Archive for October 2011
The business cycle matters when assessing the cost of new regulations
Oct 29th 2011 | from the print edition
AMERICAN policymakers are pulling every lever they can to revive the economy, from fiscal stimulus to quantitative easing. The big exception has been regulatory policy. From environmental protection to bank oversight, the rule book has steadily thickened in recent years. Republican critics of Barack Obama think this explains America’s economic malaise. Scrap the rules, they claim, and the economy will spring to life. Nonsense, responds the Treasury. In a recent article, Jan Eberly, an assistant secretary for economic policy, scrutinised the behaviour of corporate-bond yields, corporate profits and other indicators. She found no evidence that regulatory uncertainty is holding businesses back from hiring or investment; weak demand is the big culprit. Read the rest of this entry »
A plan to ease mortgage refinancing will have modest benefits, at best
Oct 29th 2011 | WASHINGTON, DC | from the print edition
SOMETIMES the best stimulus is not the biggest, but the one that’s possible. While Barack Obama has been haranguing Congress, without success, to pass his $447 billion stimulus plan, a more modest effort paid off on October 24th when the Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and Freddie Mac, the two big mortgage-finance companies, made it easier for borrowers to lower the rates they pay on their mortgages.
Mortgage rates are the lowest in a generation, triggering a rush by homeowners to retire higher-rate loans and take out new ones (see chart). But roughly a quarter of homeowners cannot refinance because their mortgages exceed the value of their homes. In early 2009 the administration introduced its Home Affordable Refinance Programme (HARP), allowing refinancing for “underwater borrowers” with no history of delinquency. Although Fannie and Freddie were taken over by the federal government in 2008, HARP would not expose the taxpayer to any more loss, since refinancing did not make the loan riskier.
What if there were another Lehman?
Oct 15th 2011 | WASHINGTON, DC | from the print edition
[Greg Ip] ASKED on October 11th how he might have handled the financial crisis of 2008 differently, Mitt Romney, the frontrunner for the Republican presidential nomination, refused to answer “a hypothetical”. He had good reason to prevaricate. The possibility of another crisis, given the euro zone’s woes, remains; the ability of the federal government to respond has changed drastically. The Dodd-Frank financial-reform law gives policymakers better tools to handle the failure of a firm like Lehman, but limits many of the other powers used to contain wider panic. Read the rest of this entry »
America’s latest anti-China bill tackles a problem already being solved
Oct 15th 2011 | from the print edition
[Greg Ip] THE global economy is sicker than a man with a bellyful of bad oysters. The last thing it needs now is a trade war. Yet on October 11th America’s Senate passed the Currency Exchange Rate Oversight Reform Act, which would allow any “fundamentally misaligned” currency to be labelled a subsidy subject to countervailing duties. No prizes for guessing which large Asian nation the senators have in mind.
Variants of this bill have been introduced regularly since 2003; all have failed. But this time may be different: anti-China sentiment in both parties has grown. Republican leaders have so far resisted holding a vote on a similar bill in the House of Representatives and look unlikely to change their minds; but if they do, the bill would almost certainly pass.
America has legitimate beefs with China, but this bill is the wrong way to address them. Read the rest of this entry »
Oct 7th 2011, 18:37 by G.I. | WASHINGTON
Italian bond yields rise. Credit rating agencies worry that higher yields make Italy’s debt unsustainable. They cut Italy’s bond rating. Italy promises to curtail its deficit (i.e. sell fewer bonds). Italian growth suffers. Investors worry that makes Italy’s debt less sustainable at current interest rates. Demand for Italian bonds falls, their yields rise. You get the picture.
But in case you don’t, look at this one. Read the rest of this entry »
Oct 7th 2011, 16:05 by G.I. | WASHINGTON
SOMETIMES it’s the absence of bad news that’s the best news of all. This morning the government reported that nonfarm payrolls in America grew by 103,000 from August to September, and previous months’ figures were revised up a total of 99,000. The August goose egg is no more; employment rose by 57,000. Both August and September were distorted by a Verizon Wireless strike, so the two-month average of 80,000 is a better indicator of underlying job growth. Government continues to be the main drag; state and local governments cut 33,000 jobs while private payrolls increased by 137,000.v
Commentators from both the left and the right grouse that these are tepid numbers, barely enough to keep up with population growth, and point out that the unemployment rate remained at 9.1%, unchanged from August. Yes, but. What matters at turning points is the second derivative, the change in the change. Nonfarm payrolls were less weak than expected, beating the consensus of 60,000. One upside surprise does not an all-clear make, but this is one of several: unemployment insurance claims were lower than expected, and automobile sales and the factory purchasing managers index were higher in September than expected.
The best filter for the newsflow is the 10-year Treasury yield. When it goes up, good news prevails. When it goes down, bad news does. (This relationship holds even though the Federal Reserve’s quantitative easing imparts a downward bias to yields.) As the accompanying chart shows, good news now has the upper hand.
The economy is by no means out of the woods. The biggest threat (and the biggest driver of bond yields) remains policy, specifically Europe’s. Stockmarkets are better bid this week on hopes that Europe is moving to recapitalise its banks. Those hopes could come to naught if Europe doesn’t also address sovereign solvency, and as this week’s issue points out, it has not. But, policy aside, America’s economy is doing all right: as of September, it has avoided recession.
As trade deals head towards approval, a backlash grows against China
Oct 8th 2011 | WASHINGTON, DC | from the print edition