econoblog.info

A roundup of economic news from around the Web.

Consumer Struggles: The Economist writes about the American consumer’s struggle with debt. “A more enduring restraint will be the pressure on consumers to reduce their debts to more manageable levels relative both to income and to the much lower value of their homes. This effect is difficult to quantify, since so many factors determine consumers’ preferred saving rates and levels of debt: assets, retirement goals, expected income, risk tolerance, access to credit, age, and so on. Some bearish analysts argue that debt ratios and saving rates ought to return to their levels of the early 1950s, but others reckon it would be enough to go back to 2000 for households to feel comfortable with their debts again. This process, known as deleveraging, requires consumption to grow more slowly than income in coming years. A sudden rush to return debt ratios to where they were in 2000 would require ridding households of some $3 trillion in mortgage debt—an almost impossible task. More probably, mortgage debt will grow more slowly than income through a combination of lenders writing off impaired loans, homeowners paying down existing mortgages and new homeowners taking out smaller mortgages than in the past. Bruce Kasman of JPMorgan Chase estimates that the most dramatic phase of increased saving has already occurred, and spending will grow only a bit less than income. But Martin Barnes of BCA Research, a financial-forecasting service, is more pessimistic. For debt to return to a more sustainable trend, real consumer spending would need to grow by just 1.3% a year from 2009 to 2013, the weakest such five-year stretch since the 1930s. It could grow even more slowly than that if taxes rise faster, he reckons, or if stagnant productivity impedes real-income growth.”
U.S. Fiscal Position: On the Baseline Scenario Simon Johnson looks at implicit IMF criticism of the U.S. fiscal position. “[IMF chief economist Olivier] Blanchard is clear that the IMF sees the need to “fix the financial system”. He also assumes this will happen slowly, and indicates this slowness is not helpful for the recovery. The implication is that the U.S. will resort to even more fiscal stimulus if the recovery proves sluggish… This presentation of country averages is an IMF way of talking about difficult country-specific situations without being indelicate – and the point here is to push you to think about the nonconvergent (red…) debt path with contingent liabilities (i.e., what the government is committing to the banking system without acknowledging the fact); the yellow path for debt, with slow economic growth, also does not look good. Blanchard doesn’t show the US debt forecast – presumably that would be indelicate. But at the 13:13 mark, he warns that the US may be heading in the same fiscal direction as Ireland (!), “the [US budget] numbers are not great but we hope that something will be done.” The content and timing of that ”something” is left vague.”
Crisis Story: David Warsh of Economicprincipals.com looks at two stories of the crisis. “We are a very long way from having a broadly agreed-upon story of the crisis that quietly commenced on the afternoon of June 20, 2007. That was when two Bear Stearns real estate hedge funds began to come apart, ushering in a long period of nervous waiting for fear eventually to subside (it didn’t) or panic to break out (it did). Nevertheless, a couple of unusually interesting accounts have appeared recently, one by the New York Times reporter who was covering the Federal Reserve Board, the other by a Bush appointee who, conceivably, might have defused the crisis altogether had he been heeded.”

Compiled by Phil Izzo