Posted by WARREN MOSLER on 17th July 2014
So do you think most of these people will find higher or lower paying jobs?…
Posted by WARREN MOSLER on 17th July 2014
So do you think most of these people will find higher or lower paying jobs?…
Posted by WARREN MOSLER on 3rd July 2014
Looking strong and inline with ADP and surveys.
All good news today!
Average hourly earnings Y/Y:
Just for fun:
Posted by WARREN MOSLER on 3rd July 2014
Looks to have spiked after benefits were cut midyear, then corrected. Might have been a prelude to the federal elimination of benefits for 1.2 million people at year end? If so, there is a sharp ‘correction’ in payroll employment heading our way:
North Carolina employment level:
Posted by WARREN MOSLER on 1st July 2014
Shows how far economic expectations have deteriorated when this kind of a whopping output gap is considered to be an unquestioned success and the envy of the euro zone, as well as most of the world.
Taxation creates unemployment (people seeking paid work), by design, as a simple point of logic.
So what sense does it make for a government to create more unemployed than it wants to hire to provision itself, and then let all those people remain unemployed?
Seems they would either hire the rest of the unemployed their tax created, or lower the tax. But that’s just me…
By Stefan Riecher and Alessandro Speciale
July 1 (Bloomberg) — German unemployment unexpectedly increased for a second month amid signs of a slowdown in Europe’s largest economy.
The number of people out of work rose a seasonally adjusted 9,000 to 2.916 million in June, the Nuremberg-based Federal Labor Agency said today. Economists forecast a decline of 10,000, according to the median of 24 estimates in a Bloomberg News survey. The adjusted jobless rate was unchanged at 6.7 percent, the lowest level in more than two decades.
Posted by WARREN MOSLER on 25th June 2014
> On Wed, Jun 25, 2014 at 8:52 AM, Sheraz wrote:
> Very weak US numbers
And not one ‘nice call’ email!!!
And yesterday’s stock market action suggests a possible data leak???
US 1Q GDP has been revised lower by far than expected. After having initially been reported as a 0.1% rise, then a 1% contraction, the third release shows that GDP growth is now reported as -2.9 QoQ% annualised, which leaves annual growth at just 1.5%YoY.
The consensus expectation was for a -1.8% reading. The damage was largely done through the private consumption component, which is now reported as rising just 1% versus 3.1% previously.
Also ‘smoothing’ from numbers that looked high to me in H2 and an adjustment to ACA related healthcare expenses previously booked as PCE:
Gross private investment remained an 11.7% contraction
Maybe after a Q4 surge due to expiring tax credits?
while government consumption was left at -0.8%. However, exports were revised down and imports revised up meaning that the contribution from net trade is to subtract 1.5% from GDP growth rather than 0.95% as previously announced.
Reversing a similar, prior blip up, as previously discussed:
Nonetheless, reaction should be fairly muted given widespread expectations of a sharp bounceback in 2Q14 and the fact that the weather had such a damaging impact on 1Q activity. Indeed, we suspect that we could see GDP rise by more than 5% annualised in 2Q.
And if so, H1 would be +1% :(
High frequency numbers for the quarter have looked good while inventories should also make a significantly positive contribution after having been run down sharply.
After having been run up in H2. We’ll see where they go from here.
And, as previously discussed after the jump up in Q3, inventory accumulation seldom leads a boom:
Mortgage purchase apps still dismal:
According to the MBA, the unadjusted purchase index is down about 18% from a year ago.
Full size image
And May durables not so good either:
Durables orders were much weaker than expected for May. Durables orders fell 1.0 percent in May after rising 0.8 percent in April. Analysts forecast 0.4 percent. Excluding transportation, orders slipped 0.1 percent, following a 0.4 percent gain in April. Market expectations were for 0.3 percent.
Transportation fell 3.0 percent after a 1.7 percent rise in April. The latest dip was from weakness in nondefense aircraft. Motor vehicles and defense aircraft orders rose.
Outside of transportation, gains were seen in primary metals, fabricated metals, and “other.” Declines were posted for machinery, computers & electronics, and electrical equipment.
On a positive note, there was improvement in equipment investment. Nondefense capital goods orders excluding aircraft rebounded 0.7 percent in May after decreasing 1.1 percent the month before. Shipments of this series rebounded 0.4 percent after a 0.4 percent dip in April.
The good news is this series is muddling along ok:
The latest durables report is in contrast to recently positive regional manufacturing surveys and also the sharp jump in manufacturing production worker hours of 0.8 percent for May. But durables data are very volatile and we likely need a couple of more months of data before taking a negative tone on this sector.
The next leg to fall may be employment, as the 1.2 million people who lost long term benefits at year end may have been taking menial jobs at the rate of maybe 75,000/month or more for 6 months or so, which may have front loaded the monthly jobs numbers. If so, monthly job gains may fall into the 100,000 range soon.
So in general it was down for the winter, back up some, and we’ll see what happens next.
The ‘survey’ numbers and professional forecasts look promising, however it still looks to me like we are under the macro constraint of a too low govt deficit that’s struggling to keep up with the unspent income/demand leakages, with scant evidence of help from growth in private credit expansion.
And I tend to agree with Fed Chair Yellen here, which would tend to keep rates lower/longer if she gets her way. However I don’t agree that low rates somehow support aggregate demand, so I don’t see the likelihood of any call from the Fed or other forecasters for the fiscal relaxation I’ve been proposing.
June 25 (Reuters) — “My own expectation is that, as the labor market begins to tighten, we will see wage growth pick up some to the point where … nominal wages are rising more rapidly than inflation, so households are getting a real increase in their take home pay,” Federal Reserve Chair Janet Yellen said last week, adding: “If we were to fail to see that, frankly, I would worry about downside risk to consumer spending.” Over the last year Fed staff changed their main model for forecasting wage and price inflation to reflect evidence that companies were adjusting prices more slowly than in prior years.
My immediate proposals remain 1) A full FICA suspension, which raises take home pay by 7.6%, and, for businesses that are competitive, lowers prices as well, restoring sales/output/employment in short order 2) A $10/hr federally funded transition job for anyone willing and able to work to promote the transition from unemployment to private sector employment 3) A permanent 0 rate policy with Tsy issuance limited to 3 mo bills. 4) Unrestricted campaign contributions, however, say, 40% of any contribution goes to the opposition…
Posted by WARREN MOSLER on 9th June 2014
Time to tighten up on account of ‘wage inflation’…
Posted by WARREN MOSLER on 8th June 2014
Better tighten up quick!!!
Posted by WARREN MOSLER on 8th June 2014
Posted by WARREN MOSLER on 6th June 2014
First, the growth rate is still low and from this chart could be leveling off.
Second, for a 40 hour week the average gross wage is only just over $800/week!
Third, the growth rate is not inflation adjusted!
Fourth, the wage share has been falling for decades as productivity increases have gone elsewhere.
And what makes anyone think any of this is a function of interest rates?
Particularly in the direction assumed?
And why is it assumed that increased wages wouldn’t cut into profit margins?
Is the economy assumed to be ‘competitive’ only when it suites?
Posted by WARREN MOSLER on 2nd June 2014
So my narrative is:
The Federal budget deficit is too small to support growth given the current ‘credit environment’- maybe $400b less net spending in 2014. The automatic fiscal stabilizers are ‘aggressive’, as they materially and continually reduce the deficit it all turns south. The demand leakages are relentless, including expanding pension type assets, corporate/insurance accumulations, foreign CB $ accumulation, etc. etc.
The Jan 2013 FICA hike and subsequent sequesters took maybe 2% off of GDP as they flattened the prior growth rates of housing, cars, retail sales, etc. etc. Q3/Q4 GDP was suspect due to inventory building, a net export ‘surge’, and a ‘surge’ in year end construction spending/cap ex etc. I suspected these would ‘revert’ in H1 2014. It was a very cold winter that slowed things down, followed by a ‘make up’ period. The question now is where it all goes from there. For every component growing slower than last year, another has to be growing faster for the total to increase.
The monthly growth rate of durable goods orders fell off during the cold snaps and the worked it’s way back up, though still not all the way back yet, and the ‘ex transportation’ growth rate was bit lower:
And of note:
Investment in equipment eased after a robust March. Nondefense capital goods orders excluding aircraft dipped 1.2 percent, following a 4.7 percent jump in March. Shipments for this series slipped 0.4 percent after gaining 2.1 percent the prior month.
In general the manufacturing surveys were firm.
Mortgage purchase applications continued to come in substantially below last year, even with the expanded, more representative survey:
According to the MBA, the unadjusted purchase index is down about 15% from a year ago.
MBA Mortgage Applications
Mortgage applications for home purchases remain flat, down 1.0 percent in the May 23 week to signal weakness for underlying home sales. Refinancing applications, which had been showing life in prior weeks tied to the dip underway in mortgage rates, also slipped 1.0 percent in the week. Mortgage rates continue to edge lower, down 2 basis points for 30-year conforming loans ($417,000 or less) to 4.31 percent and the lowest average since June last year.
And then there was the Q1 revised GDP release:
What drove it negative was a decline in inventories, net exports, and construction/cap ex:
The largest revisions to the headline number were from inventories (revised downward by -1.05%) and imports (down -0.36%), and although exports improved somewhat from the prior report, they still subtracted -0.83% from the headline. Fixed investments in both equipment and residential construction continued to contract.
PCE growth was revised up to +3.1% (adding 2.09% to GDP) but seems over 1% of that came from ACA (Obamacare) related and other non discretionary expenditures like heating expenses, etc. The question then is whether the increases will continue at that rate and whether the increased ACA related expenses will eat into other, discretionary expenditures.
The contribution made by consumer services spending remained essentially the same at 1.93% (up 0.36% from the 1.57% in the prior quarter). As mentioned last month, the increased spending was primarily for non-discretionary healthcare, housing, utilities and financial services – i.e., increased expenses that stress households without providing any perceived improvement to their quality of life.
And seems this Chart is consistent with my narrative:
And not that it matters, but just an interesting observation:
And lastly, for this report the BEA assumed annualized net aggregate inflation of 1.28%. During the first quarter (i.e., from January through March) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was over a half percent higher at a 1.80% (annualized) rate, and the price index reported by the Billion Prices Project (BPP – which arguably reflected the real experiences of American households while recording sharply increasing consumer prices during the first quarter) was over two and a half percent higher at 3.91%. Under reported inflation will result in overly optimistic growth data, and if the BEA’s numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be contracting at a -1.52% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter’s contraction rate would have been a staggering -3.64%.
And looks like this will be limiting the next quarter:
Real per-capita annual disposable income grew by $95 during the quarter (a 1.03% annualized rate). But that number is down a material -$227 per year from the fourth quarter of 2012 (before the FICA rates normalized) and it is up only about 1% in total ($359 per year) since the second quarter of 2008 – some 23 quarters ago.
And remember this?
So the question is, how strong will the Q2 recovery be, and where does it go from there?
Again, looks to me like the deficit is having trouble keeping up with the demand leakages, and it keeps getting harder with time?
Jobless claims continue to work their way lower, but they are a bit of a lagging indicator and even with 0 claims there aren’t necessarily any new hires, either, for example.
And there’s another couple of issues at work here.
First, 1.2 million people lost benefits at year end, and it’s expected up to half of them will find ‘menial’ jobs during H1. However, corporations don’t add to head count just because unskilled workers lose benefits, so the employment numbers may thus be ‘front loaded’ with higher numbers of hires in H1, followed by fewer hires in H2.
Second, seems the new jobs don’t pay a whole lot, and a lot of higher paying jobs continue to be lost, so the increased employment isn’t associated with the kind of subsequent growth multipliers of past cycles.
Corporate profits were down over 10% in the Q1 GDP report, and mainly in the smaller companies as the S&P earnings saw a modest increase. Hence the small caps under performing, for example? Not mention earnings also tend to up and down with the Federal deficit:
This year over year pending home sales chart speaks for itself:
Another series following the pattern- down for the winter weather, then back up some, and this time then backing off some:
Personal income & spending, up 0.3 percent and down 0.1 percent, fell back in April following especially strong gains in March. Wages & salaries slowed to plus 0.2 percent vs a 0.6 percent surge in March while spending on durables, reflecting a pause in auto sales, fell 0.5 percent vs gains of 3.6 and 1.3 percent in the prior two months. Spending on services, however, also fell, down 0.2 percent on a decline in utilities and healthcare after a 0.5 percent rise in March. In real terms, spending fell 0.3 percent following the prior month’s 0.8 percent surge. Price data remain muted, up 0.2 percent overall and up 0.2 percent ex-food and energy. Year-on-year price rates are at plus 1.6 percent and 1.4 percent for the core.
And again, the ACA and other non discretionaries added about 1% in Q1. So, again, it’s down for the winter, then up and this time back down to begin Q2 (with the growth of healthcare expenses backing off some):
Posted by WARREN MOSLER on 5th May 2014
Employee compensation as a share of national income has fallen to its lowest point since 1951, at 66%, while profits rose to a level not seen since around the same time, at about 16%, said Christopher Probyn, chief economist at State Street Global Advisors.
Posted by WARREN MOSLER on 29th April 2014
By Douglas Holtz-Eakin
Posted by WARREN MOSLER on 15th April 2014
Another non bounce, this time an April survey:
Empire State Mfg Survey
The first look at the manufacturing sector this month is flat with the Empire State index barely over zero, at 1.29 vs 5.61 in March and 4.48 in February. New orders, the most important of all readings, is in the negative column at minus 2.77. Shipments show some growth, at plus 3.15, while employment shows better growth, at 8.16 vs March’s 5.88. On the negative side are unfilled orders, at minus 13.27. Inventories show a draw while price data do show some upward pressure. A positive is a more than 5 point uptick in the 6-month outlook to a very solid 38.23. This report, held back by the dip in new orders, is no better than mixed suggesting that the beginning of the spring, at least in the New York manufacturing economy, didn’t make for much of a bounce.
Posted by WARREN MOSLER on 8th April 2014
Note the year over year rate of growth:
As previously discussed, in order for GDP to grow at last year’s pace all the pieces, ‘on average’ have to do same.
And so far, housing and cars are well below last year’s growth rates.
And the contribution of net govt spending is well below last year’s contribution.
And so far net export growth isn’t coming to the rescue.
Nor is consumer credit driving spending.
Even capex just took a hit.
And the personal income growth rate isn’t looking like it’s ‘bounced’ any.
Employment growth, a lagging indicator that’s largely a function of sales, if anything looks a tad less as well.
The ‘surveys’ are still showing positive growth, and maybe they’ll turn out to be correct. But I have noticed a tendency for their responses to be influenced by the stock market.
Hopefully we’ve just had a weather pause, and the consumer and business celebrate spring with a material surge of spending that exceeds their incomes to off set the ongoing ‘demand leakages’.
But if not, growth slips into reverse until the federal deficit again gets large enough to stop the slide.
Posted by WARREN MOSLER on 3rd April 2014
Total vehicle sales year over year showed some post winter bounce.
The narrative was that March started off slow but picked up due to large incentives for the last week.
We’ll see if it all holds up for April.
Factory orders ‘bounced’ from large declines but not yet enough to ‘make up’ for the declines.
And regarding capital goods, as with construction measures, I remain concerned that what looked like a year end spike was tax driven and ‘borrowed’ from this year.
Factory orders bounced back strongly in February, up 1.6 percent to edge above the high end of the Econoday consensus. The month got a major lift from a 13.4 percent upswing in commercial aircraft orders. A 3.0 percent gain in motor vehicle orders also helped the total. But the total excluding transportation orders, which is a closely tracked reading, is also healthy, up 0.7 percent following 0.1 percent declines in the prior two months.
There is, however, a negative in the February numbers and that’s a sizable 1.4 percent decline in nondefense capital goods orders excluding aircraft. This is considered a core reading on the outlook for business investment. February’s decline more than reverses a 0.8 percent rise in January. Orders for this reading were especially weak in December, at minus 1.6 percent.
Other data include a weather-related bounce in shipments, to plus 0.9 percent following January’s 0.7 percent decline. Inventories rose 0.7 percent, in line with shipments and keeping the factory sector’s inventory-to-shipment ratio unchanged at 1.30. Unfilled orders are a positive, up 0.3 percent.
This report is mostly positive if it weren’t the decline underway in core capital goods orders, a decline that points to weakness in the business outlook. Early indications on the manufacturing for March have also been mostly positive, with the exception of yesterday’s slowing in the ISM employment index.
Global manufacturing has softened in recent months. At 52.4 in March, down from 53.2 in February, the J.P.Morgan Global Manufacturing PMI fell to a five-month low, but remained above its average for the current 16-month sequence of expansion.
Global manufacturing production increased for the seventeenth consecutive month in March. However, the rate of expansion eased to a five-month low, mainly on the back of a slowdown in Asia. Growth of total new orders also eased slightly, despite improved inflows of new export business.
Purchase Mortgage applications up 1% for the week but down 19% vs last year.
What I’m saying is that Jan and Fed were weather depressed. And with the federal deficit now running maybe below 3% of GDP, down several % from last year, some pro active and some from the auto stabilizers, my concern is that the underlying support for a bounce is no longer there and the rate of growth continues to decelerate. Yes, lending is up some, but it could be the financing of utility bills and inventory/reduced cash flow growth, which takes away from future sales.
Posted by WARREN MOSLER on 31st March 2014
Notice the capital share started falling prior to the most recent recessions:
Posted by WARREN MOSLER on 18th March 2014
Lessons from Crises, 1985-2014
It is both an honor and a pleasure to receive this years SIEPR Prize. Let me list the reasons. First, the prize, awarded for lifetime contributions to economic policy, was started by George Shultz. I got my start in serious policy work in 1984-85, as a member of the advisory group on the Israeli economy to George Shultz, then Secretary of State. I learned a great deal from that experience, particularly from Secretary Shultz and from Herb Stein, the senior member of the two-person advisory group (I was the other member). Second, it is an honor to have been selected for this prize by a selection committee consisting of George Shultz, Ken Arrow, Gary Becker, Jim Poterba and John Shoven. Third, it is an honor to receive this prize after the first two prizes, for 2010 and for 2012 respectively, were awarded to Paul Volcker and Marty Feldstein. And fourth, it is a pleasure to receive the award itself.
When John Shoven first spoke to me about the prize, he must have expected that I would speak on the economic issues of the day and I would have been delighted to oblige. However, since then I have been nominated by President Obama but not so far confirmed by the Senate for the position of Vice-Chair of the Federal Reserve Board. Accordingly I shall not speak on current events, but rather on lessons from economic crises I have seen up close during the last three decades and about which I have written in the past starting with the Israeli stabilization of 1985, continuing with the financial crises of the 1990s, during which I was the number two at the IMF, and culminating (I hope) in the Great Recession, which I observed and with which I had to deal as Governor of the Bank of Israel between 2005 and 2013.
This is scheduled to be an after-dinner speech at the end of a fine dinner and after an intensive conference that started at 8 a.m. and ran through 6 p.m. Under the circumstances I shall try to be brief. I shall start with a list of ten lessons from the last twenty years, including the crises of Mexico in 1994-95, Asia in 1997-98, Russia in 1998, Brazil in 1999-2000, Argentina in 2000-2001, and the Great Recession. I will conclude with one or two-sentence pieces of advice I have received over the years from people with whom I had the honor of working on economic policy. The last piece of advice is contained in a story from 1985, from a conversation with George Shultz.
I. Ten lessons from the last two decades.
Lesson 1: Fiscal policy also matters macroeconomically. It has always been accepted that fiscal policy, in the sense of the structure of the tax system and the composition of government spending, matters for the behavior of the economy. At times in the past there has been less agreement about whether the macroeconomic aspects of fiscal policy, frequently summarized by the full employment budget deficit, have a significant impact on the level of GDP. As a result of the experience of the last two decades, it is once again accepted that cutting government spending and raising taxes in a recession to reduce the budget deficit is generally recessionary. This was clear from experience in Asia in the 1990s. The same conclusion has been reached following the Great Recession.
Who would have thought?…
At the same time, it needs to be emphasized that there are circumstances in which a fiscal contraction can be expansionary particularly for a country running an unsustainable budget deficit.
He doesn’t distinguish between floating and fixed fx policy. At best this applies to fixed fx policy, where fx reserves would be exhausted supporting the peg/conversion. And as a point of logic, with floating fx this can only mean an unsustainable inflation, whatever that means.
More important, small budget deficits and smaller rather than larger national debts are preferable in normal times in part to ensure that it will be possible to run an expansionary fiscal policy should that be needed in a recession.
Again, this applies only to fixed fx regimes where a nation might need fx reserves to support conversion at the peg. With floating fx nominal spending is in no case revenue constrained.
Lesson 2: Reaching the zero interest lower bound is not the end of expansionary monetary policy. The macroeconomics I learned a long time ago, and even the macroeconomics taught in the textbooks of the 1980s and early 1990s, proclaimed that more expansionary monetary policy becomes either impossible or ineffective when the central bank interest rate reaches zero, and the economy finds itself in a liquidity trap. In that situation, it was said, fiscal policy is the only available expansionary tool of macroeconomic policy.
Now the textbooks should say that even with a zero central bank interest rate, there are at least two other available monetary policy tools. The first consists of quantitative easing operations up and down the yield curve, in particular central bank market purchases of longer term assets, with the intention of reducing the longer term interest rates that are more relevant than the shortest term interest rate to investment decisions.
Both are about altering the term structure of rates. How about the lesson that the data seems to indicate the interest income channels matter to the point where the effect is the reverse of what the mainstream believes?
That is, with the govt a net payer of interest, lower rates lower the deficit, reducing income and net financial assets credited to the economy. For example, QE resulted in some $90 billion of annual Fed profits returned to the tsy that otherwise would have been credited to the economy. That, with a positive yield curve, QE functions first as a tax.
The second consists of central bank interventions in particular markets whose operation has become significantly impaired by the crisis. Here one thinks for instance of the Feds intervening in the commercial paper market early in the crisis, through its Commercial Paper Funding Facility, to restore the functioning of that market, an important source of finance to the business sector. In these operations, the central bank operates as market maker of last resort when the operation of a particular market is severely impaired.
The most questionable and subsequently overlooked ‘bailout’- the Fed buying, for example, GE commercial paper when it couldn’t fund itself otherwise, with no ‘terms and conditions’ as were applied to select liquidity provisioning to member banks, AIG, etc. And perhaps worse, it was the failure of the Fed to provide liquidity (not equity, which is another story/lesson) to its banking system on a timely basis (it took months to get it right) that was the immediate cause of the related liquidity issues.
However, and perhaps the most bizarre of what’s called unconventional monetary policy, the Fed did provide unlimited $US liquidity to foreign banking systems with its ‘swap lines’ where were, functionally, unsecured loans to foreign central banks for the further purpose of bringing down Libor settings by lowering the marginal cost of funds to foreign banks that otherwise paid higher rates.
Lesson 3: The critical importance of having a strong and robust financial system. This is a lesson that we all thought we understood especially since the financial crises of the 1990s but whose central importance has been driven home, closer to home, by the Great Recession. The Great Recession was far worse in many of the advanced countries than it was in the leading emerging market countries. This was not what happened in the crises of the 1990s, and it was not a situation that I thought would ever happen. Reinhart and Rogoff in their important book, This Time is Different, document the fact that recessions accompanied by a financial crisis tend to be deeper and longer than those in which the financial system remains operative. The reason is simple: the mechanisms that typically end a recession, among them monetary and fiscal policies, are less effective if households and corporations cannot obtain financing on terms appropriate to the state of the economy.
The lesson should have been that the private sector is necessarily pro cyclical, and that a collapse in aggregate demand that reduces the collateral value of bank assets and reduces the income required to support the credit structure triggers a downward spiral that can only be reversed with counter cyclical fiscal policy.
In the last few years, a great deal of work and effort has been devoted to understanding what went wrong and what needs to be done to maintain a strong and robust financial system. Some of the answers are to be found in the recommendations made by the Basel Committee on Bank Supervision and the Financial Stability Board (FSB). In particular, the recommendations relate to tougher and higher capital requirements for banks, a binding liquidity ratio, the use of countercyclical capital buffers, better risk management, more appropriate remuneration schemes, more effective corporate governance, and improved and usable resolution mechanisms of which more shortly. They also include recommendations for dealing with the clearing of derivative transactions, and with the shadow banking system. In the United States, many of these recommendations are included or enabled in the Dodd-Frank Act, and progress has been made on many of them.
Everything except the recognition of the need for immediate and aggressive counter cyclical fiscal policy, assuming you don’t want to wait for the automatic fiscal stabilizers to eventually turn things around.
Instead, what they’ve done with all of the above is mute the credit expansion mechanism, but without muting the ‘demand leakages’/'savings desires’ that cause income to go unspent, and output to go unsold, leaving, for all practical purposes (the export channel isn’t a practical option for the heaving lifting), only increased deficit spending to sustain high levels of output and employment.
Lesson 4: The strategy of going fast on bank restructuring and corporate debt restructuring is much better than regulatory forbearance. Some governments faced with the problem of failed financial institutions in a recession appear to believe that regulatory forbearance giving institutions time to try to restore solvency by rebuilding capital will heal their ills. Because recovery of the economy depends on having a healthy financial system, and recovery of the financial system depends on having a healthy economy, this strategy rarely works.
The ‘problem’ is bank lending to offset the demand leakages when the will to use fiscal policy isn’t there.
And today, it’s hard to make the case that us lending is being constrained by lack of bank capital, with the better case being a lack of credit worthy, qualifying borrowers, and regulatory restrictions- called ‘regulatory overreach’ on some types of lending as well. But again, this largely comes back to the understanding that the private sector is necessarily pro cyclical, with the lesson being an immediate and aggressive tax cut and/or spending increase is the way go.
This lesson was evident during the emerging market crises of the 1990s. The lesson was reinforced during the Great Recession, by the contrast between the response of the U.S. economy and that of the Eurozone economy to the low interest rate policies each implemented. One important reason that the U.S. economy recovered more rapidly than the Eurozone is that the U.S. moved very quickly, using stress tests for diagnosis and the TARP for financing, to restore bank capital levels, whereas banks in the Eurozone are still awaiting the rigorous examination of the value of their assets that needs to be the first step on the road to restoring the health of the banking system.
The lesson remaining unlearned is that with a weaker banking structure the euro zone can implement larger fiscal adjustments- larger tax cuts and/or larger increases in public goods and services.
Lesson 5: It is critical to develop now the tools needed to deal with potential future crises without injecting public funds.
Yes, it seems the value of immediate and aggressive fiscal adjustments remains unlearned.
This problem arose during both the crises of the 1990s and the Great Recession but in different forms. In the international financial crises of the 1990s, as the size of IMF packages grew, the pressure to bail in private sector lenders to countries in trouble mounted both because that would reduce the need for official financing, and because of moral hazard issues. In the 1980s and to a somewhat lesser extent in the 1990s, the bulk of international lending was by the large globally active banks. My successor as First Deputy Managing Director of the IMF, Anne Krueger, who took office in 2001, mounted a major effort to persuade the IMF that is to say, the governments of member countries of the IMF to develop and implement an SDRM (Sovereign Debt Restructuring Mechanism). The SDRM would have set out conditions under which a government could legally restructure its foreign debts, without the restructuring being regarded as a default.
The lesson is that foreign currency debt is to be avoided, and that legal recourse in the case of default should be limited.
Recent efforts to end too big to fail in the aftermath of the Great Recession are driven by similar concerns by the view that we should never again be in a situation in which the public sector has to inject public money into failing financial institutions in order to mitigate a financial crisis. In most cases in which banks have failed, shareholders lost their claims on the banks, but bond holders frequently did not. Based in part on aspects of the Dodd-Frank Act, real progress has been made in putting in place measures to deal with the too big to fail problem. Among them are: the significant increase in capital requirements, especially for SIFIs (Systemically Important Financial Institutions) and the introduction of counter-cyclical capital buffers for banks; the requirement that banks hold a cushion of bail-in-able bonds; and the sophisticated use of stress tests.
The lesson is that the entire capital structure should be explicitly at full risk and priced accordingly.
Just one more observation: whenever the IMF finds something good to say about a countrys economy, it balances the praise with the warning Complacency must be avoided. That is always true about economic policy and about life. In the case of financial sector reforms, there are two main concerns that the statement about significant progress raises: first, in designing a system to deal with crises, one can never know for sure how well the system will work when a crisis situation occurs which means that we will have to keep on subjecting the financial system to tough stress tests and to frequent re-examination of its resiliency; and second, there is the problem of generals who prepare for the last war the financial system and the economy keep evolving, and we need always to be asking ourselves not only about whether we could have done better last time, but whether we will do better next time and one thing is for sure, next time will be different.
And in any case an immediate and aggressive fiscal adjustment can always sustain output and employment. There is no public purpose in letting a financial crisis spill over to the real economy.
Lesson 6: The need for macroprudential supervision. Supervisors in different countries are well aware of the need for macroprudential supervision, where the term involves two elements: first, that the supervision relates to the financial system as a whole, and not just to the soundness of each individual institution; and second, that it involves systemic interactions. The Lehman failure touched off a massive global financial crisis, a reflection of the interconnectedness of the financial system, and a classic example of systemic interactions. Thus we are talking about regulation at a very broad level, and also the need for cooperation among regulators of different aspects of the financial system.
The lesson are that whoever insures the deposits should do the regulation, and that independent fiscal adjustments can be immediately and aggressively employed to sustain output and employment in any economy.
In practice, macroprudential policy has come to mean the deployment of non-monetary and non-traditional instruments of policy to deal with potential problems in financial institutions or a part of the financial system. For instance, in Israel, as in other countries whose financial system survived the Great Recession without serious damage, the low interest rate environment led to uncomfortably rapid rates of increase of housing prices. Rather than raise the interest rate, which would have affected the broader economy, the Bank of Israel in which bank supervision is located undertook measures whose effect was to make mortgages more expensive. These measures are called macroprudential, although their effect is mainly on the housing sector, and not directly on interactions within the financial system. But they nonetheless deserve being called macroprudential, because the real estate sector is often the source of financial crises, and deploying these measures should reduce the probability of a real estate bubble and its subsequent bursting, which would likely have macroeconomic effects.
And real effects- there would have been more houses built. The political decision is the desire for real housing construction.
The need for surveillance of the financial system as a whole has in some countries led to the establishment of a coordinating committee of regulators. In the United States, that group is the FSOC (Financial Stability Oversight Council), which is chaired by the Secretary of the Treasury. In the United Kingdom, a Financial Policy Committee, charged with the responsibility for oversight of the financial system, has been set up and placed in the Bank of England. It operates under the chairmanship of the Governor of the Bank of England, with a structure similar but not identical to the Bank of Englands Monetary Policy Committee.
Lesson 7: The best time to deal with moral hazard is in designing the system, not in the midst of a crisis.
Moral hazard is about the future course of events.
At the start of the Korean crisis at the end of 1997, critics including friends of mine told the IMF that it would be a mistake to enter a program with Korea, since this would increase moral hazard. I was not convinced by their argument, which at its simplest could be expressed as You should force Korea into a greater economic crisis than is necessary, in order to teach them a lesson. The issue is Who is them? It was probably not the 46 million people living in South Korea at the time. It probably was the policy-makers in Korea, and it certainly was the bankers and others who had invested in South Korea. The calculus of adding to the woes of a country already going through a traumatic experience, in order to teach policymakers, bankers and investors a lesson, did not convince the IMF, rightly so to my mind.
Nor did they need an IMF program!
But the question then arises: Can you ever deal with moral hazard? The answer is yes, by building a system that will as far as possible enable policymakers to deal with crises in a way that does not create moral hazard in future crisis situations. That is the goal of financial sector reforms now underway to create mechanisms and institutions that will put an end to too big to fail.
There was no too big to fail moral hazard issue. The US banks did fail when shareholders lost their capital. Failure means the owners lose and are financially punished, and new owners with new capital have a go at it.
Lesson 8: Dont overestimate the benefits of waiting for the situation to clarify.
Early in my term as Governor of the Bank of Israel, when the interest rate decision was made by the Governor alone, I faced a very difficult decision on the interest rate. I told the advisory group with whom I was sitting that my decision was to keep the interest rate unchanged and wait for the next monthly decision, when the situation would have clarified. The then Deputy Governor, Dr. Meir Sokoler, commented: It is never clear next time; it is just unclear in a different way. I cannot help but think of this as the Tolstoy rule, from the first sentence of Anna Karenina, every unhappy family is unhappy in its own way.
It is not literally true that all interest rate decisions are equally difficult, but it is true that we tend to underestimate the lags in receiving information and the lags with which policy decisions affect the economy. Those lags led me to try to make decisions as early as possible, even if that meant that there was more uncertainty about the correctness of the decision than would have been appropriate had the lags been absent.
The lesson is to be aggressive with fiscal adjustments when unemployment/the output gap starts to rise as the costs of waiting- massive quantities of lost output and negative externalities, particularly with regard to the lives of those punished by the government allowing aggregate demand to decline- are far higher than, worst case, a period of ‘excess demand’ that can also readily be addressed with fiscal policy.
Lesson 9: Never forget the eternal verities lessons from the IMF. A country that manages itself well in normal times is likely to be better equipped to deal with the consequences of a crisis, and likely to emerge from it at lower cost.
Thus, we should continue to believe in the good housekeeping rules that the IMF has tirelessly promoted. In normal times countries should maintain fiscal discipline and monetary and financial stability. At all times they should take into account the need to follow sustainable growth-promoting macro- and structural policies. And they need to have a decent regard for the welfare of all segments of society.
Yes, at all times they should sustain full employment policy as the real losses from anything less far exceed any other possible benefits.
The list is easy to make. It is more difficult to fill in the details, to decide what policies to
follow in practice. And it may be very difficult to implement such measures, particularly when times are good and when populist pressures are likely to be strong. But a country that does not do so is likely to pay a very high price.
In a crisis, central bankers will often find themselves deciding to implement policy actions they never thought they would have to undertake and these are frequently policy actions that they would have preferred not to have to undertake. Hence, a few final words of advice to central bankers (and to others):
Lesson for all bankers:
Proposals for the Banking System, Treasury, Fed, and FDIC
Never say never
II. The Wisdom of My Teachers
Feel free to distribute, thanks.
Over the years, I have found myself remembering and repeating words of advice that I first heard from my teachers, both academics and policymakers. Herewith a selection:
1. Paul Samuelson on econometric models: I would rather have Bob Solow than an econometric model, but Id rather have Bob Solow with an econometric model than Bob Solow without one.
2. Herb Stein: (a) After listening to my long description of what was happening in the Israeli economy in 1985: Yes, but what do we want them to do?”
(b) The difference between a growth rate of 2% and a growth rate of 3% is 50%.
(c) If something cannot go on forever, it will stop.
3. Michel Camdessus (former head of the IMF):
(a) At 7 a.m., in his office, on the morning that the U.S. government turned to the IMF to raise $20 billion by 9:30 a.m: Gentlemen, this is a crisis, and in a crisis you do not panic
(b) When the IMF was under attack from politicians or the media, in response to my asking Michel, what should we do?, his inevitable answer was We must do our job.
(c) His response when I told him (his official title was Managing Director of the IMF) that life would be much easier for all of us if he would only get himself a cell phone: Cell phones are for deputy managing directors.
(d) On delegation: In August, when he was in France and I was acting head of the IMF in Washington, and had called him to explain a particularly knotty problem and ask him for a decision, You have more information than me, you decide.
4. George Shultz: This event happened in May 1985, just before Herb Stein and I were due to leave for Israel to negotiate an economic program which the United States would support with a grant of $1.5 billion. I was a professor at MIT, and living in the Boston area. Herb and I spoke on the phone about the fact that we had no authorization to impose any conditions on the receipt of the money. Herb, who lived in Washington, volunteered to talk to the Secretary of State to ask him for authorization to impose conditions. He called me after his meeting and said that the Secretary of State was not willing to impose any conditions on the aid.
We agreed this was a problem and he said to me, Why dont you try. A meeting was hastily arranged and next morning I arrived at the Secretary of States office, all ready to deliver a convincing speech to him about the necessity of conditionality. He didnt give me a chance to say a word. You want me to impose conditions on Israel? I said yes. He said I wont. I asked why not. He said Because the Congress will give them the money even if they dont carry out the program and I do not make threats that I cannot carry out.
This was convincing, and an extraordinarily important lesson. But it left the negotiating team with a problem. So I said, That is very awkward. Were going to say To stabilize the economy you need to do the following list of things. And they will be asking themselves, and if we dont? Is there anything we can say to them?
The Secretary of State thought for a while and said: You can tell them that if they do not carry out the program, I will be very disappointed.
We used that line repeatedly. The program was carried out and the program succeeded.
Thank you all very much.
 Council on Foreign Relations. These remarks were prepared for presentation on receipt of the SIEPR (Stanford Institute for Economic Policy Research) Prize at Stanford University on March 14, 2014. The Prize is awarded for lifetime contributions to economic policy. I am grateful to Dinah Walker of the Council on Foreign Relations for her assistance.
 I draw here on two papers I wrote based on my experience in the IMF: Ten Tentative Conclusions from the Past Three Years, presented at the annual meeting of the Trilateral Commission in 1999, in Washington, DC; and the Robbins Lectures, The International Financial System: Crises and Reform Several other policy-related papers from that period appear in my book: IMF Essays from a Time of Crisis (MIT Press, Cambridge, MA, 2004). For the period of the Great Recession, I draw on Central bank lessons from the global crisis, which I presented at a conference on Lessons of the Global Crisis at the Bank of Israel in 2011.
 This point was made in my 1999 statement Ten Tentative Conclusions referred to above, and has of course received a great deal of focus in analyses of the Great Recession.
 Carmen Reinhart and Kenneth Rogoff, This Time is Different, Princeton University Press, Princeton, NJ, 2009.
Posted by WARREN MOSLER on 5th March 2014
Prior months revised down as well:
MBA Purchase Applications:
Wild swings appear to be the rule for weekly mortgage application data. The purchase index jumped 9.0 percent in the February 28 week following declines of 4.0 percent and 6.0 percent in the two prior weeks. Though the latest week is higher, the year-on-year rate fell 4.0 percentage points to minus 19 percent. The refinance index jumped 10.0 percent in the week following an 11.0 percent decline in the prior week.
The latest week got a lift from a drop in mortgage rates, down 6 basis points for 30-year conforming mortgages ($417,500) to an average 4.47 percent.
It’s hard to make much of this report, but the year-on-year rate for purchase applications does point to continued weakness for home sales.
In particular, there was a significant drop in the employment index, which plunged 8.9 points to 47.5. This is its lowest level since 2010 and commentary from respondents suggests that some of this effect could be due to the implementation of the Affordable Care Act.
Outside of the employment index, however, the new orders index climbed to 51.3 (previous: 50.9), and the headline index has now remained above the breakeven level of 50 for 49 consecutive months. Overall we would suggest that this is a softer report than January, but we do not yet think that it marks a significant slowdown in the pace of nonmanufacturing activity growth.
Note export orders down again.
Forecasters have been counting on an increase in export growth:
By Bill McBride
March 5 — From housing economist Tom Lawler:
Hovnanian Enterprises, the nations sixth largest home builder in 2012, reported that net home orders (including unconsolidated joint ventures) in the quarter ended January 31, 2014 totaled 1,202, down 10.6% from the comparable quarter of 2013. The companys sales cancellation rate, expressed as a % of gross orders, was 18% last quarter, up from 17% a year ago. Home deliveries last quarter totaled 1,138, down 4.2% from the comparable quarter of 2013, at an average sales price of $351,279, up 6.1% from a year ago. The companys order backlog at the end of January was 2,438, up 6.0% from last January, at an average order price of $368,243, up 4.3% from a year ago.
Hovnanians net orders in California plunged by 43.4% compared to a year ago. Hovnanians average net order price in California last quarter was $653,366, up 46.8% from a year ago and up 83.2% from two years ago. Net orders in the Southwest were down 10.0% YOY.
Here is an excerpt from the companys press release.
“While our first quarter is always the slowest seasonal period for net contracts, the strong recovery trajectory from the spring selling season of 2013 has softened on a year-over-year basis. Net contracts in the months of December, January and February have not met our expectations. In addition to the lull in sales momentum, both sales and deliveries were impacted by poor weather conditions and deliveries were further impacted by shortages in labor and certain materials in some markets that have extended cycle times,” stated Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer.
“We are encouraged by the fact that we have a higher contract backlog, gross margin and community count than we did at the same point in time last year. Furthermore, we have taken steps to spur additional sales in the spring selling season, including the launch of Big Deal Days, a national sales campaign during the month of March. Our first quarter has always been the slowest seasonal period and we expect to report stronger results as the year progresses. We believe this is a temporary pause in the industry’s recovery, and based on the level of housing starts across the country, we continue to believe the homebuilding industry is still in the early stages of recovery,” concluded Mr. Hovnanian.