Friday, October 17, 2014

Some Interesting Items on the Web (October 17, 2014)

Since I have not done this for a while, there are a lot of items, some of which I hope are of interest to readers of this blog.

“Errors and Emissions: Could Fighting Global Warming Be Cheap and Free?” Paul Krguman article in The New York Times.

“Florida Goes Down the Drain: The Politics of Climate Change.” Gail Collins of The New York Times.

“Climate Science Is Settled Enough: The Wall Street Journal’s fresh face of climate inaction.” Raymond T. Pierrehumbert writing for Slate.

“Are walrus at risk from climate change?” Karl Mathiesen writing for The Guardian.  
Economic Policy:

“Stuck on Inflation.”  Jeff Madrick writing for The New York Review of Books blog.

“Why inequality is such a drag on economies.” Martin Wolf of the Financial Times.
“How the Jobless Rate Underestimates the Economy’s Problems.” Jared Bernstein writing for The New York Times.

“Securing Social Security.” Gail Collins of The New York Times.
When Trade Treaties Pose a Sovereign Threat.” Jared Bernstein blog post.

“The trade clause that overrules governments.” Harold Meyerson writing for The Washington Post.
“Why Weren’t Alarm Bells Ringing?” Paul Krugman reviews a new book by Martin Wolf for The New York Review of Books.

“Labour must expose the fallacy of George Osborne’s ‘recovery’.” Robert Skidelsky writing for The Guardian.

“Secret Deficit Lovers.” Paul Krugman New York Times column.
“Dam breaks in Europe as deflation fears wash over ECB rhetoric.” Ambrose Evans-Pritchard of The Telegraph.

“Germany on defensive as criticism of economic course mounts.” Reuters article in The Globe and Mail. I attended some of the IMF events. There was an amazing consensus that most countries should spend more on infrastructure and that Germany, in particular, should do more to stimulate its economy. The Germans are resisting, though some think that the German slowdown along with international pressure may cause Angela Merkel's government to reconsider. In answer to a question about how to get Germany to arrive at a political consensus that its government needs to spend more, Larry Summers answered that he had enough trouble with American politics to get into advising about German politics. Then he went on to say that, if German Finance Minister Wolfgang Schaeuble, who was on the same panel, could manage to convince himself of the need to spend more, the finance minister could figure out how to accomplish this politically.

“Germany's Austerity Obsession Could Take Down the Global Economy.” Mark Gongloff writing for The Huffington Post.
“Fed’s Evans: Biggest Risk to U.S. Now is Premature Rate Hikes.” Article on The Wall Street Journal website. At an IMF event last week, Fed Vice Chair Stanley Fischer was asked for the definition of “a considerable time.” To my surprise, he answered with some specificity, saying that it was anywhere between 2 months and one year. However, Fischer said at this particular event and others (he appeared at many IMF events) that the decision would be dictated by the data. If the economy grows slower than the Fed expects, a rate rise would take place later. In other words, the Fed reserves the right to reevaluate its policies at any time in reaction to economic data. That is appropriate.

 “E.U. and France on Collision Course Over Budget.” New York Times article.

“Eurozone woes boost anti-austerity camp.” Article posted on the Deutsche Welle website.
“Summers, Schäuble go head to head on ailing Europe.” Video of and article on this IMF event at the CNBC website.

“Monetary policy: When will they learn?” Ryan Avent of The Economist.
“Economically, Germany is a threat to itself.” Harold Meyerson op-ed in The Washington Post. He writes:

“But I’m no fan of Germany’s macroeconomics, which are more destructive and dangerous than those of any other nation. By using its power as the dominant nation in the European Union to impose austerity on the struggling economies of Southern Europe, Germany has condemned young people in Spain and Greece to unemployment rates in excess of 50 percent, shaken the social fabric of every nation on the Mediterranean and contributed to the rise of such far-right parties as France’s National Front and Greece’s neo-Nazi Golden Dawn. Unlike other nations, Germany hasn’t offshored its best industrial jobs, but it has relentlessly offshored to its Southern neighbors conditions conducive to the rise of a xenophobic extremism that one would think Germany, of all nations, wouldn’t wish to nourish.”
“What Markets Will.” Paul Krugman column. He writes:

“I’m not mainly talking about plunging stock prices, although that’s surely telling us something (but as the late Paul Samuelson famously pointed out, stocks are not a reliable indicator of economic prospects: ‘Wall Street indexes predicted nine out of the last five recessions!’) Instead, I’m talking about interest rates, which are flashing warnings, not of fiscal crisis and inflation, but of depression and deflation.
“Most obviously, interest rates on long-term U.S. government debt — the rates that the usual suspects keep telling us will shoot up any day now unless we slash spending — have fallen sharply. This tells us that markets aren’t worried about default, but that they are worried about persistent economic weakness, which will keep the Fed from raising the short-term interest rates it controls…

“It’s also instructive to look at interest rates on ‘inflation-protected’ or ‘index’ bonds, which are telling us two things. First, markets are practically begging governments to borrow and spend, say on infrastructure; interest rates on index bonds are barely above zero, so that financing for roads, bridges, and sewers would be almost free. Second, the difference between interest rates on index and ordinary bonds tells us how much inflation the market expects, and it turns out that expected inflation has fallen sharply over the past few months, so that it’s now far below the Fed’s target. In effect, the market is saying that the Fed isn’t printing nearly enough money.”
Financial Regulation and Related Issues:

“The Secret Recordings of Carmen Segarra.” This American Life (audio).

“The Secret Goldman Sachs Tapes.” Michael Lewis writing for BloombergView.

“Finally, the Truth About the A.I.G. Bailout.” Noam Scheiber op-ed for The New York Times.

“A.I.G. Trial Witnesses Will Be Central Cast From 2008 Crisis.” New York Times article.

“The A.I.G. Trial is a Comedy.” John Cassidy of The New Yorker.
“Now as Provocateur, Summers Says Treasury Undermined Fed.” Binyamin Appelbaum of The New York Times. Also, see my comments on this.

“N.Y. Fed Lawyer Says AIG Got Billions Without Paperwork.” Bloomberg article.

“Hank Paulson’s Telling Admission.” John Cassidy of The New Yorker.


“Nobody Could Have Predicted, Bill Gross Edition.” Paul Krugman blog post.

“Depression Denial Syndrome.” Paul Krugman.

“Golden Rule: Why Beijing Is Buying.” Alan Greenspan writing for Foreign Affairs. Greenspan has long been attracted to the idea of returning to the gold standard. In fact, at the beginning of the Reagan Administration, he wrote a WSJ op-ed and submitted a comment to the government gold commission that the Treasury should issue gold-backed or linked debt securities. He not only made an unconvincing argument that this would save the government money but also made an argument that it would be the first step to a gold standard, which he favored. (I was tasked with reviewing the gold securities idea as a Treasury employee at the time.) He became quiet on this subject as Fed Chairman, though I remember reading once that he thought he might be the only person at the Fed who thought a gold standard would be a good idea.  
In this article is that Greenspan can't seem to limit it to China and gold. At the end of the article, he makes an unrelated comment about China's political system and the possible effects of that going forward. What he has to say about this is sensible, but there is no clear link between these comments and gold policy.

“After a Dreary Summer, Autumn Chill in France.” Mira Kamdar writing for The New York Times.
“In Defense of Obama.” Paul Krugman article for Rolling Stone.

“The Unhealthy Politics of Ebola.” Brendan Nyhan writing for The New York Times.
“The Nightmarish Politics of Ebola.” John Cassidy of The New Yorker.

“Calculating the Grim Economic Costs of Ebola Outbreak.” Andrew Ross Sorkin writing for The New York Times.

“No, budget cuts aren't the reason we don't have an Ebola vaccine.” Sarah Kliff writing for Vox. She writes:

“NIH funding definitely matters. “It’s fair to say that, without the budget cuts, we would be closer to a cure than we are right now,’ says Benjamin Corb at the American Society for Biochemistry and Molecular Biology. ‘We would have understood the virus and perhaps understood how to counteract the virus if we didn't have budget cuts.’
“But as Corb pointed out to me, there's a long space between being closer to a vaccine — and ‘probably’ having one (which is what [NIH director Francis] Collins claimed).”

“The Nightmarish Politics of Ebola, Part 2.” John Cassidy of The New Yorker.
“Here’s What to Say When You Don’t Know Why the Stock Market Fell.” Josh Barro writing for The New York Times.

Wednesday, October 8, 2014

Debt Management Discussion at Brookings with a Combative Larry Summers and Others

Many of the events I have attended at Brookings are sober, serious-minded affairs, and it helps to be really interested in the topic being discussed. On September 30, a discussion about debt management started off that way, but then Larry Summers got a chance to defend a policy proposal in the paper he wrote with others, “Government Debt Management at the Zero Lower Bound,” and the event became rather lively, interesting, thought-provoking, and entertaining. That is not to say that I agreed with everything that Summers said, and, combative as he was, he did admit that the discussants had given him and his coauthors issues to think about.
Despite the paper’s title, it really is a compendium of observations and analyses about debt management, some of which have no apparent link to the zero lower bound. For example, of particular interest to me because of work I did at Treasury, there is a discussion of the liquidity premium on Treasury Inflation-Protected Securities, but why this discussion is included in this paper is unclear.
The controversial issue that the paper addresses is the coordination of Treasury debt management policy with Federal Reserve open market operations. This, of course, is not just an issue when the Federal Reserve’s policies are constrained by the zero lower bound. For example, the paper makes reference to the 1961 Operation Twist policy of the U.S. government. This was an attempt to lower long-term rates and to increase short-term rates. The rationale was that short-term rates needed to be higher to protect the value of the dollar under the Bretton Woods system and long-term rates needed to be lower to encourage investment and stimulate the economy. The current paper states:
“Operation Twist is perhaps the best example of the potential for Fed and Treasury cooperation, because the circumstance was, much like the zero lower bound today, that the Fed was constrained in its use of the short rate as a policy instrument. However, unlike in the more recent period, during Operation Twist the Fed was able to complement its own actions with the secured cooperation of the Treasury to alter the maturity structure of new debt issuance.”
In fact, though the Fed and the Treasury were not cooperating, as the paper notes in footnote to its discussion of Operation Twist:

“Long-term interest rates fell on most dates in early 1962 when the initial information about Treasury and Fed policies was released. The only exception was when the Treasury surprised both the White House and the Fed by issuing longer-term bonds on March 15, 1961. This made James Tobin (then a member of Kennedy’s CEA) ‘furious.’ Treasury continued to extend its maturity thereafter and within a year the average maturity had increased by 3.5 months. Thus, Treasury began working at cross-purposes with the Fed, just in as [sic] the current episode.”  
In other words, Operation Twist is not informative about the supply effects of Treasury securities on the yield curve, nor is it an example of cooperation between the Treasury and the Fed. The authors need to revisit this issue if they revise the current paper.

The main contention of the paper is that the Treasury and the Federal Reserve are currently working at cross purposes. The Treasury is extending the maturity of the public debt by selling more long-term securities, while the Fed is taking long-term securities off the market through its open market operations. The authors believe that this selling and buying should stop. Moreover, the authors write that, even in more normal interest rate environments, “because of the importance of debt management for the functioning of financial markets and because of its relation to financial stability, the Federal Reserve should have a more significant advisory role than it does currently.”
Interestingly, the discussants argued that this recommendation could result in an erosion of Federal Reserve independence, though on its face, it would seem to give the Fed greater ability to influence the Treasury. In this connection, one should note that the authors believe that Treasury’s debt management policy is currently in error, not the Fed’s quantitative easing policies.

Nevertheless, I think the discussants are right to have this concern, though I would add that Treasury’s independence from the Fed is also a concern. The authors suggest that the Fed and the Treasury “annually release a joint statement for managing the U.S. government’s consolidated debt,” by which they mean debt held by the public not including the Federal Reserve Banks. One can only imagine the lengthy and likely unpleasant and stressful meetings at various levels as the Treasury and the Fed negotiate this statement.
Whose voice would be controlling would depend on circumstances and personalities. The Fed often has a strong hand in discussions about debt management, partly because they have more staff and other resources to draw upon than Treasury. But a strong-minded and strong-willed Secretary, think John Connally or William Simon, could conceivably bring strong pressure to bear on the Fed if there were a strong disagreement between the two institutions.

This brings me to a final comment about the paper. It reads as if the Treasury and the Fed make policy as independent actors without referencing who might be in charge of those institutions at any particular time. Political appointees to the Treasury and Federal Reserve governors and bank presidents make decisions. Sure, they receive input from staff and other sources, but ultimately they make decisions as individuals.
As way of example, with regard to debt management, the decision in 2001 to stop selling 30-year bonds was made by then Under Secretary Peter Fisher. The argument that various Treasury officials made at the time in support of this decision is that, since the yield curve usually has a positive slope, a shorter maturity structure would “over time” lead to lower cost financing. Of course, the time frame was left ambiguous, and the argument only worked, if it worked at all, if Treasury could maintain this policy over time. As it turns out, it could not. Thirty-year bond issuances resumed in the same administration as Peter Fisher served (George W. Bush) after he had left, though not immediately. The Obama Administration subsequently reversed course from the shortening strategies of both the Clinton and Bush Administrations and decided to lengthen the average maturity of the public debt. In other words, particular individuals do matter, independent of what one might model as in a particular institution’s interest.