Archive for May 2010
America contemplates yet more fiscal stimulus and leaves the pain for later
May 27th 2010 | WASHINGTON, DC
[Greg Ip] ONLY by coincidence did Europe’s debt crisis wash over American markets just as debate was heating up in Washington, DC, on a new round of fiscal stimulus. Still, the confluence of events has raised the stakes, both for those who think a bit more deficit spending is essential and for those who think it courts disaster.
May 20th 2010 | WASHINGTON, DC
From The Economist print edition
Financial reform will make the Fed more powerful and less independent
THE decision of the European Central Bank to start buying government bonds follows a path trodden by the Federal Reserve in 2008 and 2009. Both entered politically charged territory to save the financial system at great risk to their reputations. For the Fed, one consequence is that the big financial-reform bill making its way through the Senate—a vote was expected after The Economist went to press—will leave it more powerful but more beholden to Washington, DC.
The Fed has fought for, and kept, its supervision of banks. It acquires important new powers to regulate big non-bank financial companies and even to break up firms deemed a threat to the financial system. Its only significant loss of turf is direct oversight of consumer protection. The Fed keeps its emergency-lending powers, though it needs the Treasury’s approval to use them (it has usually sought such approval anyway). It cannot lend to failing firms because that job now sits with the Federal Deposit Insurance Corporation under the bill’s new resolution authority.
The price of these powers, though, is to be drawn closer into politicians’ embrace. Since its birth the Fed’s governance has reflected a mix of political and financial influences. Monetary policy is the joint responsibility of governors in Washington, DC, appointed by the president and confirmed by the Senate, and presidents of the reserve banks, some of whose directors are, or are appointed by, bankers.
Critics have long seen the bankers’ role in the running of the Fed as an affront to democracy. Under the reform bill the president will now nominate and the Senate will confirm the New York Fed president (the most important of the regional governors). Fed-supervised banks will lose any say in the governance of the reserve banks. Barney Frank, the chairman of the House Financial Services Committee, wants to go further, either stripping all reserve-bank presidents of their votes on monetary policy or making them more accountable.
Such changes have some worried that the Fed will adopt a looser monetary stance. In the near term, these fears are overdone. The economic environment remains deflationary. Excluding food and energy, inflation fell to a 49-year low of 0.9% in April. Political pressure for more expansionary policy has also been surprisingly slight. Opponents of Ben Bernanke’s confirmation to a second term as Fed chairman in January were more likely to criticise lax policy before the crisis and the Fed’s interventions during it, not its failure to maintain full employment. Inside the Fed, the pressure is also for tighter policy. Some officials are pressing for a quick sale of its holdings of mortgage-backed securities, although minutes of its April meeting suggest that will not happen before the Fed begins raising short-term rates.
The greater risk to Fed independence is not pressure from outside, but the temptation from inside to broaden its macroeconomic remit as the lines between regulatory and monetary policy blur. Financial stability has been formally added to the Fed’s duties, alongside full employment and price stability. More governors will be chosen for regulatory and legal expertise; one will be designated vice-chairman for supervision. If Barack Obama’s latest nominees are approved, only three of the seven governors will be economists; two will be lawyers. Decisions on which financial firms to regulate, which to support and which to liquidate will increasingly be made with an eye on the broader economy. Interest-rate decisions will more heavily consider the impact on the financial system. A hard job has got harder.
The original story is linked here.
[Greg Ip] THE deflation meme is back. Today the Bureau of Labour Statistics reported that headline consumer prices fell in April, though they’re up 2.2% from a year ago. Excluding food and energy, core prices were flat and up just 0.9% from a year earlier, the lowest rate of annual core inflation in either 44 or 49 years, depending on who’s counting.
Some folks argue the drop in inflation is exaggerated by the large weight given to owners’ equivalent rent. (This component uses tenant rent to calculate the cost of owning a home.) Rents have been depressed by the large stock of vacant units. Morgan Stanley notes that excluding shelter, core inflation is still 2.2%, and it predicts shelter costs will start to rise given recent firming in industry surveys of apartment rents.
But J.P. Morgan retorts that industry surveys are biased to large, multi-unit apartment buildings whereas single houses are more important to OER and their rents are rising more slowly. Goods prices, unusually firm until now, are starting to soften. Other disinflationary factors include the recent rebound in the dollar and the drop in the price of oil. Most important, wage inflation remains quite soft, although it showed some signs of firming in April.
Even if the disinflation trend is overstated a bit, I don’t see how the risks can be weighted in any direction but down. That some economists characterise this report as “benign” is understandable but wrong-headed. Inflation headed towards zero is not benign. It is especially not benign when the financial system is deleveraging, when rule makers in the Senate and in Basel, Switzerland are reinforcing that process, and when the Fed has no room to cut short term rates and is debating when to exit quantitative easing.
From The Economist print edition
Bit by bit, things worsen for the financial industry
|Lincoln smiles, banks blanch|
[Greg Ip] THE American Senate is supposed to bathe radical proposals in a breeze of moderation and reason. The opposite seems to be happening with the financial-reform bill. As it makes its way through the legislative process the bill has become progressively more hostile to Wall Street. Among the hundreds of amendments being proposed on the Senate floor are an even stricter ban on proprietary trading than originally envisaged, caps on debit- and credit-card “interchange” fees, higher deposit-insurance fees for big banks, and (potentially most serious of all) the imposition of fiduciary duties on marketmakers. Read the rest of this entry »
From The Economist print edition
New data confirm that small firms are dragging on the job market
[Greg Ip] EVEN as they heap scorn on big business, Americans and their congressmen retain a place in their hearts for small business. Which is fortunate, since small business need a little sympathy these days. Their travails, however, go some way towards explaining the puzzling weakness of job creation since the recession ended last year. Read the rest of this entry »
May 10th 2010, 16:45 by G.I. | WASHINGTON
[Greg Ip] THE dilemma in which the European Central Bank found itself this year borders on tragic. As Charlemagne notes, it had, up to this point, had a very good crisis, showing itself as creative and forceful as the Federal Reserve in responding to the market mayhem while remaining a worthy custodian of the Germanic monetary discipline it had inherited.
Then it faced a Hobson’s choice of abandoning that discipline or risk seeing the entire euro experiment collapse. Read the rest of this entry »