Unemployment in Europe is now at 10%, matching the jobless rate in the U.S. Does this undermine the argument in favor of European-style bigger government that’s more proactive in trying to minimize the perceived limits of capitalism? One response is that Europe didn’t do as much as the U.S. to mitigate the recession. For instance, the European Central Bank didn’t cut interest rates as quickly or as deeply as did the Fed. If the problem was a slow and weak monetary response, maybe the so-called friendlier face of capitalism in Europe isn’t all that helpful after all in the grand scheme of economic cycles. In that case, perhaps the lesson is that it’s best to let free markets bloom and intervene only when and if it’s necessary during financial panics a la Bagehot’s lender of last resort doctrine.

First, the good news. This morning’s release of the government’s initial estimate of fourth-quarter GDP is a blow-out number: +5.7%. That’s the highest annualized quarterly real (inflation-adjusted) rise in GDP since 2003 and it’s also up sharply from Q3’s 2.2% rise. In addition, the Q4 number exceeded what most economists were expecting, and most were predicting a healthy increase.

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Fed Chairman Ben Bernanke was confirmed for a second term today in the Senate, albeit by a relatively thin margin: 70-30. That’s reportedly the “thinnest approval ever extended to a chairman in the central bank’s 96-year history.” Just a few days ago there was some question as to whether he would survive the populist political backlash that threatened to vote him out of his position as head of the central bank.
For the moment, Bernanke has won. The question is whether his victory will turn Pyrrhic. At least expectations are uncomplicated:
“Now that the Senate has confirmed him for a second term as chairman of the Federal Reserve, Ben Bernanke has, or ought to have, a very simple agenda: improve confidence,” writes Newsweek’s Robert Samuelson. “That isn’t his job alone, of course. President Obama and Treasury Secretary Timothy Geithner are hardly bit players. But what Bernanke does and says—how he projects himself and the Fed—matters a great deal, and he faces an exacting challenge.”

Professor John Cochrane offers his take on the financial crisis of 2008 in the current issue of the Cato Institute’s Regulation.
His basic argument: “the signature event of this financial crisis was the ‘run,’ ‘panic,’ ‘flight to quality,’ or whatever you choose to call it, that started in late September of 2008 and receded over the winter. Short-term credit dried up, including the normally straightforward repurchase agreement, inter-bank lending, and commercial papermarkets. If that panic had not occurred, it is likely that any economic contraction following the housing bust would have been no worse than the mild 2001 recession that followed the dot-com bust.”
Was that really the source of the crisis? Maybe, although no one really knows. This is economics, after all. Certainly there’s no shortage of competing notions of about what happened. But even if you don’t agree with Cocgrane 100%, he makes a number of salient points that, at the very least, demand consideration in the months and years ahead as the powers in Washington attempt to “fix” the system.

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Last week we considered the possibility that the declining trend in new jobless claims had run its course. Today’s update on new filings for jobless benefits offers a reprieve from that ominous possibility. The reprieve may be temporary, of course, but for today at least it appears as though the nearly year-long decline in new filings remains intact–weak but intact.

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What shade of blue are you?

The Federal Reserve voted to keep rates unchanged today, but the vote came with glitch. “Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted,” the FOMC statement explained.

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The Fed announced that the target range for Fed funds would remain at 0% to 0.25%. This will suprise no one, given the weakness in the labor market, the rising political vulnerability of the President (who makes his State of the Union speech tonight), and recent questions about Bernanke’s reappointment prospects. Is the Fed funds rate really that susceptible to political factors? Probably not, but thinking that it might be is no longer beyond the pale. How it’s come to this isn’t easily explained, but it’s clear that insuring monetary policy remain independent of politics is as compelling as ever. Arguably the potential for politicizing the Fed is higher than at any time in recent memory. At the very least, there’s more confusion than usual.

A little perspective never hurts when surveying the equity landscape. There are no silver bullets, of course. But we must start somewhere in the thousand-mile journey of analyzing the possibilities in the land of equities, and a big-picture review of the global playing field is a reasonable way to begin.

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The global economy will expand by 3.9% for 2010, the IMF predicts in an update released today. That’s up from its 3.1% forecast for 2010 that was published last October. Of course, today’s forecast update contrasts sharply with last year’s modest contraction in the global economy. For 2011, the IMF expects global output will accelerate to 4.3%.
Progress, it seems, is unfolding as we write. But there are caveats as well.
“The recovery is proceeding at different speeds around the world, with emerging markets, led by Asia relatively vigorous, but advanced economies remaining sluggish and still dependent on government stimulus measures,” according to the IMF update. “For the moment, the recovery is very much based on policy decisions and policy actions. The question is when does private demand come and take over. Right now it’s ok, but a year down the line, it will be a big question,” IMF Chief Economist Olivier Blanchard said in an interview.

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