Thursday, July 30, 2009

Bernanke bashing... Fair game or not?

Save Ben! Reappoint Ben! I don't know why it is a new sport or what anyone gets out of it. But both Bloomberg and the WSJ have carried Op-Ed or columnist opinions that trash the guy that may have saved the economy, Ben Bernanke. Hey, he has made mistakes; he is human; but he also has come up with very innovative and timely ideas to stopper a crisis that was bout to run out of control.

Does Harvard know best? Amar Bhide (Harvard scholar) has remarks that appear in the Journal that are so incoherent as to make no sense. I wrote to Bloomberg about their anti-Bernanke article and have gotten no reply on that. I suppose we are supposed to give this comment in the Journal weight because the guy is from Harvard. Certainly it's not because of what he has argued. His article is a jumble of illogic.

Your point??? Trashing Bernanke as a academic who has no proven experience or management skills makes no sense once you admit that the guys running the banks (ruining the banks?) were life-long bankers with tons of experience.

Blame WHO??? Labeling the financial melt down as the result of lax regulation is a knee jerk response; I find myself falling prey to the notion too from time to time. But when the lawmakers change the rules and remake them such that the game is unsafe, how is anyone supposed to act safely when the new game itself is now intrinsically more risky? It was the lawmakers (not the regulators) that allowed 'nothing down' loans and 'no income test' borrowing. The bankers only followed suit, like driving too fast on a road because the speed limit lets you. Still, the bankers failed to see the heightened risk and they bear the blame for that. But don't blame the 'cops' for not arresting them for staying within the new higher and more dangerous speed limit.' Actually I think the lawmakers and bankers are more guilty than the regulators although the regulators did play a role in supporting the rule changes instead of fighting them.

Who is most guilty over sub-prime issues?? Blasting Bernanke for not seeing the dangers of sub-prime lending early in his term, when in fact the Fed had uncovered misdoings and had been silenced by its own Chairman, Alan Greenspan, a year or so earlier, hardly makes sense.

Is this central banking or hot potato??? Blaming Bernanke for not having more foresight when Greenspan was the guy who was there for nearly 20Years and was a staunch opponent of regulation also resonates with little clarity of the situation.

The least political regulator -- The Fed has been an honest regulator - not without fault, but honest and, for the most part, skilled. Had the Fed had a different Chairman prior to Bernanke it might have actually have done a better job. Instead, Bernanke became the unluckiest central banker as he had to follow the reign of the world's luckiest central banker - a guy who left just as his string of luck was running out. When the failure of a bureaucracy comes down to its leader's failings and one who was a known partisan who did not like part the job he was assigned to do (regulate) it's hard to fault the institution of the Fed for the outcome...or to fault his successor. But that is what Mr Bhide does.

Fiddle dee dee: Moreover, the lawmakers do oversee the Fed and they did not exercise much of that oversight. In his autobiography Greenspan admits to planning to say long incomprehensible things to throw them off track when they made him testify. He has never suffered any adverse repercussions from that admission. I find that odd.

A division of power that sets the blame -- The House financial services committee was willing to 'roll the dice,' as Chairman Barney Frank put it, to spread homeownership more widely. Once again this proves that the road to Hell is paved with good intentions. Good intentions may indeed make for some very bad economic policy. And they did. Such was the oversight of 'Congress.' Such things are not the fault of the Fed.

Like a Rock...not Iraq -- The Fed has in fact has been one of our better, more reliable institutions of late. Under Paul Volcker the Fed stopped a rising runaway inflation that had been the product of the combination of rising oil prices and previous Fed policy errors. Those previous errors came from a Fed Chairman who had been too partisan- at that time a Democrat (Arthur F Burns). Greenspan followed Volcker fighting a 'rear guard' action on inflation trying to reduce it slightly further. But then he lost his way in his zeal for pushing for de-regulation everywhere. In ignoring regulation violations that were in the Fed's bailiwick that were dredged up by one of its sitting governors, Greenspan made the cardinal policy error he is still trying to dodge. Greenspan said to let it go. In retrospect he argues that the Fed was too much of a bureaucracy for him to have controlled it so well. Don't believe it. So the Fed governor (Ned Gramlich) stopped pursuing what could have been the Fed's finest hour (in retrospect).

Greenspin - Greenspan blew that up by himself. He continued asserting that nationally home prices had not fallen, a stylized fact with no substance. Of course, nominal house prices had not fallen, inflation had been too high even in the previous deep recessions. Real home prices had dropped and now with inflation lower wasn't the real message that home prices would be more at risk not less as risk to drop in nominal terms?

Personal or institutional failings? You decide -- Why doesn't Mr Bhide see the difference between the personal failure of Alan Greenspan and institutional issues that pertain to the Fed?

Your point again?? Bhide's solution is to recognize that in the past, firms specialized. Now things are too complicated, apparently. Well maybe there was less competition and because of that firms could make more profit more easily. Maybe with essentially 'business-line monoplies' firms did not have to take as much risk to make money? Maybe? So is his point that there is more money in a monopoly?

An odd quote: Hence we have this odd statement by Mr Bhide about not being able to know everything about everything. (
See the address above about six paragraphs down for this reference.

Confusion - I don't get this point at all. I allude to it above... does Bhide believe in monopoly? Does he not believe in delegation and management at the Fed? Can firms only do one thing right? What sort of point is he trying to make here?

Growing Fed powers, yes but much, much more -- Bhide goes on to list the way the Fed's powers have gradually spread as though that is evidence or proof of his point. But what also spread were regulatory overlaps, regulatory holes and differences of opinion among regulators that allowed some instititutions to choose their overseer - a dangerous thing. That was not the Fed's doing but instead the environment in which it worked and eventually it was the Fed's undoing since the Fed was not the main regulator of either AIG or Lehman Brothers or Bear Stearns for that matter. But the Fed did find a way to deal with the fallout.

Fed is independent but not a loose cannon - The Fed in fact is a bureaucracy with lots of different branches and expertise. Governors are selected for their diversity in expertise and that has been more true in recent years when the challenges of economic specialization stepped up. The Fed is and always has been accountable. It reports to Congress twice a year and is overseen by GAO audits of its books.

Is more too much? Adding more regulation to the Fed's plate may spread it too thin, but I doubt it. More likely the Fed would simply need a new branch to focus on that aspect of enhanced responsibility separate from monetary policy. It seems to me that the real issue is not the question 'can the Fed regulate these markets?' but instead the question of whether the markets are doing things that should be regulated or that can be managed. Maybe some of these activities simply should be stopped.

TIME BOMB!!! Any activity that pays out today but does not reveal its true worth for several years is a ticking time bomb. Many derivatives had that property, as salesmen and traders were paid on a calendar year basis while stuff they generated and often only partly sold sat on their firm's books unsold and marked to a hypothetical market. Those are more the sorts of things that regulators need to think about.

Is hindsight really 20/20? Oversight needs to be different and more sophisticated. It needs to push back. And with the strength of the financial lobby that will not be easy regardless of which party is in power. It's not as simple as consolidating product lines and getting more experience at the helm. Mr Bhide does not seem to have a clue how complicated it all is and how the solution lies in having good people with skill and sound judgment. His brief paean to artificial rules and the role of the gold standard open a whole new can of worms for troubles to emerge. Not only is the Fed a good choice, but what other agency would have managed the last crisis so well? Who would you have trusted to take the lead in the last crisis? When put it that way the job the Fed has done shines even more brightly. Hindsight is said to be 20/20. In this case I'm not so sure. Criticism of the Fed sure has been far more myopic than that.

Tuesday, July 21, 2009

LEI: the rise is real!!

JOY JOY JOY!! The LEI-leading economic index, is jumping... if not for joy, for recovery. Its annual rate rise of 12.8% over three months is near the 14.5% peak rate it registered in the recovery period shortly after ending the recession in 2001.

The coincident index is not yet rising but if this is a real recovery it will begin to rise soon.

In the 1981 and 2001 recoveries the coindcident index DID NOT RISE in the first month of recovery. At the end of the severe 1973-75 recession the coincident index fell in the first month of recovery. So the mo/mo drop in this period is hardly decisive as a recession-ending (or not) signal. Moreover, remember that before applying too-strict of a standard, these figures will wind up being revised so we should look at trends more than trying to hold the monthly readings to their currrent decimal points of value.

Fortunately the trend is your friend. So far the signals are good and encouraging.

See my previous entry from last week on jobless claims and my own comment underneath which replies to the comment from a nervous or angry reader.

Don't look a gift horse in the mouth or deny progress when it is being made. The President needs to jump on the bandwagon of hope. He nneds to stick his political neck out instead of playing it safe. We are far enough into this thing and he was such a part of a major effort on stimulus, that if it does not work he will be held accountable. There is no blaming the Republicans for lack of recovery anymore...

The stimulus plan was mostly of Democrat construction. We need some cheerleaders badly. Pessimists need not apply. Politicians looking for a safe place to keep their heads down, or a place to wait to jump out from and claim credit: go home!!

Thursday, July 16, 2009

Jobless Claims: The drop is REAL!!!


Claims fell sharply and for the second week in a row.


That was not supposed to happen.

Latest spin is that it's auto layoffs that are not occuring because they came earlier.

and so???? That means???

I grew up in Detroit and worked in the auto/truck assembly plants in the summer to earn money for college. Model chanage-over layoffs are fact of life there.

What the absence of layoffs tells us is that previous levels of claims were INFLATED by the early claims related to layoffs and other special events that took the place of those usual layoffs. As a result seasonal adjustment factors did not anticipate what happened as a shifting forward of layoffs. So now when we are not getting those layoffs, claims look for them and as a result the LEVEL of claims finally gets adjusted lower, to the correct level. It's an offsetting error.

There is nothing specious about the drop in claims. Many of the true drops in claims come around periods when people (economists) claim there are distortions. Dropping claims that fall this sharply for two weeks in a row look real to me.

Even Nouriel Roubin is taking down his black crepe.

So think about.

The improvement is real. If you contemplate what seasonal factors do and how they interract with unexpected events you can understand why. It's because the previous progress in claims had been hidden by the previous errors in the seasonal factors and now those errors are being corrected. The economy is getting better.

It's real. Don't fight the good news.


Tuesday, July 14, 2009

Mort Zukerman hoodwinks the WSJ with Pessimism

The following Op-Ed appreared in yesterdays WSJ. I re-offer it wihth some added annotations. Zuckerman is simply TOO PESSIMISTIC for words

The recent unemployment numbers have undermined confidence that we might be nearing the bottom of the recession. What we can see on the surface is disconcerting enough, but the inside numbers are just as bad.

The Bureau of Labor Statistics preliminary estimate for job losses for June is 467,000, which means 7.2 million people have lost their jobs since the start of the recession. The cumulative job losses over the last six months have been greater than for any other half year period since World War II, including the military demobilization after the war. The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion. (wrong: the 1981-1982 recession undid the gains of the 1980 recession’s recovery.)

Here are 10 reasons we are in even more trouble than the 9.5% unemployment rate indicates:

1- June's total assumed 185,000 people at work who probably were not. The government could not identify them; it made an assumption about trends. But many of the mythical jobs are in industries that have absolutely no job creation, e.g., finance. When the official numbers are adjusted over the next several months, June will look worse. FACT: When you estimate things you can get them wrong on the up side or down side, Simply, assuming that the error is in the direction of your fantasy, as Mort does here, and making that a point is in your favor is not playing fair. In fact as the job losses are receding (and they are receding, down from a peak monthly pace of -741K per month) the danger is that that the government overestimates job losses)

2- More companies are asking employees to take unpaid leave. These people don't count on the unemployment roll.

3- No fewer than 1.4 million people wanted or were available for work in the last 12 months but were not counted. Why? Because they hadn't searched for work in the four weeks preceding the survey. FACT: the pool of discouraged workers is dropping (down 0.9% from April peak). There is always some number of these people around. The Dept of Labor reports 5.884mln that are not in the Labor force but who say they want a job. Data on this (discouraged workers) go back to Jan 1994. The percentage of not employed said to be discouraged is only in the 38% percentile of range for that percentage for the whole period).

4- The number of workers taking part-time jobs due to the slack economy, a kind of stealth underemployment, has doubled in this recession to about nine million, or 5.8% of the work force. Add those whose hours have been cut to those who cannot find a full-time job and the total unemployed rises to 16.5%, putting the number of involuntarily idle in the range of 25 million. FACT: Whoa there Mort. This is over the top. You COULD HAVE called them involuntarily less active but not involuntarily idle. First you can’t cal call those who are working part time and wanting full time work NOT EMPLOYED as you do in this construct. Second there are always people in the category of ‘working part time for economic reason’: the rate as a percentage of the labor force averages 3.6% (now it is 5.8%) elevated yes, but these people ARE working. Moreover having your hours cut by 48minutes on average does not make you out of work. And having hours cut is often a good sign that the reduction in demand and need to cut hours is believed to be temporary on teh part of employers, If firms thought the lost output were to be for a long period, they would cut workers, so be careful in how you use this hours reduction phenomenon.

5- The average work week for rank-and-file employees in the private sector, roughly 80% of the work force, slipped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water, and factories are operating at only 65% of capacity. If Americans were still clocking those extra 48 minutes a week now, the same aggregate amount of work would get done with 3.3 million fewer employees, which means that if it were not for the shorter work week the jobless rate would be 11.7%, not 9.5% (which far exceeds the 8% rate projected by the Obama administration). FACT: workers downgraded to part time status are already in included in the statistics above. This is not a new point, it’s a retreaded old one. Again and mentioned above cutting hours instead f workers is a good thing. We are down to NINE points.

6- The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high. FACT: true but we need to look at % of labor force figures to get perspective since the economy is larger. On that basis Mort is right. The 4.4mln long term unemployed as a percentage of the labor force is a record. At 2.8%. It did reach 2.6% in June 1983 in the last long recession. We expect this sort of thing is a recession of record length (post war period).

7- The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour. FACT: The real wage is up by 4.1% Yr/Yr in May (no CPI for June yet). Hey let’s not take an article with all sorts of long run stuff and to add another point based on month to month meaningless number. Ok? We are now down 8 points, Mort. .

8- The goods producing sector is losing the most jobs -- 223,000 in the last report alone. Fact: Mort has this right and the job losses in the goods sector are sharply better than their loss of 405,000in January. This is an improvement, Mort. Let’s add that since the END of the last recession MFG jobs only have risen month-to month 13 times. This is not a job growth sector in this economy add in the troubles in housing recently and of course, it gets worse. So this is not a recession point, we are down to seven.

9- The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers back to full time. Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business. General Motors and Chrysler, closed hundreds of dealerships and reduced brands. Citigroup and Bank of America cut tens of thousands of positions and exited many parts of the world of finance. Fact: There is none. This is all polemic. We are down to six points. True, there have been permanent job losses in this recession. The automakers are notable, their numbers are and importance is not what they once were...

10(?) Job losses may last well into 2010 to hit an unemployment peak close to 11%. That unemployment rate may be sustained for an extended period. FACT: No facts here either. This is all opinion. We are down to five tempered points.

Can we find comfort in the fact that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power since employment reflects decisions taken earlier in the business cycle. But today is different. Unemployment has doubled to 9.5% from 4.8% in only 16 months, a rate so fast it may influence future economic behavior and outlook. Fact Check: He has this backwards: history says sharp, strong rises in unemployment are followed by relatively rapid recoveries in jobs

How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in stimulus spending that was supposed to yield $1.50 in growth for every dollar spent? For a start, too much of the money went to transfer payments such as Medicaid, jobless benefits and the like that do nothing for jobs and growth. The spending that creates new jobs is new spending, particularly on infrastructure. It amounts to less than 10% of the stimulus package today.

About 40% of U.S. workers believe the recession will continue for another full year, and their pessimism is justified. (Fact check: why?) As paychecks shrink and disappear, consumers are more hesitant to spend and won't lead the economy out of the doldrums quickly enough. Fact Check: If the facts change, the workers will change their minds and that is if things are better-than-expected, too.

It may have made him unpopular in parts of the Obama administration, but Vice President Joe Biden was right when he said a week ago that the administration misread how bad the economy was and how effective the stimulus would be. It was supposed to be about jobs but it wasn't. The Recovery Act was a single piece of legislation but it included thousands of funding schemes for tens of thousands of projects, and those programs are stuck in the bureaucracy as the government releases the funds with typical inefficiency .Fact Check: TRUE. Biden is right, things are worse than had been expected. See this link:

Another $150 billion, which was allocated to state coffers to continue programs like Medicaid, did not add new jobs; hundreds of billions were set aside for tax cuts and for new benefits for the poor and the unemployed, and they did not add new jobs. Now state budgets are drowning in red ink as jobless claims and Medicaid bills climb.

Next year state budgets will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending, raise taxes, or both. State and local governments, representing about 15% of the economy, are beginning the worst contraction in postwar history amid a deficit of $166 billion for fiscal 2010, according to the Center on Budget and Policy Priorities, and a gap of $350 billion in fiscal 2011.

Households overburdened with historic levels of debt will also be saving more. The savings rate has already jumped to almost 7% of after-tax income from 0% in 2007, and it is still going up. Every dollar of saving comes out of consumption. Since consumer spending is the economy's main driver, we are going to have a weak consumer sector and many businesses simply won't have the means or the need to hire employees. After the 1990-91 recessions, consumers went out and bought houses, cars and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won't be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so. The paycheck has returned as the primary source of spending. FACT Check: consumers rebound in all recessions. Don’t confuse what ahs happened with what WILL happen.

This process is nowhere near complete and, until it is, the economy will barely grow if it does at all, and it may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of excessive debt has been completed. Until then, the economy will be deprived of adequate profits and cash flow, and businesses will not start to hire nor race to make capital expenditures when they have vast idle capacity. FACT check: This is just more unsupported pessimism. Again history suggests the opposite that severe job losses come back on line as strong recovery gains. The 1990 and 2001 recessions with such bad jobs recoveries were sluggish job-loss recessions - not like this one at all.

No wonder poll after poll shows a steady erosion of confidence in the stimulus. So what kind of second-act stimulus should we look for? Something that might have a real multiplier effect, not a congressional wish list of pet programs. It is critical that the Obama administration not play politics with the issue. The time to get ready for a serious infrastructure program is now. It's a shame Washington didn't get it right the first time.