"It is increasingly clear by now that a severe U.S. recession is inevitable in next few months. Those of us who warned for the last 12 months about a combination of a worsening housing recession, a severe credit crunch and financial meltdown, high oil prices and a saving-less and debt-burdened consumers being on the ropes causing an economy-wide recession were repeatedly rebuffed the consensus view about a soft landing given the presumed resilience of the US consumer."Roubini is a smart economist who often goes against the consensus view."But the evidence is now building that an ugly recession is inevitable."
Saturday, October 31, 2009
Nouriel Roubini: "clear by now that a severe U.S. recession is inevitable in next few months."
Nouriel Roubini, a leading economist at New York University, is now saying that a US Recession is almost here:
Friday, October 30, 2009
Ted Kennedy
America has had a few precious individuals who are both passionate about social justice and also understand deep in their bones its practical meaning. And we have had a few who possess great political shrewdness and can make the clunky machinery of democratic governance actually work. But I have known but one person who combined all these traits and abilities. His passing is an inestimable loss.
Most Americans will never know how many things Ted Kennedy did to make their lives better, how many things he prevented that would have hurt them, and how tenaciously he fought on their behalf. In 1969, for example, he introduced a bill in the Senate calling for universal health insurance, and then, for the next forty years, pushed and prodded colleagues and presidents to get on with it. If and when we ever achieve that goal it will be in no small measure due to the dedication and perseverance of this one remarkable man. We owe it to him and his memory to do it soon and do it well.
Most Americans will never know how many things Ted Kennedy did to make their lives better, how many things he prevented that would have hurt them, and how tenaciously he fought on their behalf. In 1969, for example, he introduced a bill in the Senate calling for universal health insurance, and then, for the next forty years, pushed and prodded colleagues and presidents to get on with it. If and when we ever achieve that goal it will be in no small measure due to the dedication and perseverance of this one remarkable man. We owe it to him and his memory to do it soon and do it well.
Thursday, October 29, 2009
Wednesday, October 28, 2009
On college endowments
According to a study released yesterday by the National Association of College and University Business Officers (NACUBO), the endowment fund of Harvard University is worth $34.6 billion, a 19.8% percent higher than a year ago. 76 colleges and universities sit on endowments over $1b. Even more impressively, almost every one of the 733 institutions analyzed reports a double-digit increase in the value of its fund. (Look up the endowment of your alma mater here.)
Chart 1 (click to enlarge)
Chart 1 (click to enlarge)
Tuesday, October 27, 2009
More Americans Expecting Recession in The Next Year
More Americans are expecting a recession in the next year. Consumers are waking up to the reality that the economy has a significant chance of recession next year.
Recession times are increasingly being expected. The coming holiday spending season will likely provide important clues to where consumer spending is headed. Consumer spending is about 70% of the US's GDP. Consumer spending is a key factor in a forecasting a recession.
The economic mood took a sharp turn for the worse over the past month, with 40 percent of Americans expecting a recession in the next year, according to a Reuters / Zogby poll released Wednesday.
That was a big rise from a month earlier, when 31 percent of the likely voters polled predicted a recession. The darker mood came as mounting concerns about housing and credit markets pounded Wall Street, and oil prices approached $100 per barrel.
That was a big rise from a month earlier, when 31 percent of the likely voters polled predicted a recession. The darker mood came as mounting concerns about housing and credit markets pounded Wall Street, and oil prices approached $100 per barrel. (CNBC 1/21/07)
Recession times are increasingly being expected. The coming holiday spending season will likely provide important clues to where consumer spending is headed. Consumer spending is about 70% of the US's GDP. Consumer spending is a key factor in a forecasting a recession.
Monday, October 26, 2009
Don't Succumb to Deficit Hysteria
Today, as expected, the White House announced that the deficit projections are worse than it had thought. And as expected, the same old group of deficit hystrics went ballistic. "A 10-year deficit of $9 trillion is $30,000 for each man, woman and child in the United States!" kabaam. "Public debt will total a whopping $17.5 trillion by 2019 — three-quarters of the nation's entire economy!" Kaboom. "The number would send Reagan's stack of thousand-dollar bills into satellite orbit!" Zowee.
Can we please relax?
First, ten year projections are notoriously irrelevant. Remember Ross Perot? In 1992, he predicted that the federal budget deficit was on track to end to the world as we knew it. In fact, the rapid growth of the economy during the following years reduced the deficit to zero (neither Bill Clinton's famous deficit-cutting nor Republican insistence on a balanced budget was responsible; the deficit reached zero before any major fiscal changes kicked in).
Second, deficits and debts mean just about nothing anyway -- at least out of context. In 1945, the federal debt was 120 percent of the entire U.S. economy. Yeegads! Yet only a few years later, the debt as a proportion of GDP had been tamed -- and not primarily because of cuts in government spending. Yes, of course, wartime spending ended. But the big change was in the denominator of the equation. Economic growth kicked in big time, and reduced the debt as a proportion of the economy to manageable levels.
The only item worth looking at is the part of the report that predicts the government will have nearly a $1.6 trillion deficit in the fiscal year that ends this Sept. 30 -- but not because that number is alarmingly large. It strikes me as alarmingly small. I'd prefer the government run a larger deficit. With unemployment and underemployment still rising, consumers still pulling away from the malls, business investment still in the basement, and exports still dead, the federal government has to spend more -- and the deficit has to be larger -- in order to get people back to work.
Can we please relax?
First, ten year projections are notoriously irrelevant. Remember Ross Perot? In 1992, he predicted that the federal budget deficit was on track to end to the world as we knew it. In fact, the rapid growth of the economy during the following years reduced the deficit to zero (neither Bill Clinton's famous deficit-cutting nor Republican insistence on a balanced budget was responsible; the deficit reached zero before any major fiscal changes kicked in).
Second, deficits and debts mean just about nothing anyway -- at least out of context. In 1945, the federal debt was 120 percent of the entire U.S. economy. Yeegads! Yet only a few years later, the debt as a proportion of GDP had been tamed -- and not primarily because of cuts in government spending. Yes, of course, wartime spending ended. But the big change was in the denominator of the equation. Economic growth kicked in big time, and reduced the debt as a proportion of the economy to manageable levels.
The only item worth looking at is the part of the report that predicts the government will have nearly a $1.6 trillion deficit in the fiscal year that ends this Sept. 30 -- but not because that number is alarmingly large. It strikes me as alarmingly small. I'd prefer the government run a larger deficit. With unemployment and underemployment still rising, consumers still pulling away from the malls, business investment still in the basement, and exports still dead, the federal government has to spend more -- and the deficit has to be larger -- in order to get people back to work.
Sunday, October 25, 2009
Saturday, October 24, 2009
Friday, October 23, 2009
Thursday, October 22, 2009
Why the Senate Should Confirm Bernanke But Make the Fed More Accountable, Too
The President did the right thing in renominating Ben Bernanke to be Fed Chair, but the Senate should couple its vote to confirm him with new legislation requiring the Fed to be far more open about its doings.
If you'd have asked me three months ago whether Bernanke would be confirmed, I'd have said no. Congress (and much of the public) is still furious about the bank bailouts, as well they should be. TARP saved the Wall Street but Wall Street still hasn't saved Main Street, which was the publicly-stated purpose of the bailouts. The only clear outcome of the taxpayers' $600 billion rescue package is a return to giant salaries and bonuses on the Street.
But Bernanke at least deserves credit for lowering interest rates, swamping the nation with money, and pushing the Fed to become the nation's banker of last resort. With the big banks sitting it out, the Fed is buying a huge number of mortgage-backed securities (keeping many homeowners afloat, via the intermediaries of Frannie and Freddie); buying securities in which car loans, educational loans, and other consumer loans are bundled; and -- importantly -- signaling its willingness to do more, if necessary. It's become the U.S. Bank.
To the extent the U.S. economy is showing signs of "bottoming out" -- or, more likely, coming to a slow landing on swampy tarmac rather than crashing -- it's partly due to Bernanke's U.S. Bank. Congress knows this, or at least knows whatever Bernanke has been doing seems to be working. Hence, the Senate will confirm.
Yet much of what Bernanke has been doing has been cloaked in secrecy. No one knows exactly what the Fed has bought, from whom, and why. The secrecy is unnecessary. If the Fed is going to continue to be the U.S. Bank, it has to be publicly accountable. This is no argument for direct political control of the Fed. It's an argument for transparency. Congress and the public need to know what the Fed, with the ever-creative Bernanke at its lead, are up to. Never underestimate the power of public knowledge and opinion. Even our least democratic branch -- the federal judiciary -- is not immune to it. And don't underestimate the importance to our economy of knowing who and what is getting Fed assistance, and in what form.
So the Senate should confirm Bernanke, but link the confirmation vote to new legislation that makes the Fed more transparent.
If you'd have asked me three months ago whether Bernanke would be confirmed, I'd have said no. Congress (and much of the public) is still furious about the bank bailouts, as well they should be. TARP saved the Wall Street but Wall Street still hasn't saved Main Street, which was the publicly-stated purpose of the bailouts. The only clear outcome of the taxpayers' $600 billion rescue package is a return to giant salaries and bonuses on the Street.
But Bernanke at least deserves credit for lowering interest rates, swamping the nation with money, and pushing the Fed to become the nation's banker of last resort. With the big banks sitting it out, the Fed is buying a huge number of mortgage-backed securities (keeping many homeowners afloat, via the intermediaries of Frannie and Freddie); buying securities in which car loans, educational loans, and other consumer loans are bundled; and -- importantly -- signaling its willingness to do more, if necessary. It's become the U.S. Bank.
To the extent the U.S. economy is showing signs of "bottoming out" -- or, more likely, coming to a slow landing on swampy tarmac rather than crashing -- it's partly due to Bernanke's U.S. Bank. Congress knows this, or at least knows whatever Bernanke has been doing seems to be working. Hence, the Senate will confirm.
Yet much of what Bernanke has been doing has been cloaked in secrecy. No one knows exactly what the Fed has bought, from whom, and why. The secrecy is unnecessary. If the Fed is going to continue to be the U.S. Bank, it has to be publicly accountable. This is no argument for direct political control of the Fed. It's an argument for transparency. Congress and the public need to know what the Fed, with the ever-creative Bernanke at its lead, are up to. Never underestimate the power of public knowledge and opinion. Even our least democratic branch -- the federal judiciary -- is not immune to it. And don't underestimate the importance to our economy of knowing who and what is getting Fed assistance, and in what form.
So the Senate should confirm Bernanke, but link the confirmation vote to new legislation that makes the Fed more transparent.
Wednesday, October 21, 2009
Tuesday, October 20, 2009
Personal bankruptcy and consumption smoothing
The welfare effects of bankruptcy legislation are not correctly understood. Policymakers and the general public think, for the most part, that laws that protect borrowers in the event of default are beneficial to consumers. In practice, however, those laws have negative effects on the households that need credit most — and, ironically, those whom the legislation was intended to protect.
Traditionally, Chapter 7 has been the most popular type of bankruptcy filing. Under that section of the Bankruptcy Code, a filer relinquishes her assets, minus a certain exempted amount, and in return is discharged from her unsecured debt (credit card debt, personal loans, student loans, etc.).
State law sets those exempted amounts. In Illinois, for instance, exemptions are: $7,500 for home equity, $1,200 for motor vehicles, $750 for tools of the trade, and $2,000 for any other generic property. So suppose that you file for bankruptcy in the “Land of Lincoln,” and that you have $20,000 worth of home equity, and a car with a market value of $600. Then you can sell the house and keep $7,500 of the proceeds, and sell your car and keep the $600 (since that’s below the $1,200 limit).
Since 1978, with the passage of the Bankruptcy Reform Act (BRA), there’s also a federal exemption. Some states allow filers to choose between the state and the federal amounts. Obviously, if given the opportunity, filers use whichever is highest.
There is an enormous disparity of bankruptcy exemptions across states, even after accounting for the existence of the federal limits. For example, in 2006 the states of Texas, Florida, Oklahoma, Iowa, Kansas, South Dakota, and the District of Columbia, all allowed for an unlimited homestead exemption. In the states of Ohio and Virginia, at the other extreme, the limit is set at $5,000 (and those states don’t allow for the application of the federal exemption). The map below shows the maximum exemption that a married homeowner could claim in 2003, after combining homestead and non-homestead amounts, and taking the highest of the state and federal limit (where the federal limit is available). The limits also vary over time, although high-exemption states tend to remain the same over the years.
Traditionally, Chapter 7 has been the most popular type of bankruptcy filing. Under that section of the Bankruptcy Code, a filer relinquishes her assets, minus a certain exempted amount, and in return is discharged from her unsecured debt (credit card debt, personal loans, student loans, etc.).
State law sets those exempted amounts. In Illinois, for instance, exemptions are: $7,500 for home equity, $1,200 for motor vehicles, $750 for tools of the trade, and $2,000 for any other generic property. So suppose that you file for bankruptcy in the “Land of Lincoln,” and that you have $20,000 worth of home equity, and a car with a market value of $600. Then you can sell the house and keep $7,500 of the proceeds, and sell your car and keep the $600 (since that’s below the $1,200 limit).
Since 1978, with the passage of the Bankruptcy Reform Act (BRA), there’s also a federal exemption. Some states allow filers to choose between the state and the federal amounts. Obviously, if given the opportunity, filers use whichever is highest.
There is an enormous disparity of bankruptcy exemptions across states, even after accounting for the existence of the federal limits. For example, in 2006 the states of Texas, Florida, Oklahoma, Iowa, Kansas, South Dakota, and the District of Columbia, all allowed for an unlimited homestead exemption. In the states of Ohio and Virginia, at the other extreme, the limit is set at $5,000 (and those states don’t allow for the application of the federal exemption). The map below shows the maximum exemption that a married homeowner could claim in 2003, after combining homestead and non-homestead amounts, and taking the highest of the state and federal limit (where the federal limit is available). The limits also vary over time, although high-exemption states tend to remain the same over the years.
Bankruptcy exemptions under Chapter 7 of the Bankruptcy Code
(in 2003, for a home owner)
Click to enlarge
(in 2003, for a home owner)
Click to enlarge
Monday, October 19, 2009
Sunday, October 18, 2009
Why the Gang of Six is Deciding Health Care for Three Hundred Million of Us
Last night, the so-called "gang of six" -- three Republican and three Democratic senators on the Senate Finance Committee -- met by conference call and, according to Senator Max Baucus, the committee's chair, reaffirmed their commitment "toward a bipartisan health-care reform bill" (read: less coverage and no public insurance option). The Washington Post reports that the senators shared tales from their home states, where some have been besieged by protesters angry about a potential government takeover of the nation's health care system.
It's come down to these six senators. The House has reported a bill as has another Senate committee, but all eyes are fixed on Senate Finance -- and on these three Dems and three Republicans, in particular. But who, exactly, anointed these six to decide the fate of the nation's health care?
I don't get it. Of the three Republicans in the gang, the senior senator is Charles Grassley. In recent weeks Grassley has refused to debunk the rumor that the House's health-care bill will spawn "death panels," empowered to decide whether the sick and old get to live or die. At an Iowa town meeting last Tuesday Grassley called the President and Speaker Nancy Pelosi "intellectually dishonest" for claiming the opposite. On Thursday Grassley told the Washington Post that Congress should scale back its efforts to overhaul health care in the wake of intense anger at town hall meetings. But -- wait -- the anger is largely about distortions such as the "death panels" that Grassley refuses to debunk.
This week on Fox News Grassley termed the House bill "the Pelosi Bill," and called it "a government takeover of heath care, exploding the deficit because it's not paid for and it's got high taxes in it."
I really don't get it. We have a Democratic president in the White House. Democrats control sixty votes in the Senate, enough to overcome a filibuster. It is possible to pass health care legislation through the Senate with 51 votes (that's what George W. Bush did with his tax cut plan). Democrats control the House. The Speaker of the House, Nancy Pelosi, is a tough lady. She has said there will be no health care reform bill without a public option.
So why does the fate of health care rest in Grassley's hands?
It's not even as if the gang represents America. The three Dems on the gang are from Montana, New Mexico, and North Dakota -- states that together account for just over 1 percent of Americans. The three Republicans are from Maine, Wyoming, and Iowa, which together account for 1.6 percent of the American population.
So, I repeat: Why has it come down to these six? Who anointed them? Apparently, the White House. At least that's what I'm repeatedly being told by sources both on the Hill and in the Administration. "The Finance Committee is where the action is. They'll tee-up the final bill," says someone who should know.
It's come down to these six senators. The House has reported a bill as has another Senate committee, but all eyes are fixed on Senate Finance -- and on these three Dems and three Republicans, in particular. But who, exactly, anointed these six to decide the fate of the nation's health care?
I don't get it. Of the three Republicans in the gang, the senior senator is Charles Grassley. In recent weeks Grassley has refused to debunk the rumor that the House's health-care bill will spawn "death panels," empowered to decide whether the sick and old get to live or die. At an Iowa town meeting last Tuesday Grassley called the President and Speaker Nancy Pelosi "intellectually dishonest" for claiming the opposite. On Thursday Grassley told the Washington Post that Congress should scale back its efforts to overhaul health care in the wake of intense anger at town hall meetings. But -- wait -- the anger is largely about distortions such as the "death panels" that Grassley refuses to debunk.
This week on Fox News Grassley termed the House bill "the Pelosi Bill," and called it "a government takeover of heath care, exploding the deficit because it's not paid for and it's got high taxes in it."
I really don't get it. We have a Democratic president in the White House. Democrats control sixty votes in the Senate, enough to overcome a filibuster. It is possible to pass health care legislation through the Senate with 51 votes (that's what George W. Bush did with his tax cut plan). Democrats control the House. The Speaker of the House, Nancy Pelosi, is a tough lady. She has said there will be no health care reform bill without a public option.
So why does the fate of health care rest in Grassley's hands?
It's not even as if the gang represents America. The three Dems on the gang are from Montana, New Mexico, and North Dakota -- states that together account for just over 1 percent of Americans. The three Republicans are from Maine, Wyoming, and Iowa, which together account for 1.6 percent of the American population.
So, I repeat: Why has it come down to these six? Who anointed them? Apparently, the White House. At least that's what I'm repeatedly being told by sources both on the Hill and in the Administration. "The Finance Committee is where the action is. They'll tee-up the final bill," says someone who should know.
Saturday, October 17, 2009
Who's Paying For Your Fix?
by Kate Duncan
May/Jun 2003 Issue
Unless your morning latte was a fair trade blend, it probably cost more than what the farmer who picked the beans earns in a day.
Conventional coffee prices are at their lowest in a century, even below the cost of production. Farmers have been leaving the fruit to rot on the tree, pulling the kids out of school, abandoning the family land and pouring into the cities to find non-existent work. That’s why, as the most heavily traded commodity after oil, and the most common beverage after water, coffee is a major focus of the fair trade movement.
If your morning latte was a fair trade brew, it means the person who farmed the beans is earning enough to support his family. This is all well and good, but the way fair trade is usually explained - with prices, numbers and statistics - ignores it’s lasting benefits. The true point of fair trade is the cultural, communal, and environmental stability it bolsters.
A farmer who sells through fair trade is a member of a cooperative that is a vehicle for community empowerment. And not just a neighborhood watch: The people typically organized via fair trade are those whom the free market has filtered to the lowest economic stratum. Rather than maneuvering them into a position where they’re forced to take what they can get, fair trade recognizes farmers as equal partners, a platform from which they can command more control over their business and lives.
'Fair trade is a different kind of business relationship between the producer and buyer, which has been an inspiration to help these communities pull together instead of caving to the pressure of all the things trying to blow them apart,' says Monika Firl. Monika heads up producer relations for Cooperative Coffees, and as such, led half a dozen coffee roasters and me (as a grateful representative of Idyll Development Foundation, one of Cooperative Coffee’s funders) on a buying trip to farmers’ co-ops in Nicaragua, Guatemala, and Mexico in February, where we were able to see the effect for ourselves. [Clamor]
Friday, October 16, 2009
On inflation expectations
With Federal Reserve and government doing their best to stimulate demand, people have started looking at inflation. The worry is that the economy is not as sick as our policymakers think, and so the fiscal and monetary medicines are excessive. Markets disagree.
Expected inflation is an important determinant of future inflation. If the public expects higher inflation, workers demand higher wages, prompting employers to raise the price of their goods, which results in higher actual inflation.
Markets in fixed-income securities provide timely information about inflation expectations. Treasury inflation-protected securities (TIPS) deliver interest and principal payments that are tied to inflation. Payments from regular Treasury notes, on the other hand, are not indexed to inflation. The difference between the yield rates of the two types of securities must be equal to the inflation rate expected by the markets—otherwise there would be an arbitrage opportunity. In practice, because of technical issues, the yield spread is only an approximation to expected inflation, and people call it the break-even inflation (BEI) instead. (More on this below.) From here on I use BEI and “expected inflation” interchangeably.
Because the Treasury has created notes with different maturities, we can use the spread between nominal and TIPS securities to gauge inflation expectations for different horizons. For example, today’s difference between the yield of five-year TIPS and that of five-year nominal notes is approximately equal to the inflation rate expected over the five years starting now (2008-2012).
The Fed is interested in long-term inflation expectations, because in the short term prices are affected by transitory or volatile factors, such as commodity prices. One measure of long-term expectations, which we can also derive from yields, is the five-year, five-year forward rate. That is an approximation to the rate of inflation expected for the five years starting five years from now. Today, that would be the period from 2013 through 2017.
Chart 1 (click to enlarge)
Expected inflation is an important determinant of future inflation. If the public expects higher inflation, workers demand higher wages, prompting employers to raise the price of their goods, which results in higher actual inflation.
Markets in fixed-income securities provide timely information about inflation expectations. Treasury inflation-protected securities (TIPS) deliver interest and principal payments that are tied to inflation. Payments from regular Treasury notes, on the other hand, are not indexed to inflation. The difference between the yield rates of the two types of securities must be equal to the inflation rate expected by the markets—otherwise there would be an arbitrage opportunity. In practice, because of technical issues, the yield spread is only an approximation to expected inflation, and people call it the break-even inflation (BEI) instead. (More on this below.) From here on I use BEI and “expected inflation” interchangeably.
Because the Treasury has created notes with different maturities, we can use the spread between nominal and TIPS securities to gauge inflation expectations for different horizons. For example, today’s difference between the yield of five-year TIPS and that of five-year nominal notes is approximately equal to the inflation rate expected over the five years starting now (2008-2012).
The Fed is interested in long-term inflation expectations, because in the short term prices are affected by transitory or volatile factors, such as commodity prices. One measure of long-term expectations, which we can also derive from yields, is the five-year, five-year forward rate. That is an approximation to the rate of inflation expected for the five years starting five years from now. Today, that would be the period from 2013 through 2017.
* * *
Chart 1 (click to enlarge)
