Sen. Bob Corker (R., Tenn.) said he was very disappointed talks have broken off with Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and blamed health care and White House politics for the problem.

“I think Republicans want to see a good financial reform bill. I think Democrats want to see a financial reform bill. If we cannot do this in a bipartisan way, and I still have hope that we will, we can’t do anything anymore in the United States Senate.”

See the rest here: 
Corker Disappointed Talks on Financial Regulation Broke Off

A roundup of economic news from around the Web.

• Consumer Lending: Ellyn Terry on the Atlanta Fed’s macroblog looks at consumer lending. “Is the decline in consumer credit the result of supply- or demand-side forces? Perhaps the answer is both. According to the Federal Reserve’s Senior Loan Officer Survey, demand for all types of consumer loans (revolving and nonrevolving combined) has fallen since the first quarter of 2009. A decrease in demand for consumer loans is plausible because consumers tend to delay big purchases such as cars and vacations when uncertainty about future income increases. Because future income is affected by job prospects, consumer credit demand lags the recession much like employment does.”
• Supply or Demand: Stephen Gandel also wonders whether supply or demand is the main issue with consumer lending. “Credit card lending is falling because banks are cutting consumers off. And so this is much more of a supply side problem. When it comes to credit, neither demand nor supply problems are easy to fix fast. But my guess is that the supply side problem is the easier one to tackle. Banks generally want to lend. They are incentivized to do so. That’s how they make money. What’s more, the Fed has ways to get banks to lend. The government can pump more money into banks. The Fed can even start to essentially lend money itself, by buying up bonds. Yes, it has done a lot of this stuff already and lending has dropped, but not nearly as much you would have expected. And as the economy improves I would suspect that banks will become willing very quickly to lend again. If existing banks are too battered, persistent low interest rates should cause new banks to pop up to fill the void.”
• State and Local Debts: Paul Krugman worries about state and local cuts offsetting the stimulus. “I think it’s fair to say that state and local cuts largely offset federal stimulus. And David Broder thinks this is a good thing, that Washington should be more like the states. What amazes me is that Broder doesn’t even seem to be aware that there’s an argument on the other side, let alone that most economists are dismayed by the effects of fiscal austerity. If Broder is a guide to Beltway conventional wisdom — which he usually is — we’ve got a big problem.”

Compiled by Phil Izzo

Original post:
Secondary Sources: Consumer Lending, Supply and Demand, Local Debt

Today Senate Banking Committee Chairman Chris Dodd (D., Conn.) issued the following statement on financial reform:

“On Monday, I will present to my colleagues a substitute to the original financial reform package, unveiled last November.”

“Over the last few months, Banking Committee members have worked together to try and produce a consensus package. Together we have made significant progress and resolved a many of the items, but a few outstanding issues remain.”

“It has always been my goal to produce a consensus package. And we have reached a point where bringing the bill to the full committee is the best course of action to achieve that end. I plan to hold a full committee markup the week of March 22nd.”

“I have been fortunate to have a strong partner in Senator Corker, and my new proposal will reflect his input and the good work done by many of our colleagues as well.”

“Our talks will continue, and it is still our hope to come to agreement on a strong bill all of the Senate can be proud to support very soon.”

Original post:
Dodd Statement on Financial Reform

In recent weeks, policy makers from President Barack Obama to Federal Reserve Chairman Ben Bernanke have been taking extraordinary measures to remove what they see as a serious impediment to the recovery: A dearth of credit for the small businesses that many economists say must play a leading role in creating new jobs.

David Altig, head of research at the Atlanta Fed, has been in the front lines on the issue, polling small businesses in his region and parsing economic data to figure out what’s really happening. He spoke with Real Time Economics about the extent to which small businesses are in trouble, what banks have to do with it and why we should care.

In 2009, the U.S. experienced the largest contraction in bank lending since 1942. That might not be a problem for big companies, which can borrow on bond markets, but most small businesses have nowhere to go but the local bank. What might that mean for the recovery?

Altig: What this means for the recovery is nothing good. Depending on how you define small businesses, they account for something between one third and two thirds of net job creation. So if there’s some impediment to the growth of such companies, we obviously have the bleaker side of our employment forecasts being the likely outcome.

How big of a role did small businesses play in the latest recession?

Altig: An outsized fraction of the job losses during this recession came from small businesses, particularly very small businesses with less than 50 employees. In the 2001 recession, about 9% of the net job losses came from that small business category. This time around it was 45%.

Why did this recession hit small business so hard?

Altig: We’re looking for explanations. One obvious candidate is that this was the group that would have more difficulty with a credit event, which clearly this recession was.

We tried to get to the bottom of that by surveying small businesses about access to credit and how big of a problem it was in our district. We didn’t really pick up access to credit as being a big problem for these businesses.

Of course we’re talking about those businesses that have survived. And what we don’t know is how many small businesses are not being formed because of lack of access to credit. A lot of startups depend not on direct business loans, but on loans their owners take out against their homes. With the decline in real-estate values, those loans have become a lot harder to get.

Some surveys have shown that small businesses are more concerned about poor sales than about access to credit. Does this mean that lack of credit isn’t such a big problem, or that they haven’t yet run into it because they’re still reluctant to expand?

Altig: We don’t really know if this will become more of a significant problem once things begin to pick up and businesses decide they want to expand. We did look at whether people were anticipating problems, but unless you’re in construction, we’re still not picking up that sentiment.

We still get lots of anecdotal feedback that people are having credit problems and it is restraining them. It’s our intuition and really it’s embedded in our view of the trajectory of the economy that balance sheet repair and credit tightness is going to be a factor restraining the recovery.

We’re particularly worried that looming issues in commercial real estate will heavily impact the sorts of banks that would serve small businesses. That remains on our radar screen as a concern.

How much can regulators and the government do to get credit to small businesses?

Altig: I think it’s hard to tell what will be effective and what won’t be effective, in part because we’re struggling here, trying to diagnose exactly what the problem is. We’re trying to promote an environment that is conducive to growth and let things sort themselves out.

Here is the original post:
Q&A: Atlanata Fed’s Altig on Small Business’s Potential to Derail Recovery

The Chicago School–why does anybody still listen to it?
I have frequently written here about the problems of “freshwater” economics–the school personified by Milt Friedman and the extremist “free market” ideology that views government as the enemy, the “markets” as always right, and any public role in economic development as “socialism”. As I’ve noted, this ideology misses many points about the role of government in creating a space where markets can function as they should and where individuals can have maximal personal liberty while pursuing better lives and respecting a societal decision that valuing each individual means allocating society’s resources in ways that support, rather than brutalize, those at the bottom.

The Nieman Foundation, connected with Harvard’s journalism school, has an interesting watchdog website that includes a number of controversial articles raising questions about the way today’s media tend to accept without questioning the “received wisdom” of the past (including the ideological views of the “free market” right). As part of a series on the economic collapse, the site includes an article by Henry Banta (a partner at Lobel, Novins & Lamont) noting the consensus developing among a small but diverse group of economists, professors, and those interested in how the economy works about the failure of efficient market theory. That’s a post worth reading, since it focuses on this issue. (My posts, perhaps to readers’ chagrin, tend to throw these criticisms in as asides in the course of analyzing one position or another being put forrward unthinkingly by proponents of that theory.). Enjoy. Henry Banta, Republicans are locked in a passionate embrace with a corpse and won’t let go, Nieman Watchdog, Feb. 11, 2010.

crossposted with ataxingmatter

Originally posted here: 
The Chicago School–why does anybody still listen to it

The inflation pressures are building in key emerging economies, especially in the BIICs (Brazil, India, Indonesia, and China) – see this previous post regarding my new acronym, and this article at the Curious Capitalist (curiously posted just shortly after my post), which leaves my omitted “R” but relays the intuition behind the second “I”.

Although the inflation is not prevalent in any BIIC except India, really, I wanted to comment about why it will build…quickly.

First round, the construction of consumer prices is heavily weighted toward food and energy costs across the BIICs. Indonesia, India, and China are highly susceptible to food price shocks (either driven by shortages or demand growth). Expect this as a first-round driver of inflation as the global economy recovers further. It’s already happening.

Second round, the BIICs are growing quickly and nearing, or are already at, potential. Annual industrial production growth has recovered or surpassed its pre-crisis rate in China, Brazil, and India, 19%, 16%, and 17%, respectively. This is expected, given the drop-off in world trade (an illustration can be found from this May 2009 pos), but unsustainable as the output gap closes.

Third round, interest rate differentials. This year, the BIICs’ central banks are expected to raise policy rates. In fact, Brazil, China, and India have already boosted reserve requirements. But with US rates expected to stay low for an “extended period”, international interest rate differentials will change and monetary flows will shift. Capital inflows can lead to inflation if not properly sterilized.

To date, inflows are not properly sterilized, as evidenced by the ongoing accumulation of reserves and rising money supply growth (again, I refer you to my previous post on M1 growth rates.

The chart above illustrates the one-year-ahead nominal interest-rate differential between the 2yr forward government rate for each respective BIIC country versus the 2 yr forward US Treasury rate. The forward differentials for China and India are on a steady upward trajectory, while those for Brazil and Indonesia are simply steady. I believe that this appropriately represents the sterilization efforts and monetary policy management on the part of the BIICs’ central banks: more managed in Brazil and Indonesia, not as much in China and India.

So where does this analysis leave us? With a very interesting policy mix in the emerging market space. In fact, in my view this is the riskiest part of the emerging market cycle: the recovery. If policymakers get this wrong, we could see a lot of price action, final goods and assets alike, on the horizon.

View original post here: 
Get ready for a little EM inflation

by Marshall Auerback

A new book by Kenneth Rogoff and Carmen Reinhart, “This Time It’s Different: Eight Centuries of Financial Follies”, has occasioned much comment in the press and blogosphere (see here and here)

The book purports to show that once the gross debt to GDP ratio crosses the threshold of 90%, economic growth slows dramatically.

But that’s too simplistic: a ratio is just a number. Debt to GDP is a ratio and the ratio value is a function of both the numerator and denominator. The ratio can rise as a function of either an increase in debt or a decrease in GDP. So to blindly take a number, say, 90% debt to GDP as Rogoff and Reinhart have done in their recent work, is unduly simplistic. It appears that they looked at the ratio, assumed that its rise was due to an increase in debt, and then looked at GDP growth from that period forward assuming that weakness was caused by debt instead of that the rise in the ratio was caused by economic weakness. In other words, they have the causation backwards: Deficits go up as growth slows due to the automatic countercyclical stabilizers.They don’t cause the slow down, etc.

After the Second World War, the debt ratio came down rather rapidly—mostly not due to budget surpluses and debt retirement but rather due to rapid growth that raised the denominator of the debt ratio. By contrast, slower economic growth post 1973, accompanied by budget deficits, led to slow growth of the debt ratio until the Clinton boom (that saw growth return nearly to golden age rates) and budget surpluses lowered the ratio.

From 1991 through 2001 the growth of government debt had been falling and since then rising most recently at a faster pace. The raw data comes courtesy of the St. Louis Fed (and attached spreadsheet).

The Ratio of the rates of change of Debt / GDP is rising faster than the change in Debt indicating that both the increase in Debt and the fall in GDP are contributing to a rising Debt / GDP ratio. For policy makers who obsess about a rising Debt / GDP ratio, they fail to understand that austerity measures that cut GDP growth will cause a rise in the Debt to GDP ratio. Basically, it boils down to this simple observation: it is foolish, dangerous, and thoroughly counterproductive to treat fiscal balances in isolation. In particular, setting a fiscal deficit to GDP target equal to expected long run real GDP growth in order to hold public debt/GDP ratios at a completely arbitrary (indeed, literally pulled out of thin air) public debt to GDP ratio without for a moment considering what the means for the feasible range of current account and domestic private sector financial balance is utterly nonsensensical.

It is crucial that investors and policy makers recognize and learn to think coherently about the connectedness of the financial balances before they demand what is being currently called fiscal sustainability. As it turns out, pursuing fiscal sustainability as it is currently defined will in all likelihood just lead many nations to further private sector debt destabilization. To put it bluntly, if the private sector continues to pursue a high net saving/financial surplus position while fiscal retrenchment is attempted, unless some other bloc of nations becomes large net importers (and the BRICs are surely not there yet), nominal GDP will fall in the fiscally “sound” nations, the designated fiscal deficit targets WILL NEVER BE ACHIEVED (there can also be a paradox of public thrift), and private debt distress will simply escalate.

In fact, if austerity measures are based on measures of debt relative to economic growth there is a very real risk of a downward spiral where economic growth declines at a faster pace than government debt and the rising Debt / GDP ratio leads to ever greater austerity measures. At a minimum, focusing only on the debt side of the equation risks increasing the Debt / GDP ratio that is the object of purported concern is likely to lead to policy incoherence and HIGHER levels of debt as GDP plunges. The solution is to recognize that the increase in the ratio is in some fair measure the result of declining economic growth and that only by increasing economic growth will the ratio be brought down. This may cause an initial rise in the ratio because of debt financing of fiscal stimulus but if positive economic growth is achieved the problem should be temporary. The alternative is to risk a debt deflationary spiral that will be much more difficult (and costly) to reverse.

This article is crossposted with News N Economics

See original here:
It Takes Two to Tango: A Look at the Numerator AND Denominator

When it comes to the government’s budget plans, we know that Gordon Brown does not always tell it entirely straight. Remember last summer, when he was still refusing to utter the word “cut”? But listening to him today, you have to say he’s consistent.

In today’s interview with Nick Robinson, the prime minister once again clung to the thought that Labour was continuing the stimulus this year - even as retailers count the cost of the recent rise in VAT, accountants across the country lick their lips at the thought of the tax rises coming in a few weeks’ time. He said:

“We have got to decide whether to continue the stimulus until the recovery is fully sustained, or whether we go back to the old days of just letting things take their course.”

For an activist like Gordon Brown, to accuse someone of “letting things take their course” is a grave insult indeed. But in these still perilous times, he does think there is something worse than inaction.

“In a situation where growth is uncertain… you cannot afford to withdraw this stimulus and therefore return yourself to a position where you’re not able to say you’re fighting for growth…”

?
“Withdraw the stimulus now, withdraw it completely as the Conservatives would do, and then you would find yourself in a position not to be able to secure growth for the future.”

It’s stirring stuff - as Nick says, all designed to take us back to Gordon Brown’s “save the world” moments in the autumn of 2008 and the G20 Summit a year ago.

There’s just one problem. In just a few weeks’ time, Gordon Brown’s government will have withdrawn the stimulus as well. It is withdrawing it “completely”. To all intents and purposes, it is an ex-stimulus. It has ceased to be.

This will not be news to readers of Stephanomics. But let me quickly run through the facts.

Since the 2008 Budget, the government has announced several stimulus measures, on both tax and spending, designed to boost the economy. According to the IFS, these changes - the temporary VAT cut, for example - had the effect of raising borrowing by £9bn in fiscal year 2008-9, and £23bn in 2009/10.

You may or may not believe that these steps kept unemployment down, or limited the number the repossessions, or whatever else the government claims to have achieved with them. But they did constitute a bona fide economic stimulus, worth about 1.6% of GDP in 2009.

What is the stimulus in 2010, to “secure growth” in this fragile and uncertain year? The answer is zero. There is none. Almost alone among G20 economies, we have no discretionary stimulus planned for 2010 at all.

You might say the government was “letting things take their course”. Certainly, it is letting the other parts of spending take their course - like the higher cost of debt interest, and previously agreed pay rises in the public sector. That is why spending is still going up in 2010/11, and why the deficit may also rise, albeit very slightly.

But, when it comes to direct policy measures, the government is tightening fiscal policy by 1.6% of GDP. That’s VAT going back up. That’s the new 50p rate of income tax. That’s the £1.2bn rise in fuel duty coming in April.

Don’t expect the Conservatives to make too much of this. They’re got enough trouble on their hands explaining how, exactly, they would tighten further in 2010. But the next time you hear Gordon Brown or the chancellor talking about the folly of withdrawing the stimulus, it could be helpful to bear these figures in mind.

PS. Let me also point out that the “£3bn” that the prime minister claimed would be saved from the public sector pay freeze he re-announced today does not seem to allow for the fact that these workers will paying less income tax as a result. Taking those losses into account, the IFS has previously said the net savings would be more like £2.1bn.

Read the rest here:
The activist Mr Brown

Greeks are bracing for a long and deep recession ahead as it begins to dawn on them that the cost of fixing the country’s public finances will entail years of economic hardship and high unemployment.

In recent public opinion polls, but also in the media, the business community, and even in ordinary dinner conversation, the feeling is that it will take several years for the Greece to emerge from its economic crisis and that there is much pain to come before things improve.

“I have no doubt that we will remain in recession in 2010, 2011 and 2012 and that the recession will deepen. It won’t be until the first half of 2013 that we will see a recovery,” said Yanos Gramatidis, president of the American-Hellenic Chamber of Commerce. “And I think most people have grasped that.”

The polls seem to show so, too. According to one poll in Sunday’s edition of To Vima newspaper, 37.9% of Greeks expect the recession to last three to four years. Another 19.3% think it could last five to nine years, and 22.4% think it could take a decade or longer for Greece to emerge from recession. Only a small minority, 15.4%, reckon that a recovery will come in the next year or two, the poll showed.

“I used to think that this recession would be short-lived, but I don’t really believe that anymore. I think it is here to stay and for some time to come,” said Alex Pyromallis, 27 years old, who works in a bookshop in the center of Athens. “And things will definitely get worse before they get better.”

How much worse remains to be seen. Greece’s 250 billion euro economy shrank 2% last year, after 15 years of 4% average annual growth rates, and marking the country’s first recession since the early 1990s.

Officially, the Greek government has forecast only a relatively mild contraction of 0.3% in the economy this year and a recovery next year. But privately, people in the government say those forecast figures will be lowered to show a decline of 1.5% or worse this year, with a recovery only due to start in 2012.

But others think even that may be too optimistic. A recent Deutsche Bank report forecasts a 4% decline in Greek gross domestic product this year.

“I think we are in for an even deeper recession than we have had so far,” said Constantine Michalos, president of the Athens Chamber of Commerce and Industry. “There have been some estimates of a 4% decline for this year and I can’t really refute that. I think those estimates are very much on the ball.”

Mr. Michalos and other business leaders say that the recent austerity packages adopted by the Greek government to narrow the budget deficit to 8.7% of GDP this year is only half of the challenge.

Greece also faces years of structural reforms to get its economy back on track and restore its lost competitiveness against its European neighbors. And that kind of deep restructuring will take a long time.

“We will be the last country in Europe to stage a turnaround,” said Panagiotis Hazakos, a 66-year-old engineer who is retired but still runs two small boutique hotels on the resort island of Myconos. “But I think people have started to understand the severity of the situation.”

See more here:
Greece Braces for Long, Deep Recession

See the full interactive graphic.

Thirty states and the District of Columbia recorded unemployment rate increases in January from a month earlier, while states registered rate decreases, the Labor Department said. But in a sign the job market is inching toward recovery 31 states added jobs in the first month of the year.

In January, the overall U.S. unemployment rate fell to 9.7% from 10% a month earlier, while the nation’s economy shed 26,000 jobs. The job losses continued in February amid strong weather effects, but the jobless rate remained at 9.7%.

Michigan continued to have the highest unemployment rate in the nation, though the state posted a month-over-month decline of 0.2 percentage point. Mississippi notched the biggest gain in its jobless rate, increasing 0.4 percentage point to 10.9%.

Unemployment Rate, by State

Source: Labor Department

View original post here: 
Unemployment Rates, by State: Most Regions Added Jobs in January