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Posen on Japan and fiscal policy

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Adam is pretty much right on with this.

Perhaps more interesting is that the deficit terrorists at Peterson keep him on the payroll:

Must We Repeat Japan’s Stimulus Mistakes? (Answer: Not Necessarily)

by Gerald F. Seib

Feb 2 (Wall Street Journal) — Adam Posen, deputy director of the Peterson Institute for International Economics, agrees that Japanese mistakes in executing stimulus spending — perhaps most notably enacting tax increases rather than tax cuts along the way — prevented stimulus spending from hitting the real economy with full effect.

“Most of the time in Japan…they didn’t spend or stimulate even a fraction of what they announced,” he says. “Usually they either raised taxes at the same time they increased spending, thus defeating the purpose, or they promised projects that required state/local government matching funds that didn’t exist, so the money didn’t get spent.” That suggests Washington needs to be sure states don’t have to pull in their horns too severely to improve any package’s chances of success.

Perhaps most important in the long run, Mr. Posen says Japan’s stimulus spending, while it drove up short-term government debt, didn’t lead “to permanent increases in government programs or upward spirals in the debt level.”

The lesson for the U.S. now? “There is nothing inevitable about doing temporary spending that turns into automatic government creep and expansion in a lasting way,” Mr. Posen says.


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2009-02-02 USER

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Personal Income MoM (Dec)

Survey -0.4%
Actual -0.2%
Prior -0.2%
Revised -0.4%

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Personal Income YoY (Dec)

Survey n/a
Actual 1.4%
Prior 2.1%
Revised n/a

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Personal Income ALLX (Dec)

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Personal Spending (Dec)

Survey -0.9%
Actual -1.0%
Prior -0.6%
Revised -0.8%

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PCE Deflator YoY (Dec)

Survey 1.0%
Actual 0.6%
Prior 1.4%
Revised n/a

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PCE Core MoM (Dec)

Survey 0.0%
Actual 0.0%
Prior 0.0%
Revised n/a

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PCE Core YoY (Dec)

Survey 1.7%
Actual 1.7%
Prior 1.9%
Revised n/a

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ISM Manufacturing (Jan)

Survey 32.5
Actual 35.6
Prior 32.4
Revised 32.9

 
Karim writes:

  • ISM bounces but level remains at recessionary/deflationary levels.

  • Headline rises by 2.7pts and price paid by 11pts.

  • Bounces seem quite narrow in scope as only 2 of 18 industries posted a rise in orders and 1 of 18 an increase in prices (metals-which oddly, has anecdote below about year being down 20-30%).

  • Manufacturing Index 35.6/32.9

  • Prices paid 29.0/18.0

  • Production 32.1/26.3

  • New orders 33.2/23.1

  • Employment 29.9/29.9

  • Export orders 37.5/35.5

  • Imports 36.5/39.0

  • “The slowdown in the automobile industry is forcing their suppliers to reduce production and employment.” (Apparel, Leather & Allied Products)

  • “Our manufacturing is tied to the automobile industry, and we are seeing the ‘trickle down’ effect.” (Chemical Products)

  • “High inventory at customers is slowing production orders.” (Electrical Equipment, Appliances & Components)

  • “Sales are settling in; Q4 was better than expected.” (Machinery)

  • “Consumer confidence is low. Could see the entire year being down 20 percent to 30 percent.” (Fabricated Metals)

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ISM Prices Paid (Jan)

Survey 18.0
Actual 29.0
Prior 18.0
Revised n/a

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Construction Spending MoM (Dec)

Survey -1.2%
Actual -1.4%
Prior -0.6%
Revised -1.2%

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Construction Spending YoY (Dec)

Survey n/a
Actual -3.6%
Prior -4.2%
Revised n/a


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Bank Bailouts have it upside down

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>   
>   On Thu, Jan 29, 2009 at 8:52 PM, Russell wrote:
>   

Bank Bailout Could Cost Up to $4 Trillion: Economists

Jan 29 (Reuters) — Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.

That would also shrink if there was a payroll tax holiday and the states were given $300 billion on a per capita basis as delinquencies would subside and asset quality restored.

This problem is best addressed from the bottom up by enhancing the income of borrowers, not from the top down by assisting the lenders.

The Wall Street Journal said government officials had discussed spending $1 trillion to $2 trillion to help restore banks to health, citing people familiar with the matter….

The government would not necessarily have to spend the full $4 trillion to buy the assets. If it follows the model used in a Federal Reserve program to support consumer and small business loans, the government could potentially put up just 10 percent of the total.


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WSJ.com- Opinion: Animal spirits depend on trust

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Just sent this as a response:

The problem with banking is the rising delinquency rate as the economy falters. Top down measures such as capital injections and asset purchases do not address this issue. Instead, bottom up fiscal measures are in order to restore income, output, and employment.

As Professor Shiller suggests, banks (as well as most of the rest of the private sector agents) are pro cyclical and not counter cyclical entities, and ‘forcing’ them to lend makes no sense. Only the Federal Government, which has no solvency issue, can safely act counter cyclically with proactive deficit spending.

A drop in ‘animal spirits’ is also known as an increase in ‘savings desires’ which reduces aggregate demand as private borrowing wanes.

Any drop in demand, however, can be readily addressed with some combination of lower Federal taxes or spending increases, and the longer ‘animal spirits’ remained subdued the longer our taxes can be kept down. This is well worth considering before we jump to the conclusion that we want to restore the financial sector and lending in general.

There is more than one way to skin this cat, and the option to sustain output and employment with lower taxes (and/or higher Federal spending) rather then with accelerating private sector debt has gotten no media attention whatsoever.

Warren Mosler

Animal Spirits Depend on Trust

by Robert J. Shiller

Jan 27 (Wall Street Journal) —President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen….


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Contango shrinks- Shell sells by the sea shore

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OPEC cuts starting to bite.

Saudis back in control of price as excess inventory dissipates.

Shell Sells Oil Cargoes, Phibro Tanker Leaves Orkney

by Alexander Kwiatowski

Jan 27 (Bloomberg) — Royal Dutch Shell Plc sold a cargo of crude stored off the U.K. and a vessel hired by Citigroup Inc.’s Phibro LLC left its anchorage in Scotland for the U.S. as the incentive to keep oil in tankers disappears.

Shell sold 600,000 barrels of North Sea Forties crude for delivery in mid-February at Scapa Flow near Scotland’s Orkney Islands to oil trader Vitol Group yesterday, the companies said. The cargo, already on board the supertanker Oliva, has been anchored off the U.K. coast since at least December, according to Bloomberg vessel tracking data.

Oil companies and traders have stored as much as 80 million barrels of crude on tankers

That’s not quite one day’s world consumption of crude.

as the so-called contango, a market where buyers pay more for supplies later in the year than now, allowed them to profit from storing crude. The incentive to store oil on vessels is shrinking as the spread between first- and 12th month crude narrows to about $10 a barrel from $17 in early December.


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Geithner quote

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Doesn’t get much more counterproductive than this:

Geithner’s testimony to Senate Finance panel

Jan 21 (Reuters) — GEITHNER ON U.S. DEFICIT, ENTITLEMENT PROGRAMS: “It is absolutely critical to the efforts to get the economy back on track that we give the American people and investors around the world confidence that we’re going to have the ability and the will, working with the Congress, to get our fiscal position back down over the next five years to a sustainable position, but also that we’re willing to start to take on and find a consensus on a bipartisan basis for putting Social Security and Medicare on a more sustainable financial position longer term.

“I think we have to do both of those things together.”


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Geithner testimony

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From Geithner testimony April 3, 2008:

Geithner testimony

Bear Stearns

“With this important context, let me return to the actions taken by the Federal Reserve in response to the situation that arose at Bear Stearns. That response was shaped in roughly four stages: (1) the decision on the morning of March 14 to extend a non-recourse loan through the discount window to JPMorgan Chase so that JPMorgan Chase could in turn lend that money to Bear Stearns;…

We did not have the authority to acquire an equity interest in either Bear or JPMorgan Chase, nor were we prepared to guarantee Bear’s very substantial obligations. And the only feasible option for buying time would have required open ended financing by the Fed to Bear into an accelerating withdrawal by Bear’s customers and counterparties.

We did, however, have the ability to lend against collateral, as in the back-to-back non-recourse arrangement that carried Bear into the weekend. After extensive discussion with my colleagues at the New York Fed, Chairman Bernanke, and Secretary Paulson, and with their full support, the New York Fed and JPMorgan Chase reached an agreement in principle that the New York Fed would assist with non-recourse financing. Using Section 13(3) of the Federal Reserve Act, the New York Fed agreed in principle to lend $30 billion to JPMorgan Chase and to secure the lending with a pledge of Bear Stearns assets valued by Bear on March 14 at approximately $30 billion.”

Geithner clearly told Congress this was a non recourse loan.

In fact, he knew or should have known it was a purchase, which was actually a better arrangement for the Fed.

This is the March 24, 2008 press release from the NY Fed:

The Federal Reserve Bank of New York (“New York Fed”) has agreed to lend $29 billion in connection with the acquisition of The Bear Stearns Companies Inc. by JPMorgan Chase & Co.

The loan will be against a portfolio of $30 billion in assets of Bear Stearns, based on the value of the portfolio as marked to market by Bear Stearns on March 14, 2008.

JPMorgan Chase has agreed to provide $1 billion in funding in the form of a note that will be subordinated to the Federal Reserve note. The JPMorgan Chase note will be the first to absorb losses, if any, on the liquidation of the portfolio of assets.

The New York Fed loan and the JPMorgan Chase subordinated note will be made to a Delaware limited liability company (“LLC”) established for the purpose of holding the Bear Stearns assets. Using a single entity (the LLC) will ease administration of the portfolio and will remove constraints on the money manager that might arise from retaining the assets on the books of Bear Stearns….

…Repayment of the loans will begin on the second anniversary of the loan, unless the Reserve Bank determines to begin payments earlier. Payments from the liquidation of the assets in the LLC will be made in the following order (each category must be fully paid before proceeding to the next lower category):

  • to pay the necessary operating expenses of the LLC incurred in managing and liquidating the assets as of the repayment date;
  • to repay the entire $29 billion principal due to the New York Fed;
  • to pay all interest due to the New York Fed on its loan;
  • to repay the entire $1 billion subordinated note due to JPMorgan Chase;
  • to pay all interest due to JPMorgan Chase on its subordinated note;
  • to pay any other non-operating expenses of the LLC, if any.

Any remaining funds resulting from the liquidation of the assets will be paid to the New York Fed.

This last statement indicates this was functionally a purchase of assets by the Fed and not a loan as Geithner testified.

The question is, why was he less than truthful to Congress when he characterized it as a loan when it was a purchase?

Particularly when, as a purchase, the terms were more advantageous for the Fed?


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Help Ireland or it will exit euro, economist warns

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He touches on the domestic demand issue, highlighted below.

And while sterling is going down versus the euro, more important is the fiscal response in the UK vs the eurozone.

Also, Germany and France are probably not in any position to help, even if they wanted to.

Help Ireland or it will exit euro, economist warns

by Ambrose Evans-Pritchard

Jan 19 (Telegraph) — “This is war: countries have to defend themselves,” said David McWilliams, a former official at the Irish central bank.

“It is essential that we go to Europe and say we have a serious problem. We say, either we default or we pull out of Europe,” he told RTE radio.

“If Ireland continues hurtling down this road, which is close to default, the whole of Europe will be badly affected. The credibility of the euro will be badly affected. Then Spain might default, Italy and Greece,” he said.

Mr McWilliams, a former UBS director and now prominent broadcaster, has broken the ultimate taboo by evoking threats to precipitate an EMU crisis, which would risk a chain reaction across the eurozone’s southern belt, where yield spreads on state bonds are already flashing warning signals. The comments reflect growing bitterness in Dublin over the way the country has been treated after voting against the EU’s Lisbon Treaty.

“If we have a single currency there are obligations and responsibilities on both sides. The idea that Germany and France can just hang us out to dry, as has been the talk in the last couple of days should not be taken lying down,” he said.

Mr McWilliams cited the example of New York’s threat to default in 1975. President Gerald Ford “blinked” at the 11th hour and backed a bail-out to prevent broader damage.

As yet, there is no public support for withdrawal from the euro. A Quantum poll published by the Irish Independent yesterday found that 97pc reject such a radical move. Three-quarters are in favour of a national government, an idea floated by Unilever’s ex-chief Niall Fitzgerald.

“The economic disaster we are facing is unlike anything which has happened in my lifetime. It is a national crisis and needs a government of national unity,” Mr Fitzgerald said.

Mr McWilliams said EMU was preventing Irish recovery. “The only way we can win this war is by becoming, once again, an export country. We can do what we are doing now, which is to reduce our wages, throw more people on the dole and suffer a long contraction. The other model is what the British are doing. Britain is letting sterling fall so that the problem becomes someone else’s. But we, of course, have ruled this out by our euro membership.

“We are paying twice for the euro: once on the exchange rate and once more on the interest rate,” he said.

“By keeping with the current policy, the state is ensuring that Ireland turns itself into a large debt-repayment machine. Is this the sort of strategy to win wars? ” he said.


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Peru requesting swap lines

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Seems something that maybe should involve Congress, along with the other near $600 billion outstanding draws?

Peru Seeking Currency Swap Lines With US Fed, China

by Robert Kozak

Jan 15 (Dow Jones) — Peru has begun talks with the U.S. Federal Reserve and China’s central bank with the aim of setting up currency swaps, Finance Minister Luis Valdivieso said Thursday.

These would be part of a strategy of having access to various measures to confront any economic slowdown that could affect Peru’s economy, he said at press conference with the foreign press.


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