Mediocre Growth, Job Stress, IMF Outlook, Financial Turbulence, Financial Crisis Inquiry Commission and US Competitiveness

 

Mediocre Growth, Job Stress, IMF Outlook, Financial Turbulence, Financial Crisis Inquiry Commission and US Competitiveness

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011

This post considers mediocre growth and resulting job stress in the light of the IMF outlook, financial turbulence, the report of the Financial Crisis Inquiry Commission and the US competitiveness initiative. The content is as follows:

I Mediocre Growth and Job Stress

II IMF Outlook

III Financial Turbulence

IV Financial Crisis Inquiry Commission

V US Competitiveness

VI Economic Indicators

VII Interest Rates

VIII Conclusion

References

I Subpar Growth. The recovery of the US economy continues but with subpar growth rates. Growth rates are mediocre in the expansion from the recent contraction from IVQ07 (fourth quarter 2007) to IIQ09 relative to recoveries from past strong contractions from IIIQ57 to IIQ58, IVQ73 to IQ75 and IIIQ81 to IV82 (see reference cyclical dates of the NBER (http://wwwdev.nber.org/cycles/cyclesmain.html). Table 1 shows the inferior rates of growth in the first six quarters of expansion from IIIQ09 to IVQ10 in contrast with the growth rates from the first six quarters of expansion from IQ83 to IIQ84. Professor Michael Boskin of Stanford, former Chairman of the CEA, provides analysis of growth in cyclical expansions in an article for the Wall Street Journal (http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html ). The critical historical perspective is that average quarterly rates of growth in the expansions after a severe recession were incomparably higher than during the current expansion: 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975, 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter in 1983 and only 3 percent in the first four quarters and 2.9 percent forecast in the first 12 quarters after the trough in the third quarter of 2009. GDP grew at the SA quarter-on-quarter yearly-equivalent rate of 1.7 percent in IIQ10, 2.6 percent in IIIQ10 and 3.2 percent in IVQ10. The Congressional Budget Office (CBO) finds that “production and employment are likely to stay well below the economy’s potential for a number of years” (CBO 2011BEO, 1). The consequence of subpar growth is that the rate of unemployment will only approach 5.3 percent by 2016, close to the CBO’s estimate of the “natural rate of unemployment,” or rate of unemployment resulting from all factors except fluctuations in aggregate demand (Ibid, 2). The rate of unemployment in Dec 2010 is estimated by the Bureau of Labor Statistics at 9.4 percent. The number of people in job stress, unemployed or working involuntarily in part-time jobs, is estimated at 26 million. The rate of unemployment could be measured at 12 percent and the number of people in job stress at 30 million by calculations using the rate of participation in the labor force that account for the people who have desisted from finding a job and are thus not counted in the labor force (http://cmpassocregulationblog.blogspot.com/2011/01/is-us-unemployment-rate-12-percent-are.html).

 

Table 1, Quarterly Growth Rates of GDP, % Annual Equivalent SA

Q	1981	1982	1983	1984	2008	2009	2010
I	8.6	-6.4	5.1	7.1	-0.7	-4.9	3.7
II	-3.2	2.2	9.3	3.9	0.6	-0.7	1.7
III	4.9	-1.5	8.1	3.3	-4.0	1.6	2.6
IV	-4.9	0.3	8.5	5.4	-6.8	5.0	3.2

Source: http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&FirstYear=2009&LastYear=2010&Freq=Qtr

 

The contributions to the rate of growth of GDP in percentage points (PP) are provided in Table 2. Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase in IIIQ83 to IIQ1984 than in IIIQ09 to IVQ10.

 

Table 2, Contributions to the Rate of Growth of GDP in Percentage Points

	GDP	PCE	GDI	∆ PI	Trade	GOV
2010
I	3.7	1.33	3.04	2.64	-0.31	-0.32
II	1.7	1.54	2.88	0.82	-3.50	0.80
III	2.6	1.67	1.80	1.61	-1.70	0.79
IV	3.2	3.04	-3.20	-3.70	3.44	-0.11
2009
I	-4.9	-0.34	-6.80	-1.09	2.88	-0.61
II	-0.7	-1.12	-2.30	-1.03	1.47	1.24
III	1.6	1.41	1.22	1.10	-1.37	0.33
IV	5.0	0.69	2.70	2.83	1.90	-0.28
1982
I	-6.4	1.62	-7.50	-5.47	-0.49	-0.03
II	-2.2	0.90	-0.05	2.35	0.84	0.50
III	-1.5	1.92	-0.72	1.15	-3.31	0.57
IV	0.3	4.64	-5.66	-5.48	-0.10	1.44
1983
I	5.1	2.54	2.20	0.94	-0.30	0.63
II	9.3	5.22	5.87	3.51	-2.54	0.75
III	8.1	4.66	4.30	0.60	-2.32	1.48
IV	8.5	4.20	6.84	3.09	-1.17	-1.35
1984
I	8.0	2.35	7.15	5.07	-2.37	0.86
II	7.1	3.75	2.44	-0.30	-0.89	1.79
III	3.9	2.02	-0.89	0.21	-0.36	0.62
IV	3.3	3.38	1.79	-2.50	-0.58	1.75

Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive

GDP: percent change at annual rate; percentage points at annual rates

Source: http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&FirstYear=2009&LastYear=2010&Freq=Qtr

 

Table 3 provides more detailed information on the causes of the acceleration of GDP growth from 2.6 percent in IIIQ10 to 3.2 percent in IVQ10. The Bureau of Economic Analysis (BEA) finds three source of contribution to the acceleration: (1) sharp deceleration of import growth from 16.8 percent IIIQ10 to 13.6 percent in IVQ10; (2) acceleration in PCE growth from 2.4 percent to 4.4 percent; and (3) acceleration in residential fixed investment (RFI) growth from negative 27.3 percent to 3.4 percent. There are three sources constraining growth: (1) deceleration of nonresidential fixed investment (NRFI) from 10.0 percent to 4.4 percent; (2) negative percentage point contribution of change in private inventories (∆% PI) of 3.70 from 1.61; and (3) deceleration of government consumption and expenditures (GOV) from 8.8 percent to -0.2 percent. There are other interesting features of the GDP report. The rate of increase of net domestic sales (GDP-∆ PI) jumped from 0.9 percent to 7.1 percent. The rate of increase of gross domestic purchases of goods, produced domestically or not, rose from 0.7 percent to 2.1 percent. The rate of increase of prices of gross domestic purchases rose from 0.9 percent to 1.7 percent. The personal savings rate, or savings as percent of disposable income, fell from 5.9 percent to 5.4 percent.

 

Table 3, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase

	IIIQ2010	IVQ2010
PCE	2.4	4.4
Durable Goods	7.6	21.6
NRFI	10.0	4.4
RFI	-27.3	3.4
Exports	6.8	8.5
Imports	16.8	13.6
GOV	8.8	-0.2
∆ PI (PP)	1.61	-3.70
GDP-∆ PI	0.9	7.1
Gross Domestic Purchases	4.2	-0.3
Prices Gross Domestic Purchases	0.7	2.1
Real Disposable Personal Income	0.9	1.7
Personal Savings Rate	5.9	5.4

Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in

private inventories; GDP -  ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_adv.pdf

 

US real GDP increased from the 2009 annual level to the 2010 annual level by 2.9 percent in contrast with a decrease by 2.6 percent in 2009. Table 4 shows the percentage point (PP) contributions to the annual levels in 2009 and 2010. PCEs contributed 1.27 PPs to GDP growth in 2010 of which 1.00 PP in goods and 0.27 PP in services. GDI deducted 3.24 PPs of GDP growth in 2010 of which -2.69 PPs by fixed investment and -0.55 PP of ∆PI. Trade, or exports of goods and services net of imports, contributed 1.13 PPs of which exports deducted 1.18 PPs and imports added 2.32 PPs. Government added 0.32 PP of which 0.43 PP by the federal government and -0.11 PP by state and local.

 

Table 4, Percentage Point Contributions to the Growth Rate of GDP

	2009	2010
GDP	-2.6	2.9
PCE	-0.84	1.27
GDI	-1.53	-3.24
∆ PI	-0.51	-0.55
Trade	1.18	1.13
GOV	0.54	0.32

See note to Table 2.

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_adv.pdf

 

II IMF Outlook. The IMF Chief Economist, Olivier Blanchard, finds two critical issues in the global economy (IMF 2011WF): (1) management of capital inflows by emerging market countries that were caused by high growth in those countries and low interest rates in advanced economies; and (2) slow growth in advanced economies that results in prolonged high unemployment and difficulties in reducing fiscal deficits because of slow growth of government revenue. The Director of the IMF’s Monetary and Capital Markets Department, José Viñals, finds heightened risks of debt sustainability in advanced economics because of slow growth and continuing weakness of their fiscal balances. The stability of the global financial system is interacting with debt sustainability risks that could result in spread of this interaction that is currently acute in sovereign risk issues in Europe.

The January update of the IMF World Economic Outlook (WEO) estimates that world output fell by 0.6 percent in 2009 but rebounded by 5.0 percent in 2010 and is projected to increase by 4.4 percent in 2011 and 4.5 percent in 2012 (IMF 2011WEOJan, 2). An important characteristic of recovery from the contraction is the uneven or two-speed impact and recovery. Output in the advanced economies fell by 3.4 percent in 2009 but rose by 2.6 percent in emerging and developing economies; output in the advanced economies is estimated to grow by 3.0 percent in contrast with 7.1 percent in the developing and emerging economies; and output in the advanced economies is projected to grow at 2.5 percent in 2011 and 2012 but by 6.5 percent in the developing and emerging economies. Consumer prices are estimated to increase by only 1.6 percent in 2011 and 2012 in the advanced economies but by 6.0 percent in 2011 and 4.8 percent in 2012 in the developing and emerging economies. World trade fell 10.7 percent in 2009 but grew 12.0 percent in 2010 and is estimated to grow 7.1 percent in 2011 and 6.8 percent in 2012. Trade of emerging and developing economies is projected to grow above that of the world while trade of advanced economies is projected to underperform world trade growth.

The combined fiscal deficits of the US, as estimated by the CBO in Table 5, in 2010-2012 add to $3960 billion or about 26.6 percent of US current dollar GDP of $14,870.4 billion in 2010 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_adv.pdf 3). The IMF (2001FMJan) estimates the deficit for 2011 at 10.8 percent and the gross debt reaching 102.0 percent in 2012. The IMF finds that “the United States will be the only major advanced economy implementing procyclical fiscal policies this year, albeit in the face of a still-sizeable output gap.” The CBO finds that government revenues are growing in such way as to compensate for the increase in revenue resulting from higher GDP growth. According to the CBO (2011BEO, 3), the “federal budget deficit of nearly $1.5 trillion projected for this year [2011] will equal 9.8 percent of GDP, a share that is nearly 1 percent higher than the shortfall recorded last year and almost equal to the deficit posted in 2009, which at 10.0 percent of GDP was the highest in nearly 65 years.” Debt held by the public was under $6 trillion in 2008, equivalent to about 40 percent of GDP but rose to 62.1 percent of GDP in 2010 and is projected in Table 5 to be 75.5 percent of GDP in 2013. The CBO (2011BEO, 4) finds that under current law “the government’s annual spending on net interest will more than double between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to 3.3 percent.” Deficits and debt may be moving toward an unsustainable path.

 

Table 5, CBO Estimate of US Government Revenue, Outlays, Deficit and Debt Held by the Public as Percent of GDP and IMF Estimate of Deficit and Gross Debt

CBO	2010	2011	2012	2013
Revenues	14.9	14.8	16.3	18.8
Outlays	23.8	24.7	23.3	23.1
Deficit	-8.9	-9.8	-7.0	-4.3
Debt	62.1	69.4	73.9	75.5
Deficit $B	-1294	-1480	-1186	-704
IMF
Deficit	-10.6	-10.8	-7.2
Gross Debt	91.2	97.9	102.0

Source:

http://www.cbo.gov/ftpdocs/120xx/doc12039/SummaryforWeb.pdf

http://www.imf.org/external/pubs/ft/fm/2011/01/update/fmindex.htm

 

III Financial Turbulence. The risks to the baseline scenario of the IMF projections of the world economy are mostly financial (IMF 2011WEOJan, 6; 2011GFSJan): (1) sovereign risk issues in highly-indebted countries could affect the larger economies of the euro zone through banking and capital markets interrelations; (2) major advanced economies may not engage in appropriate fiscal consolidation resulting in higher budget deficits and unsustainable government debt paths; (3) the real estate sector of the US economy could soften again with adverse effects on the overall economy and lending institutions; (4) high commodity prices could result in output effects and inflation spreading through components of the price indexes; and (5) higher growth rates than warranted in emerging markets may end in contractions of economic activity with adverse repercussions in the world economy as those markets account for about 40 percent of global economic activity. An upside risk of the projections is that investment may grow faster in major advanced economies.

Another form of viewing the risks of the world economy is by effects of these risk factors originating in regional conditions. There are three broad categories of risks. First, as analyzed by the IMF (2011WEOJan) there was threatening financial turbulence resulting from the deterioration of creditworthiness of highly-indebted countries in the euro zone after Apr and again after Nov. A debt event in the highly-indebted countries of the euro zone could cause substantial losses in fixed-income securities and loans resulting in losses to investors, write downs in bank balance sheets and lower capital ratios. The IMF (2011WEOJan, 7) estimates that repetition of the credit-tightening conditions during the Lehman Bros crisis in Sep 2008 could cause a reduction in growth of the euro area by about 2.5 PPs in the baseline scenario. Under the assumption of less stress in US lending, the IMF estimates that the decline in world growth would be 1 PP (Ibid, 7). Higher levels of stress in banking and capital markets could result in sharper reductions of growth in individual regions and the world economy. Second, conditions in the US could worsen in a combination of one or several risk factors: (i) declining real estate values; (ii) slower growth of GDP with high rates of unemployment and involuntary part-time employment; (iii) an event of distrust in financial markets on the increasing fiscal imbalance and rapidly growing government debt; (iv) adverse expectations on investment and consumption because of anticipations of tax increases; and (v) expectations of rising interest rates because of higher inflation and the unpredictable effects of unwinding the balance sheet of the Fed currently at $2426 billion, or $2.4 trillion, with portfolio of long-term securities of $2199.7, or $2.2 trillion, composed of $1039.6 billion of notes and bonds, $50.4 billion of inflation-indexed notes and bonds, $144.6 billion of federal agency debt securities and $965.1 billion of mortgage-backed securities with reserve balances with Federal Reserve Banks of $1083.9 billion, or $1.1 trillion (http://federalreserve.gov/releases/h41/current/h41.htm#h41tab1 ). Third, financial turbulence has originated also in fears of possible decline in the growth rate of China resulting from monetary tightening to control rising inflation. The large marginal weight of China in commodity prices, world trade and the regional economy of Asia could have effects on the world economy.

The key to the three commodity price shocks after 1971, 2003-2004 and currently is that “primary commodity prices register enhanced inflationary expectations more quickly because speculators can easily bid for long positions in organized commodity future markets” (McKinnon CWI, 1). The risks cannot be ignored (McKinnon 2011CWI, 2; see McKinnon 2011INF). The Fed raised interest rates to 22 percent in Jul 1981 and inflation receded in the US. Inflows of funds attracted by improved conditions in the US appreciated the dollar that became overvalued, causing a large deficit in current account jointly with the internal deficit. Cheaper imports of manufactures resulted in the US rust belt. The lesson from this experience is that US inflation is processed with a long lag and has costly consequences for the economy and employment.

Table 6 provides CPI inflation in a large variety of countries. There is inflation everywhere with the possible exceptions of Japan and the US. Most countries have emerged with significant fiscal imbalances partly because of the reduction of revenue and the increase in expenses during the global recession. There is a valid concern if the US will escape inflation with hard consequences of its control on the economy and employment that could be more harmful than the second fear of deflation in less than ten years that has not materialized except in counterfactual exercises.

 

Table 6, CPI Inflation and Government Deficit as Percent of GDP

	CPI 2006	CPI 2010	Deficit 2008 % GDP	Deficit 2010 % GDP
Euro Area	2.2	2.2	-2.6	-4.6
Advanced Economies	1.9	1.1	-3.8	-6.8
Germany	1.8	1.9	-1.6	-3.1
France	1.9	2.0	-3.1	-5.0
USA	2.5	1.5	-4.9	-8.9
UK	2.3	3.7	-5.6	-7.9
Japan	0.2	0.1*	-3.6	-7.6
China	2.5	4.6	7.7	3.5
Brazil	3.1	5.9	-3.5	-1.6
Russia	9.0	8.1*	4.5	-4.3
India	6.7	12.7**	-6.1	-9.6
Korea	2.1	3.0**	1.7	1.4
Singapore	0.8	4.1**	5.2	2.4
Taiwan	0.7	2.3**	-2.4	-3.8
Indonesia	3.1	5.9**	-1.6	-1.5
Thailand	3.5	1.5**	0.1	-2.7

Sources: IMF PIN

http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/index.aspx

**IMF estimate http://www.imf.org/external/np/sec/pn/2011/pn1102.htm

*Nov

http://www.gks.ru/bgd/free/B00_25/IssWWW.exe/Stg/d000/000710.HTM

http://www.stat.go.jp/english/data/cpi/1581.htm

http://www.stats.gov.cn/english/statisticaldata/monthlydata/t20101227_402693597.htm

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-14012011-BP/EN/2-14012011-BP-EN.PDF

http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&language=en&pcode=tsieb060&tableSelection=1&footnotes=yes&labeling=labels&plugin=1

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

http://www.bls.gov/news.release/pdf/cpi.pdf

http://www.bcb.gov.br/?INDICATORS

 

The combined GDP of member countries of the euro area is shown in Table 7 as $12,067 billion. Financial events in the euro area could impact the world economy. The combined GDP of Greece, $305 billion, Ireland, $204 billion, and Portugal, $224 billion, is $733 billion, or 5.8 percent of GDP of the euro area. The effects on financial markets could be magnified by high leverage and lending. Adding the GDP of other countries experiencing high debts, such as Spain, $1275 billion, Italy, $2037 billion, and Belgium, $461 billion, total GDP is $4506 billion or 37.3 percent of the GDP of the euro area. Financial events in the US and China could have an even more devastating effect on world capital markets. Current levels and IMF/WEO projections of debt/GDP and current account/GDP data for the countries in Table 7 show that many countries are emerging from the global recession with high and increasing debts and external imbalances. In a benign scenario, world economic conditions continue to improve, allowing for adjustment and international coordination that reinforces strength of the recovery.

 

Table 7, GDP, Debt/GDP and Current Account/GDP for Selected Countries

	GDP $ Billions	Debt/ GDP 2010 %	Debt/ GDP 2015 %	Current Account % GDP 2010	Current Account % GDP 2015
Euro Area	12,067	53.4	67.4	0.2	0.2
Germany	3,652	58.7	61.8	6.1	3.9
France	2,865	74.5	78.7	-1.8	-1.8
Portugal	224	79.9	93.6	-9.9	-8.4
Ireland	204	55.2	71.4	-2.7	-1.2
Italy	2,037	98.9	99.5	-2.9	-2.4
Greece	305	109.5	112.6	-10.8	-4.0
Spain	1,275	54.1	72.6	-5.2	-4.3
Belgium	461	91.4	100.1	0.5	4.1
USA	14,870	65.8	84.7	-3.2	-3.4
UK	2,259	68.8	76.0	-2.2	-1.1
Japan	6,517	120.7	153.4	3.1	1.9
China	5,745	19.1	13.9	4.7	7.8
Brazil	2,023	36.7	30.8	-2.6	-3.3
Russia	1,477	11.1	14.6	4.7	1.3
India	1,430	71.8	67.2	-3.1	-2.2

Source: http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/index.aspx

 

IV Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Commission (FCIC) “was created to ‘examine the causes, domestic and global, of the current financial and economic crisis in the United States.’ The Commission was established as part of the Fraud Enforcement and Recovery Act (Public Law 111-21) passed by Congress and signed by the President in May 2009” (http://fcic.gov/about/history). The panel included 10 members with experience in diverse areas, six of whom “appointed by the Democratic leadership of Congress and four by the Republican leadership” (Ibid). FCIC (2011R) provides the conclusions and dissenting views in a volume with 662 pages.

Chairman Bernanke is quoted by the FCIC (2011R, 354) as stating:

“As a scholar of the Great Depression, I honestly believe that September and October 2008 was the worst financial crisis in global history, including the Great Depression. If you look at the firms that came under pressure in that period…only one…was not at serious risk of failure…So out of maybe the 13, 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”

Comparisons of the credit/dollar crisis and global recession with the Great Depression are typically misleading and not rare. For example, Modigliani (1988, 399) states that in a speech President Reagan “began by suggesting that ‘we are in the worst economic mess since the Great Depression,’ a statement that an objective review of the situation would find highly exaggerated.” Much the same occurs currently in comparisons with the 1930s that provide some of the widest fluctuations of events and data required for economic research. US GDP in constant dollars fell 8.6 percent in 1930, 6.4 percent in 1931, 13.0 percent in 1932 and 1.3 percent in 1934 for a cumulative contraction of 26.5 percent and GDP in current dollars contracted by 48.9 percent (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-1; Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 205-7; for review of the academic literature on the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217). About 40 percent of commercial banks in the US in 1929-1933, or 9440, were suspended, 79 percent of which were state banks and 21 percent national banks (Mitchener 2005, 156).

There is a parallel of the FCIC with the Pecora hearings in the US Senate Banking and Currency Committee beginning in Jan 1933 that focused on the activities of a few New York banks (Kroszner and Rajan 1997, 1994; Benston 1990; for review of the academic literature see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 96-8, Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 120-9). An important argument in those hearings of Congress that motivated the Glass-Steagall Act was that banks fooled naïve investors passing on to them inferior securities of clients to unload them from their balance sheets, or so-called “naïve investor hypothesis.” On the basis of data collection and advanced statistical techniques, Kroszner and Rajan (1994, 819-20) conclude that bank “affiliate-underwritten issues defaulted statistically less often than ex ante similar investment bank issues” (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 123). The experience of 1921-1933 provides evidence that the quality of bank-affiliate underwritten securities was superior to those underwritten by investment banks. The Pecora committee, often cited as an example for the FCIC, misled regulation.

The conclusion of the FCIC (2011R, xvi), with dissent considered below, is that:

“It was the collapse of the housing bubble—fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages—that was the spark that ignited a string of events, which led to a full-blown crisis in the fall of 2008. Trillions of dollars in risky mortgages had become embedded throughout the financial system, as mortgage-related securities were packaged, repackaged and sold to investors around the world. When the bubble burst, hundreds of billions of dollars in losses in mortgages and mortgage-related securities shook markets as well as financial institutions that had significant exposures to those mortgages and had borrowed heavily against them. This happened not just in the United States but around the world. The losses were magnified by derivatives such as synthetic securities.”

The specific causes and characteristics of the FCIC (2011R, xvii-xxviii) are succinctly: (1) the financial crisis could have been avoided; (2) failure of financial regulation and supervision compromised the stability of the financial markets; (3) a key cause was the failure of governance and risk management in “systemically-important financial institutions”; (4) excessive leverage, high risks and “lack of transparency” moved the financial system into crisis; (5) lack of preparation by the government resulted in “inconsistent response,” adding to the “uncertainty and panic in financial markets”; (6) accountability and ethics suffered “a systemic breakdown”; (7) lax standards in mortgage lending and mortgage securitization ignited the crisis and its contagion; (8) over-the-counter derivatives significantly contributed to the crisis; and (9) credit rating agencies failed, contributing to “financial destruction.”

Commissioners Keith Hennessey, Douglas Holtz-Eakin and Bill Thomas provide a joint dissenting view (FCIC 2011R, 413-39). This dissenting view takes a global approach relating ten causes of the financial crisis: (1) a credit bubble developed because of large savings in countries such as China that invested in the US and Europe, reducing the cost of borrowing with US monetary policy contributing but not being a sole cause without the savings glut; (2) a housing bubble developed in the US since the late 1990s that accelerated in the 2000s resulting from many factors that caused major losses to homeowners and investors; (3) nontraditional mortgages surged because optimistic forecasts of US housing prices and failures in primary and secondary mortgages resulted in weak origination standards and increasing flows of credit to housing finance; (4) rating agencies failures in adequately rating mortgage-backed securities and careless securitization resulted in poor quality of underlying mortgages; (5) concentration of highly correlated housing risk developed in large and middle size financial institutions; (6) leverage was excessive and liquidity insufficient in financial entities; (7) risk of contagion, or too-big-to-fail doctrine, dissuaded policymakers from allowing failures; (8) a common shock consisted of many unrelated financial institutions with similar risks on housing finance; (9) failures, near failures and restructurings of ten firms caused a “global financial panic”; and (10) the financial crisis caused a global recession.

Commissioner Peter J. Wallison provides an additional dissenting statement (FCIC 2011R, 443-83). In this view, various factors contributed to the financial crisis but there is a necessary condition for the type of crisis that occurred (Wallison, FCIC 2011, 451):

“Although there were many contributing factors, the housing bubble of 1997-2007 would not have reached its dizzying heights or lasted as long, nor would the financial crisis of 2008 have ensued, but for the role played by the housing policies of the United States government over the course of two administrations. As a result of these policies, by the middle of 2007, there were approximately 27 million subprime and Alt-A mortgages in the US financial system—half of all mortgages outstanding—with an aggregate value of over $4.5 trillion. These were unprecedented numbers, far higher than at any time in the past, and the losses associated with the delinquency and default of these mortgages fully account for the weakness and disruption of the financial system that has become known as the financial crisis.”

The now available transcripts of the FOMC meeting on Jun 29/30, 2005, discussing a presentation on housing, reveal the comments by the Vice-Chairman of the FOMC, Timothy Geithner: “It’s worth noting, though, that these risks—from a cliff in housing prices to a sharp increase in household savings, to a larger and more sustained oil shocks, to less favorable future productivity outcomes, to a sharp increase in risk premia or to declines in asset prices—in general are risks that we can’t really mitigate substantially ex ante through monetary policy” (FOMC 2005JM, 138; see also FOMC 2005PM). Participants of the FOMC meetings in 2005 interviewed by Bloomberg find that the Fed fueled the housing boom by the slow and predictable interest rate policy that added the term “measured” to the FOMC statements as the form of reducing policy accommodation in small increments (FOMC 2005JM, 124, 155, 159, 170; see http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aMsKd2nN3.sY). At the meeting of the FOMC on Jun 29/30, 2005, FRBSF economist John C. Williams estimated with unusual anticipation that the decline of house prices by 20 percent from those prevailing at that time would “reduce household wealth by $3.6 trillion (30% of current GDP)”(FOMC 2005PM, 26). The carry trade of “buying” money at near zero riskless interest rates and shorting the dollar to invest or take long risk positions caused a gigantic valuation of risk financial assets and real estate that is shown in Table 8. McKinnon (2011CWI, 2011IN) also observes the rapid depreciation of the dollar after 2003 that is now shown in Table 8 from $1.1423 on Jun 26, 2003 (using Federal Reserve data) to 1.5914 on Jul 14, 2008 (using WSJ data confirmed by Federal Reserve data) for a cumulative devaluation of 39.3 percent. The last row shows the increase of Dec to Dec consumer price inflation (CPI) rising from 1.9 percent in 2003 to 3.4 percent in 2005 and 4.1 percent in 2007. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4).

 

Table 8, Volatility of Assets

DJIA	10/08/02-10/01/07	10/01/07-3/4/09	3/4/09- 4/6/10
∆%	87.8	-51.2	60.3
NYSE Financial	1/15/04- 6/13/07	6/13/07- 3/4/09	3/4/09- 4/16/07
∆%	42.3	-75.9	121.1
Shanghai Composite	6/10/05- 10/15/07	10/15/07- 10/30/08	10/30/08- 7/30/09
∆%	444.2	-70.8	85.3
STOXX EUROPE 50	3/10/03- 7/25/07	7/25/07- 3/9/09	3/9/09- 4/21/10
∆%	93.5	-57.9	64.3
UBS Com.	1/23/02- 7/1/08	7/1/08- 2/23/09	2/23/09- 1/6/10
∆%	165.5	-56.4	41.4
10-Year Treasury	6/10/03	6/12/07	12/31/08	4/5/10
%	3.112	5.297	2.247	3.986
USD/EUR	6/26/03	7/14/08	6/03/10	8/13/10
Rate	1.1423	1.5914	1.2126	1.323
New House	1963	1977	2005	2009
Sales 1000s	560	819	1283	375
New House	2000	2007	2009	2010
Median Price $1000	169	247	217	203
	2003	2005	2007	2010
CPI	1.9	3.4	4.1	1.5

Sources: http://online.wsj.com/mdc/page/marketsdata.html

http://www.census.gov/const/www/newressalesindex_excel.html

http://federalreserve.gov/releases/h10/Hist/dat00_eu.htm

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

 

McKinnon (2011CWI, 1) finds current monetary policy as: “the Fed has set U.S. short-term interest rates at essentially zero since Sep 2008 followed in 2010 by QEs 1&2 [quantitative easing 1, Dec 2008 to Mar 2009, and 2, after Nov 3] to drive down long rates.” The result of monetary policy (Ibid, 1) is that: “just in 2010 alone, all items in The Economist’s dollar commodity price index rose 33.5 percent, while the industrial raw materials component soared a remarkable 37.4 percent.” Chairman Bernanke (2010WP) explained on Nov 4 the objectives of purchasing an additional $600 billion of long-term Treasury securities and reinvesting maturing principal and interest in the Fed portfolio. Long-term interest rates fell and stock prices rose when investors anticipated the new round of quantitative easing. Growth would be promoted by easier lending such as for refinancing of home mortgages and more investment by lower corporate bond yields. Consumers would experience higher confidence as their wealth in stocks rose, increasing outlays. Income and profits would rise and, in a “virtuous circle,” support higher economic growth. Yellen (2011AS, 6) broadens the effects of quantitative easing by adding dollar devaluation: “there are several distinct channels through which these purchases tend to influence aggregate demand, including a reduced cost of credit to consumers and businesses, a rise in asset prices that boosts household wealth and spending, and a moderate change in the foreign exchange value of the dollar that provides support to net exports.” There are two problems with this analysis of quantitative easing: (i) the general equilibrium model of Tobin (1969) as extended by Andrés et al (2004) consists of a set of j = 1,2,∙∙∙m portfolio balance equations for i = 1,2,∙∙∙n capital assets, A_ij = f(r, x), where r is the 1xn vector of rates of return (interest plus capital gains) r_i and x the vector of other relevant variables (Tobin 1969, 5). Fed policy chooses only three of n capital assets that can be stimulated by Fed policy: (a) long-term securities that are close substitutes of securitization of loans to lower their rates and stimulate investment and consumption of aggregate demand; (b) the US stock market to increase perceived wealth of households in the effort to increase consumption and home buying and construction; and (c) devaluation of the dollar to improve the trade account in the effort to grow the economy by net exports. In practice, the Fed cannot anticipate the carry trade from zero interest rates to the other n-3 capital assets, or actually to the entire n capital assets, including multiple risk financial assets such as auction-traded commodities, currencies and foreign stocks; and (ii) world markets for financial assets have been shocked by bouts of risk aversion resulting from sovereign risk issues in Europe; increase of inflation in China that prompts tight monetary policies that can reduce growth of the Chinese economy, affecting world financial markets, Asian economies and the world economy; and uncertainties about growth in the US in an expansion phase characterized by legislative restructurings, implementation of intrusive regulation, record deficits/government debt and increasing expectations of taxation and sharp increases in interest rates rising from zero. Zero interest rates constitute a necessary condition for higher valuations of capital assets especially risk financial assets in an upward trend, in what McKinnon calls the “Bernanke shock,” but with sharp fluctuations originating in the shocks in Europe, China and the US. A sufficient condition for the “trend is my friend” stimulus to carry trade from zero interest rates to risk financial asset valuations is subdued risk aversion from the shocks in Europe, China and the US. Investors have learned from the losses of the credit/dollar crisis or by avoiding the losses and are more cautious than before, implementing strategies of buying and rapidly realizing profits. Table 9 illustrates the carry trade, which is now trading more opportunistically on a learning curve far ahead of that of the Fed. The trend observed by McKinnon resulted in a rise of valuations of risk financial assets that reached a peak in the second half of Apr. Sovereign risk issues in Europe caused significant risk aversion that lasted until early Jul, which is shown in the fourth column of Table 9, “∆% to Trough,” in sharp declines of all risk financial assets, most of which are in the n-3 segment not mentioned in policy analysis by the Fed and are traded in auction markets such as global stocks, commodities and currencies. The appreciation of the dollar by 21.2 percent shows the flight into temporary safety of dollar assets that caused a collapse of long-term yields of dollar-denominated securities such as Treasury notes and bonds. The final column, “∆% Trough to 1/28/11,” shows the trend of carry trade from zero interest rates in the US to long leveraged positions in risk financial assets all of which soared in valuations except for devaluation of the dollar by 14.2 percent after subdued sovereign risks in Europe.

 

Table 9, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 1/ 28/11	∆% Week 1/ 28 /11	∆% Trough to 1/ 28 /11
DJIA	4/26/ 10	7/2/10	-13.6	5.5	-0.4	22.1
S&P 500	4/23/ 10	7/20/ 10	-16.0	4.9	-0.5	24.8
NYSE Finance	4/15/ 10	7/2/10	-20.3	-4.9	-1.4	19.3
Dow Global	4/15/ 10	7/2/10	-18.4	2.5	-0.2	25.6
Asia Pacific	4/15/ 10	7/2/10	-12.5	7.5	0.7	22.8
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-9.1	0.8	17.4
China Shang.	4/15/ 10	7/02 /10	-24.7	-13.0	1.4	15.5
STOXX 50	4/15/10	7/2/10	-15.3	-2.0	-0.6	15.7
DAX	4/26/ 10	5/25/ 10	-10.5	12.2	0.6	25.3
Dollar Euro	11/25 2009	6/7 2010	21.2	10.0	0.1	-14.2
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	11.2	-0.4	30.1
10-Year Tre.	4/5/ 10	4/6/10	3.986	3.323

T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)

Source: http://online.wsj.com/mdc/page/marketsdata.html.

 

Table 10, updated with every comment, shows the yield of the 10-year US Treasury on selected dates, the price calculated at that yield with coupon of 2.625 percent and maturity in exactly ten years and in the final column “∆% 11/04/10” the percentage change in price relative to Nov 4, 2010 when the Fed announced the purchase of an additional $600 billion of long-term Treasury securities. The increase in yield could result from a variety of factors that do not exclude some expectation of higher inflation in the future with unwillingness of the Fed to control it because of the projected weakness of employment over several years. Evans (2011TT) finds market behavior that suggests concerns by investors on stagflation in the US. Analysis of past cycles suggests that the yield curve slopes upward during expansion phases with the sharpest slope occurring early in the recovery. As investors anticipate short-term interest rate increases by the Fed, the yield curve flattens if long-term rates reflect anticipated credibility of the Fed in curbing future inflation and could become downward sloping in expectation of recession. There are two market analyses found by Evans (2011TT): (1) RBS Securities identified a record 4 percentage point spread between the 30-year Treasury bond and 2-year Treasury note with the spread at 3.96 percentage points at the close of market on Jan 28 (http://markets.ft.com/markets/bonds.asp?ftauth=1295789611081); (2) Treasury yields imply a rising annual inflation rate of 3 percent in the 5 to 10 year horizon that has not been detected since the tightening beginning after Jun 2004.

 

Table 10, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note

Date	Yield	Price	∆% 11/04/10
05/01/01	5.510	78.0582	-22.9
06/10/03	3.112	95.8452	-5.3
06/12/07	5.297	79.4747	-21.5
12/19/08	2.213	104.4981	3.2
12/31/08	2.240	103.4295	2.1
03/19/09	2.605	100.1748	-1.1
06/09/09	3.862	89.8257	-11.3
10/07/09	3.182	95.2643	-5.9
11/27/09	3.197	95.1403	-6.0
12/31/09	3.835	90.0347	-11.1
02/09/10	3.646	91.5239	-9.6
03/04/10	3.605	91.8384	-9.3
04/05/10	3.986	88.8726	-12.2
08/31/10	2.473	101.3338	0.08
10/07/10	2.385	102.1224	0.8
10/28/10	2.658	99.7119	-1.5
11/04/10	2.481	101.2573	-
11/15/10	2.964	97.0867	-4.1
11/26/10	2.869	97.8932	-3.3
12/03/10	3.007	96.7241	-4.5
12/10/10	3.324	94.0982	-7.1
12/15/10	3.517	92.5427	-8.6
12/17/10	3.338	93.9842	-7.2
12/23/10	3.397	93.5051	-7.7
12/31/10	3.228	94.3923	-6.7
01/07/11	3.322	94.1146	-7.1
01/14/11	3.323	94.1064	-7.1
01/21/11	3.414	93.4687	-7.7
01/28/11	3.323	94.1064	-7.1

Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates

Source:

http://online.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3020

 

V US Competitiveness. President Obama (2011SU) provides vision on improving the competitiveness of the US:

“The first step in winning the future is encouraging American innovation…Our free enterprise system is what drives innovation. But because it’s not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and investors with the support that they need…Two years ago, I said that we needed to reach a level of research and development we haven’t seen since the height of the Space Race. And in a few weeks, I will be sending a budget to Congress that helps us meet that goal. We’ll invest in biomedical research, information technology, and especially clean technology—an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.”

Ryan (2011SU) states that: “our debt is out of control. What was a fiscal challenge is now a fiscal crisis.” It is difficult to predict how Congress will reconcile the needs for the US to innovate with need for fiscal consolidation.

An immediate area of interest is that monetary and devaluation policy has united. An essay by Chairman Bernanke in 1999 on Japanese monetary policy received attention in the press, stating that (Bernanke 2000, 165):

“Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and experiment—in short, to do whatever it took to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done”

Quantitative easing has never been proposed by Chairman Bernanke or other economists as certain science without adverse effects. What has not been mentioned in the press is another suggestion to the Bank of Japan (BOJ) by Chairman Bernanke in the same essay that is very relevant to current events and the contentious issue of ongoing devaluation wars (Ibid, 161):

“Because the BOJ has a legal mandate to pursue price stability, it certainly could make a good argument that, with interest rates at zero, depreciation of the yen is the best available tool for achieving its mandated objective. The economic validity of the beggar-thy-neighbor thesis is doubtful, as depreciation creates trade—by raising home country income—as well as diverting it. Perhaps not all those who cite the beggar-thy-neighbor thesis are aware that it had its origins in the Great Depression, when it was used as an argument against the very devaluations that ultimately proved crucial to world economic recovery. A yen trading at 100 to the dollar is in no one’s interest”

Chairman Bernanke is referring to the argument by Joan Robinson based on the experience of the Great Depression that: “in times of general unemployment a game of beggar-my-neighbour is played between the nations, each one endeavouring to throw a larger share of the burden upon the others (Robinson 1947, 156). Devaluation is one of the tools used in these policies (Ibid, 157). Banking crises dominated the experience of the United States, but countries that recovered were those devaluing early such that competitive devaluations rescued many countries from a recession as strong as that in the US (see references to Ehsan Choudhri, Levis Kochin and Barry Eichengreen in Pelaez and Pelaez, Regulation of Banks and Finance, 205-9; for the case of Brazil that devalued early in the Great Depression recovering with an increasing trade balance see Pelaez, 1968, 1972; Brazil devalued and abandoned the gold standard during crises in the historical period as shown by Pelaez 1976, Pelaez and Suzigan 1981). Beggar-my-neighbor policies did work for individual countries but the criticism of Joan Robinson was that it was not optimal for the world as a whole. Because of this experience most countries of the world tried to create cooperation through international financial institutions, the International Monetary Fund (IMF) and the World Bank. The global devaluation war is also forcing many countries into painful macroeconomic adjustment and central bank intervention with repeated calls by the IMF for coordination and cooperation in sharing the adjustment to world imbalances. The managing director of the IMF, Dominique Strauss-Khan, warns about obstacles to the operation of the international monetary system: “tensions and risks have been building up in its operations, which manifest themselves in large official reserve accumulation, persistent global imbalances, and capital flow and exchange rate volatility” (http://www.imf.org/external/np/pp/eng/2010/100110c.pdf ).

The interpretation of the competitive devaluations of the 1930s by McKinnon (2011BTN, 2) is different. Britain attempted to restore the Gold Standard in 1925 but austere monetary policies in the form of increasing interest rates and reductions in wages and spending worsened the Great Depression. The gold parity was abandoned by Britain in Sep 1931, causing devaluation of the sterling pound by 25 percent with exit from the gold standard by other countries. Roosevelt then forced sharp depreciation of the dollar relative to gold. As McKinnon 2011BTN, 2) states: “In 1936, the remaining gold bloc countries gave up and depreciated, but not before they suffered a precipitate drop in exports and industrial production. Whence the odium associated with ‘beggar-thy-neighbor’ devaluations.” The current environment is described by McKinnon (2011BTN) as “beggar-thy-neighbor interest rates.” The combination of the zero interest rate after Dec 16, 2008, with quantitative easing of $1750 billion in the first round from Dec 2008 to Mar 2009 and additional $600 billion after Nov 3, 2010 has “unleashed a flood of hot money into most ‘peripheral’ countries in Asia and Latin America as well as Australia, Canada and New Zealand” (Ibid, 4). The mechanism is the carry trade of short positions in short-term interest rates and the dollar combined with long leveraged positions in commodities, emerging market stocks and the large number of risk financial assets left out of the policy analysis of the Fed. Table 11, updated with every comment, shows the sharp appreciation relative to the dollar of most currencies in the world, which is far higher than the Fed’s objective of attaining by quantitative easing “a moderate change in the foreign exchange value of the dollar that provides support to net exports,” as revealed for the first time by Yellen (2011AS, 6).

 

Table 11, Exchange Rates

	Peak	Trough	∆% P/T	Jan 28 2011	∆% T Jan 28	∆% P Jan 28
EUR USD	7/15 2008	6/7 2010		1/28/ 2011
Rate	1.59	1.192		1.361
∆%			-33.4		12.4	-16.8
JPY USD	8/18 2008	9/15 2010		1/28 2011
Rate	110.19	83.07		82.11
∆%			24.6		1.2	25.5
CHF USD	11/21 2008	12/8 2009		1/28 2011
Rate	1.225	1.025		0.942
∆%			16.3		8.1	23.1
USD GBP	7/15 2008	1/2/ 2009		1/28 2011
Rate	2.006	1.388		1.586
∆%			-44.5		12.5	-26.5
USD AUD	7/15 2008	10/27 2008		1/28 2011
Rate	0.979	0.601		0.994
∆%			-62.9		39.5	1.6
ZAR USD	10/22 2008	8/15 2010		1/28 2011
Rate	11.578	7.238		7.173
∆%			37.5		0.9	38.0
SGD USD	3/3 2009	8/9 2010		1/28 2011
Rate	1.553	1.348		1.285
∆%			13.2		4.7	17.3
HKD USD	8/15 2008	12/14 2009		1/21 2011
Rate	7.813	7.752		7.788
∆%			0.8		-0.5	0.3
BRL USD	12/5 2008	4/30 2010		1/28 2011
Rate	2.43	1.737		1.6676
∆%			28.5		3.2	30.8
CZK USD	2/13 2009	8/6 2010		1/28 2011
Rate	22.19	18.693		17.832
∆%			15.7		4.8	19.8
SEK USD	3/4 2009	8/9 2010		1/28 2011
Rate	9.313	7.108		6.584
∆%			23.7		8.2	29.9

Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; P: peak; T: trough

Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation

Source: http://online.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000

 

VI Economic Indicators. Housing continues to lag the recovery and new jobless claims of unemployment insurance are still high. Sales of new houses, seasonally adjusted, jumped 17.5 percent in Dec relative to Nov but are lower by 7.6 percent relative to Dec 2009. Sales without seasonal adjustment in 2010 were 321,000 or 14.2 percent below 375,000 in 2009 and 74.9 percent lower relative to sales of 1.282.000 in 2005 and 73.3 percent below 1.203.000 in 2004 (http://www.census.gov/const/newressales.pdf http://www.census.gov/const/newressales_200512.pdf). The SP Case-Shiller price index measures that house prices have decelerated since May 2010 with the 10-city composite showing a negative annual growth rate of 0.4 percent in Nov, compared with positive 5.4 percent before May and the 20-city composite showing a negative annual rate of 1.6 percent versus 4.6 percent before May (http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----). US jobless claims rose by 51,000 in the week ending on Jan 22 to 454,000 from a revised 403,000 a week earlier (http://www.dol.gov/opa/media/press/eta/ui/current.htm). Weather problems affected reporting.

VII Interest Rates. The yield of the 10-year Treasury collapsed to 3.33 percent because of events in the Middle East, which is lower than 3.42 percent a week earlier and 3.36 percent a month earlier. The 30-year Treasury traded at 4.58 percent for a spread of 3.96 percentage points relative to 0.62 percent for the 2-year Treasury. The 10-year government bond of Germany traded at 3.15 percent for a negative spread of 18 basis points (http://markets.ft.com/markets/bonds.asp?ftauth=1296399812090). The 10-year Treasury with coupon of 2.625 percent and 11/20 maturity traded at a yield of 3.33 percent, or equivalent price of 94.16 (http://markets.ft.com/ft/markets/reports/FTReport.asp?dockey=GOV-280111).

VIII Conclusion. Growth in the US is insufficient to recover employment in contrast with past sharp economic contractions. The world economy is growing unevenly with advanced economies lagging emerging and developing countries. Recurring financial turbulence can affect recovery and employment. There is active debate on the actual causes of the credit/dollar crisis and global recession. The outlook of the US is clouded by high deficits and government debt and the drag of the real estate sector. Monetary policy is deliberately devaluing the dollar with the objective of stimulating growth with net exports but is causing inflows of capital in many countries and loss of competitiveness. (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)

http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10)

 

References

Andrés, Javier, J. David López-Salido and Edward Nelson. 2004. Tobin’s imperfect asset substitution in optimizing equilibrium. Journal of Money, Credit and Banking 36 (4, Aug): 665-90.

Benston, George J. 1990. The separation of commercial and investment banking. Oxford: Oxford University Press.

Bernanke, Ben S. 2000. Japanese monetary policy: a case of self-induced paralysis? In Adam Posen and Ryoichi Mikitani, eds. Japan’s financial crisis and its parallels to US experience. Washington: Institute for International Economics http://www.iie.com/publications/chapters_preview/319/7iie289X.pdf

Bernanke, Ben S. 2010WP. What the Fed did and why: supporting the recovery and sustaining price stability. Washington Post, Nov 4. http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372_pf.html

Evans, Kelly. 2011TT. Treasurys throw the recovery a curve. Wall Street Journal, Jan 21 http://professional.wsj.com/article/SB10001424052748703921504576094443412448216.html

CBO. 2011BEO. The budget and economic outlook: fiscal years 2011 to 2021. Washington, US Congress http://www.cbo.gov/ftpdocs/120xx/doc12039/SummaryforWeb.pdf

FCIC. 2011R. Final report of the national commission on the causes of the financial and economic crisis in the United States. Washington, DC: US Government Printing Office, Jan http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_full.pdf

FOMC. 2005JM. Meeting of the Federal Open Market Committee on June 29, 30, 2005.

Washington, Federal Reserve System, Jun 29, 30 http://www.federalreserve.gov/monetarypolicy/files/FOMC20050630meeting.pdf

FOMC. 2005PM. Appendix 1: materials used by Messrs. Gallin, Lehnert, Peach, Rudebusch and Williams. Washington, Federal Reserve System, Jun 29, 30 http://www.federalreserve.gov/monetarypolicy/files/FOMC20050630material.pdf

IMF. 2011FMJan. Strengthening fiscal credibility. Washington, DC, Jan 27 http://www.imf.org/external/pubs/ft/fm/2011/01/update/fmindex.pdf

IMF. 2011GFSJan. Global financial stability still at risk. Washington, DC, IMF, Jan 25 http://www.imf.org/External/Pubs/FT/fmu/eng/2011/01/pdf/0111.pdf

IMF. 2011WEOJan. Global recovery advances but remains uneven. Washington, DC, IMF, Jan 25 http://www.imf.org/external/pubs/ft/weo/2011/update/01/pdf/0111.pdf

IMF. 2011WF. World still needs to fix key economic, financial problems. Washington, DC, IMF, Jan 25 http://www.imf.org/external/pubs/ft/survey/so/2011/RES012411A.htm

Kroszner, Randall S. and Raghuram G. Rajan. 1994. Is the Glass-Steagall Act justified? A study of the US experience with universal banking before 1933. American Economic Review 84 (4, Sep): 810-32.

Kroszner, Randall S. and Raghuram G. Rajan. 1997. Evidence from commercial bank securities activities before the Glass-Steagall Act. Journal of Monetary Economics 39 (Aug): 475-516.

McKinnon, Ronald I. 2010BTN. Beggar-thy-neighbor interest rate policies. Stanford, CA, Stanford University, Nov http://www.stanford.edu/~mckinnon/papers/Beggar%20thy%20neighbor%20interest%20rate%20policies.pdf

McKinnon, Ronald I. 2011INF. The latest American export: inflation. Wall Street Journal, Jan 18 http://professional.wsj.com/article/SB10001424052748704405704576064252782421930.html?mod=WSJPRO_hpp_sections_opinion

McKinnon, Ronal I. 2011CWI. The Fed on the cusp of worldwide inflation. Stanford, CA, Jan 4 http://www.stanford.edu/~mckinnon/papers/fed_on_cusp_worldwide_inflation.pdf

Mitchener, Kris. 2005. Bank supervision, regulation and instability during the Great Depression. Journal of Economic History 65 (1, Mar): 152-85.

Modigliani, Franco. 1988. Reagan’s economic policies: a critique. Oxford Economic Papers 40 (3, Sep): 397-426.

Obama, Barrack. 2011SU. Remarks by the President in State of the Union Address. Washington, United States Capital, Jan 25 http://blogs.wsj.com/washwire/2011/01/25/text-of-obamas-state-of-the-union-address/

Pelaez, Carlos M. and Carlos A. Pelaez. 2005. International Financial Architecture. Basingstoke: Palgrave Macmillan. http://us.macmillan.com/QuickSearchResults.aspx?search=pelaez%2C+carlos&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.x=26&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.y=14 http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2007. The Global Recession Risk. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2008a. Globalization and the State: Vol. I. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2008b. Globalization and the State: Vol. II. Basingstoke: Palgrave Macmillan.

Pelaez, Carlos M. and Carlos A. Pelaez. 2008c. Government Intervention in Globalization. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009a. Financial Regulation after the Global Recession. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009b. Regulation of Banks and Finance. Basingstoke: Palgrave Macmillan.http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos Manuel. 1968. The State, the Great Depression and the Industrialization of Brazil, PhD diss. Columbia University, Jun.

Pelaez, Carlos Manuel. 1976. The theory and reality of imperialism in the coffee economy of Nineteenth-Century Brazil. Economic History Review NS 29 (2, May): 276-90.

Pelaez, Carlos Manuel and Wilson Suzigan. 1981. História Monetária do Brasil Segunda Edição. Coleção Temas Brasileiros. Brasília: Universidade de Brasília.

Robinson, Joan. 1947. Beggar-my-neighbour remedies for unemployment. In Joan Robinson, Essays in the Theory of Employment, Oxford, Basil Blackwell, 1947.

Ryan, Paul. 2011SU. Remarks of Congressman Paul Ryan. Washington, DC, House Budget Committee, Jan 25 http://blogs.wsj.com/washwire/2011/01/25/text-of-rep-ryans-republican-response/

Tobin, James. 1969. A general equilibrium approach to monetary theory. Journal of Money Credit and Banking 1 (1, Feb): 15-29.

Yellen, Janet L. 2011AS. The Federal’s Reserve’s asset purchase program. Denver, Colorado, Allied Social Science Association Annual Meeting, Jan 8 http://federalreserve.gov/newsevents/speech/yellen20110108a.pdf

© Carlos M. Pelaez, 2010, 2011