Macro Talk

Fiscal stimulus is a much-needed temporary painkiller, but it is not enough to put the global economy on a path to recovery. This column argues that some economists – led by Paul Krugman – invest too much hope in the effects of fiscal stimulus while turning a blind eye towards the bad-debt mess. Stringent inspections and evaluations of bank assets by financial regulators, followed by sufficient infusions of taxpayer-funded capital will be the only effective means of clearing away the oppressive uncertainty.

http://www.voxeu.org/index.php?q=node/3502

The term “tipping point,” made fashionable after Malcolm Gladwell’s 2000 book of the same name, became part of the academic vernacular after a 1971 paper in which Nobel laureate economist Thomas Schelling showed how white families leaving a neighborhood as black families moved in induced other whites to leave as well. In Tuesday’s Wall Street Journal, Justin Lahart writes about about tipping points and energy prices — why, for instance, did signs of conservation appear when gasoline neared $4 a gallon, instead of say a year ago, when it pushed past $3? Post your thoughts on energy and tipping points below, and also check out these related links.Schelling’s original paper on the tipping point and white flight: http://www.casos.cs.cmu.edu/education/phd/classpapers/Schelling_Seg_Models.pdf

Geoffrey Heal and Howard Kunreuther with more on tipping points: http://opim.wharton.upenn.edu/risk/library/06-13.pdf

Peter Reiss and Matthew White on demand for electricity markets in San Diego during California’s energy crisis in 2000. It shows that people really do respond quickly to higher energy prices, though their ability to cut back by a lot is constrained by the fact that they can’t easily replace appliances like refrigerators — which are the biggest energy hogs — with more efficient models: http://opim.wharton.upenn.edu/risk/library/06-13.pdf

Here’s a paper by Nicholas Burger — a PhD student at U.C. Santa Barbara — and Colorado School of Mines economist Daniel Kaffine (himself a recent graduate of UCSB). It shows that as prices go up, L.A. freeways get a lot less congested.
http://www.econ.ucsb.edu/~burger/working_papers/BKGas.pdf

Here’s Lutz Kilian and Paul Edelstein on how higher prices affect cosumer expenditures. Shows how, because of the declining importance of the U.S. auto sector and because U.S. auto makers can more easily shift to making smaller cars, gasoline price increases might not be quite so damaging to the economy as in the 1970s/early 1980s:
http://www-personal.umich.edu/~lkilian/ek052407b.pdf

Economists and others weigh in on the 0.6% jump in consumer prices.

Excerpts from an interview President Bush gave to Sky TV.

Q: Well, no, no, no. It was probably the one thing that Prime Minister — Prime Minister Brown has been very clear about is the economic problems, the downturn we’re all going through.

BUSH: Yes.

Q: And he’s said repeatedly that, you know, the credit crunch — basically it’s America’s fault.

BUSH: I think we have our own problems. I mean, to the extent that America’s economy helps drive a lot of the world economy and to the extent that we’ve slowed down — therefore, you know, part of it has to do with America’s slowdown. But high energy prices aren’t America’s fault. High energy prices are the fault of demand relative to world supply. And we’re getting our house back in order. I mean, if what the Prime Minister is saying is, I hope America recovers as quickly as possible, I’m right there with him. And we had a significant stimulus package that we passed back to our people.

Q: Do you think it was too free economically in the United States with the growth of the sub-prime market and the loans that were –

BUSH: You know, I think it’s — first of all, I don’t think there is such a thing as almost too free an economy. I’m a free market person. Inherent in that question is, do you think the government ought to be regulating more of economic growth; I don’t believe that. I think it’s a combination, no question, of an oversupply in housing. And there was, frankly, some — you know, Wall Street created some products that people weren’t sure what they were buying, really.

And it’s just a confluence of some bad events that came together, and yet our economy is still growing. Keep in mind, this is — you know, this is an economy that grew nearly 1 percent in the last quarter. Is that good enough? No. But it’s certainly better than the negative.

The International Monetary Fund’s executive board is expected on Friday to bless the staff’s effort to create a voluntary code of “best practices” to guide sovereign wealth funds, giving a political boost to the efforts.

On a request from the Group of seven nations – U.S., Germany, Italy, Japan, Britain, France and Canada — the IMF has been trying to put together a kind of voluntary code of conduct that would help sovereign wealth funds convince skeptical politicians in Europe and the U.S. that the funds are investing for commercial rather than political reasons.

Sovereign wealth funds are vast, government-owned investment funds with more than $3 trillion in assets, which in the past six months have invested in capital-hungry financial firms, including Citigroup and Merrill Lynch in the U.S. and UBS in Switzerland. But the funds’ appetite for such investments has seemed to tail off as the financial crisis deepened. The funds are powered by oil revenue, in the cases of Russia or Middle Eastern nations, or export revenue, in the cases of Singapore and China

The IMF’s staff report doesn’t propose a definitive list of practices to guide the funds, according to several officials who have seen the document. Rather it is a kind of discussion paper that looks at areas such as disclosure, reporting, transparency and governance. It discusses the pros and cons of some actions.

For instance, some funds already disclose the currencies that they invest in. But that might not be wise, says one official who has read the report, because it could exacerbate foreign exchange swings. The paper also generally endorses greater transparency by the funds.

The main significance of the board discussion is to give more political push to the process. Board members represents the IMF’s 185 members. Russia and China, which have been skeptical of the IMF efforts for fear that their investment effort will be hampered, are expected to give their general support to the IMF proceedings, IMF officials say.

The IMF has also sent out a survey to major sovereign wealth funds, asking them to explain how they operate, in an effort to see if the funds can find common ground. The IMF plans to give an update on its efforts by its Spring meeting in April and have a proposal for a voluntary code by its annual meeting in October.

India gets more money sent back from migrants than any country in the world, according to a new World Bank report that also showed the U.S. was the top source of remittance.

Migrants sent $27 billion to India in 2007. China came in second, receiving $25.7 billion and Mexico was a close third with $25 billion.The U.S., which was the top immigration country in 2005 with 38.4 million immigrants, is by far the largest source of outflows, with $42 billion in recorded outward flows in 2006. Saudi Arabia ranks as the second largest, followed by Switzerland and Germany. The Mexico-U.S. corridor is the largest migration corridor in the world, the Worlds Bank said, accounting for 10.4 million migrants by 2005.

Writing for the Financial Times, Anil Kashyap and Hyun Song Shin argue that Middle East sovereign wealth funds could help prop up the troubled companies facing credit issues. “The quickest solution is to identify some buyers before the next spiral down. One obvious set of buyers are the Middle Eastern sovereign wealth funds. They have stepped up once and were burnt on their first wave of investments. But since the January meeting of the Fed’s open market committee, when the central bank made it abundantly clear that it will try everything possible to stave off collapse, oil prices have risen from roughly $92 a barrel to $109 (as of March 18). Other commodity prices have also risen over this period. Given the deteriorating prospects for the global economy over this time, a plausible interpretation is that some of the financing that might have gone to the financial institutions has instead been directed towards buying commodities such as oil. This portfolio reallocation represents a pure windfall for the oil producers.”

Losing Our Marbles: Steve Waldman on his Interfluidity blog explains the credit crisis for Kindergarteners, likening the situation to a game of marbles where everyone has promised to give more than they have. “A credit crisis arises when many more promises are made than can possibly be kept, and disputes emerge about how and to whom promises will be broken. It’s less a matter of SIVs than ABCs.” On his Economist’s View blog, Mark Thoma responds to the metaphor with a solution that can work in marbles and the current financial crisis.

• The economic factors clearly took a back seat to liquidity fears and the restoration of confidence in a system fraught with uncertainty. A prudent, economics-focused Fed would more likely have balanced the downside risks of obviously slowing growth with the potential for higher prices down the road. Such a balance, as the Taylor Rule suggests, would more likely mean a [half percentage] point rate cut, but current circumstances simply demand a more aggressive response. –Guy LeBas, Janney Montgomery Scott
• The dissents might be a signal that the [three-quarter-point] outcome represented a compromise between some who pushed for a larger move and those that would go along with only a [half-point] cut… We reject the notion that the smaller than anticipated rate cut reflects an attempt to save some ammunition. Instead, it appears that there are at least some members who remain concerned about inflation risk and perhaps some who have related concerns regarding the dollar. –David Greenlaw, Morgan Stanley
• Mr. Plosser [who dissented] has form; he was a member of the Shadow FOMC, a monetarist group which railed against the Fed easings in April 01. Yes, you read that right, he did not want to ease even though the economy was in recession. We should probably be grateful he agreed to anything today… By April 30 Mr. Bernanke should be able to extract another 50 basis points from his more reluctant colleagues. This will all make no difference to the near-term data, but it is a necessary precondition for recovery, eventually. –Ian Shepherdson, High Frequency Economics
• These actions were taken despite rising inflation pressures. The Fed expects these pressures will subside as energy and other commodity prices flatten out, and as unused resources rise. Our take, however, is that commodity price strength is in part a function of the easy stance of monetary policy and that inflation is headed higher. –Bear Stearns
• For our money, this was the most difficult call for the Fed and for market players in some number of decades. In our assessment, the difference between [a three-quarter-point cut] and [a full-percentage-point cut] is immaterial. The size and scope of both the action out of Washington coming down the pike and the regulation that will come in its aftermath make the extra quarter-point of liquidity pale in comparison over what has become a very dark winter on Wall Street. Spring will arrive eventually, but the thaw that accompanies the deep freeze in financial markets will be quite painful. –Joseph Brusuelas, IDEAglobal
• What’s next? About the only thing we know is that further surprises are likely to occur. The Fed is rapidly using up all its bullets but there is no other choice. It will probably have to use more up before the coast is clear. Ultimately, I believe the Fed will succeed in keeping us out of a steep and protracted recession and I still feel that the economy will be up and running by the end of the year. –Naroff Economic Advisors