San Francisco Federal Reserve Bank President Janet Yellin is Obama's nominee for Vice Chair of the Federal Reserve Bank. Why this policy dove may be a perfect short term answer, and a long term disaster.
Mission
The primary role of the Fed is the pursuit of maximum employment and price stability. Sounds simple.
It's anything but.
I. Maximum Employment
To pursue the goal of full employment, the Fed must make business conditions favorable to hiring. That means that businesses must be able to borrow easily, expand and hire employees to facilitate such growth. As you know, banks must keep a certain amount of their deposits with their local branch of the Federal Reserve Bank in order to have sufficient liquidity to prevent panics that contributed to the Great Depression. When short term interest rates are low, banks can more freely lend to businesses because they don't have to keep as close an eye on their cash reserves. Money's cheap.
When rates rise, banks keep a tighter rein on lending by strengthening borrowing standards. It's harder to get a loan, business expansion slows and jobs are harder to get.
Why not have a continuing policy of low interest rates?
II. Price Stability
Price stability is another way of saying low inflation. Inflation is the amount prices go up every year. Anyone who lived through the 1970s remembers that prices rose much faster than wages. Every year our same dollars bought less and less.
When inflation takes hold, it's hard to stop. People want more money to afford what they could afford last year. If they get raises, however, their businesses have to raise prices to cover higher payroll costs, so costs rise. A vicious circle ensues, where labor wants raises and businesses want higher prices. What stops the circle? A recession, when businesses lay off workers and can contain prices. The higher inflation, the more prolonged the recession.
The problem is, during the recession, the Fed is pressured to lower interest rates to stimulate the economy. But, r
Once inflation takes hold, it's very hard to stop.
A Dovish Policymaker
Janet Yellin is described as an inflation "dove." That means that her decisions have been "growth and employment" oriented and less focused on containment of inflation. You may think, that with unemployment rates hovering in the double-digits, this is just what we need. Certainly, that political opinion would be currently popular. But, would it be a good long term policy?
Deficits and Inflation
No reputable economist of whom I'm aware would not have advised deficit spending to stimulate the economy during the last recession. It was a necessary evil that prevented the country from likely sinking into a Depression. But historically, the relationship between deficit spending and inflation is problematic.
Generally, when government borrowing increases, the amount of funds that remains for businesses and individuals to borrow decreases, and the competition for these fewer dollars causes rates to increase.
So-called inflation "doves," who generally advise keeping rates low, can accommodate both government and business lending only by printing more money for the government to buy its own debt, causing the money supply to expand and debt to contract.
Expanding the money supply is inflationary. Instead of raising taxes to pay its debt, printing more money makes the dollar less valuable. The cost of everything goes up when your dollar is worth less.
The Federal Reserve Board of Governors
At its last meeting, only one Fed governor, that of St. Louis, voted against keeping interest rates low. The majority (11 members) voted to keep rates low because their perception that the risk of sinking back into recession was more significant than the threat of inflation. Dr. Bernanke, current Fed chairman, is considered one of the premier scholars of the Great Depression. One significant factor in its length is thought to be insufficient economic stimulus. It is a mistake about which Bernanke argues eloquently, and apparently the majority of the board agrees.
With a propensity of more dovish members, however, it is of some concern that one who has been one of the most consistent would be considered as the Vice Chair. Generally, upon the retirement or failure to reappoint the Chair, the Vice Chair is likely to assume this influential post.
At a time when deficit spending is so high, the national debt is ballooning and the nation only recently stepped back from the brink of Depression, is it wise to choose a member who is so dovish about inflation that she stated last February, "If it were possible to take interest rates into negative territory I would be voting for that."?
Perhaps a candidate with a more balanced approach to the Fed's dual mandate would be a more reasonable decision.
Showing posts with label recession. Show all posts
Showing posts with label recession. Show all posts
Tuesday, March 23, 2010
Monday, January 18, 2010
Farewell, Banker Welfare
US women seem to have an innate sense of fairness. Whether it is because of nature or nurture, even with our more liberated world position, it is women who empathize with the plight of those who have had seemingly insurmountable obstacles in their lives, and we endeavor to help them to help themselves. Our maternal instincts appear to apply to more than our offspring.
Mothers, however, are more than nurturers. They also prepare their children to be self-sufficient, self-reliant members of society, and that requires more than giving. It also requires knowing when to practice "tough love," knowing when not giving is appropriate.
During the early years of the Clinton Administration, most US women supported welfare reform, after seeing that government spending toward our poor sisters seemed to have the effect of a pattern of generational poverty from which it was nearly impossible to extricate themselves. Paying for the opportunity for self-sufficiency was a more effective solution than an endless number of monthly checks that stubbornly kept women at the poverty level.
We've spoken often about the causes of the latest recession, which could have easily been a depression, had governments not doled out dollars that paled against those paid for welfare during the 1980s and 1990s. For our investment, we avoided a certain economic meltdown, but for the 16% who are unemployed and looking for jobs, the resentment for that deal could not be higher, particularly when the bonuses paid to bankers, some of whom were the direct cause of the melt-down, have never been higher.
It is instructive to not only examine the root of this anger, but also, like the angry middle-class in the 1980s that paid the cost of welfare, look to a long term solution.
Changing welfare from an incentive NOT to work to an incentive to work reformed the system to one that both provided a safety net for those who were truly in need and an incentive for those who could better themselves to do so. What such incentive have we given for bankers who lowered lending standards, then sliced up, securitized risk and sold it throughout the world NOT to take inordinate levels of risk again?
None. Not one piece of financial reform legislation has passed. Bonuses based on short term profits, largely made by merely buying long term US debt we created to save them with the money we gave them, continue largely unabated.
Our bankers are the urban poor of twenty years past, incented to do the wrong thing by the money we pay them.
It's time to show some tough love to our bankers, and pressure our lawmakers to pass meaningful financial reform that incents long term capital growth over high risk short term behavior.
An email to your legislators is an excellent place to start.
Mothers, however, are more than nurturers. They also prepare their children to be self-sufficient, self-reliant members of society, and that requires more than giving. It also requires knowing when to practice "tough love," knowing when not giving is appropriate.
During the early years of the Clinton Administration, most US women supported welfare reform, after seeing that government spending toward our poor sisters seemed to have the effect of a pattern of generational poverty from which it was nearly impossible to extricate themselves. Paying for the opportunity for self-sufficiency was a more effective solution than an endless number of monthly checks that stubbornly kept women at the poverty level.
We've spoken often about the causes of the latest recession, which could have easily been a depression, had governments not doled out dollars that paled against those paid for welfare during the 1980s and 1990s. For our investment, we avoided a certain economic meltdown, but for the 16% who are unemployed and looking for jobs, the resentment for that deal could not be higher, particularly when the bonuses paid to bankers, some of whom were the direct cause of the melt-down, have never been higher.
It is instructive to not only examine the root of this anger, but also, like the angry middle-class in the 1980s that paid the cost of welfare, look to a long term solution.
Changing welfare from an incentive NOT to work to an incentive to work reformed the system to one that both provided a safety net for those who were truly in need and an incentive for those who could better themselves to do so. What such incentive have we given for bankers who lowered lending standards, then sliced up, securitized risk and sold it throughout the world NOT to take inordinate levels of risk again?
None. Not one piece of financial reform legislation has passed. Bonuses based on short term profits, largely made by merely buying long term US debt we created to save them with the money we gave them, continue largely unabated.
Our bankers are the urban poor of twenty years past, incented to do the wrong thing by the money we pay them.
It's time to show some tough love to our bankers, and pressure our lawmakers to pass meaningful financial reform that incents long term capital growth over high risk short term behavior.
An email to your legislators is an excellent place to start.
Wednesday, August 19, 2009
Late Summer Economy
Summer is generally a time when capital markets languish, brokers vacation in the Hamptons, and there is little economic news. That is not the case in the Summer of 2009.
A fierce battle is being fought between the economic interests of those who have monetized health care - the pharmaceutical companies, the health insurers and health care providers like doctors and nurses - and millions of Americans who are teetering on the edge of economic insolvency because of our country's unsustainable rise in the cost of health care. The stakes are undeniably high, as are the emotions of those who argue both sides of the issue.
On one thing we can all agree. To fail to address this issue is to destroy the long term health of our economy.
In addition to that issue, however, we are also emerging from the worst recession since the Great Depression. Because financial markets ceased to function at the end of last year, an enormous amount of money was provided to commercial banks (and investment banks who changed their charters to avail themselves of this money) in order to prevent a financial disaster. This disaster was caused by securitizing and selling the risk of poorly underwritten mortgages, and the sales - and disastrous effects - were worldwide.
This problem began in the late 1990s, with the dissolution of the Glass-Steagall Act, that separated commercial and investment banking. It appears that we expect, however, that this decade long problem-in-the-making is solved immediately.
"What is taking so long?" is the predominant economic question.
We have, apparently, become a nation convinced that there are simple, quick solutions to everything.
We continue to face declines in manufacturing, rising unemployment, plummeting housing prices and a distinct lack of consumer confidence. On the bright side, inflation is almost non-existent, interest rates are at decade lows, and capital markets show unmistakable signs of predicting an end to our recession. We are working on financial reform and the excesses of the past seem, at least for the present, to have subsided.
It's a mixed bag. We will not suddenly pop out of this quagmire in a month or two. That is clear.
It is also clear that we will politicize economic issues. We will criticize the Economic Team, point to rising deficits, scream about banker's bonuses and wonder why we're not back to normal seven months from the inauguration of the new administration.
Yet, not one of these issues is directly relevant.
Rising deficits? Yes. Was there an alternative to a huge cash infusion into the economy? No.
Banker's bonuses? Yes. Are they a significant percentage of the "bailout money?" No.
What, then, should we be discussing?
A fierce battle is being fought between the economic interests of those who have monetized health care - the pharmaceutical companies, the health insurers and health care providers like doctors and nurses - and millions of Americans who are teetering on the edge of economic insolvency because of our country's unsustainable rise in the cost of health care. The stakes are undeniably high, as are the emotions of those who argue both sides of the issue.
On one thing we can all agree. To fail to address this issue is to destroy the long term health of our economy.
In addition to that issue, however, we are also emerging from the worst recession since the Great Depression. Because financial markets ceased to function at the end of last year, an enormous amount of money was provided to commercial banks (and investment banks who changed their charters to avail themselves of this money) in order to prevent a financial disaster. This disaster was caused by securitizing and selling the risk of poorly underwritten mortgages, and the sales - and disastrous effects - were worldwide.
This problem began in the late 1990s, with the dissolution of the Glass-Steagall Act, that separated commercial and investment banking. It appears that we expect, however, that this decade long problem-in-the-making is solved immediately.
"What is taking so long?" is the predominant economic question.
We have, apparently, become a nation convinced that there are simple, quick solutions to everything.
We continue to face declines in manufacturing, rising unemployment, plummeting housing prices and a distinct lack of consumer confidence. On the bright side, inflation is almost non-existent, interest rates are at decade lows, and capital markets show unmistakable signs of predicting an end to our recession. We are working on financial reform and the excesses of the past seem, at least for the present, to have subsided.
It's a mixed bag. We will not suddenly pop out of this quagmire in a month or two. That is clear.
It is also clear that we will politicize economic issues. We will criticize the Economic Team, point to rising deficits, scream about banker's bonuses and wonder why we're not back to normal seven months from the inauguration of the new administration.
Yet, not one of these issues is directly relevant.
Rising deficits? Yes. Was there an alternative to a huge cash infusion into the economy? No.
Banker's bonuses? Yes. Are they a significant percentage of the "bailout money?" No.
What, then, should we be discussing?
- Financial Regulation - Plug up the holes that caused excesses without unduly burdening the financial system
- Long Term Employment Growth Policy - Some jobs, including much manufacturing, are gone forever. Reeducating the work force for long term employment is vital
- Deficit Reduction and National Debt Repayment - Once we've stabilized the economy and gotten back to work (in about a year), we need to raise taxes. Yes, we all need to pay more taxes to reduce the current deficit and repay the national debt. It is as big a security issue as reliance on foreign oil.
There you have it. It's not a pretty story, but at least we're talking about the real issues.
As always, your comments are most welcome.
Tuesday, July 14, 2009
Unemployment - A Commentary
The previous article is one that provides data with respect to the current unemployment situation as compared with previous economic cycles and in previous Presidential administrations from Truman to date. This is my personal opinion about that data, and a response to criticisms regarding the adequacy of the stimulus program signed on February 17, 2009 to address the unemployment problem.
As stated previously, 10% of the stimulus money has been spent. Asking whether the program is successful at this point is analogous to asking whether your outfit is appropriate after having put on your panties. There is not sufficient information available to answer the question. If the administration is correct in its allegation that, by early August, 500,000 jobs will have been created or saved by the $75 billion spent thus far, job losses will be 2 million instead of 2.5 million. 10% of the stimulus will have improved job losses by 20%.
Some allege that the fact that the unemployment rate is at 9.5% shows that the stimulus program is a failure. Data show that to be false, based solely on the fact that unemployment rates are well within historical parameters of previous recessions. Further, in the recession ended November, 1982, unemployment averaged 9.8% for a full year after the recession ended. It is, as has been said by countless pundits, a lagging indicator.
Others say that stimulus money could have been put to better use by lowering business taxes. It is true that the US has on of the highest business tax in the world, second only to Japan. Those who hold this opinion feel that lowering business taxes would result in immediate hiring. History shows that opinion to be false.
In reviewing hiring behavior in prior recessions, data show that businesses rely upon increasing productivity of existing staff as the business cycle improves, delaying the necessity to add new staff until the cycle is well past recessionary levels. Consequently, it would be more likely that businesses would use tax savings for other purposes.
While the success of the stimulus package is certainly not a given at this point, those who suggest that there is sufficient data to opine that it is a failure are relying upon 10% of its expenditures and five months in order to draw this conclusion. Further, those who believe that the funds would better serve the unemployment situation with lowering business taxes are at odds with historic recessionary hiring trends.
As stated previously, 10% of the stimulus money has been spent. Asking whether the program is successful at this point is analogous to asking whether your outfit is appropriate after having put on your panties. There is not sufficient information available to answer the question. If the administration is correct in its allegation that, by early August, 500,000 jobs will have been created or saved by the $75 billion spent thus far, job losses will be 2 million instead of 2.5 million. 10% of the stimulus will have improved job losses by 20%.
Some allege that the fact that the unemployment rate is at 9.5% shows that the stimulus program is a failure. Data show that to be false, based solely on the fact that unemployment rates are well within historical parameters of previous recessions. Further, in the recession ended November, 1982, unemployment averaged 9.8% for a full year after the recession ended. It is, as has been said by countless pundits, a lagging indicator.
Others say that stimulus money could have been put to better use by lowering business taxes. It is true that the US has on of the highest business tax in the world, second only to Japan. Those who hold this opinion feel that lowering business taxes would result in immediate hiring. History shows that opinion to be false.
In reviewing hiring behavior in prior recessions, data show that businesses rely upon increasing productivity of existing staff as the business cycle improves, delaying the necessity to add new staff until the cycle is well past recessionary levels. Consequently, it would be more likely that businesses would use tax savings for other purposes.
While the success of the stimulus package is certainly not a given at this point, those who suggest that there is sufficient data to opine that it is a failure are relying upon 10% of its expenditures and five months in order to draw this conclusion. Further, those who believe that the funds would better serve the unemployment situation with lowering business taxes are at odds with historic recessionary hiring trends.
Monday, July 13, 2009
Unemployment
The latest "doom and gloom" prediction is centered around the unemployment rate.
Misery Index
The Misery Index consists of adding the unemployment rate to the rate of inflation, or the percentage of those out of work plus the percetage by which prices are rising.
Historically, the misery index has been
Misery Index
The Misery Index consists of adding the unemployment rate to the rate of inflation, or the percentage of those out of work plus the percetage by which prices are rising.
Historically, the misery index has been
- Truman Administration (1948 - 1952) Average 7.88 (High 13.63, Low 3.45)
- Eisenhower Administration (1953 - 1960) Average 6.26 (High 10.98, Low 2.97)
- Kennedy Administration (1961 - 1962) Average 7.14 (High 8.38, Low 6.40)
- Johnson Administration (1963 -1968) Average 6.77 (High 8.19, Low 5.70)
- Nixon Administration (1969 - 1973) Average 10.57 (High 13.61, Low 7.80)
- Ford Administration (1974 - 1976) Average 14.93 (High 19.90, Low 12.66)
- Carter Administration (1977 - 1980) Average 20.27 (High 21.98, Low 12.60)
- Reagan Administration (1981 - 1988) Average 11.19 (High 19.33, Low 7.70)
- Bush I Administration (1989 - 1992) Average 9.68 (High 12.47, Low 9.64)
- Clinton Administration (1993 - 2000) Average 8.80 (High 10.56, Low 5.74)
- Bush II Administration (2001 - 2008) Average 8.10 (High 11.47, Low 5.71)
The time weighted average Misery Index since 1948 is 9.64. The current Misery Index is 9.8: Unemployment is 9.5, and Inflation is .3. To put this into perspective, we are now 1.6% higher than the average since 1948.
Unemployment Rate
Some economic theorists have used the unemployment rate to justify their opinion that- The stimulus package isn't working
- There should be another stimulus package, i.e., the stimulus package wasn't sufficient
Let's take a look at that hypothesis.
Of the $787 billion dollar stimulus package, approximately $75 billion, or about 10%, has been paid out. The Obama administration estimates that the stimulus package will have helped create (or save) 500,000 jobs in the two hundred day period from signing the bill February 17 to early August. 10% of the stimulus package will therefore have improved the number jobs lost by 20%. In other words, without the stimulus package, the jobs lost in the two hundred days since the stimulus package was in effect would have been 2.5 million instead of 2 million.
The Obama administration believes the government will ultimately meet its spending targets, increasing spending toward the end of the year as states fund their projects. Ultimately, the measurement of success is whether the economy improves, and, as shown below, it may be too early to make that judgment.
To use consistent time measurements, since 1948 there have been eleven recessions. Let's look at each, and the accompanying rate of unemployment.
Nov. 1948 - October, 1949 (11 months) - Average unemployment rate 10.69%
July 1953 - May, 1954 (10 months) - Average unemployment rate 4.43%
Aug., 1957 - April, 1958 (8 months) - Average unemployment rate 5.69%
April, 1960 - Feb., 1961 (10 months) - Average unemployment rate 5.94%
Dec. 1969 - Nov.,1970 (11 months) - Average unemployment rate 4.88%
Nov. 1973 - Mar. 1975 (16 months) - Average unemployment rate 6.09%
Jan. 1980 - July 1980 (6 months) - Average unemployment rate 7.07%
Jul.,1981 - Nov. 1982 (16 months) - Average unemployment rate 9.09%
Jul, 1990 - Mar. 1991 (8 months) - Average unemployment rate 6.225%
Mar. 2001 - Nov. 2001 (8 months) - Average unemployment rate 4.813%
Dec. 2007 - Jun. 2009 (18 months) Average unemployment rate 6.76%
(Note: Data are not available for July. Most economists opine that the the third quarter 2009 will be flat, and fourth quarter will show a slight increase in GDP)
For comparison purposes, the two most severe recessions in the period under review were Nov. 1973 - Mar. 1975 and the current one. The last five months of those recessions averaged an unemployment rate of 7.72 and 8.88, respectively. The last five months of this recession was 15% worse than the 1973 - 1975 recession.
Further, the average unemployment rate in the last five months of the recession ended Nov, 1982 was 10.18%, and it averaged 9.8% for the year after that recession was over.
Our current numbers are well within historical precedents, and to assert that the stimulus program is ineffective at this point is not supported by data, obtained from the U.S. Bureau of Labor Statistics.
In our next discussion, we'll talk about the deficit to see whether the alarm expressed by some over its size is warranted.
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