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Time for Paulson to Rescue the Dollar?
Tweet Share on Facebook October 22, 2007 Comment (1)Anyone who watched U.S. Treasury Secretary Hank Paulson's caffeinated—if not somewhat manic—press-conference performance last Friday evening at the end of the G-7 meetings might be forgiven for thinking that the former Goldman Sachs CEO needed a long, restful weekend. It had been a busy week, after all. In addition to hobnobbing with financial ministers from the major economies—and keeping an eye on the plunging Dow—Paulson announced an $80 billion rescue fund for big banks stuck with illiquid asset-backed debt securities. He also gave a gloomy speech on the housing market. That being said, might it be time for him to devote some precious energy and attention to the falling dollar? As CNBC's Lawrence Kudlow put it in his latest syndicated column:
Wouldn't this be a good time for Mr. Paulson to signal that enough is enough, and call a halt to the dollar's decline? Oil prices are rising. Gold prices are rising. And currency traders around the world have set up huge short-selling positions in the greenback. But a few strong words from Mr. Paulson, coupled with a few well-timed rounds of dollar-buying, could turn the U.S. currency story around.
Indeed, the Bush administration hasn't intervened to boost the dollar a single time since taking office, only offering the usual rhetorical boilerplate about the value of a "strong dollar." And that policy seems unlikely to change, barring a catastrophic plunge. The dollar was not even mentioned in the post-meeting communiqué from the United States. As economist Robert Brusca notes in a letter to clients:
But the U.S. Secretary when asked about the dollar and language about cooperation did not say anything about the dollar's recent weakness at all (he did NOT call it undesirable or term it something to be reversed). Sometimes it is what they don't say that is as important, or more important, than what they do say. And the attention paid to the language of "cooperation" did not result in any favorable comments made by Paulson about the potential for FX intervention.
As one Wall Street economist told me over the weekend:
It's a hard-core position of the U.S. side that, barring outright turmoil, there is little purpose in [foreign exchange] intervention. This certainly seems to be the position of this administration. Of course, this is not the attitude of the Japanese. Without an agreement from the U.S. side to conduct coordinated intervention, intervention by the Europeans would be futile.
Would a currency intervention work? You could argue that with so many traders betting one way on the greenback, just the right amount of financial pressure at the right moment and right place would be tantamount to a sort of financial jujitsu move that would reverse the dollar's downward momentum. Then again, today's huge, high-velocity currency markets might shake off a currency intervention like a burly fullback shedding a lightweight tackler. Paulson might face a currency version of Alan Greenspan's interest-rate "conundrum" when global credit markets seemed to ignore his moves to raise interest rates.
Look, over the long run, a country's currency reflects a country's economic strength. So anyone worried about the dollar should be advocating policies that strengthen the American economy. Perhaps traders were looking forward to the unveiling this week of House Ways and Means Chairman Charles Rangel's huge tax overhaul plan and finding it antigrowth. Indeed, a 2001 study from the Federal Reserve Bank of New York found that "an analysis of the link between the dollar's movements and productivity developments in the United States, Japan, and the euro area suggests that productivity can account for much of the change in the external value of the dollar over the past three decades." Want to boost the dollar? Implement pro-growth, pro-innovation, and pro-productivity policies.
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Rangel Tax Hike Bill Is on Its Way
Tweet Share on Facebook October 19, 2007 Comment (10)Next week, House Ways and Means Committee Chairman Charles Rangel, a New York Democrat, will unveil his plan to overhaul the U.S. tax code, with likely measures including repealing the alternative minimum tax, cutting corporate taxes (though also eliminating some tax breaks), and raising taxes on wealthier Americans and, specifically, hedge fund managers. He will also introduce a bill to temporarily patch the AMT so it doesn't snag millions of new middle-class taxpayers next year. A longtime Capitol Hill observer tells me that finding the $65 billion to pay for the one-year fix will probably mean that Dems will abandon their pay-as-you-go rule, which requires tax cuts to be paid for through spending cuts or higher taxes elsewhere. Another Congress watcher puts it this way in E-mail to me:
This Rangel situation is a mess. He needs to find $65 billion for this year's patch which is no small task—a major tax increase on some group/industry is needed. On the larger bill, he was creative to include the corporate tax reduction with the idea of "closing loopholes." But he is not doing this for efficiency or simplicity purposes—he is doing it to raise revenue. So you may have a 1 percent drop in the rate, $4 billion per year, but have $20 billion per year in corporate tax increases. (These are random numbers for illustrative purposes.) In my view he is pushing hard to do this so the Dems don't need to raise taxes upon entering office with full control in '09.
Policy analyst Ann Mathias of the Stanford Group, an institutional research firm, sees things this way: "[Rangel] undoubtedly knows such a measure would be vetoed this fall by President Bush; by year-end a clean bill will pass, waiving the pay-as-you-go provisions [for a temporary AMT fix]. ... [But the bigger bill] is a preview of what will come as Congress considers the Great Tax Hike of 2009."
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Two Cheers for Greenspan and the Housing Bubble
Tweet Share on Facebook October 19, 2007 Comment (29)Two European Central Bank economists, in a paper presented at a conference run by the St. Louis Federal Reserve Bank, say the housing boom—and slightly higher inflation—were caused by the Alan Greenspan-led Fed's holding interest rates too low for too long earlier this decade. "Easy monetary policy designed to stave off perceived risks of deflation in 2002 to 2004 has contributed to the boom in the housing market in 2004 and 2005,'' economists Marek Jarocinski and Frank Smets said in the academic paper.
Ultimately, I don't think this is much of an indictment. Their calculations show inflation was only one quarter of a percentage point higher than it would have been without the Fed rate cuts. That seems like a small price to pay for avoiding a deflationary spiral and gaining a housing boom that dramatically increased the net worth of many Americans, who are still sitting on huge gains even with the bubble now deflating. And even after all the subprime defaults and foreclosures, homeownership is still likely to be higher than it otherwise would have been.
Indeed, Greenspan might want to fully embrace and tout his role in all this. Just as the Internet bubble left behind Google, eBay, and 90 million miles of fiber-optic cable, the credit bubble upgraded America's aging housing infrastructure and created a host of online services—Realtor.com, Zillow—that have permanently shifted the balance of power from real-estate agents to consumers. (This whole argument is wonderfully argued in the book Pop! by Daniel Gross.) And as Australian economist and bubble-ologist Jason Potts puts it, "A bubble is good for growth because it creates a low-cost environment for experimentation." Even if it eventually pops.
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Why 2008 Is Looking Like 1992 (Update No. 4)
Tweet Share on Facebook October 19, 2007 Comment (28)The International Monetary Fund just cut its estimate for U.S. growth this year and next to 1.9 percent. Now plenty of economists think that's too low. (Then again, a new poll shows that nearly half of Americans—46 percent to be exact—think we're already in a recession even though the economy grew briskly last quarter.) But if the IMF is right, it will be one more factor helping Democrats next year. I can already hear Democratic presidential nominee Hillary Clinton (or one of her rivals) echoing the rhetoric of the first Clinton-Gore campaign next year: "Are you ready for change, America? Gas prices are up; home prices are down. The trade deficit is up; the dollar is down. Health costs are up; jobs and wages are down. Insecurity is up; hope is down. Everything that should be down is up, and everything that should be up is down. America is ready for change, and change is on the way!"
(Another in an occasional series looking at how the 2008 election seems to be paralleling the 1992 election.)
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Hank Paulson's Twin Mission(s): Impossible
Tweet Share on Facebook October 17, 2007 CommentIt's some measure of the scope and depth of Treasury Secretary Hank Paulson's portfolio that instigating and arranging an $80 billion bank bailout fund isn't the biggest item on his packed agenda. Yes, dealing with the fallout from the subprime implosion and ensuing credit market fallout is important stuff, but it pales with successfully tackling the two major long-term issues that Paulson is actively confronting: creating a policy framework for keeping Social Security solvent and, most important, managing trade relations with China.
At least the former Goldman Sachs honcho is having some success with the credit crisis. Social Security and China will probably go down in history as nice efforts but ultimately failing ones. The Treasury Department has been releasing research reports on Social Security's fiscal situation and what measures—higher taxes and spending cuts—would need to be taken to make the system self-sustaining.
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Recession Odds Continue to Fall
Tweet Share on Facebook October 16, 2007 Comment (25)Plenty of economists have been downgrading the chances of the mortgage meltdown/credit crunch turning into a recession. So have the betting markets. Over at Intrade, traders have lowered the odds of recession this year from around 15 percent to around 3 percent and next year from 60 percent to 30 percent. But there's still an element of uncertainty and danger out there.
Federal Reserve Chairman Ben Bernanke seemed to say as much Monday night in an economic speech in Manhattan. At one point, Wall Street legend Henry Kaufman asked him what sort of information he would like to have when making monetary policy. In response, Bernanke joked, "I would like to know what those damn things are worth," referring to complex credit products at the heart of the current financial turmoil.
Then you have the news that three of the largest banks—at the urging of Treasury Secretary Hank Paulson—will team up to buy troubled credit instruments. Here's the insightful take of my friend Larry Kudlow (of CNBC) on all this:
At the urging of the Treasury, the big banks that couldn't sell asset-backed commercial paper have decided to pool their resources and create a new vehicle to do what? Sell more asset-backed commercial paper. The markets aren't buying it. They gave it a big Bronx cheer. There's something like $500 billion worth of asset-backed commercial paper to be rolled over in the next few months. And, while no one can be sure, there's something like $500 billion worth of subprime securitized mortgage bonds, plus leveraged loans from various buyouts and the private equity deals that are sitting on bank shelves. Eventually this paper will be sold at big discounts. Now the banks will take big haircuts, cutting into their loan loss provisions and their capital adequacy ratios. That, in turn, may reduce the availability of loans to good businesses and consumers. In other words, the subprime credit crunch has additional shoes to fall. While it's quite true that jobs and incomes look pretty good, it is also true that credit turmoil is not yet over. Goldilocks is looking at all this with great caution.
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A Different Path Dems Could Take on Trade
Tweet Share on Facebook October 16, 2007 CommentHarvard economist Dani Rodrik has a blog where he recently gave his take on what a liberal free-trade agenda might look like. The whole thing is pretty interesting, but two points really popped out:
It would get real with the domestic social agenda. That means two things: more and better social insurance (safety nets) and more and better compensation. Progressives need to communicate that social insurance is the flip side of the open economy, that redistribution is logically the flip side of the gains from trade. The gains from trade do not become real unless and until there is compensation.... [Second], it would begin to chip away at the artificial distinction between the mobility of goods and capital, on the one hand, and the mobility of labor. Progressives should be in favor of expanding international labor mobility at the margin, and especially of temporary labor mobility schemes (which would spread the gains around more widely). It is possible to do this without necessarily creating an underclass of foreign workers.
My take: The first point gets to the creation of some sort of new social safety net—expanded unemployment, wage insurance, a universal 401(k)—to help workers in an age of globalization. This approach would basically accept free trade but use government to smooth some of the sharp edges. Democrats have so far seemed to have little interest in going down this path vs. attacking China for keeping the yen weak, though Hillary Clinton is pushing the 401(k) option—with a government match—as a replacement for her "baby bond" idea. The second point, I think, might be partially referring to the idea that real "free trade" would allow easier access to the U.S. market by service professionals such as doctors. Dean Baker of the Center for Economic and Policy Research has done a lot of interesting work on this subject.
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Global Warming and Al Gore's $307 Trillion Gamble
Tweet Share on Facebook October 15, 2007 Comment (1)Experts love to debate which is a better way to deal with climate change, a cap-and-trade system or carbon taxes. But there is a third option: Supercharge the global economy, and make us all as wealthy and technologically advanced as possible.
In one of its occasional assessments, the Intergovernmental Panel on Climate Change—the cowinner with Al Gore of the Nobel Peace Prize—posited a scenario in which the global economy would grow at about 2 percent a year for the next 100 years (it's growing at more than twice that pace currently) with "fragmented" and "slow" per capita economic growth and technological change.
Indeed, it is just this scenario that was used by the influential Stern Report on the economic impact of climate change. By the year 2100, the size of the global economy would be $243 trillion. However, there is another IPCC scenario. It imagines "a future world of very rapid economic growth, low global population growth that peaks in mid-century and declines thereafter, and the rapid introduction of new and more efficient technologies." According to this story line, the global economy would grow at 3.5 percent per year, giving us a $550 trillion global economy in the year 2100, more than twice the size of the economy assumed in the first scenario.
I don't know about you, but give me a century of accelerating technological change and $300 trillion to pay for it, and there are few problems that would keep me up at night. So the question is: Which policies will get us there?
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Stock Market Wealth Is Offsetting Housing Declines
Tweet Share on Facebook October 15, 2007 CommentMy guy Ed Yardeni, economist over at Oak Associates, makes a great point about the plunge in home prices: "The negative wealth effect from real estate is likely to be more than offset by the positive wealth effect from the global bull market in stocks." He then notes that at the end of June, household real estate was worth a record $21 trillion. However, Americans owned a record-low 51.7 percent of their homes at the time. In other words, owners' equity was $10.9 trillion. By comparison, Americans had a record $16.8 trillion in retirement funds at the end of last year. What's more, the value of all stocks traded in the United States rose to a record $22.2 trillion, slightly exceeding the gross value of our homes. Both of these items are up roughly $10 trillion since early 2002.
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Why 2008 Is Looking Like 1992 for Republicans (Update No. 3)
Tweet Share on Facebook October 15, 2007 Comment (21)The Wall Street Journal this morning follows up on my post of two weeks ago looking at the way the housing downturn is playing out in key 2008 battleground states. I noted then:
Take Florida, which President Bush won 52 to 47 over John Kerry. In the second quarter, for instance, existing-home sales fell by nearly 30 percent from a year earlier. Building permits are down 60 percent. And guess what? Unemployment is rising, to 4 percent in August from 3.3 percent a year earlier. With housing prices falling and jobless rates rising, the situation looks like a "regional recession," according to JPMorgan Chase.
