Wednesday, 24 Jun 2009
By: Alex Crippen
In a live interview on CNBC today, Warren Buffett said there has been little progress over the past few months in the "economic war" being fought by the country. "We haven't got the economy moving yet." While the economy is a "shambles" and likely to stay that way for some time, he remains optimistic there will eventually be a recovery over a period of years.
Buffett says the nation should concentrate on creating jobs.
Buffett also revealed that he had a cataract operation on his left eye about a month ago. He joked that he thought it might help him see "green shoots" for the economy, but so far he hasn't seen any hopeful signs. Taking a firm position in an ongoing debate in the financial markets, Buffett says he's not concerned at all about deflation, but does think inflation will be a problem in coming years. Despite his negative view on the economy, Buffett still believes the stock market is attractive "over the next 10 years" when compared to alternatives like Treasury bonds. Buffett endorsed Ben Bernanke's reappointment as Federal Reserve Chairman, saying "you couldn't do better." He also praised Treasury Secretary Tim Geithner. Asked about how Apple handled Steve Jobs' liver transplant, Buffett said it is a "material fact" when the CEO of a company is facing major surgery. He thinks criticism of Apple over the matter is appropriate. Buffett repeated his criticism of "cap and trade" as a method to control pollution, saying it would be a huge, regressive tax.
Wednesday, June 24, 2009
Warren Buffett to CNBC: U.S. Economy In "Shambles" .. No Signs of Recovery Yet
Wednesday, June 17, 2009
China sells US bonds to show concern
A decision by China to reduce its US Treasury holdings suggests concern about the US attitude towards its economic woes, Chinese economists were quoted as saying in state media Wednesday. The remarks, coming after US data showed a modest decline in Chinese investments in US government bonds, were in contrast to an earlier statement in Beijing which had said the recent sell-off was a routine transaction. "China is implying to the US, more or less, that it should adopt a more pragmatic and responsible attitude to maintain the stability of the dollar," He Maochun, a political scientist at Tsinghua University, told the Global Times.
According to US Treasury data issued Monday, Beijing owned 763.5 billion dollars in US securities in April, down from 767.9 billion dollars in March. It was the first month since June 2008 that Beijing failed to purchase more US T-bills. Zhang Bin, a researcher at the Chinese Academy of Social Sciences, said China's move showed a more cautious attitude. "It is unclear whether the reduction will continue because the amount is so small. But the cut signals caution of governments or institutions toward US Treasury bonds," Zhang told Xinhua news agency.
China's foreign ministry said Tuesday that its purchases of US Treasuries remained based on "security, liquidity and value preservation". For Zhao Xijun, deputy director of the Finance and Securities Research Institute of People's University, China may have reduced its holding of US Treasuries simply because it needed the money. Zhao said the sell-off could have been in order to pay for its own economic stimulus package. "The reduction was a result of composite factors, such as the investment need and the market change," Zhao told Global Times.
Copyright AFP 2008, AFP stories and photos shall not be published, broadcast, rewritten for broadcast or publication or redistributed directly or indirectly in any medium
According to US Treasury data issued Monday, Beijing owned 763.5 billion dollars in US securities in April, down from 767.9 billion dollars in March. It was the first month since June 2008 that Beijing failed to purchase more US T-bills. Zhang Bin, a researcher at the Chinese Academy of Social Sciences, said China's move showed a more cautious attitude. "It is unclear whether the reduction will continue because the amount is so small. But the cut signals caution of governments or institutions toward US Treasury bonds," Zhang told Xinhua news agency.
China's foreign ministry said Tuesday that its purchases of US Treasuries remained based on "security, liquidity and value preservation". For Zhao Xijun, deputy director of the Finance and Securities Research Institute of People's University, China may have reduced its holding of US Treasuries simply because it needed the money. Zhao said the sell-off could have been in order to pay for its own economic stimulus package. "The reduction was a result of composite factors, such as the investment need and the market change," Zhao told Global Times.
Copyright AFP 2008, AFP stories and photos shall not be published, broadcast, rewritten for broadcast or publication or redistributed directly or indirectly in any medium
Saturday, June 13, 2009
Tuesday, June 9, 2009
The Obama Numbers on Unemployment Are Pure Fiction.
The Media Fall for Phony 'Jobs' Claims
By WILLIAM MCGURN
Wall Street Journal
June 9, 2009
Tony Fratto is envious. Mr. Fratto was a colleague of mine in the Bush administration, and as a senior member of the White House communications shop, he knows just how difficult it can be to deal with a press corps skeptical about presidential economic claims. It now appears, however, that Mr. Fratto's problem was that he simply lacked the magic words -- jobs "saved or created."
"Saved or created" has become the signature phrase for Barack Obama as he describes what his stimulus is doing for American jobs. His latest invocation came yesterday, when the president declared that the stimulus had already saved or created at least 150,000 American jobs -- and announced he was ramping up some of the stimulus spending so he could "save or create" an additional 600,000 jobs this summer. These numbers come in the context of an earlier Obama promise that his recovery plan will "save or create three to four million jobs over the next two years."
The president should 'save or create' more jobs in Cleveland.
Mr. Fratto sees a double standard at play. "We would never have used a formula like 'save or create,'" he tells me. "To begin with, the number is pure fiction -- the administration has no way to measure how many jobs are actually being 'saved.' And if we had tried to use something this flimsy, the press would never have let us get away with it." Of course, the inability to measure Mr. Obama's jobs formula is part of its attraction. Never mind that no one -- not the Labor Department, not the Treasury, not the Bureau of Labor Statistics -- actually measures "jobs saved." As the New York Times delicately reports, Mr. Obama's jobs claims are "based on macroeconomic estimates, not an actual counting of jobs." Nice work if you can get away with it. And get away with it he has. However dubious it may be as an economic measure, as a political formula "save or create" allows the president to invoke numbers that convey an illusion of precision. Harvard economist and former Bush economic adviser Greg Mankiw calls it a "non-measurable metric." And on his blog, he acknowledges the political attraction. "The expression 'create or save,' which has been used regularly by the President and his economic team, is an act of political genius," writes Mr. Mankiw. "You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus."
Mr. Obama's comments yesterday are a perfect illustration of just such a claim. In the months since Congress approved the stimulus, our economy has lost nearly 1.6 million jobs and unemployment has hit 9.4%. Invoke the magic words, however, and -- presto! -- you have the president claiming he has "saved or created" 150,000 jobs. It all makes for a much nicer spin, and helps you forget this is the same team that only a few months ago promised us that passing the stimulus would prevent unemployment from rising over 8%. It's not only former Bush staffers such as Messrs. Fratto and Mankiw who have noted the political convenience here. During a March hearing of the Senate Finance Committee, Chairman Max Baucus challenged Treasury Secretary Timothy Geithner on the formula. "You created a situation where you cannot be wrong," said the Montana Democrat. "If the economy loses two million jobs over the next few years, you can say yes, but it would've lost 5.5 million jobs. If we create a million jobs, you can say, well, it would have lost 2.5 million jobs. You've given yourself complete leverage where you cannot be wrong, because you can take any scenario and make yourself look correct."
Now, something's wrong when the president invokes a formula that makes it impossible for him to be wrong and it goes largely unchallenged. It's true that almost any government spending will create some jobs and save others. But as Milton Friedman once pointed out, that doesn't tell you much: The government, after all, can create jobs by hiring people to dig holes and fill them in.
If the "saved or created" formula looks brilliant, it's only because Mr. Obama and his team are not being called on their claims. And don't expect much to change. So long as the news continues to repeat the administration's line that the stimulus has already "saved or created" 150,000 jobs over a time period when the U.S. economy suffered an overall job loss 10 times that number, the White House would be insane to give up a formula that allows them to spin job losses into jobs saved. "You would think that any self-respecting White House press corps would show some of the same skepticism toward President Obama's jobs claims that they did toward President Bush's tax cuts," says Mr. Fratto. "But I'm still waiting."
Write to MainStreet@wsj.com
By WILLIAM MCGURN
Wall Street Journal
June 9, 2009
Tony Fratto is envious. Mr. Fratto was a colleague of mine in the Bush administration, and as a senior member of the White House communications shop, he knows just how difficult it can be to deal with a press corps skeptical about presidential economic claims. It now appears, however, that Mr. Fratto's problem was that he simply lacked the magic words -- jobs "saved or created."
"Saved or created" has become the signature phrase for Barack Obama as he describes what his stimulus is doing for American jobs. His latest invocation came yesterday, when the president declared that the stimulus had already saved or created at least 150,000 American jobs -- and announced he was ramping up some of the stimulus spending so he could "save or create" an additional 600,000 jobs this summer. These numbers come in the context of an earlier Obama promise that his recovery plan will "save or create three to four million jobs over the next two years."
The president should 'save or create' more jobs in Cleveland.
Mr. Fratto sees a double standard at play. "We would never have used a formula like 'save or create,'" he tells me. "To begin with, the number is pure fiction -- the administration has no way to measure how many jobs are actually being 'saved.' And if we had tried to use something this flimsy, the press would never have let us get away with it." Of course, the inability to measure Mr. Obama's jobs formula is part of its attraction. Never mind that no one -- not the Labor Department, not the Treasury, not the Bureau of Labor Statistics -- actually measures "jobs saved." As the New York Times delicately reports, Mr. Obama's jobs claims are "based on macroeconomic estimates, not an actual counting of jobs." Nice work if you can get away with it. And get away with it he has. However dubious it may be as an economic measure, as a political formula "save or create" allows the president to invoke numbers that convey an illusion of precision. Harvard economist and former Bush economic adviser Greg Mankiw calls it a "non-measurable metric." And on his blog, he acknowledges the political attraction. "The expression 'create or save,' which has been used regularly by the President and his economic team, is an act of political genius," writes Mr. Mankiw. "You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus."
Mr. Obama's comments yesterday are a perfect illustration of just such a claim. In the months since Congress approved the stimulus, our economy has lost nearly 1.6 million jobs and unemployment has hit 9.4%. Invoke the magic words, however, and -- presto! -- you have the president claiming he has "saved or created" 150,000 jobs. It all makes for a much nicer spin, and helps you forget this is the same team that only a few months ago promised us that passing the stimulus would prevent unemployment from rising over 8%. It's not only former Bush staffers such as Messrs. Fratto and Mankiw who have noted the political convenience here. During a March hearing of the Senate Finance Committee, Chairman Max Baucus challenged Treasury Secretary Timothy Geithner on the formula. "You created a situation where you cannot be wrong," said the Montana Democrat. "If the economy loses two million jobs over the next few years, you can say yes, but it would've lost 5.5 million jobs. If we create a million jobs, you can say, well, it would have lost 2.5 million jobs. You've given yourself complete leverage where you cannot be wrong, because you can take any scenario and make yourself look correct."
Now, something's wrong when the president invokes a formula that makes it impossible for him to be wrong and it goes largely unchallenged. It's true that almost any government spending will create some jobs and save others. But as Milton Friedman once pointed out, that doesn't tell you much: The government, after all, can create jobs by hiring people to dig holes and fill them in.
If the "saved or created" formula looks brilliant, it's only because Mr. Obama and his team are not being called on their claims. And don't expect much to change. So long as the news continues to repeat the administration's line that the stimulus has already "saved or created" 150,000 jobs over a time period when the U.S. economy suffered an overall job loss 10 times that number, the White House would be insane to give up a formula that allows them to spin job losses into jobs saved. "You would think that any self-respecting White House press corps would show some of the same skepticism toward President Obama's jobs claims that they did toward President Bush's tax cuts," says Mr. Fratto. "But I'm still waiting."
Write to MainStreet@wsj.com
Thursday, June 4, 2009
Why Bernanke is right to be worried
By Mohamed El-Erian
Financial Times
June 3 2009
Fed chairman Ben Bernanke’s congressional testimony on Wednesday warrants careful attention by market participants – this at a time when policy measures play an unusually large role in determining both absolute and relative values in many markets. In his prepared written remarks, Mr Bernanke correctly points to the ongoing healing in critical elements of the financial markets, including inter-bank and commercial paper transactions. He also notes the improved functioning of the corporate credit market which has enabled many companies to raise needed and precautionary capital. Yet, the most interesting aspects of his testimony are elsewhere. They relate to his more nuanced outlook about the economy and his attempt to place fiscal issues in their proper place. Mr Bernanke acknowledges that, despite the ”green shoots”, there are still question mark over which components of demand will kick into gear once the cyclical inventory pick-up runs its course, as it will inevitably do so over the next few months. Indeed, the chairman notes that ”businesses remain very cautious and continue to reduce their workforces and capital investments.”
Concerns about a sustainable recovery are not limited to the dynamics of the immediate cyclical recovery. Mr Bernanke also notes that ”even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilisation will increase further.” Yet he stops short of addressing what, increasingly, will be on many people’s minds going forward. Specifically, the longer-term question goes well beyond the notion of a prolonged period of below-potential growth. The level of potential growth itself is likely to decline. Indeed, this is a central element of what we, at Pimco, call the ”new normal”. When it comes to fiscal issues, the chairman is not timid about worrying about longer-term questions – and rightly so. He is explicit about the need for greater clarity on how fiscal sustainability will be restored after this period of emergency policy actions. Mr Bernanke states that ”even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs.”
He does not stop here. He goes on to warn that ”near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.” These are strong words, and appropriately so given the worrisome fiscal outlook facing the US. By necessity, Mr Bernanke will increasingly be in the business of countering monetisation and inflation concerns. Indeed, the markets have already fired a couple of clear warning shots in the last couple of weeks, as illustrated by recent moves in US bonds and the dollar. The chairman’s challenges on this count are neither easy nor amenable to quick solutions. Moreover, as markets increasingly look into the underlying factors, as inevitably they will, they will recognise the difficulty that the government faces in credibly committing to the needed primary fiscal adjustment in the absence of high economic growth. The bottom line is that we should come away from Mr Bernanke’s testimony with at least two conclusions: the chairman seems more cautious about the growth outlook when compared with other recent public statements; and he wants to push fiscal sustainability issues clearly away from the Fed’s domain and back where they belong, with Congress and the administration. He is correct on both counts. He would have been justified on Wednesday in being even more forceful; and he mostly probably will be in the next few months.
The writer is chief executive and co-chief investment officer of Pimco. His book ‘When Markets Collide: Investment Strategies for the Age of Global Economic Change’ won the 2008 FT/Goldman Sachs Business Book of the Year
Financial Times
June 3 2009
Fed chairman Ben Bernanke’s congressional testimony on Wednesday warrants careful attention by market participants – this at a time when policy measures play an unusually large role in determining both absolute and relative values in many markets. In his prepared written remarks, Mr Bernanke correctly points to the ongoing healing in critical elements of the financial markets, including inter-bank and commercial paper transactions. He also notes the improved functioning of the corporate credit market which has enabled many companies to raise needed and precautionary capital. Yet, the most interesting aspects of his testimony are elsewhere. They relate to his more nuanced outlook about the economy and his attempt to place fiscal issues in their proper place. Mr Bernanke acknowledges that, despite the ”green shoots”, there are still question mark over which components of demand will kick into gear once the cyclical inventory pick-up runs its course, as it will inevitably do so over the next few months. Indeed, the chairman notes that ”businesses remain very cautious and continue to reduce their workforces and capital investments.”
Concerns about a sustainable recovery are not limited to the dynamics of the immediate cyclical recovery. Mr Bernanke also notes that ”even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilisation will increase further.” Yet he stops short of addressing what, increasingly, will be on many people’s minds going forward. Specifically, the longer-term question goes well beyond the notion of a prolonged period of below-potential growth. The level of potential growth itself is likely to decline. Indeed, this is a central element of what we, at Pimco, call the ”new normal”. When it comes to fiscal issues, the chairman is not timid about worrying about longer-term questions – and rightly so. He is explicit about the need for greater clarity on how fiscal sustainability will be restored after this period of emergency policy actions. Mr Bernanke states that ”even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs.”
He does not stop here. He goes on to warn that ”near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.” These are strong words, and appropriately so given the worrisome fiscal outlook facing the US. By necessity, Mr Bernanke will increasingly be in the business of countering monetisation and inflation concerns. Indeed, the markets have already fired a couple of clear warning shots in the last couple of weeks, as illustrated by recent moves in US bonds and the dollar. The chairman’s challenges on this count are neither easy nor amenable to quick solutions. Moreover, as markets increasingly look into the underlying factors, as inevitably they will, they will recognise the difficulty that the government faces in credibly committing to the needed primary fiscal adjustment in the absence of high economic growth. The bottom line is that we should come away from Mr Bernanke’s testimony with at least two conclusions: the chairman seems more cautious about the growth outlook when compared with other recent public statements; and he wants to push fiscal sustainability issues clearly away from the Fed’s domain and back where they belong, with Congress and the administration. He is correct on both counts. He would have been justified on Wednesday in being even more forceful; and he mostly probably will be in the next few months.
The writer is chief executive and co-chief investment officer of Pimco. His book ‘When Markets Collide: Investment Strategies for the Age of Global Economic Change’ won the 2008 FT/Goldman Sachs Business Book of the Year
Benefit spending soars to new highs
By Dennis Cauchon, USA TODAY
June 4, 2009
The recession is driving the safety net of government benefits to a historic high, as one of every six dollars of Americans' income is now coming in the form of a federal or state check or voucher. Benefits, such as Social Security, food stamps, unemployment insurance and health care, accounted for 16.2% of personal income in the first quarter of 2009, the Bureau of Economic Analysis reports. That's the highest percentage since the government began compiling records in 1929. In all, government spending on benefits will top $2 trillion in 2009 — an average of $17,000 provided to each U.S. household, federal data show. Benefits rose at a 19% annual rate in the first quarter compared to the last three months of 2008. The recession caused about half of the increase, according to the report. Unemployment insurance nearly tripled in the past year. The other half is the result of policies enacted during President George W. Bush's first term.
Following the 2001 recession — when costs normally decline — social spending soared to pay for the Medicare drug benefit, expanded health care for children and greater use of food stamps. The safety net is working, advocates say. "We're not seeing the hunger we saw in the 1930s because the food stamp program is doing what it's supposed to do," says Florida food stamp director Jennifer Lange. What's driving the $209 billion increase in benefit costs from a year ago:
• Unemployment insurance. One-fourth of the extra spending covers jobless benefits, a program started in the Depression. The stimulus law, passed in February, increased benefits.
• Social Security. The bad economy has prompted a 10%-15% jump in early retirements, the program's actuary says. A 5.8% increase took effect January 1. Bottom line: $55 billion in new costs.
• Food stamps. Enrollment hit a record 33.2 million people in March, up 5.2 million from last year. The stimulus law boosted the size of the benefit. Average March benefit: $114 per person.
"The increase in social spending is still relatively modest given the severity of the downturn," says economist Dean Baker of the liberal Center for Economic and Policy Research. "We're not France." Adam Lerrick, economist at the conservative American Enterprise Institute, says the benefits' explosion will eventually lead to an economic crisis. "We've seen this movie before in many countries. It always has the same ending," he says.
June 4, 2009
The recession is driving the safety net of government benefits to a historic high, as one of every six dollars of Americans' income is now coming in the form of a federal or state check or voucher. Benefits, such as Social Security, food stamps, unemployment insurance and health care, accounted for 16.2% of personal income in the first quarter of 2009, the Bureau of Economic Analysis reports. That's the highest percentage since the government began compiling records in 1929. In all, government spending on benefits will top $2 trillion in 2009 — an average of $17,000 provided to each U.S. household, federal data show. Benefits rose at a 19% annual rate in the first quarter compared to the last three months of 2008. The recession caused about half of the increase, according to the report. Unemployment insurance nearly tripled in the past year. The other half is the result of policies enacted during President George W. Bush's first term.
Following the 2001 recession — when costs normally decline — social spending soared to pay for the Medicare drug benefit, expanded health care for children and greater use of food stamps. The safety net is working, advocates say. "We're not seeing the hunger we saw in the 1930s because the food stamp program is doing what it's supposed to do," says Florida food stamp director Jennifer Lange. What's driving the $209 billion increase in benefit costs from a year ago:
• Unemployment insurance. One-fourth of the extra spending covers jobless benefits, a program started in the Depression. The stimulus law, passed in February, increased benefits.
• Social Security. The bad economy has prompted a 10%-15% jump in early retirements, the program's actuary says. A 5.8% increase took effect January 1. Bottom line: $55 billion in new costs.
• Food stamps. Enrollment hit a record 33.2 million people in March, up 5.2 million from last year. The stimulus law boosted the size of the benefit. Average March benefit: $114 per person.
"The increase in social spending is still relatively modest given the severity of the downturn," says economist Dean Baker of the liberal Center for Economic and Policy Research. "We're not France." Adam Lerrick, economist at the conservative American Enterprise Institute, says the benefits' explosion will eventually lead to an economic crisis. "We've seen this movie before in many countries. It always has the same ending," he says.
Bernanke Warns Deficits Threaten Financial Stability
By Craig Torres and Brian Faler
June 3 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall. “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.” Bernanke’s comments signal that the central bank sees risks of a relapse into financial turmoil even as credit markets show signs of stability. He said the Fed won’t finance government spending over the long term, while warning that the financial industry remains under stress and the credit crunch continues to limit spending. The Fed chief said in his remarks to the House Budget Committee that deficit concerns are already influencing the prices of long-term Treasuries. Yields on 10-year notes have climbed about 1 percentage point since the Fed announced plans in March to buy $300 billion of long-term government bonds. The notes yielded 3.54 percent at 5 p.m. in New York, down from 3.61 percent late yesterday, as Bernanke’s warnings on the need to reduce the deficit supported the market.
Rise in Yields
“In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen,” Bernanke said. “These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings.” The budget deficit this year is projected to reach $1.85 trillion, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office. “Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.” Bernanke also addressed banks’ efforts to bolster common equity in the aftermath of regulators’ stress tests on the 19 largest U.S. lenders. He said the 10 firms that were found to have a total capital shortfall of $75 billion have now sold or announced plans to boost common equity by $48 billion.
Bank Plans
“We expect further announcements shortly” as the banks submit plans due by June 8, Bernanke said. This year’s projected budget deficit, four times the size of last year’s shortfall, has been driven up mostly by costs associated with the financial crisis. “Bernanke knows that fiscal financing problems are already complicating monetary policy and are in danger of undermining Fed credibility,” said Alan Ruskin, chief international strategist at RBS Securities Inc. in Stamford, Connecticut. “He knows that there is only so much quantitative-easing financing that can be done.” A fiscal stimulus of almost $800 billion, the government’s financial rescue effort, takeovers of Fannie Mae and Freddie Mac and increased costs of running safety-net programs such as unemployment insurance have added billions to spending. President Barack Obama has pledged to halve the deficit by the end of his term. Even if successful, his administration anticipates the government will still run what would be, by historical standards, large deficits for the foreseeable future. Bernanke said the debt-to-gross domestic product ratio is set to reach the highest since the 1950s.
‘Hard Slog’
“It is fine to have this budget deficit now,” said Alan Blinder, a Princeton University economics professor and former Fed vice chairman. “It will also be a long hard slog to get the budget deficit down to a manageable level.” House Majority Leader Steny Hoyer told reporters that Bernanke “is absolutely right, we need to be very concerned about incurring additional indebtedness.” The House plans to pass legislation before its July 4 recess to cut spending in one category before increasing it in another, he said. In addition, “we need to address entitlements.” Treasury Secretary Timothy Geithner, in an interview with Bloomberg Television May 21, said the administration’s goal is to cut the budget shortfall to 3 percent of GDP or smaller. Rising government spending, forecasts for a record fiscal deficit and an unprecedented expansion of central bank credit have also fueled investor concerns that inflation will rise. Bernanke said inflation “will remain low” as the economy operates with slack resource use.
‘Dangerous’ Mix
Wisconsin Representative Paul Ryan, the ranking Republican on the committee, said in opening remarks that the Treasury’s debt issuance and the Fed’s monetary stimulus, including purchases of government bonds, “can be a dangerous policy mix” and risks “runaway inflation” in the longer term. Ryan said he’s concerned about “substantial” political pressure on the Fed to delay plans to tighten credit should unemployment remain high. “The Fed’s political independence is critical and essential for safeguarding its commitment to price stability,” Ryan said. “We policy makers should realize that our most challenging policy period is going to be ahead of us.” In Europe, German Chancellor Angela Merkel said yesterday she views “with great skepticism what authority the Fed has and the leeway the Bank of England has created for itself,” to purchase a range of assets in their efforts to end the crisis. She urged central banks to return to a “policy of reason.” Asked by a lawmaker about Merkel’s comments, Bernanke said, “I respectfully disagree with her views.”
‘Inflationary Consequences’
“I am comfortable with the policy actions that the Federal Reserve has taken,” he said. “We are comfortable that we can exit from those policies at the appropriate time without inflationary consequences.” The central bank is buying as much as $1.75 trillion of housing debt and Treasuries this year to lower borrowing costs across the economy after reducing the benchmark interest rate almost to zero in December. Fed officials hold their next policy meeting June 23-24 in Washington. Bernanke said during the hearing he wouldn’t support any measure that would have the Fed’s 12 regional Fed bank presidents nominated by the White House and confirmed by the Senate. Fed bank presidents are currently appointed by the regional bank boards with the approval of the Board of Governors.
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Brian Faler in Washington at bfaler@bloomberg.net
June 3 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall. “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.” Bernanke’s comments signal that the central bank sees risks of a relapse into financial turmoil even as credit markets show signs of stability. He said the Fed won’t finance government spending over the long term, while warning that the financial industry remains under stress and the credit crunch continues to limit spending. The Fed chief said in his remarks to the House Budget Committee that deficit concerns are already influencing the prices of long-term Treasuries. Yields on 10-year notes have climbed about 1 percentage point since the Fed announced plans in March to buy $300 billion of long-term government bonds. The notes yielded 3.54 percent at 5 p.m. in New York, down from 3.61 percent late yesterday, as Bernanke’s warnings on the need to reduce the deficit supported the market.
Rise in Yields
“In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen,” Bernanke said. “These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings.” The budget deficit this year is projected to reach $1.85 trillion, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office. “Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.” Bernanke also addressed banks’ efforts to bolster common equity in the aftermath of regulators’ stress tests on the 19 largest U.S. lenders. He said the 10 firms that were found to have a total capital shortfall of $75 billion have now sold or announced plans to boost common equity by $48 billion.
Bank Plans
“We expect further announcements shortly” as the banks submit plans due by June 8, Bernanke said. This year’s projected budget deficit, four times the size of last year’s shortfall, has been driven up mostly by costs associated with the financial crisis. “Bernanke knows that fiscal financing problems are already complicating monetary policy and are in danger of undermining Fed credibility,” said Alan Ruskin, chief international strategist at RBS Securities Inc. in Stamford, Connecticut. “He knows that there is only so much quantitative-easing financing that can be done.” A fiscal stimulus of almost $800 billion, the government’s financial rescue effort, takeovers of Fannie Mae and Freddie Mac and increased costs of running safety-net programs such as unemployment insurance have added billions to spending. President Barack Obama has pledged to halve the deficit by the end of his term. Even if successful, his administration anticipates the government will still run what would be, by historical standards, large deficits for the foreseeable future. Bernanke said the debt-to-gross domestic product ratio is set to reach the highest since the 1950s.
‘Hard Slog’
“It is fine to have this budget deficit now,” said Alan Blinder, a Princeton University economics professor and former Fed vice chairman. “It will also be a long hard slog to get the budget deficit down to a manageable level.” House Majority Leader Steny Hoyer told reporters that Bernanke “is absolutely right, we need to be very concerned about incurring additional indebtedness.” The House plans to pass legislation before its July 4 recess to cut spending in one category before increasing it in another, he said. In addition, “we need to address entitlements.” Treasury Secretary Timothy Geithner, in an interview with Bloomberg Television May 21, said the administration’s goal is to cut the budget shortfall to 3 percent of GDP or smaller. Rising government spending, forecasts for a record fiscal deficit and an unprecedented expansion of central bank credit have also fueled investor concerns that inflation will rise. Bernanke said inflation “will remain low” as the economy operates with slack resource use.
‘Dangerous’ Mix
Wisconsin Representative Paul Ryan, the ranking Republican on the committee, said in opening remarks that the Treasury’s debt issuance and the Fed’s monetary stimulus, including purchases of government bonds, “can be a dangerous policy mix” and risks “runaway inflation” in the longer term. Ryan said he’s concerned about “substantial” political pressure on the Fed to delay plans to tighten credit should unemployment remain high. “The Fed’s political independence is critical and essential for safeguarding its commitment to price stability,” Ryan said. “We policy makers should realize that our most challenging policy period is going to be ahead of us.” In Europe, German Chancellor Angela Merkel said yesterday she views “with great skepticism what authority the Fed has and the leeway the Bank of England has created for itself,” to purchase a range of assets in their efforts to end the crisis. She urged central banks to return to a “policy of reason.” Asked by a lawmaker about Merkel’s comments, Bernanke said, “I respectfully disagree with her views.”
‘Inflationary Consequences’
“I am comfortable with the policy actions that the Federal Reserve has taken,” he said. “We are comfortable that we can exit from those policies at the appropriate time without inflationary consequences.” The central bank is buying as much as $1.75 trillion of housing debt and Treasuries this year to lower borrowing costs across the economy after reducing the benchmark interest rate almost to zero in December. Fed officials hold their next policy meeting June 23-24 in Washington. Bernanke said during the hearing he wouldn’t support any measure that would have the Fed’s 12 regional Fed bank presidents nominated by the White House and confirmed by the Senate. Fed bank presidents are currently appointed by the regional bank boards with the approval of the Board of Governors.
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Brian Faler in Washington at bfaler@bloomberg.net
Monday, June 1, 2009
Zoellick Warns Stimulus ‘Sugar High’ Won’t Stem Unemployment
By Timothy R. Homan
May 30 (Bloomberg) -- World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the “real economy” and rising joblessness threatens to set off political unrest across the globe. “While the stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working,” Zoellick said in an interview yesterday with Bloomberg Television’s “Political Capital with Al Hunt.” “When unemployment increases, that’s probably the most political combustible issue.”
Zoellick’s caution is a contrast with private economists, who are raising their outlooks for growth from India to China as stimulus measures take effect. The biggest developed and emerging nations have committed spending increases and tax cuts totaling 2 percent of their combined economies, a level the International Monetary Fund recommended to end the recession. The World Bank is monitoring private companies’ abilities to roll over “a lot” of debt in the developing world, Zoellick said. At the same time, he played down risks to the global recovery posed by rising U.S. Treasury yields, saying that “in terms of absolute levels, rates are still pretty low for most players.” Zoellick also said that the dollar will remain the world’s main currency “for a long time,” and noted that investors flocked to the dollar as a haven during the worst parts of the financial crisis.
Reagan, Bush Terms
Zoellick, 55, took the helm of the World Bank in 2007, and served as U.S. deputy secretary of state and chief trade negotiator in the Bush administration, and in positions at the Treasury Department under President Ronald Reagan. At State, he played a central role in formulating policy toward China, before departing government for a stint at Goldman Sachs Group Inc. Chinese officials’ comments calling for a new international currency have been “over-read” and may be more of an indication of the nation’s desire to free up its capital flows, Zoellick said. He added that China’s stimulus has helped stoke growth in the nation that “may even beat expectations a little bit.” China this year approved a $585 billion (4 trillion yuan) stimulus plan, and the U.S. is now implementing a $787 billion package of tax cuts and spending that President Barack Obama signed in February. “Right now, the international system appears to have a sufficient amount of stimulus,” Zoellick said. “The danger is if you spend too much government money, you create a different problem.”
Yields Climb
Benchmark 10-year U.S. Treasury yields have climbed about 1.25 percentage point so far this year to 3.46 percent, reflecting in part some investors’ concerns at faster inflation and record budget deficits. Rates on 30-year fixed mortgages exceeded 5 percent. Still, Zoellick noted that in recent days there’s been “unwinding” of some of investors’ concerns. “In terms of financial markets, I think people have broken the fall,” Zoellick said. What’s needed now is to “focus on how to recapitalize banks and deal with the bad assets -- that’s a story that’s still going forward.” In the U.S., Treasury Secretary Timothy Geithner aims to use money from the $700 billion financial-rescue fund to help kick-start a $1 trillion effort to remove devalued loans and securities from banks’ balance sheets. The first transactions for mortgage securities aren’t expected to start for months. Eastern Europe is one region in particular danger of a further economic decline, the World Bank president said.
Eastern Europe
“The nature of integration over the past 20 years has been unwound somewhat,” Zoellick said. He warned about “the danger of unemployment leading to protectionism as politicians sort of feel they run out of different levers.” Eastern European nations have received more than $90 billion in international aid since September to prevent the countries shaken by the financial crisis from defaulting. Nations that have received bailouts include Romania, Hungary, Belarus, Serbia, Latvia and Ukraine. Credit ratings companies have downgraded the outlooks for banks in the Czech Republic, Ukraine and Kazakhstan. Foreign lenders in Romania and Hungary pledged this month to keep doing business there to help the economies weather the economic turbulence. Romanian banks, about 90 percent foreign- owned, agreed to boost their capital by a total of 1 billion euros ($1.4 billion) by March 2010 as overdue debt rises, the IMF said on May 22.
Protectionist Threat
Another threat is trade protectionism, which nations may resort to in order to protect their industries from the global slump, Zoellick said. “The real danger is that you get into a cycle of retaliation,” he said. He estimated that 17 of the Group of 20 emerging and developing nations are considering or imposing restrictions on trade, breaking a pledge they made during an April 2 summit in London. The World Trade Organization in March predicted a 9 percent drop in global commerce this year. China and Brazil are researching how they can conduct trade in the yuan and real, in a signal they’re seeking to reduce their reliance on the dollar. “You could -- and you’ve already seen this over the past 20 years -- have multiple currencies” used in the global system, Zoellick said. “You will see China and India playing a larger role, including in financial markets.” Still, he added that “I just don’t believe it’s going to supplant the U.S. as a reserve currency.”
To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net.
May 30 (Bloomberg) -- World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the “real economy” and rising joblessness threatens to set off political unrest across the globe. “While the stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working,” Zoellick said in an interview yesterday with Bloomberg Television’s “Political Capital with Al Hunt.” “When unemployment increases, that’s probably the most political combustible issue.”
Zoellick’s caution is a contrast with private economists, who are raising their outlooks for growth from India to China as stimulus measures take effect. The biggest developed and emerging nations have committed spending increases and tax cuts totaling 2 percent of their combined economies, a level the International Monetary Fund recommended to end the recession. The World Bank is monitoring private companies’ abilities to roll over “a lot” of debt in the developing world, Zoellick said. At the same time, he played down risks to the global recovery posed by rising U.S. Treasury yields, saying that “in terms of absolute levels, rates are still pretty low for most players.” Zoellick also said that the dollar will remain the world’s main currency “for a long time,” and noted that investors flocked to the dollar as a haven during the worst parts of the financial crisis.
Reagan, Bush Terms
Zoellick, 55, took the helm of the World Bank in 2007, and served as U.S. deputy secretary of state and chief trade negotiator in the Bush administration, and in positions at the Treasury Department under President Ronald Reagan. At State, he played a central role in formulating policy toward China, before departing government for a stint at Goldman Sachs Group Inc. Chinese officials’ comments calling for a new international currency have been “over-read” and may be more of an indication of the nation’s desire to free up its capital flows, Zoellick said. He added that China’s stimulus has helped stoke growth in the nation that “may even beat expectations a little bit.” China this year approved a $585 billion (4 trillion yuan) stimulus plan, and the U.S. is now implementing a $787 billion package of tax cuts and spending that President Barack Obama signed in February. “Right now, the international system appears to have a sufficient amount of stimulus,” Zoellick said. “The danger is if you spend too much government money, you create a different problem.”
Yields Climb
Benchmark 10-year U.S. Treasury yields have climbed about 1.25 percentage point so far this year to 3.46 percent, reflecting in part some investors’ concerns at faster inflation and record budget deficits. Rates on 30-year fixed mortgages exceeded 5 percent. Still, Zoellick noted that in recent days there’s been “unwinding” of some of investors’ concerns. “In terms of financial markets, I think people have broken the fall,” Zoellick said. What’s needed now is to “focus on how to recapitalize banks and deal with the bad assets -- that’s a story that’s still going forward.” In the U.S., Treasury Secretary Timothy Geithner aims to use money from the $700 billion financial-rescue fund to help kick-start a $1 trillion effort to remove devalued loans and securities from banks’ balance sheets. The first transactions for mortgage securities aren’t expected to start for months. Eastern Europe is one region in particular danger of a further economic decline, the World Bank president said.
Eastern Europe
“The nature of integration over the past 20 years has been unwound somewhat,” Zoellick said. He warned about “the danger of unemployment leading to protectionism as politicians sort of feel they run out of different levers.” Eastern European nations have received more than $90 billion in international aid since September to prevent the countries shaken by the financial crisis from defaulting. Nations that have received bailouts include Romania, Hungary, Belarus, Serbia, Latvia and Ukraine. Credit ratings companies have downgraded the outlooks for banks in the Czech Republic, Ukraine and Kazakhstan. Foreign lenders in Romania and Hungary pledged this month to keep doing business there to help the economies weather the economic turbulence. Romanian banks, about 90 percent foreign- owned, agreed to boost their capital by a total of 1 billion euros ($1.4 billion) by March 2010 as overdue debt rises, the IMF said on May 22.
Protectionist Threat
Another threat is trade protectionism, which nations may resort to in order to protect their industries from the global slump, Zoellick said. “The real danger is that you get into a cycle of retaliation,” he said. He estimated that 17 of the Group of 20 emerging and developing nations are considering or imposing restrictions on trade, breaking a pledge they made during an April 2 summit in London. The World Trade Organization in March predicted a 9 percent drop in global commerce this year. China and Brazil are researching how they can conduct trade in the yuan and real, in a signal they’re seeking to reduce their reliance on the dollar. “You could -- and you’ve already seen this over the past 20 years -- have multiple currencies” used in the global system, Zoellick said. “You will see China and India playing a larger role, including in financial markets.” Still, he added that “I just don’t believe it’s going to supplant the U.S. as a reserve currency.”
To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net.
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