ZIRP and ZMP – Krugman – From my point of view, the current slump is just about what we should have expected given that we had a nasty financial crisis and continue to have a lot of over-leveraged players in the system. Ken Rogoff once said that the United States is having a “garden-variety severe financial crisis” — indeed, anyone who read Reinhart and Rogoff on the aftermath of crises more or less expected a prolonged period of weak employment. And I’ve been warning about a protracted liquidity trap, in which even a zero interest rate policy (ZIRP) isn’t enough to raise demand sufficiently, for more than a decade. And yet a number of economists seem determined to find some kind of supply-side explanation for low employment. Via Scott Sumner, I see that Tyler Cowen has been suggesting that workers are unemployed because there’s literally nothing they can do — that they have a zero marginal product. I also gather that this is what the Austrians are saying these days. So, is ZMP a plausible alternative to ZIRP?
The table above itemizes the particular postwar events that are reviewed in detail in my paper. The paper also provides the following summary discussion:
Global Warming and Cold Winters – If you were to look out most windows as of this writing, there is a good chance that you would be presented with an image of winter. And more than a few of you might be asking yourself, "What happened to global warming?" Well, the effects of global warming are all around us. That harsh winter that we are experiencing, it is not proof that global warming is not happening, but rather serves as proof that it is indeed happening, and even a bit faster than we might like to think. It also shows why the phrase "Climate Change" is a better term to describe the effects of man on his environment. But how does a colder winter support the idea of a warming earth? It’s really simple when you look at the evidence.
Chile protests turn deadly as Latin America buckles under rising energy prices – The world’s southernmost city, with a population of 110,000, remained largely paralyzed today by a general strike as local residents and elected officials demand that the national government maintain subsidies on natural gas, which is widely used in the region to power vehicles, heat homes, and provide energy for businesses. The protests are the latest in a wave of anger in Latin America as governments attempt to reconcile budgets with energy prices, which have climbed to levels not seen since the record highs of 2008. Close on Bolivia’s heels Just two weeks ago, Bolivian demonstrators took to the streets in the week between Christmas and New Year’s to protest against President Evo Morales’ plan to reduce subsidies for gasoline and diesel. Mr. Morales ultimately reversed his decision and reinstated subsidies on oil and gas.
The Fed No Longer Even Denies that the Purpose of Its Latest Blast of Bond Purchases … Is To Drive Up Wall Street – The stated purpose of quantitative easing was to drive down interest rates on U.S. treasury bonds. But as U.S. News and World Reported noted last month: the Fed is purchasing $600 billion in treasuries in hopes that it will push interest rates even lower, spur lending, and help jump-start the economy…. a funny thing has happened. Treasury yields have actually risen since the Fed’s announcement. The following charts from Doug Short update this trend: Click for a larger image Of course, rather than admit that the Fed is failing at driving down rates, rising rates are now being heralded as a sign of success. As the New York Times reported Monday: The trouble is [rates] they have risen since it was formally announced in November, leaving many in the markets puzzled about the value of the Fed’s bond-buying program.. “Rates have risen for the reasons we were hoping for: investors are more optimistic about the recovery,” said Mr. Sack. “It is a good sign.” Last November, after it started to become apparent that rates were moving in the wrong direction, Bernanke pulled a bait-and-switch, defending quantitative easing on other grounds:
Petroleum-based products are part of life – The real issue that needs to be explored is how much your life is surrounded by products made of petroleum. Oil often goes overseas to manufacturing facilities that realign and reshape the molecules of crude oil to create synthetics and polymers (nylon, polyester, Styrofoam, plastics, etc.) used in the everyday items we need. Even a car, which we often only see in terms of gasoline consumption and MPGs, is designed using plastics and synthetics for the bumpers, interiors, radio units and so on. Entire corporations are being built on oil but not in the conventional sense of ExxonMobil or BP. The technology industry’s blossoming success over the past two decades is not just due to its innovative creations. It’s due to its ability to realign carbon molecules from crude oil and petroleum into the alkenes and plastics that become the exterior to an Apple iPhone or the silicon-based motherboard of a Dell Inspiron PC
Industrial output is up by 5.9 per cent year-on-year. Yet the labor market is still "eh." Here is more, but again note it is wrong to reject the AD factor altogether, though it seems to be becoming less relevant over time. Arguably AD and AS are interacting in unusual and presumably deleterious ways. I have read too many blog posts attacking a caricatured version of either RBC theory or a narrowly defined notion of "structural unemployment" which requires excess demand for labor in significant parts of the economy. As Arnold Kling points out, the labor market shock can be asymmetric in its effects. From a different direction, here is Scott Sumner criticizing the recalculation argument.
Citigroup Was On The Verge Of Failure, New Report Finds; Rescue Was Based On ‘Gut Instinct’ – Citigroup, the nation’s third-largest bank by assets, was on the verge of being closed by regulators the week of Nov. 24, 2008 as depositors rapidly withdrew money and the bank’s counterparties declined to provide it credit, according to a government report released Thursday. The new findings shed light on the degree to which Citigroup, the financial services behemoth with a long history of finding itself in trouble and receiving government support, was actually in danger of failing during the fall of 2008. Until now, few were aware that Citi was perilously close to being shut down. "We were on the verge of having to close this institution because it can’t meet its liquidity Monday morning," said Sheila Bair, chairman of the Federal Deposit Insurance Corporation, during a meeting the previous Sunday night, according to the report by the Special Inspector General for the Troubled Asset Relief Program.
EPA Blasted as It Revokes Mine’s Permit – WSJ – The Environmental Protection Agency, in an unusual move, revoked a key permit for one of the largest proposed mountaintop-removal coal-mining projects in Appalachia, drawing cheers from environmentalists and protests from business groups worried their projects could be next. The decision to revoke the permit for Arch Coal Inc.’s Spruce Mine No. 1 in West Virginia’s rural Logan County marks the first time the EPA has withdrawn a water permit for a mining project that had previously been issued. The EPA said Thursday it revoked the permit, issued by the Army Corps of Engineers in 2007, because it concluded new scientific research on mountaintop-removal mining since then indicated the potential harm to streams and watershed areas surrounding the Spruce project could be significant. A spokeswoman for Arch said the company was "shocked and dismayed" by the agency’s decision, which it said would block an additional $250 million investment that would create 250 jobs. The company said it would appeal to the courts.
Norway’s $186 Billion Gas Loss to Cement Russian Grip on Supply – Europe may face a shortfall of Norwegian natural gas as soon as 2015 after the country slashed its estimate for undiscovered resources because of a dearth of discoveries from companies such as Royal Dutch Shell Plc. Europe’s second-largest supplier yesterday cut its estimate for gas yet to be discovered by 31 percent, or 570 billion cubic meters. That’s equal to more than five years of production at current rates and would be valued at about $186 billion based on today’s prices at the U.K’s trading hub. “This will rack up the pressure on the European Union to develop and secure access to reliable energy,” “The EU will be forced to increase imports from the Middle East and Africa to compensate for and reduce Russia’s domination.”
A defense of a working program — Meet the Press David Gregory brings up Social Security in relation to federal debt (this is the push), but Senator Reid responds at least forthrightly. This is noteworthy given the apparent acceptance by politicos that Social Security needs fixing at all. Here is part of the transcript:
MR. GREGORY: Social Security, how does it have to change? What they put on the agenda is raising the retirement age, maybe means testing benefits. Is it time for Social Security to fundamentally change if you’re going to deal with the debt problem?
SEN. REID: One of the things that always troubles me is, when we start talking about the debt, the first thing people do is run to Social Security. Social Security is a program that works, and it’s going to be–it’s fully funded for the next 40 years. Stop picking on Social Security. There are a lot places we can go to…
MR. GREGORY: Senator, you’re really saying the arithmetic on Social Security works?
SEN. REID: I’m saying the arithmetic on Social Security works. I have no doubt it does. Social Security is fine.
Progress on Overhaul of Corporate-Tax Rules– Top financial executives from several big U.S. companies endorsed the idea of revamping corporate-tax rules following a Friday meeting with Treasury Secretary Timothy Geithner. The session produced no specific breakthrough, signaling many more meetings ahead on the Obama administration’s efforts to overhaul corporate taxes. Still, executives described the discussion as productive. Much of it focused on the administration’s aim to overhaul corporate taxes in a way that doesn’t add to the budget deficit—a goal known as "revenue neutrality." Some business executives at the meeting suggested a more lenient standard that could add somewhat to future budget deficits, but also would allow them to keep some existing tax breaks, according to industry officials with knowledge of the situation.
China Lawmaker Says Yuan Appreciation Won’t Help Ease Inflation - A senior Chinese lawmaker on Saturday said he opposed yuan appreciation and said the rise in the yuan’s value won’t help the country to curb inflation. "China should keep the yuan stable, and the yuan shouldn’t appreciate," He Keng, deputy director of the financial and economic-affairs committee of the National People’s Congress, told a forum in Beijing. He also said it isn’t bad for a country to hold a large amount of foreign-exchange reserves. His comments are in stark contrast to the universal opinion held by economists and U.S. politicians that a fast rise in the yuan will help China to curb the country’s burgeoning inflation.
Banks Loosen Purse Strings – U.S. banks are expanding their loans to consumers for the first time since the credit crisis erupted, as lending standards begin to loosen and demand for new loans edges higher.J.P. Morgan Chase & Co., which Friday posted a 47% profit jump for its fourth quarter, said its total loans increased 6% since the end of September. While most of the loan growth came from loans to businesses, the nation’s No. 2 bank by assets said total credit-card balances rose for the first time in two years. Consumers were more willing to pull out their plastic. Credit-card usage was up 10% year-over-year. The bank issued 3.4 million new credit cards in the fourth quarter, up 4% from the same period a year earlier. "We see the consumer is getting stronger," said J.P. Morgan Chairman James Dimon. He added that many Americans are still saving and paying down their debts, which he said will make them better borrowers.
Copper Deficit May be 600,000 Tons, JPMorgan Says — The world refined copper market is expected to have a 500,000-metric-ton to 600,000-ton deficit in 2011, even with a significantly weaker demand scenario, according to JPMorgan Securities Ltd. Disruptions last year seemed to have wiped out most of mine supply growth, “As demand further recovers into 2011, supply-side issues will become more influential,” he said. Copper for delivery in three months in London advanced to a record of $9,754 a metric ton on Jan. 4 after rising 30 percent last year as the improving global economy and rising investment demand for commodities prompted buying. The International Copper Study Group is expecting a 435,000-ton global deficit in the refined metal this year. While current prices are sufficient to encourage brownfield and greenfield developments, longstanding issues, including capital availability, relative merit of projects, resource nationalism, and geotechnical issues, remain key impediments for supply increase, said Jansen.
Does a Bad Job Market Lead to More Discrimination? – As I noted in an article today, discrimination charges filed with the Equal Employment Opportunity Commission jumped last year, reaching a record high of 99,922. As you can see, there was also a bump in discrimination claims after the 2001 recession. That increase and the increase last year could largely be explained by cyclical factors: many of the people who once might have been reluctant to accuse a company of prejudice because they feared retaliation have now been laid off and therefore have less to lose from filing a claim. Additionally, and perhaps more importantly, many people may be claiming discrimination precisely because they are out of a job — that is, they may believe they were improperly targeted for layoff based on their age, sex, race, etc.
How to Fix Mortgage Mess in Three Steps – Much of these toxic assets, as well as many of Fannie and Freddie’s prime mortgages, aren’t performing or will likely default. Nationwide, 8 million mortgages — or one in 10 — are under water, with the property’s value at least 25 percent below what’s owed. We need a new limited-purpose mortgage system, which confines banks and other mortgage makers to doing just one thing — connecting lenders with borrowers, not leveraging the taxpayer. And we need the government to directly oversee the mortgage initiation process, organize a competitive market in home loans, and fully disclose all the details of mortgages on the Web so investors in these loans will know what they are buying.
Step 1: Set up a new government agency — the Federal Financial Authority. The FFA would hire companies to verify, rate, appraise and disclose mortgage applications. These contractors would work exclusively for the FFA, eliminating any conflict of interest. Liar loans and no-doc loans would be history.
Step 2: Limit buyers of home loans to doing so only through closed-end mortgage mutual funds. If a fund manager chooses poor mortgages, the value of his fund’s shares will fall, but the fund itself won’t go broke. Mortgage defaults will never again lead to financial-sector collapse.
Step 3: Establish an electronic mortgage auction and require mutual funds to purchase loans at this market so borrowers receive the best price (lowest interest rate).