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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David Champion of the Harvard Business Review is unimpressed with the Obama administration’s proposal on banking reform. In fact, he’s downright dismissive:
“The Obama reform… seems to be neither radical nor particularly useful, except perhaps as political theater,” Champion writes.
Of course, that’s far from the consensus view, at least when surveying the movers and shakers. Britain’s central banker Mervyn King seems to be in favor of Obama’s plan. Ditto for OECD’s secretary general.
Meanwhile, a pair of finance professors from NYU weigh in and offer support, with some caveats: “On balance, President Obama’s plans – a fee against systemic risk and scope restrictions – seem to be a step in the right direction from the standpoint of addressing systemic risk, if their implementation is taken to logical conclusions.”
But this is all beside the point for the moment. What will the reform really look like once it runs through the political sausage grinder? Meantime, one might wonder if the core of the alleged solution–separating conventional banking from the trading-oriented aspects of financial institutions–is a touch misguided. It certainly plays well as headline material. But wasn’t the real problem one of poorly designed loans? In that case, what do proprietary trading desks at investment banks have to do with any of this? Is it really the case that if we separate prop desks from banks the odds of another real estate buying frenzy will be diminished? Or might there be other factors to consider? Such as extraordinarily low interest rates?

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.

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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.”