A new research paper from the New York Fed connects some of the dots for thinking that monetary policy, balance sheets in banking, leverage, credit cycles and macro risk premiums are related (“Macro Risk Premium and Intermediary Balance Sheet Quantities”). That’s hardly shocking, or at least it shouldn’t be. But revisiting the economic plumbing is refreshing, not to mention necessary, as far too many pundits go off the deep end in assigning blame and evaluating cause and effect.

Continue reading →

Economist Scott Sumner at The Money Illusion is exactly right when asserts that what we should be debating re: Bernanke’s reappointment as Fed Chairman is monetary policy. To be precise, Sumner writes that the key economic issues are:
1. Whether to cut the fed funds target from 0.25% to 0%
2. Whether to put an interest penalty on excess reserves
3. Whether to do additional QE
4. Whether to set an inflation or NGDP target
5. Whether to target growth rates or levels
6. And of course the key overarching question: Would the economy benefit from an increase in AD, or nominal spending?
Yes, there are political considerations, as Sumner recognizes. It’s Washington, after all. Nonetheless, it’s striking how little attention is being given to the issue of monetary policy proper and the role it played, or didn’t play, in the provoking if not causing the Great Recession. The usual suspects in economic commentary would have you believe that other issues take priority, but there are some weighty policy questions lurking, and a fair amount of it rests with decisions made (and not made) in the halls of central banking in recent years.
As we said earlier this month, “The question is less about blame and more of figuring out how to improve monetary policy going forward. Indeed, the stakes are higher than ever for the years ahead.”
Indeed, there are other perspectives, such as the Austrian view. But unless you’re looking hard and digging deep, you might think that the only stakes in new new debate over Bernanke’s nomination are political. In fact, there’s quite a bit more hanging in the balance than whether the President scores points in the next news cycle.

The three Ds are lurking, thought not necessarily in equal amounts. That’s hardly surprising, but the details are somewhat sobering, as a new McKinsey & Co. report shows: Debt and Deleveraging: The Global Credit Bubble and its Economic Consequences.
Among some of the notable points in the analysis:
• “Enabled by the globalization of banking and a period of unusually low interest rates and risk spreads, debt grew rapidly after 2000 in most mature economies. By 2008, several countries…had higher levels of debt as a percentage of GDP than the United States.”
• “Deleveraging has only just begun…”
• “…Specific sectors of five economies have the highest likelihood of deleveraging…[in the U.S., the household and commercial real estate sectors have a relatively high likelihood of deleveraging]”
• “While we cannot say for certain that deleveraging will occur today, we do know empirically that deleveraging has followed nearly every major financial crisis in the past half-century…The historic episodes of deleveraging fit into one of four archetypes:
1)…credit growth lags behind GDP growth for many years;
2) massive defaults;
3) high inflation; or
4) growing out of debt through very rapid real GDP growth caused by a war effort, a ‘peace dividend’ following war, or an oil boom.”

The media’s all a buzz with the question of whether Fed Chairman Ben Bernanke will survive the political gauntlet and be reconfirmed. The latest chatter leans toward an affirmative answer, including this overt prediction from Senate Republican Leader Mitch McConnell yesterday: “”He’s going to have bi-partisan support and I would anticipate he will be confirmed.”
At the very least, it’s hard to imagine that the majority party would inflict a political wound on their President, who’s already on the defensive in the wake of last week’s election in Massachusetts. Obama’s bona fides are being questioned left and right (politically speaking and otherwise) on matters of finance and economics. There’s a chance to repair some of the political damage on Wednesday, when the President delivers the annual State of the Union speech. “He’s got to convince the American people that [jobs are] his number-one focus,” Jason Johnson, a professor of political science at Hiram College in Ohio, tells The Hill today. Call us crazy, but opening what surely would be a hornet’s nest at this late date with questions of Bernanke replacements doesn’t look all that savvy at this juncture.

Continue reading →

The Conference Board yesterday reported that its closely watched index of leading economic indicators (LEI) was up 1.1% in December. The LEI for the U.S. “increased sharply in December, and has risen steadily for nine consecutive months,” Ataman Ozyildirim, economist at The Conference Board, said in an accompanying press release.

Continue reading →

Economist Bill Conerly brings some much-needed clarity to the task of analyzing the trend in the U.S. labor market. Yes, there’s still trouble ahead, but let’s at least be sensible when assessing the decade just passed.

BCA Research yesterday made the case for seeing emerging market stocks as “fully priced” on an earnings basis. Or, if you prefer, they’re “no longer cheap.”
It doesn’t help that the MSCI Emerging Markets Index soared last year to the upper realms of bull market records, rising nearly 80% in 2009. A chart in the January issue of The Beta Investment Report, published earlier this month, made this point in a way that only graphics can:

Is any of this related to the recent weakness in emerging market equities and related funds, such as iShares MSCI Emerging Markets (EEM)? Bloomberg News today advises that emerging-market stocks are “heading for their steepest weekly decline since October, as commodity prices dropped amid concern higher interest rates in China and proposed U.S. banking reforms will slow economic recovery.”

Continue reading →

A month ago we discussed why the dearth of loans is especially troublesome at this point in the economic cycle. The news that Fed Chairman talked today with Sen. Majority Leader Harry Reid in an effort to change the state of frozen lending isn’t exactly encouraging, even though that’s exactly the goal. “I believe more pressure needs to be applied to banks to lend money to small businesses and keep more Americans in their homes,” said Reid said after his confab with the Fed head. You can lead a horse to water, but can you beat him over the head to make him drink? Meanwhile, at the other end of Pennsylvania Ave., the White House is trying to put a lid on big banks assuming “reckless risks.” So why isn’t any one smiling yet?

There are two ways to interpret this morning’s disappointing news on jobless claims for last week. One is that the jig is up and the economy’s set for a fresh round of trouble. The other is newly minted confirmation that the post-recession recovery this time really is going to arrive in fits and starts, take longer than usual, and deliver subpar performance for an unusually long time.
We’re still in the latter camp, as we have been for some time, although critics can rightly ask: What’s the difference in these two viewpoints? At the moment, precious little. Until and if we receive more encouraging news on the labor market, and soon, the jig may in fact be up. But not yet, or at least we don’t think so.

Continue reading →

Was last year’s $787 billion fiscal stimulus too small? Or just ill-conceived? Or was it doomed to fail from the start? Or perhaps the money was spent too fast. Or too slow. At least it’ll be easier to access broadband in a few states.