Summary of business news and analysis

Macro and Other Market Musings: What Role Did the Fed play in the Housing Bubble, by David Beckworth, Sept. 3, 2010

Keywords: Fed, Monetary Policy

Keywords: China Manufacturing, China Wage Increase

Keywords: Economic Growth, Unemployment

VOX: Measuring the output responses to fiscal policy, by Alan J Auerbach and Yuriy Gorodnichenko, both from UC Berkeley, Sept. 3, 2010

The return from a fiscal stimulus – the fiscal multiplier – remains one of the most controversial topics in economics today. This column considers the influence of expectations, of variation in recessions and expansions, and of different components of government spending. It finds that the size of the multiplier varies considerably over the business cycle: between 0 and 0.5 in expansions and between 1 and 1.5 in recessions.



The effect of fiscal policy on output – and its components – has long been a central part of fiscal policy analysis. And yet, as has been made clear by the recent debate over the likely effects of fiscal stimulus in the US and elsewhere, economists are a long way from reaching a consensus. Indeed economists remain divided over areas such as:

•the strength of fiscal policy’s macroeconomic effects,
•the channels through which these effects are transmitted, and
•the variations in these effects and channels with respect to economic conditions. read more on Vox

Keywords: Fiscal Multiplier, Government Spending, Output Response

Airtime: Thurs. Sept. 2 2010 | 10 15 00 ET

Keywords: Financial Crisis, Too Big To Fail, Shadow Banks

EuroIntelligence: Policy Makers of Last Resort, by Barry Eichengreen (Berkeley), Sept. 2, 2010

The clouds over the U.S. economy are now parting, and the view from 35,000 feet is not pretty. It is clear that the risk of a double dip is now high. While I am mindful of the eminent forecaster Edgar Fiedler’s admonition that he who lives by the crystal ball soon learns to eat ground glass, I would now put the odds of a double dip at 3 to 1. The recent data flow, from home sales and new unemployment claims to exports and manufacturing activity, leave no doubt that U.S. growth will be less than 1 per cent in the second half of the year. That could be stall speed.

It is also clear that there will be only a token fiscal response. President Obama will try to come up with more finance for infrastructure spending and more help for the states. But the results will be no more than cosmetic. The American public doesn’t understand the case for another stimulus. And with the November elections approaching, the Congress lacks the courage to buck popular opinion. The definition of political courage is going against public opinion when public opinion is wrong. But saying that the Congress should display political courage is different from saying that it will. read more

Keywords: Monetary Policy, Stimulus

Find here a link to a new sovereign debt study by the IMF:

Long-Term Trends in Public Finances in the G-7 Economies, by Carlo Cottarelli and Andrea Schaechter, IMF, Sept. 1, 2010

Keywords: Sovereign Debt, G7

Project Syndicate: Why America Isn’t Working, by Kenneth Rogoff, Sept. 1, 2010

As the US economy limps toward the second anniversary of the Lehman Brothers bankruptcy, anemic growth has left unemployment mired near 10%, with little prospect of significant improvement anytime soon. Little wonder that, with mid-term congressional elections coming in November, Americans are angrily asking why the government’s hyper-aggressive stimulus policies have not turned things around. What more, if anything, can be done?

The honest answer – but one that few voters want to hear – is that there is no magic bullet. It took more than a decade to dig today’s hole, and climbing out of it will take a while, too. As Carmen Reinhart and I warned in our 2009 book on the 800-year history of financial crises (with the ironic title “This Time is Different”), slow, protracted recovery with sustained high unemployment is the norm in the aftermath of a deep financial crisis. read more

Keywords: US Economy, Unemployment, Aftermath of Financial Crisis

Related:

Reinhart and Rogoff:

MO: This time is not very different, April 19, 2008
MO: The economy after financial crises, Jan. 29, 2009

Airtime: Wed. Sept. 1 2010 | 10 03 00 ET

Keywords: China Output, China Economy, Economic Data

Guardian: Rise in US industrial output drives markets higher • Dow Jones up 200 points as recession fears recede; • But UK industrial orders lowest for nine months, Sept. 1, 2010

Share prices rose strongly in the City and on Wall Street after a stronger than expected showing by America's factories last month helped ease concerns of a double-dip recessionin the world's largest economy.

Amid signs of relief in New York, the Dow Jones industrial average surged by more than 200 points following the release of the monthly snapshot of US manufacturing from the Institute for Supply Management.

Dealers shrugged off separate data indicating further declines for the US construction sector and a decline in private sector employment over the past month to concentrate on a pick-up in manufacturing activity in America and China. read more

Keywords: US Economy, US Output, Economic Data

Related:

CNBC: Thursday Look Ahead: Markets Already Looking to Friday's Jobs Report, Sept. 1, 2010

David Kotok, Cumberland Advisors, and Michelle Meyer, BofA Merrill Lynch Global Research, discuss economic data:

Airtime: Wed. Sept. 1 2010 | 10 16 00 ET

Some analysis from Calculated Risk:

Calculated Risk: Some comments on August ISM Manufacturing Index, Sept. 1, 2010

Reaction on Robert Barro's WSJ article "The Folly of Subsidizing Unemployment":

Does Anyone Believe That Unemployment Would Be Just 6.8% If Obama Hadn't Extended Jobless Benefits

Keywords: Unemployment, Jobless Rate, Jobless Benefits

Keywords: Bubble, GDP, US, Australia, Income Distribution, Standard of Living, Middle Class

The Economist: Hedge funds Bigger, safer but duller; A secretive industry opens up to meet the demands of investors and regulators, August 26, 2010

FOR much of the past two years hedge-fund managers have tried to convince queasy investors not to give up on them. Now it seems that some of the industry’s biggest names have given up on themselves. Stanley Druckenmiller, a celebrated hedge-fund manager and protégé of George Soros, announced on August 18th that he would close his fund, Duquesne Capital Management, because he was “dissatisfied” with its performance. Two days later it emerged that another well-known manager, Paolo Pellegrini, plans to hand back investors their remaining money by the end of September, after making losses. read more

Keywords: Hedge Fund, Regulation

Related background reading suggested:

Rivière, Anne C., The Future of Hedge Fund Regulation: A Comparative Approach (United States, United Kingdom, France, Germany, Italy) (April 23, 2010). Available at SSRN: http://ssrn.com/abstract=1663553

BIS Annual Report 2009/10: Chapter III: III. Low interest rates: do the risks outweigh the rewards?

Keywords: Interest Rates, Monetary Policy, Risks of Low Interest Rates, BIS

David Goldman, Bank of America and Don Luskin, Trend Macro, discuss how many years it will take to recover from the credit bubble.

Airtime: Tues. Aug. 31 2010 | 10 01 00 ET

Keywords: Credit Bubble, Recovery, Lost Decade

Selected further reading:

Economic causes and consequences of financial crises:

Reinhart and Rogoff:

MO: This time is not very different, April 19, 2008
MO: The economy after financial crises, Jan. 29, 2009

Michael D. Bordo:

MO: Same old story, only players have changed, Nov. 8, 2007

Markets:

MO: Morgan Stanley analysts research bear markets, Sept. 19, 2009

The Future of Finance: The LSE Report

"This book presents a novel approach to the reform of the world’s financial system, starting with the basic question, what is a financial system for? It shows that the existing system has become far more complicated than it needs to be to discharge its functions – and dangerously unstable into the bargain. It proposes some drastic remedies.

The Future of Finance: The LSE Report is the work of a group of leading academics, financiers, journalists and officials from the UK’s Financial Services Authority, the Bank of England and the Treasury. They met twelve times, for what many of those present described as the best and most searching discussions they had ever participated in.

The first author is Adair Turner, chair of the Working Party of the G20 Financial Stability Board reporting to the G20 Summit in November 2010; the others are major international players in policymaking or public debate."

The book mentioned in Frankfurter Allgemeine Zeitung (FAZ):

FAZ: „Finanzsektor maßlos aufgebläht“; Das „Wunder“ der Banker, August 30, 2010

Kewords: Financial Sector, Financial Value Creation, Bubble

Kukla, Daniel A., The Boundary of the Investment Firm (August 13, 2010). Available at SSRN: http://ssrn.com/abstract=1658541

Abstract:

"The central concept of an investment firm is fuzzier than might immediately appear. Why do investment firms exist at all? What should be the range of their activities? This exploratory study investigates forces which shape the boundary of the investment firm by analyzing firms in the Private Equity industry. The PE industry offers a rich ground for research, given that substantial parts of the PE universe have been rapidly migrating from traditional single-product PE firms towards multi-business investment firms. Based on interviews with senior investment professionals and executives from leading PE firms and based on case studies, I find that the boundary of the firm is determined by the trade-off between expansion enhancers, in particular ‘deal sourcing advantages’, ‘capital sourcing advantages’, ‘procurement cost advantages’ and ‘information sharing advantages’, and expansion inhibitors, particularly ‘conflicts of interest’, ‘asset allocation authority’, and ‘parenting disadvantages’. Moreover, I speculate that if the new generation of multi-business investment firm models succeeds, they may fill the gap which most recent regulation has created in the commercial and investment banking industry, given that multi-business firms are not scrutinized to the same extent."

Keywords: Private Equity, Multi-Business Investment Firm

Keywords: US Economy, Unemployment, Obama

WSJ: The Folly of Subsidizing Unemployment; My calculations suggest the jobless rate could be as low as 6.8%, instead of 9.5%, if jobless benefits hadn't been extended to 99 weeks, by Robert Barro (Harvard), August 30, 2010

Here is an excerpt of the article linked to above:

..."I want to focus here on another dimension of the Obama administration's policies: the expansion of unemployment-insurance eligibility to as much as 99 weeks from the standard 26 weeks.

The unemployment-insurance program involves a balance between compassion—providing for persons temporarily without work—and efficiency. The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.

In a recession, it is more likely that individual unemployment reflects weak economic conditions, rather than individual decisions to choose leisure over work. Therefore, it is reasonable during a recession to adopt a more generous unemployment-insurance program. In the past, this change entailed extensions to perhaps 39 weeks of eligibility from 26 weeks, though sometimes a bit more and typically conditioned on the employment situation in a person's state of residence. However, we have never experienced anything close to the blanket extension of eligibility to nearly two years. We have shifted toward a welfare program that resembles those in many Western European countries."...

Keywords: Unemployment, Unemployment Insurance

Related:

Here is an overview of employment programs around the globe. Among them the Swiss method of short time work, government giving support to companies to keep employees part-time in their jobs. The programme is timely limited but helps to keep people in the working process.

Labour market policies in times of crisis, ILO, 2009

Discussion between R. Barro and R. Reich:

Airtime: Aug. 31 2010 | 10 01 00 ET

Guardian: Global markets fall as investors are braced for poor US economic results; Countries fear US heading for a double-dip recession; Poor US employment figures expected on Friday, August 30, 2010

Financial markets around the globe fell today as investors faced a crucial week of data on the US economy.

The prospect of poor employment figures on Friday and a snapshot of the state of manufacturing on Wednesday has unnerved markets which fear the world's biggest economy could be heading for a double-dip recession. read more

Keywords: US Economy, US Employment, Global Economy