Some More Reports
The Fed: A Systemic Risk Generator – Richard Salsman, InterMarket FC
A Signficant Rise In the PPI – Anika Khan, Wells Fargo Economics
Add comment July 17th, 2009
Archive for July 17th, 2009
Tougher times for inflation targeters
Tougher times for inflation targeters: Over the past two decades, inflation targeting has become the holy grail of modern central banking. Most central banks have adopted some form of inflation target and have set interest rates mainly with a view to stabilising inflation around that target over the medium term. However, the recent experience poses a major challenge for inflation-targeting central banks, for two reasons:
First, the wild gyrations of commodity prices and the boom-bust credit and economic cycle have caused big swings in inflation. Only a year ago, actual inflation was way above most central banks’ targets; now it is far below in most cases. This has contributed to rising uncertainty about the longer-term inflation outlook, as illustrated by more volatile market-implied inflation expectations and by a much greater dispersion of economists’ inflation forecasts.
• Second, the asset price bubble and bust has been a useful reminder that stabilising consumer price inflation does not automatically stabilise asset prices. On the contrary, as we have argued repeatedly over the years, by focusing too narrowly on consumer prices, which were kept low for a long time by non-monetary factors such as globalisation, deregulation and IT-led productivity increases, central banks fostered asset price inflation by keeping interest rates too low for too long. Looking ahead, many central banks are thus likely to pay more attention to asset prices in setting monetary policy. This, in turn, may lead to bigger and longer-lasting deviations of inflation from target and thus constitutes a challenge to the credibility of their inflation targets (see “The Morning After”, The Global Monetary Analyst, April 1, 2009).
Higher Savings Is Not Consumer Retrenchment – Richard Berner, Morgan
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Top tax rate may soon exceed 50 percent
The Wall Street Journal reports, House Health Bill Slaps 5.4% Tax on Top Earners. The Tax Foundation calculates that adding this surcharge to existing taxes would raise the top tax rate to over 50 percent in 39 states. Click on the link to find out where your state stands in their ranking.
I believe the relevant marginal tax rate is even higher than the Tax Foundation suggests. Their calculations seem to ignore sales taxes, which are significant in many states. Because income earned will eventually be spent and thus subject to sales taxes, sales tax rates need to be combined with income tax rates to find the true tax wedge that distorts the consumption-leisure decision. Once sales taxes are included, a top earner in a typical state would face a marginal tax rate of about 55 percent.
Top Tax Rate May Soon Exceed 50 percent – Greg Mankiw’s Blog
Add comment July 17th, 2009
Robert Rubin: Whiz Kid?
The death of Robert McNamara has confronted the architects of another massive national catastrophe with a challenge: Will they, like McNamara in his post-Vietnam agony, acknowledge their failings and confess the error of their ways? Will they come up with a list, as McNamara did, of what to do differently next time?
There has already been speculation aplenty about whether Donald Rumsfeld will ever reassess his performance in the Iraq war. But I’m not thinking about Rumsfeld or the other men who brought us the war in Iraq. I have in mind the architects — every bit as cerebral and self-certain as McNamara — of the financial world that imploded last year. The real latter-day McNamara may not be Rumsfeld but Robert Rubin, Treasury secretary under Bill Clinton.
In fact, the similarities between the men who crafted the Iraq war and the men who crafted Vietnam aren’t that strong. McNamara’s hubris was that of a hyper-rationalist. He and his whiz kids, his systems analysts and efficiency experts, stormed into an intellectually sleepy capital determined to subject what had been the haphazard realm of policy to scientific measurement. The Air Force flyboys may have wanted to bomb the bejesus out of the commies, but McNamara’s boys could tell you precisely what tonnage would destroy precisely what industrial capacity. Victory was just an equation or two away.
The hubris of the late and unlamented Bush presidency was of a different order. If it was McNamara’s math that made it hard for him to grasp how a peasant army could resist half a million American troops, it was a simple refusal to take seriously the utterly predictable consequences that Saddam Hussein’s removal would have on a fractured Iraq that led Bush and his crew to plunge us, and Iraq, into a needless war. As once the hyper-rationalists had failed to factor for human complexity, so too, four decades later, did the ideologues who disdained the reality-based community do the same. Brought low by the hubris of the brilliant, we were brought low again by the hubris of fools.
Our time is no stranger to the hubris of the brilliant, though. To find it, we need to look not to Washington but to Wall Street. The real successors to McNamara’s whiz kids are the economic geniuses, the “quants,” who figured out how to build a tower of investment on a dot of assets, arbitrage everything, and hedge any risk, except, of course, the ones that plunged us into a depression.
The devastation they wrought may not have reached the level of the Vietnam War, which embittered this nation for decades and cost the lives of tens of thousands of Americans and many times more Vietnamese. But considering that they were merely economists, bankers and their ideologues, the damage is impressive enough. It’s not just the millions of jobs lost, the retirement savings wiped out, the homes foreclosed on. It’s also the offshoring of American manufacturing and the concomitant creation of mountains of consumer debt (which the American people owed to Wall Street) so that their compatriots could continue to consume even though their incomes had stagnated. It’s the transformation of a nation that once invested in productive enterprise into a nation sustained by asset bubbles.
Will the creators of this crisis wander through an intellectual and moral desert as McNamara did for decades? As yet, the mea culpas have been few and, like McNamara’s, incomplete. Alan Greenspan did admit to a congressional committee that his belief in the rational behavior of financial institutions had been shattered. But the confessions of failure and assumptions of responsibility from Chicago School economists, leading Wall Street bankers and lax governmental regulators, all of whom assured us that the very profitable financial vehicles they had devised also reduced the risk to the rest of us, are almost nowhere to be found.
If there’s an analogous figure to McNamara in this mess, then, it’s probably Rubin — socially liberal, like McNamara; concerned with the world’s poor, like McNamara; architect, like McNamara, of a system perfected by the best minds of his time, a system that should have worked but that failed catastrophically. Rubin’s repentance is a private matter, but the lessons that his protégés Larry Summers and Tim Geithner derive from the failure of deregulated hypercapitalism are of the utmost public concern. Whiz kids themselves, do they still believe in the capacity of their fellow whizzes to concoct financial devices so mathematically sound that strong regulation would be superfluous? Their reluctance to tightly regulate credit-default swaps suggests that they haven’t really been disenthralled of their faith in self-regulating markets. If we’re lucky, the image of Bob McNamara calculating the war on his slide rule, and spending the subsequent decades trying to understand where he went wrong, may bring them to their senses. It certainly should do that for us.
Is Robert Rubin Today’s McNamara? – Harold Meyerson, Washington Post
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