September 7, 2010
READING ROUNDUP FOR TUESDAY: 9.07.2010
►Dangerous Defeatism is taking hold among America's economic elites
Ambrose Evans-Pritchard/Telegraph (U.K.)
"Blitz the market with bond purchases, but do so outside the banking system by buying from insurers, pension funds, and the public. This would gain traction on the broad M3 money instead of letting it collapse (yes, the "monetary base" has exploded, but that is a red herring), working through the classic Fisher/Friedman mechanisms of the quantity of money theory.
This is quite different from the Fed's QE which buys bonds from the banks and works by trying to drive down borrowing costs. While Bernanke's 'creditism' is certainly better than nothing, it is not gaining full traction."
►The Monetary Base and Bank Lending: You Can Lead a Horse to Water…
David C. Wheelock/St. Louis Fed
"Why was the increase in the money stock so small when the increase in the monetary base was so large? The answer centers on the willingness of depository institutions (banks) to lend and the perceived creditworthiness of potential borrowers. A deposit is created when a bank makes a loan. Ordinarily, bank loans—and hence deposits—increase when the Fed adds reserves to the banking system. How ever, despite an increase in reserves of over $1 trillion, total commercial bank loans were some $200 billion lower in May 2010 than in September 2008. Banks added to their holdings of securities, which resulted in a modest increase in deposits and the money stock, but many banks were reluctant to make new loans. Partly this reflected weak loan demand, but it also indicated a diminished appetite for risk on the part of bankers."
Stephen Williamson/New Monetarist Economics
We have important monetary policy issues to think about, but Krugman's NYT column this morning was too much to resist...
The 1938 recession is a key part of the Great Depression experience. It has long been part of our macroeconomic policy narrative, and has been used before in support of Keynesian-style responses to the financial crisis, in particular by Christina Romer. The FDR administration took the budget deficit from 5.5% of GDP in 1936 to a state (roughly) of budget balance in 1938. A Keynesian interpretation of that is that the contraction in fiscal policy helped cause the 1938 recession. Milton Friedman and Anna Schwartz, in their A Monetary History of the United States argued that monetary policy was important - principally the doubling in reserve requirements from 1936 to 1937. Hal Cole and Lee Ohanian argue here that you can explain a lot of the features of the latter Great Depression years as coming from FDR's labor market policies. This is far from an open and shut case. I think you could convince me that the state of the government deficit at the time had little to do with the 1938 recession.
►World markets rise as double-dip fears ease
"'The renewed flight to safety we have witnessed over the past month is overdone and risks an equally large reversal when the worries over a double dip subside,' analysts from Rabobank said in a report. 'As the unexciting, steady and below-trend global recovery continues, it's important not to confuse it with a double dip recession.'"
►We'll be lucky to merely brush by another recession
TJ Marta/Marta On The Markets
"Much like Hurricane Earl did with New Jersey and New York City, the data published last week suggest that we might just merely brush by another recession. The developments last week were sufficiently mixed to dissuade markets from the notion that the economy is going down in flames, although the data remain weak enough to underscore the characterization of the trajectory by Pimco's El-Erian as the "new normal" and keep the probability of tipping into another recession by yearend in our minds at a worrisome 40-50%."
►Jobs Data Keep Shaky Recovery Afloat
"Heather Boushey, senior economist at the Center for American Progress, said Friday that 'the labor market has entered a holding pattern.' The private sector's monthly average gains of 78,000 in June through August are 'not nearly enough to begin to reduce unemployment.'"
►Business Cycle Variation in the Risk-Return Trade-Off
Hanno N. Lustig and Adrien Verdelhan/SSRN.com
"In this paper, we take the opposite approach to the literature on equity and bond market return
predictability. Instead of looking for predictors of equity and bond excess returns and then studying the cyclical properties of these predictors, we simply measure realized excess returns at different points of the business cycle in the U.S. and other developed economies.
We obtain striking results. Realized equity excess returns and equity Sharpe ratios increase
during recessions and decrease during expansions. Variations are economically large and statistically significant. In a model with time-varying risk aversion, such dynamics are not puzzling: in bad times, investors are risk-averse and expected excess returns are high."
►A Mildly Discouraging Update on the Job Market
Gary Burtless/Brookings Institute
"According to the payroll survey, government employment losses in August more than offset the gains in private-sector employment. Most of the drop in public-sector payrolls is explained by the departure of 114,000 temporary Census workers. However, state and local government payrolls also continued to shrink in August. Since the start of this year state and local public-sector payrolls have fallen 135,000, or almost 17,000 per month. These job losses are almost certainly linked to the expected end of federal fiscal relief under the Administration’s stimulus program. Earlier in the recession public-sector employment was a bright spot in an otherwise gloomy employment picture. In spite of a huge falloff in state and local tax revenues, federal fiscal relief permitted state and local governments to maintain their payrolls. With weak revenues and poor prospects of future federal fiscal relief, state and local governments are now trimming their payrolls. The trend could continue for a number of months unless there is a sizeable pickup in local tax revenues."
Posted by jp at September 7, 2010 6:26 AM