A widening financial crisis in Europe is threatening to put a damper on the economic recovery here and abroad just as the American economy is gathering steam.
Greece’s fiscal woes threaten the U.S. – latimes – A credit contagion that began in heavily indebted Greece spread Wednesday to Spain, whose economy is much larger than Greece’s, as Standard & Poor’s cut the Madrid government’s credit rating, just one day after slashing Athens’ bonds to "junk" status and downgrading Portugal’s debt as well. European officials pledged Wednesday to act swiftly on a hefty package of loans for Greece, but skepticism remained that Germany, the continent’s strongest economic power, would ultimately agree to the plan. Even under the rosiest scenario in which a rescue package comes through and the problem is contained, analysts say, European economic growth will slow as more countries feel pressure to raise taxes and take other tough measures to get their fiscal affairs in order. "It’ll take years of savage spending cuts, wage cuts and welfare-pension reform to eventually grow out of the debt situation,"
Obama Nominates Yellen as Fed Vice Chairman – Putting a bigger stamp on the Federal Reserve, President Barack Obama on Thursday chose Janet Yellen as vice chairwoman of the central bank and filled two other vacancies on the board, which has enormous power over Americans’ pocketbooks. His moves come as the Fed, whose decisions influence economic activity, employment and inflation, is facing political and economic challenges. The Fed is steering the economy out of the worst recession since the 1930s, and legislation to overhaul the financial system would eliminate some of the Fed’s authority while giving it new responsibilities. Some lawmakers think the Fed overstepped its authority by bailing out some big financial firms during the 2008 financial crisis.
Diamond nominated for Federal Reserve post – MIT News – MIT economist and Institute Professor Peter Diamond PhD ’63 has been nominated by U.S. President Barack Obama to serve on the Board of Governors of the Federal Reserve, the central bank of the United States. If confirmed to what would be a 14-year term, Diamond would be one of seven governors on the board. As a member of the Fed’s board, Diamond would automatically serve on the Federal Open Market Committee (FOMC), the group that influences economic activity, employment and inflation by setting key interest rates. At the moment, interest rates are low in an effort to spur lending, investment and growth following the deep recession that began in late 2007. In addition to nominating Diamond, Obama today announced he was naming two others to serve on the Federal Reserve’s central board: Janet Yellen, currently president of the Federal Reserve Bank of San Francisco (nominated to be vice chair of the Fed), and Sarah Raskin, a lawyer who is Maryland’s commissioner of financial regulation.
When We Will Get a VAT – The recent mini-boomlet for a value-added tax (VAT) that was kicked off a few weeks ago when former Federal Reserve chairman Paul Volcker indicated support for the idea is now officially over. Jackie Calmes of the New York Times quotes him this morning as dismissing the VAT for the time being. "I don’t think it’s on the political table for now or for the indefinite future, but that’s the kind of thing you have to look at," Volcker said. Since his brief comment of support on April 6, the right-wing crazies have been having a field day denouncing it. No doubt, millions of pieces of direct mail have already been dropped to raise money for an all-out war against the VAT. Thousands of little old ladies will be induced to sign over their Social Security checks for dubious campaigns against a tax that has no chance whatsoever of being enacted for many years. Since there is nothing to keep at bay, all such contributions will simply go into the pockets of executives at the organizations sponsoring these direct mail campaigns and the companies that do the mailing.
Why Environmentalists Don’t Trust Economists – I’ve written a lot here about climate change and environmental economics, trying to point out weaknesses and blind spots in the cap and trade approach. I’m aware of the political limitations, disappointed in the state of the discourse, but realizing that right now, something better isn’t possible (unless, of course, the EPA shows it’s willing to get the job done without Congress- then, that would be preferable). Today, though, 5 environmental groups said that the Senate bill simply isn’t good enough- it’s a step in the wrong direction. I think opposition to the bill from the “left” demonstrates tensions between environmental groups and economists, and I find myself quite sympathetic to the environmentalists. Environmental Economics argues that these tensions should be set aside, that environmental economists are on their side
All for One Tax and One Tax for All? – Rogoff – Recently, the IMF proposed a new global tax on financial institutions loosely in proportion to their size, as well as a tax on banks’ profits and bonuses.The Fund’s proposal has been greeted with predictable disdain and derision by the financial industry. More interesting and significant are the mixed reviews from G-20 presidents and finance ministers. Governments at the epicenter of the recent financial crisis, especially the United States and the United Kingdom, are downright enthusiastic, particularly about the tax on size. Countries that did not experience recent bank meltdowns, such as Canada, Australia, China, Brazil, and India, are unenthusiastic. Why should they change systems that proved so resilient? But the IMF’s big-picture diagnosis of the problem gets a lot right. Financial systems are bloated by implicit taxpayer guarantees, which allow banks, particularly large ones, to borrow money at interest rates that do not fully reflect the risks they take in search of outsized profits. Since that risk is then passed on to taxpayers, imposing taxes on financial firms in proportion to their borrowing is a simple way to ensure fairness.
Consumer credit: More than meets the eye – Atlanta Fed blog – A lot has been made (here, for a recent example) of the idea that banks have shown a surprising amount of reluctance to extend credit and to start making loans again. Indeed, the Fed’s consumer credit report, which shows the aggregate amount of credit extended to individuals (excluding loans secured by real estate), has been on a steady downward trend since the fall of 2008. Importantly, that report also provides a breakdown that shows how much credit the different types of institutions hold on their books. Commercial banks, which are the single largest category, accounted for about a third of the total stock in consumer credit in 2009. The two other largest categories—finance companies and securitized assets—accounted for a combined 45 percent. While commercial banks have been the biggest source of credit, they have not been the biggest direct source of the decline.
U.S. Households Lost $100,000 From Crisis, Study Says (Bloomberg) — The financial crisis and recession cost U.S. households an average of about $100,000 in lost wealth and income, according to a study by former Treasury Department economist Phillip Swagel. From June 2008 through March 2009, households’ stock holdings fell $66,000 and real estate dropped $30,000, according to the study released today by the Pew Economic Policy Group. Each household also lost an average $5,800 from unemployment and lower earnings from September 2008 through December 2009, the study said. While stocks have rebounded this year, the fallout from the crisis was broader than the price of the government’s $700 billion bank rescue or $787 billion economic stimulus package, the study said. Swagel said the losses probably won’t be recouped until 2011 at the earliest.
Big business pleads for loopholes in financial regulation – Here’s a simple explanation for the financial crisis: Too much cheap credit was extended to households, businesses and even sovereign governments that couldn’t afford to carry that debt or pay it back. The obvious implication is that, going forward, credit and other financial risks should be made more expensive and harder to get. Now, however, as we close in on the endgame for financial regulatory reform legislation, special interests are crawling out of the political woodwork demanding loopholes and exemptions. And if you strip away their end-of-the-world-as-we-know-it rhetoric, their basic complaint is that the reform bill would make credit and other financial risks more expensive and harder to get — in other words, the bill is doing exactly what it is supposed to.
Banks Bailed Out By American Taxpayers Are Paying Us Back By Shorting Our States and Cities – Americans bailed out the giant banks. So how do the too big to fails re-pay the American taxpayers? By betting that American states and cities will fail. As the Wall Street Journal notes: As U.S. cities and towns wrestle with financial problems, investors are finding a new way to profit on their misery: by buying derivatives that essentially bet municipalities will default.These so-called credit default swaps are basically insurance contracts that have long been available to protect holders of corporate bonds against default. They became available a few years ago for municipal debt, allowing investors to short sell—or bet against—countless cities, towns and bridges, and more than a dozen states, including California, Michigan and New York.
Police Cuts Spark a Debate on Public Safety – WSJ– In New York, Mayor Michael Bloomberg recently vowed not to lay off cops, but tight budgets have slowed hiring so much that the force is down about 12% from 2000, with more attrition expected. Some violent crimes, including homicides, are on the rise. Paul Browne, a deputy police commissioner, says the department has kept a lid on problems by flooding high-crime areas with cops on foot patrol who practice community policing, such as checking in with merchants and pastors. Mr. Browne said the department is committed to such programs but acknowledges that "it’s getting harder" to devote enough resources.
Goldman Sachs adds to its ranks of lobbyists – Over the past two years, as it emerged from the financial crisis with a reinforced image as Wall Street’s top bank but also the No. 1 target of public ire, Goldman has built up a 12-person government affairs office in Washington to help the firm get its message to legislators and regulators. The team has gotten down in the trenches with the other large banks, meeting multiple times in recent months with members of key House and Senate committees working on the regulatory overhaul. Earlier this month, for example, Goldman sent executives from New York to Washington, where they accompanied the firm’s lobbyists to a meeting with the staff of Sen. Blanche Lincoln (D-Ark.), chairman of the Senate Agricultural Committee and author of a proposal that would force banks to spin off their lucrative derivatives-trading desks.
Prosecutors Said to Start Inquiry at Goldman – NYTimes – Federal prosecutors have opened an investigation into trading at Goldman Sachs, raising the possibility of criminal charges against the Wall Street giant, according to people familiar with the matter. While the investigation is still in a preliminary stage, the move could escalate the legal troubles swirling around Goldman. The Securities and Exchange Commission, which two weeks ago filed a civil fraud suit against Goldman, referred its investigation to prosecutors for the Southern District of New York, which has now opened its own inquiry. Goldman has vigorously denied the accusations by the S.E.C., which accused Goldman of defrauding investors involved a complex mortgage deal known as Abacus 2007-AC1.