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  • Ben Bernanke on Innovative Responses to Financial Crisis

    Ben Bernanke closed out a daylong discussion at the Brookings Institution titled Liquidity and the Role of the Lender of Last Resort. In his address, Bernanke talked about how the Fed--with him at the helm--responded to "unforeseen challenges" during the global financial crisis. Bernanke notes that the Fed had to be innovative because of limited legal powers.
  • China's Premier Says No to Stimulus Measures

    If you are waiting on China's government to make some policy moves to jump-start growth, you may want to find something to do with your time. As Aileen Wang and Adam Rose report for Reuters , Chinese Premier Li Keqiang has quashed any rumors of pending fiscal and/or monetary policy shifts. The almost unabated run of disappointing data this year has fuelled investor speculation the government would loosen fiscal or monetary policy more dramatically to shore up activity. But authorities so far have resisted broad stimulus measures. On Wednesday, the top economic planning agency said the government had less room to underpin growth because it did not want to inflate local debt risks. Still, authorities have take some steps to bolster growth. Earlier this month, they announced tax breaks for small firms and plans to speed up some infrastructure spending, including the building of rail lines. The national railway operator now plans to raise its annual investment by 20 billion yuan (1.9 billion pounds) to 720 billion yuan in 2014. There have also been moves to cut down on bureaucracy and to open up state-dominated sectors to private investors. In his speech, Li said China was positioned to sustain a reasonable level of growth over the long term. "We have set our annual economic growth target at around 7.5 percent," he said. "It means there is room for fluctuation. It does not matter if economic growth is a little bit higher than 7.5 percent, or a little bit lower than that." Read the full article here .
  • CEA Final Report on the Effect of Recovery Act

    On the occasion of the fifth anniversary of the American Recovery and Reinvestment Act, the Council of Economic Advisers has released a report to Congress on the economic impact of the act. The CEA stands firmly behind the act, and the report points to several measures as signs of the effectiveness of the government's plan. Among the evidence presented: GDP per capita returned to pre-crisis levels in four years, an the economy has added over 2 million jobs a year since ARRA. The estimates for the long term impact of ARRA are bullish, with the CEA touting a significant multiplier effect from overall fiscal policy: CEA Estimates of the Recovery Act and Subsequent Fiscal Measures Combined. The combined effect of the Recovery Act and the subsequent countercyclical fiscal legislation is substantially larger and longer lasting than the effect of the Recovery Act alone. The Recovery Act represents only about half of total fiscal support for the economy from the beginning of 2009 through the fourth quarter of 2012. Moreover, as shown in Figures 7 and 8, the bulk of the effects of the other fiscal measures occurred as the Recovery Act was phasing down. These other measures thus served to sustain the recovery as effects of the Recovery Act waned. The CEA multiplier model indicates that by themselves these additional measures increased the level of GDP by between 1.0 and 1.5 percent per quarter from mid-2011 through the end of calendar year 2012. Altogether, summing up the effects for all quarters through the end of calendar year 2012, the Recovery Act and subsequent fiscal measures raised GDP by an average of more than 2.4 percent of GDP annually—totaling a cumulative amount equal to about 9.5 percent of fourth quarter 2008 GDP. The contribution of all fiscal measures to employment is equally substantial. Other fiscal measures beyond the Recovery Act are estimated to have raised employment by 2.8 million job- years, cumulatively, through the end of calendar year 2012. Adding these jobs to those created or saved by the Recovery Act, the combined countercyclical fiscal measures created or saved more than 2.3 million jobs a year through the end of 2012—or 8.8 million job-years in total over the entire period. Estimates from Private Forecasters. Private forecasters and domestic and international institutions have used large-scale macroeconomic models, mostly to estimate the effects of either the Recovery Act by itself or other policies in isolation. The models used by these individuals and organizations generally employ a similar multiplier-type analysis as is found in CEA and CBO work, although they vary considerably in their structure and underlying assumptions. Although no outside estimates of the total impact of all the fiscal measures are available, Table 6 displays the estimates of the impact of the Recovery Act offered by several leading private-sector forecasters before the Act was fully implemented. Despite the differences in the models, these private-sector forecasters all estimated that the Recovery Act would raise GDP substantially from 2009 to 2011, including a boost to GDP of between 2.0 and 3.4 percent in 2010. Read the full report here . For a helpful summary, read a summary from CEA chair Jason Furman here .
  • Bank of England Governor Mark Carney on Need for Stimulus, And Risks in Stimulus Measures

    Given that he is Canadian, was educated in the U.S., and is now governor of the Bank of England, Mark Carney might be as qualified as anyone to speak to global economic challenges (or at least for English-speaking economies). In an interview with Charlie Rose , Carney spoke to a particular challenge for central banks: to promote additional stimulus while cutting down on the risks that stimulus measures can create. Here is an excerpt from the interview: Here is the full episode:
  • SF Fed President on the Challenge of Rebalancing Economies in China and US

    Speaking to community leaders in Los Angeles, San Francisco Fed President John C. Williams compared the challenges for U.S. policymakers to those of their counterparts in China. While the details in each economy are rather different, the overall challenges are similar. Both countries need to rebalance their economies for future growth. But that is no small undertaking, and it is made more difficult by short-term challenges. From the speech: Unsurprisingly, economists can’t agree about the primary reason China’s domestic consumption is so low and what should be done about it. One possibility is the population’s focus on saving—in large part to cover the cost of health care, education, and preparation for old age. This is exacerbated by China’s massive and rapid urbanization; as it currently stands, most social services, such as education and health care, are administered in one’s home city. This means that much of the migrant workforce can’t access these services in their new cities, and is forced to save to cover those expenses. While local authorities may balk at paying more for social services, there is a trade-off: addressing such structural barriers would free up workers’ income that could be spent locally, stimulating host cities’ economies. Another issue is increasing income inequality—something we in the United States can relate to. What money is flowing to households is concentrated largely in the expanding class of wealthy citizens, rather than in rural and middle-class families. The final and perhaps most important factor is that, while corporate profits have risen, a comparable rise in individual income has not followed. Again, something that has happened in the United States as well. Low borrowing costs for state-supported firms, combined with low wages for many workers, have helped business profits at the expense of households. If China is to rebalance the economy away from exports and towards domestic consumption, there must be an increase in household incomes. That means higher wages and dividend payments from firms. Further liberalization of the financial system will also help, as higher deposit rates and more investment options would boost spending power. Furthermore, China’s citizens must feel a sense of stability and certainty regarding their future. When we’re worried about the future, the natural response is to want to save more. So, even if these steps were to be taken, the question remains whether China’s middle- and rural-class citizens are willing to become bigger spenders anytime soon. Turning to the United States, over the longer run we need to increase investment in education, physical capital, technology, and infrastructure. We will also need to put federal fiscal policy on a sustainable path, which involves making some tough decisions about taxes and spending. Importantly, spending less on current consumption will free up resources for investment areas that foster greater production and will increase the size of the economy over the long term. However, to succeed at these longer-run goals, we first need to get our economy working at its full potential. That’s where the Federal Reserve and monetary policy come in. Since the early days of the crisis and recession, the Federal Reserve’s monetary policy body, the Federal Open Market Committee (FOMC), has been taking strong actions to foster economic recovery and get people back to work. We lowered short-term interest rates to near zero almost five years ago. The goal was simple: With very low interest rates, households and businesses are more willing to spend. This increase in demand for goods and services leads businesses to hire more workers. Read Rebalancing the Economy: A Tale of Two Countries here .
  • Barclays' Chang on China's Disappointing Slowdown

    China's policy leaders are facing the reality of slow growth--this week brought the news of a significant decline in exports. So while China will surely seek measures to reverse the momentum, don't expect to see a stimulus plan to be effective, according to Barclays chief China economist, Jian Chang . She discussed the disappointing economic figures with the Wall Street Journal 's Michael Arnold:
  • Andy Xie: 'Australian economy is probably a bubble on top of China's overinvestment bubble'

    Australia sat out the global economic crisis as much as any major economy could. Thanks to mining wealth and ripple effects from China, Australia has seen strong growth while trading partners in the West have struggled. But Chinese economist Andy Xie , Director at Rosetta Stone Advisors , warns that Australia may be due for a financial crisis of its own in the coming year. Writing at The Big Picture , Xie outlines the threat to an economy that may have become too closely tied to China's fortunes and easy credit: The Australian economy has boomed more than any other developed economy over the past decade. Its nominal GDP has doubled in a decade, and its currency value against the U.S. dollar has doubled too. As a result, its per capita income is much higher than in the United States or Europe. Its property is the most expensive among developed economies. The price of its main export, iron ore, appreciated ten times at its peak, which justified some of its prosperity. Foreign investment in its mining sector has played a more important role. It has caused the Australian dollar to appreciate strongly despite its current account deficit and higher inflation than elsewhere. The strong currency has attracted financial capital from retail investors in China and Japan. The snowball effect on the financial side has made the Australian economy strong despite the recent tumbling of the price of iron ore. As mentioned, the investment flow is sticky due to the long cycle of mining asset development. So much capital inflow has pumped up Australia’s monetary system, creating an environment of easy credit. This is the factor behind the real estate and consumption booms. If capital inflow is a bubble, Australia’s property market must be a bubble, too. When the capital inflow reverses, the bubble will pop. The Australian economy is probably a bubble on top of China’s overinvestment bubble. The latter’s unwinding will sooner or later trigger the former to do so, too. Among the mining investors I have met there is strong hope that China would soon introduce a stimulus like in 2008. This is why the price of iron ore has rebounded by 40 percent recently. Bottom fishers came in to speculate on China’s possible stimulus before or soon after the 18th Party Congress. They are likely to be disappointed. The last stimulus has made the overinvestment situation so severe that another round is just plain wrong. Also, it would trigger severe inflation and currency devaluation. I just don’t see it happening. Read A Hard Landing Down Under here .
  • Lagarde Implores Policymakers to Follow Central Bankers' Lead and Push Recovery

    IMF Managing Director Christine Lagarde was at the Peterson Institute in Washington yesterday, where she urged policymakers to put their feet on the gas pedal. Lagarde argued that recent monetary policy moves have presented an opportunity to build momentum (and, in turn, growth). Let me begin by saying that many of the right decisions have been taken. Most recently, initiatives by major central banks—the European Central Bank’s OMT bond-purchasing program, QE3 by the U.S. Federal Reserve, the Bank of Japan’s expanded Asset Purchase Program—are big policy signals in the right direction. They point the way forward and create an opportunity to build on what has been done; an opportunity to make a decisive turn in the crisis. Just as the Central Banks were misguided during the Great Depression and accelerated that crisis, it may well be that Central Banks will have played a significant role in pulling the global economy out of this great recession. But we should not get ahead of ourselves. The global economy is still fraught with uncertainty, still far from where it needs to be. The situation is a bit like a jig-saw puzzle. Some of the pieces are in place and we know what the picture should look like. But, to complete the picture, we need all the pieces to come together. That will depend on delivering on the policy commitments that have been made and in that respect, there is still a long way to go. You can read the full speech here . And watch Lagarde's address below:
  • Boston Fed President: U.S. Economy 'Treading Water,' Calls for More Fed Action

    With the U.S. economy effectively stalled, Boston Fed President Eric Rosengren is calling for the Fed to do more to spur economic growth. In an interview with the Binyamin Applebaum of the New York Times , Rosengren, who is not currently one of the voting member of the Federal Open Market Committee (the five voting slots rotate among Fed branch presidents), called for the Fed to buy more mortgage bonds and Treasury securities. And then buy some more. Until... “You continue to do it until it’s clear that you’re no longer treading water,” Mr. Rosengren said in an interview. “You continue to do it until you have documented evidence that you’re getting growth in income and the unemployment rate consistent with your economic goals.” The government estimated that payrolls increased by 163,000 in July, more than in the last several months and more than analysts had predicted. But Mr. Rosengren emphasized that several indicators, including the unemployment rate and the share of the population in the work force, had retreated to their levels at the beginning of the year. “For the last seven months we’ve been treading water. That’s different from what we expected at the beginning of the year,” he said. “I think it’s time to swim to shore.” Read Fed Officials Underscore Divisions Over Action here .
  • European Central Bank Interest Rate Below 1% for First Time

    There has been a lot of action in central banks around the world today. The European Central Bank followed the plan laid out at last week's EU summit and lowered interest rates to .75%. ECB president Mario Draghi called on Europe's banks to focus on the "soundness of [their] balance sheets as he announced the rate cut. Draghi: Based on our regular economic and monetary analyses, we decided to cut the key ECB interest rates by 25 basis points. Inflationary pressure over the policy-relevant horizon has been dampened further as some of the previously identified downside risks to the euro area growth outlook have materialised. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. At the same time, economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment. We have implemented both standard and non-standard monetary policy measures. This combination of measures has supported the transmission of our monetary policy. All our non-standard monetary policy measures are temporary in nature and we maintain our full capacity to ensure medium-term price stability by acting in a firm and timely manner. Let me also remind you of the decision taken by the Governing Council on 22 June 2012 concerning further measures to increase collateral availability for counterparties. Let me now explain our assessment in greater detail, starting with the economic analysis . On a quarterly basis, euro area real GDP growth was flat in the first quarter of 2012, following a decline of 0.3% in the previous quarter. Indicators for the second quarter of 2012 point to a renewed weakening of economic growth and heightened uncertainty. Looking beyond the short term we expect the euro area economy to recover gradually, although with momentum dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on credit conditions, the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment are expected to weigh on the underlying growth momentum. Read the full release here . Meanwhile, central banks in the UK and China also cut rates today in an effort to counter expected slowdowns. The FT has a helpful summary of the day's events here .
  • The Far Reach of the European Central Bank's Monetary Policy

    In Europe, all eyes are on Thursday's pending announcement from the European Central Bank on policy moves to halt economic slowdown. That the ECB will cut interest rates below 1% for the first time seems to be accepted. But that may not be enough, as Paul Carrel reports for Reuters . Whatever the ECB decides to do will have an impact on markets globally, and on the U.S. economy. The Wall Street Journal 's Brian Blackstone discusses the potential ripple effects of the ECB's moves:
  • Roubini: Europe 'has an austerity strategy but no growth strategy'

    Nouriel Roubini is afraid Europe may be headed toward a very rude awakening to what he calls a "short vacation." At Project Syndicate , he credits Mario Draghi and the European Central Bank with taking important measures that staved off major problems like a liquidity run on Europe's banks. But the positive impact of those moves may have been temporary, and now, Roubini argues, the short-term approach by Europe's policymakers could have medium and long term negative impact on growth and economic stability. To make matters worse, the eurozone depends on oil imports even more than the United States does, and oil prices are rising, even as the political and policy environment is deteriorating. France may elect a president who opposes the fiscal compact and whose policies may scare the bond markets. Elections in Greece – where the recession is turning into a depression – may give 40-50% of the popular vote to parties that favor immediate default and exit from the eurozone. Irish voters may reject the fiscal compact in a referendum. And there are signs of austerity and reform fatigue both in Spain and Italy, where demonstrations, strikes, and popular resentment against painful austerity are mounting. Even structural reforms that will eventually increase productivity growth can be recessionary in the short run. Increasing labor-market flexibility by reducing the costs of shedding workers will lead – in the short run – to more layoffs in the public and private sector, exacerbating the fall in incomes and demand. Finally, after a good start, the ECB has now placed on hold the additional monetary stimulus that the eurozone needs. Indeed, ECB officials are starting to worry aloud about the rise in inflation due to the oil shock. The trouble is that the eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming. Read Europe's Short Vacation here .
  • Econographics: Good Magazine's History of the Recession

    We're always on the lookout for different approaches to telling recent economic history. The spring 2012 issue of Good magazine features a fairly concise history, using a mix of text from Tim Fernholz and great visualizations from Dylan Lathrop . The feature presents the before, during, after, and future of the global economic crisis. And a lot of Lathrop's visualizations are simple, but useful, timelines. Here's one sample: Read It's All About the Benjamins here.
  • Karl Smith: 'The speed limit on the economy is extremely high'

    At Modeled Behavior , Karl Smith shares two graphs. He asks us to look at what happened to the output gap after 1983: ...and then at the output gap for now: ..and he asks us to consider whether we could see a rapid recovery over the next year. Smith says it si possible. Not likely, but possible. Read How Fast, Recovery here . (Hat tip, Mark Thoma )
  • Jeffrey Sachs Calls on Nations to Pay Down Debt, AND Strengthen Public Policy Apparatus

    In his latest book, The Price of Civilization: Reawakening American Virtue and Prosperity , Jeffrey Sachs calls on Americans to recognize that we are connected to other countries' problems in direct ways, and that our behavior as consumers and citizens have a significant impact on global development. And he offers up his prescription for working toward a cure to the global economic crisis. He discussed the state of the global economy, and specifically the euro-zone debt crisis, in an interview with Parminder Bahra of the Wall Street Journal:
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