lining: Amid Devastation, Many Still See Gains In Burst Tech Bubble

Even Sufferers Cite the Value Of Innovation and Base For Longer-Term Growth — Looking Again to the Fed

By Greg Ip

Staff Reporter of The Wall Street Journal

2497 words

20 March 2001

The Wall Street Journal

A1

English

(Copyright (c) 2001, Dow Jones & Company, Inc.)

WASHINGTON — As the U.S. economy struggles with the bursting of the high-tech bubble, here’s an improbable question: Could there also have been a bright side?

Billions of dollars went down the drain in the past few years, to support high-tech companies that never made a profit. Years of entrepreneurial effort by the nation’s best and brightest were flushed away on failed business plans. Massive wealth was created, and then destroyed, leaving shattered confidence in its wake.

Yet the bubble also may have done society a huge favor. The technology-stock boom fertilized new technologies and business innovations, and it galvanized old-economy companies into accelerating their own adoption of these innovations.