TheEconomist The Fed and its discontents

The Fed and its discontents THE wake of Ben Bernanke’s media blitz, Republican lawmakers have renewed their attack on the Federal Reserve’s dual mandate for both “maximum employment” and “stable prices”. Emboldened by the tea-party movement’s auriferous fetish, Republicans Mike Pence and Bob Corker, a representative and a senator respectively, have led the charge to eliminate the Fed’s “employment” responsibility. In Mr Pence’s words, “It’s time that the Fed focus solely on price stability and the dollar.” Now, I have some sympathy with the idea that central bankers shouldn’t be treated as divine experts unfettered by rules and inoculated from democratic accountability. They make far-reaching decisions that, in part, reflect political judgments about which people can disagree. The Republicans’ line of attack, however, makes little sense. The political logic of attacking the Fed, however, is clear. Unelected elitists in Washington make for a nice villain. This is doubly true for moderate Republicans like Mr Corker who need to polish their tea-party bona fides ahead of a potential primary challenge in 2012.
Freddie Mac: 90+ Day Delinquency Rate increases in November – Freddie Mac reported that the serious delinquency rate increased to 3.85% in November from 3.82% in October. The following graph shows the Freddie Mac serious delinquency rate (loans that are "three monthly payments or more past due or in foreclosure"): Some of the rapid increase last year was probably because of foreclosure moratoriums, and from modification programs because loans in trial mods were considered delinquent until the modifications were made permanent. As modifications have become permanent, they are no longer counted as delinquent.  The increases in October and November are probably related to the new foreclosure moratoriums. The rate will probably start to decrease again in 2011.
Bill would allow Indiana cities to declare bankruptcy – A plan backed by Gov. Mitch Daniels would allow local governments in Indiana to ask for a state takeover and declare bankruptcy if necessary. Daniels says he hopes there won’t be many local governments that seek bankruptcy, but says the state needs to have the law clarified and on standby in case it happens. Republican state Sen. Ed Charbonneau of Valparaiso is sponsoring a bill to outline the procedure. His bill would allow a local government in financial trouble to ask the Indiana Distressed Unit Appeals Board to appoint an “emergency manager” to run the government. The emergency manager would have the power to cut the budget, renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring. The bill states that if the emergency manager can’t turn around the local government’s finances, the unit would be allowed to seek federal bankruptcy protection.
  • GDP Boosted by Personal Transfer Payments – Personal transfer payments are essentially a wealth transfer process from those that are well compensated to those that are less well compensated.  There are some requirements that recipients work (Earned Income Tax Credit for poverty level wage earners, for example), and that recipients have worked in the past (Social Security Retirement Benefits and unemployment benefits, for examples).  Other transfers have no work requirement at all, food stamps for example.   Whether personal transfer payments are desirable or not has been widely debated.  It is a subject for an Op Ed and will not be addressed here.  Instead we will analyze how personal transfer payments (more specifically increases in the payments) have influenced the course of The Great Recession and the recovery. We will use GDP as the measure of how personal transfer payments have influenced the economy.  Some knowledgeable readers are going to say: “Hold on!  It is well known that personal transfer payments are not included in GDP.”  That is correct, but when those payments are spent by recipients for goods and services GDP is increased.  And most personal transfer payment receipts are immediately spent on goods and services.
    Tax Cutters Set Up Tomorrow’s Fiscal Crisis: Simon Johnson – Both sides think they got something: Democrats feel this will nudge unemployment below 8.5 percent in 2012, helping the president get reelected; Republicans achieved longstanding goals on measures such as the estate tax and think they will get most of the credit for an economic recovery that’s already under way.  The truth is, the deal moved us closer to a fiscal crisis, just as the euro zone now is experiencing.  The central conceit behind official thinking about fiscal policy on both sides of the aisle is that investors will buy almost all U.S. government debt without blinking an eye or increasing Treasury yields. This is an endearing and heart- warming notion, rather like a seasonal showing of Jimmy Stewart in “It’s a Wonderful Life.”  What it should do is force us to think about how much the world has changed and how antiquated such ideas are today.
    China Cuts First-Round Rare Earth Export Quotas by 11% – China cut its rare earths export quotas by 11 percent in the first round of permits for 2011, threatening to worsen a global shortage of the minerals needed for smartphones, hybrid cars and guided missiles.  The government allotted 14,446 metric tons of rare earth exports split among 31 companies, the Ministry of Commerce said in a statement. That compares with the first round this year of 16,304 tons and the second round of 7,976 tons, according to previous ministry statements. The government usually issues two rounds of export quotas every year. China, which accounts for more than 90 percent of world supplies, slashed export quotas by 72 percent in the second half of this year, sparking a surge in prices. Japan, the biggest user, has sought alternate supplies with companies including Hitachi Metals Ltd. and Toyota Motor Corp. seeking cooperative ventures at home and abroad to secure the minerals.
    Defying the Pessimists, Holiday Sales Rebound – After a 6 percent free fall in 2008 and a 4 percent uptick last year, retail spending rose 5.5 percent in the 50 days before Christmas, exceeding even the more optimistic forecasts, according to MasterCard Advisors SpendingPulse, which tracks retail spending.  The rise was seen in just about every retail category. Apparel led the way, with an increase of 11.2 percent. Jewelry was up 8.4 percent, and luxury goods like handbags and expensive department-store clothes increased 6.7 percent. There was even a slight increase in purchases of home furniture, which had four consecutive years of declining sales. The figures include in-store and online sales, and exclude autos.
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