Maintaining zero interest rates is creating a scenario in which containing risks "becomes virtually impossible," according to an analysis.» Read More
Economists Hold Mixed Views on Inflation Risks (CNBC via Reuters) The debate about whether deflation or inflation is a bigger risk to the U.S. economy isn't merely political: "About a third of NABE [National Association for Business Economics] panelists view the Fed's second asset purchasing program as somewhat lessening the risks of deflation, while another 33 percent saw the step as risking inflation." While that may seem less than definitive, note the following: "Still, they forecast the Fed's preferred measure of consumer inflation—the personal consumption expenditures price index excluding food and energy —to rise to 1.5 percent by the end of 2011 from a projected 1.0 percent this year." That range would be "below the Fed's considered comfort zone between 1.7 percent and 2.0 percent." One imagines that those who see inflation as the bigger threat may quibble with the exclusion of more volatile food and energy prices from the sample.
Is China's Reserve Rate Hike a Countermove to QE2? (New York Times) As widely reported today: "Commercial banks were ordered to transfer an additional 0.5 percent of their assets by Nov. 29 to very low-yielding accounts at the central bank, the People’s Bank of China." How could that be viewed as a countermove against the Fed?
Perhaps the most interesting part of Ben Bernanke's speech today was his claim that the Fed is not conducting quantitative easing at all.
Paul Krugman and Gauti Eggertsson of the New York Fed have a new paper out arguing that the recession and persistent unemployment could have been ameliorated by aggressive government spending. It'll be getting lots of attention, I suspect, so you might as well start reading it now.
Bryan Kaplan asks an important question about Ben Bernanke's policy choices:
As Sumner keeps telling us, all of Bernanke's research prescribed a simple solution : Maintain nominal GDP, and let the other chips fall where they may. This might have meant quantitative easing instead of targeting short-term interest rates, but that's it. Instead Bernanke became a key accomplice for the disgraceful series of bailouts, fiscal stimulus, and obfuscation about the zero nominal bound. The latest round of quantitative easing makes Bernanke's doublethink plain; if he thinks it's going to work in 2010, why wouldn't it have worked in 2008? And if it would have worked in 2008, why did he join Paulson and Bush's stampede?
In the end, Bernanke's behavior baffles me. He abandoned his own intellectual positions without explanation, humiliated himself, sparked a terrible recession, set a long list of dangerous precedents, and pushed the U.S. and the world down the road to serfdom. My best guess is that he simply didn't have the backbone to tell people like Paulson and Bush that they didn't know what they were talking about. Whatever the reason, though, the crisis forced me to rethink my optimism about the Fed. Bernanke and company ignored their own research, got predictably bad results, and pleaded impotence. Instead of playing the voice of reason, they acted like they'd believed in bailouts and fiscal stimulus all along. I expected better. I was wrong.
Dan Primack at Fortune has been doing a heroic job covering Steve Rattner's travails. His post about NYC Mayor Mike Bloomberg yesterday should be read by everyone.
Primack wrote :
"Here's a sign that Bloomberg isn't seriously considering a run for president: His stubborn refusal to cut Steve Rattner loose, or even acknowledge that his friend is involved in a serious public corruption scandal.
For example, here's what he said back in June:
'I don't think [Rattner] did anything wrong… I happen to think the charge against him is ridiculous... I've always stood up for anybody that works with me who gets attacked by the press.'
One day, reality sets in. The most powerful force in the universe isn't love: It's the bond markets.
As Nouriel Roubini said this morning on Squawk Box , in a conversation with political scientist Ian Bremmer: "The bond vigilantes have not woken up for the US treasury market—yet."
Roubini's comments focused largely on the structural challenges of the United States. According to Roubini, here is the economic driver of the broader challenges the U.S. economy faces: "You can borrow at zero rates at the short end, and at 2.5 percent on the long end, why would you want to sacrifice when you can kick the can down the road?"
Democrats are dead set against entitlement reform—and the Republican Party is opposed to any kind of increase in taxes. And, Roubini believes, without major changes on both sides of that fiscal equation, it is nearly impossible to solve the United States' looming fiscal crisis.
In 2 to 3 years, Roubini says, there may be major insolvency issues with the individual U.S. states.
Nicole Lapin, of CNBC's Worldwide Exchange, explains what she's long and what she's short this week.
(Reuters) Perhaps the most interesting thing in Bernanke's defense of the Fed's inflationary policy is that he blamed recent currency movements on Europe's bailouts. Who knew he had that kind of chutzpah?
"We have too much private debt in the case of Ireland," according to Nouriel Roubini.
But the nub of the crisis is this: "We have decided to socialize the private losses of the banking system. Now you have a huge increase in public debt—going from 7 percent to 100 percent of GDP. Soon it will be 120 percent."
And, turning more broadly to the rest of Europe, "Greece is already at 120 percent."
Roubini believes that further attempts at intervention have only increased the magnitude of the problems with sovereign debt. He says, "Now you have a bunch of super sovereigns— the IMF, the EU, the eurozone—bailing out these sovereigns."