FatherGarage.com

While the world has been transfixed with Japan, Europe has been struggling to avoid another financial crisis. On any Richter scale of economic threats, this may ultimately matter more than Japan’s grim tragedy. One reason is size. Europe represents about 20 percent of the world economy; Japan’s share is about 6 percent. Another is that Japan may recover faster than is now imagined; that happened after the 1995 Kobe earthquake. It’s hard to discuss the “world economic crisis” in the past tense as long as Europe’s debt problem festers — and it does.

Just last week, European leaders were putting the finishing touches on a plan to enlarge a bailout fund from an effective size of roughly 250 billion euros (about $350 billion) to 440 billion euros ($615 billion) and eventually to 500 billion euros ($700 billion). By lending to stricken debtor nations, the fund would aim to prevent them from defaulting on their government bonds, which could have ruinous repercussions. Banks could suffer huge losses in their bond portfolios; investors could panic and dump all European bonds; Europe and the world could relapse into recession.

Unfortunately, the odds of success are no better than 50-50.

Europe must do something. Greece and Ireland are already in receivership. Private investors won’t buy their bonds at reasonable rates. There are worries about Portugal and Spain; Moody’s recently downgraded both, though Spain’s rating is still high. The trouble is that the sponsors of the bailout fund are themselves big debtors. In 2010, Italy’s debt burden (the ratio of its government debt to its economy, or gross domestic product) was 131 percent, reports the Organization for Economic Cooperation and Development; that exceeded Spain’s debt ratio of 72 percent. Debt ratios were high even for France (92 percent) and Germany (80 percent).

As these numbers suggest, there’s no automatic threshold beyond which private investors refuse to buy a country’s debt. Germany and France are considered sound investments, deserving low interest rates, because their economies are judged to be strong. But investor perceptions and confidence can dissolve in a flash. If private markets lost faith in, say, Italy or Belgium, even the enlarged bailout fund probably wouldn’t be big enough to rescue them. The whole scheme is debtors lending to debtors. It could collapse if investors conclude it’s unworkable, dump bonds and demand higher interest rates.

What would happen then is anyone’s guess. Would defaults occur? Would a banking crisis follow? Would some countries abandon the euro? (This sounds simple; in practice, it would be hugely complex. A country would have to convert all its money into a new national currency. It would be legally impossible to switch some debts from euros. The country would probably have to impose capital controls — restrictions on money entering or leaving the country.) Would the European Central Bank — the continent’s Fed — buy vast amounts of government bonds? Would the International Monetary Fund organize a bailout, financed heavily by China, to rescue Europe?

Europe has arrived at this dismal juncture driven by three forces: (a) large welfare states that were too often financed with debt; (b) the financial crisis that led to recession and has pushed some countries (Ireland, Spain) to aid their banks; (c) the perverse side effects of the single currency, the euro.

The euro’s role is especially ironic. Adopted in 1999 — and now used by 17 nations — the euro was intended to promote prosperity and political unity. Countries could enjoy similarly low interest rates and the convenience of common money. It seemed to work for a while. But low interest rates in Greece, Spain and Ireland encouraged unsustainable booms or housing bubbles that, when burst, aggravated their recessions and budget deficits. Now unity has turned to discord. Countries that back the debt bailout — particularly Germany — resent the possible costs; countries being bailed out resent the harsh austerity that’s imposed as a condition of aid.

There is a fragile debtor-creditor consensus that could crumble, posing yet another danger to economic recovery. Already, unemployment rates in Greece and Ireland hover around 13 percent. How much budget stringency (spending cuts, tax increases) will countries accept before social unrest or national pride cause politicians to say “enough”? Even European countries not facing an immediate debt problem need to reduce budget deficits to retain market confidence. All confront a common dilemma. Too much austerity too quickly could create a recession, widening deficits. Too little austerity too slowly could unnerve investors, raising interest rates and deficits.

It’s understandable that the human suffering, physical destruction and nuclear hazards in Japan compel our attention. But we ought to remember that a greater menace to global stability and prosperity lies halfway around the world.

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

CHICAGO – Gov. Haley Barbour of Mississippi may not yet be a Republican presidential candidate, but his travel itinerary suggests that may be simply a formality, as he visited President Obama’s hometown on Monday before flying to Iowa to begin testing themes of a probable campaign.

In a luncheon speech to the Chicagoland Chamber of Commerce, Mr. Barbour delivered a sweeping indictment of the president’s economic and energy policies, saying that expanding the size of government would not lead to the creation of more jobs in the United States.

“Let’s look at their record,” he said. “In the last two years, the federal government spent $7 trillion and our economy lost seven million jobs. I guess we ought to be glad they didn’t spend $12 trillion. We might have lost 12 million jobs.”

Mr. Barbour is among the wide field of Republicans who are considering entering the fight for the 2012 Republican presidential nomination. He has said that he intends to make a decision after the Mississippi legislative session ends next month.

In a 30-minute address to business leaders, Mr. Barbour offered a preview to the message of his potential candidacy, with a heavy emphasis on traditional Republican themes of economic growth, job creation and increasing oil production through expanding drilling. He delivered more criticism than specific policy proposals.

“In fairness, the Obama administration arrived in office facing some of the worst economic conditions in decades,” Mr. Barbour said. “But for more than two years, this administration and its Congress has pursued policy after policy that created economic uncertainty or directly hurt the economy.”

As the country’s energy policy takes on heightened importance with the turmoil in the Middle East and the nuclear disaster in the wake of the earthquake in Japan, he said: “The Obama energy policy basically boils down to this: increase the price of energy so Americans will use less of it. That’s an environmental policy, not an energy policy.”

He stopped well short of declaring his intentions. In a question following the speech, a man in the audience asked if Mr. Barbour was ready to announce his presidential bid.

“No,” Mr. Barbour said, not pausing for even a moment. As laughter broke out in the room, he added: “That was easy.”

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

Austan D. Goolsbee, an economics professor on leave from the University of Chicago, became chairman of President Obama’s Council of Economic Advisers in September. He talked with John Harwood of the Times and CNBC at the White House recently about the state of the economy and Republican criticisms of the administration’s policies. Here is a condensed, edited version of their conversation:

What does this economy need right now?

The answer is: give certainty so that we don’t have a precipitous decline in consumer spending and a big hit on the middle class, and follow through on getting the credit and tax relief to small businesses that the president has been for, encouraging business investment, and encouraging exports and innovation to get us on a growth path. We need to certainly extend the tax cuts for the middle class. We should certainly extend the unemployment benefits.

The independent economist Mark Zandi, who’s been an ally of yours on fiscal policy, says, “Yes, extend unemployment insurance.” But he also says it would be a mistake to raise any tax rates, even the top end, with the economy so fragile. Set aside the politics. As a matter of economics, is he right?

I know Mark Zandi, he’s a friend of mine. If you ask what has the most immediate impact on the economy, preserving tax cuts for the middle class, versus the high end, it doesn’t make sense…

But setting aside the comparison. On the simple economic question of whether it would be positive for the economy to leave those rates in place, at least for a short time — it sounds like you agree with him, but just don’t want to say so.

I think you’re putting words in my mouth. Let’s start from what can we afford. I personally do not think that we can afford to borrow $700 billion to pay for tax cuts we know don’t work. Didn’t work the first time. Will not work now.

It’s not $700 billion if you only do it for two years.

You start from what money you have. And then let’s do it in order of what has the highest bang for the buck. And I think there’s actually pretty bipartisan agreement on what the order of bang for the buck is — the high-income tax cuts are the bottom.

I talked to a couple of your predecessors from Republican administrations, Greg Mankiw and Glenn Hubbard. Both said that the administration was over-emphasizing the wrong thing: stimulating consumer demand, as opposed to stimulating business investment, which is the more important source of recovery at this moment. Hubbard said the administration has a fetish for consumer demand. What’s wrong with his reasoning?

There’s nothing wrong with the reasoning. We want to encourage business investment.

The principal focus of the program that the president’s put forward is about getting the economy to grow. It isn’t about just increasing consumer spending. It’s very heavily on investments, on both the physical capital factories and equipment side, as well as the human capital side of investing and training of our workers. And trying to get people to build businesses here. That’s a different question than: ‘Should we completely disregard the fact that, if we go cut off the unemployment extensions for people that are looking for work, their spending is going to drop precipitously?’ The data shows us that that’s true. And it’s not responsible to do that at a moment like this.

Would our economy be in better shape right now if the initial stimulus when the administration took office had been bigger?

I don’t know the answer to that for sure. There’s a bit of a crystal ball in that. It obviously depends on what the things were.

Respond to the argument that the reason the economy is not healthier despite stimulus is that the Keynesian ‘multiplier’ simply doesn’t have the same impact that it once was thought to have.

Well, I’d give you one technical and one broader answer. On the technical answer, if you go look at the quarterly reports on the Recovery Act, they suggest that the overall impact on jobs saved or created is just about what was predicted. The main thing that everybody missed, not just the government, is the base line of ‘how bad is the economy.’ It was significantly worse than was forecast. So, I think that part is fair.

Glenn Hubbard said there are some times when contractionary fiscal policy is actually beneficial to growth, and this may be one of those times.

I think there’s a deep flaw in that reasoning. That contractionary fiscal policies can be expansionary centers on getting the interest rate reduced. The interest rate — we’re hitting the zero lower bound. So, it’s hard to see how contractionary fiscal policy, at a moment when we’re coming out of the worst recession since 1929 and still in a fragile state, is going to be expansionary.

Is what Britain is doing right now, with respect to budget cutbacks, the right thing economically for the world? Is it a good model for the United States?

The U.K. is engaged in significant budget-cutting and austerity, and several other countries are advocating austerity as well. As the Recovery Act is winding down, U.S. spending levels are on path to be dramatically reduced. So the U.S. does not need to take lessons in austerity from other countries.

When you think purely about business, and all of the cash that business is sitting on, and what it would take to unlock that, is what business needs right now more customers? Or, confidence in the future – which is perhaps a function of spending levels, deficits, tax rates?

There’s about one trillion dollars on the balance sheets of corporations. The question is, why have they not been using that money? And I believe that uncertainty is the most important thing. They have been afraid. By far, the biggest uncertainty has been about demand, and about where will the U.S. economy be now, and in the coming years. Not the policy uncertainty.

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

While the television images showed Black Friday shoppers in the customary frenzy that has become almost traditional for the day after Thanksgiving, it remains to be seen whether Americans are really ready to believe that the recession is over. ShopperTrak, which compiles retail data, reported that retail sales for Black Friday were a mere 0.3 [...]

The prez and vice prez will be going way down to Kokomo (Indiana) on Tuesday, Nov. 23 — as part of a “White House to Main Street Tour” focused on the economy. Here’s what’s on tap: 9:15 a.m. — The president receives the Presidential Daily Briefing in the Oval Office. 9:55 a.m. — Departs the [...]

Velma Hart, a woman who got President Obama’s attention when she said she was “exhausted” from defending him and his policies, has lost her job as chief financial officer with a Maryland-based veterans group. Hart has been laid off by Am Vets, but not because of any failure of her part. “She got bit by [...]