Crisis of Confidence by Default

The “Voice of Euro zone” has been quietly subdued by the countercyclical fear of defaults! And the economic powers are becoming pitiful being at the end of their resources.

The grandeur seems to have been short-lived and failed to reach the magnificence of a United States of Europe! Yet, one shall keep in hope alive as crisis often do wonders, though seldom astounding.

Continued fiscal doldrums in Euro zone has literally put countries in crisis of confidence by the panic of default- the very same dialect which USA has avoided by hook-and-nook, just a few weeks ago, with much pain still left behind. The theory of growth now lays “much in paper than in practice” which remains confined to mathematical theorists of growth. The actual growth in the Euro zone in entirety has been of one such nonplus 1.1%.

Ideological Divisions

And now, the whole of the EU continent has been holed up in debt crisis. Lack of prudency in monitoring fiscal balances and failure to move on sustainable fiscal track aided by mismanagement of public debt has led to political turmoil shaken up by economic crisis, which at present, strictly undermines the confidence of the euro zone currency- and the European Union, by itself. The rise of disparity due to differences in governance, political and ideological both, over bond purchases which has taken its first toll in Juergen Stark, who resigned from the ECB governing council, is giving a hard time to policy makers- in one of the hardest of times the EU ever faced since its conception. The ECB’s purchase of troubled nation’s debt that has somehow given an opportunity to escape from the blunt of the fiscal debacle for those countries counting their untenable and mountaineering debt has indeed created a political firestorm giving policy-makers a run for their pedagogical opinions. Political and ideological divisions at the independent ECB has taken a front seat that mellows down on the rationality of backing those member countries with bailout funds until its own treasury gets exhausted! Those Countries who were listening in silence and observing in despair, now, have become more thoughtful than usual, and are much active in charting out in what could be the worst case scenario.

The subject of recurrent bond purchases almost concealed a serious import of “wholesale” fiscal calamity, although the balance of perception has been relatively on the default side. Ever since the euro came into existence, it has been under some kind of attack-whether speculative or from systemic crisis, whilst the present bond market meltdown have placed it under existential threat.

There have been some genuine causes behind such ideological imbalances. As Prof. Krugman has rightly pointed out, that the policy makers did a pathetic job of targeting inflation rather than monitoring fiscal balances whereby, (inflation) actually never posed a greater problem than the problem of default itself. They would have acted in anticipation in devising deficit-cutting measures as a “priori” and hence the questions arise- of what were the three musketeers (ECB, IMF, and the EC) doing all through these two years of euro-zone crisis as mariners and foreseers who failed to see a much deeper yet impregnable trouble? People know what the IMF was going through-fighting scandals. But what about the other two? Sleeping?

Well, the real thing is, you need to blame the government policy makers ‘even’ if they were right, and yet, must hold them responsible when they are wrong. It’s a great paradox, the greatness, which cannot be hired by default!

Oration of Aid and Sermon of Charity!

Well, I do not want to condemn in haste without taking into consideration of the adjacent circumstances in foretaste.

In effect, they (the ECB) did just one thing, undoubtedly (in) sensible, to maintain price stability, but they also failed to anticipate some sort of fiscal calamity that would undermine the real efficacy of those EU policy practices. And what are they doing now? Buying up bad debts to prevent crises of the states! Indeed, that is their ‘Sermon of Charity’, backed up by “Oration of Aid” at present. Now, I do think that they really need to rethink on their inflation targeting monetary policies yet over and in entirety again.

A central institution like the ECB is predestined to posses’ variety in judgment and diversity in policy making. The trio seems to have forgotten all these norms of normative policy practices since they singled out a simple policy of targeting inflation, that’s all, and though it was indeed questionably necessary, over and above, what was required to be mandated-a monitoring of the physical health of euro zone states, which was however, ignominiously ignored. And now, the situation has molded up in such grandeur that it has really become tricky to decide “whom to attend and who to leave out”. The ECB until now has bought €135 billion worth of bonds of Italy, Greece, Spain, Ireland and Portugal. It is now faced by the “dual dilemma” of restructuring Greece’s public debt along with buying Italian and Spanish bonds. Greece, as euro zones’ weakest debtor, has already received €110 billion as bailout, and more may be in the offering.

So now, as I have already mentioned in my review a couple of weeks earlier, don’t expect asperities of austerity. That won’t work.

The ECB have already provided preventive credit lines but those were not enough to immunize against such dreadful disease of default! With fear of default that risks investor capital flight and run on the banks, less attractive becomes a country’s bonds to already unwilling investors unless offered at a very high interest rate. What would have made those bonds attractive, if ever backed-up by proactive govt. measures to infuse new life in those ailing old economies, was never a distant prospect, neither a far-flung nebulae. A trouble-free strategy of maintaining budged deficits was all that was mandated as an obligation to maintain the value of the euro zone currency, as well, the value of the member states themselves. What was required was to oversee the structural issues underlying the origin of fiscal imbalances and mounting debt, by reexamining the path over which the fault line has passed- by resolving issues related to stagnating growth, and by judging things with commitment.

Shouting "impeccable, impeccable" won’t resolve systemic crises. A pure instance of such impeccability is the present state of affairs, which is indeed an impeccable sample by itself.

In effect, it’s the same old idiom-“growth” herein and over again which rules the board and displaces the weak for the mighty. Neither is any hope for Dennis Robertson’s once reproached chance of reviving foreign trade as an engine of growth in Euro zone-barring Germany. Error of irrelevancy is sharp as it reminds me of a theory once in ardent demand, and once successful enough- Rostow’s ‘takeoff’ induced by innovation drive back in the 19th century in the US as a sharp rise in savings rate which had been much critical for economic growth, and which is much relevant at this moment. Vintage things don’t age faster than new stuffs. And so, new stuffs are discarded as quickly as they are introduced. But it’s these new stuffs that once do indeed become priceless vintage!

And hence, it seems that the great Western powers are loosing out in the “art of competitive innovation” to their sister Eastern concerns- to China in great extent and to India, in some measures. Yet, you can’t blame these two righteous competitors since these two are beautiful places for learning about real growth to begin with, and more generous place for them to end in.

Sources: IHT, NY Times, Economic Times

Where is “The Real Chance” of a Double-dip Recession?

Indeed, rationality says that there is some chance of a recession along with few questionable probabilities. And arguably there are certain clinical manifestations and diagnostic symptoms that points to a highly perceivable recession looming across the US and the Europe. Consider many circumstances. The economic state of affairs isn’t doing well with faltering economic recovery and job growth rate which has fallen bellow previous records. We are waiting for the NBER academic review of a probable recession as of late. They are doing this for the last eight decades ever since “Wesley Mitchell” started to analyze business cycles by around 1916 and he was the front runner of measuring business cycle timings as well of the term BRICS-about 80 years ago (Jeffrey Sachs actually didn’t invented the term BRICS- he rather innovated Mitchell’s concept!). What a great foreseer who foresaw nearly 100 years ahead of his business days!

Coming “directly to the point” and without inventing parables, I would say, one of the prime real indicators of a probable modern economic recession is perhaps and without doubt- the stagnating FFR, or the Federal Funds Rate. This unique yet powerful Federal Reserve instrument (interest rate) after declining for more than a couple of years since 2008 isn’t moving upwards at all. And here lay the hidden problem!

The FFR rate should have moved by April or say, June by most this year (2011), which it did not! And I was alarmed by the fact that if this trend continues for another 2-3 months more, it can profoundly spell a rebound recessive doom for the OECD economies. And that’s what it is technically lingering right now!

Some interesting connotations;
The FFR touched a formidable low at 1% on June 29th 2004, at the peak of the great credit boom, when, the then Fed governor Mr. Greenspan kept the policy rate indicatively low during the period of 2002-2003. This ultralow rate scenario fuelled credit boom, we all know that. Well, it was a causal effect to cushion the economy from the dotcom bubble burst of 2000. Indeed, that helped revive the American market economy from the aftermath of the first millennium crash (dotcom). The FFR started its journey high up in the air from August 9th 2004, when it was increased by 0.25% bps. Symbolically, the FFR peaked incrementally to 5.25% at the mid of September 17th, 2007 say, when Mr. Bernanke took over as Fed Chairman just a year before from Mr. Greenspan. It’s quite interesting to note that the FFR rate also peaked to 9% during 1987-1988. Questions arise of whether this high FFR rate did actually precipitate the 1987 market crash, since, there are no other potential predisposing factors being found yet, and I “can’t” answer that (which is beyond my cognizance).

If that’s so, then it’s the rate hike which peaked (5.25%) during the September 2007 and this was “the time” when markets globally started to become volatile, and write-downs and default news circulated throughout the USA.

Speaking in the “wind” won’t do any good, so one requires backing up with some clear facts.
And the fact is; it’s time for some “reality show” in economics!

My question is-

Who’s the “d.g” who moved the rate and messed up things? Why did they take that bold decision to raise the interest rate and that too, based on what rationality? Or was it inevitable and beyond human control? Why it went up so much and now why is it stagnating? Who’s gonna answer?

Now, it’s exactly four years from today, when the rate peaked, as well, exactly 3 years since the Lehman Bros went bust on September 13th. What a strange coincidence!

Nevertheless, those ensuing rate increases set-off uncompromising adjustments in amortization schedules of subprime loans extended on lax documentations to less creditworthy individuals, who found it comparatively difficult to pay back the installments as well as the interest payments all due to intricacies in Adjustable Rate Mortgages (ARM) settings, a common story with which we all are familiar.

You may find more about these from a beautiful paper written by Gary Gorton from the NBER in 2008.

The “crux” of the matter is however, to pin down on the main culprit-here, the FFR rate or “the d..” and some evidence I have provided that might be of some interest to the readers, just to tag the main villain-Federal Fund Market Rate. And that isn’t moving; since there is no ensuing inflation target and if this particular trend goes through October this year, I may well assume that there is a “sure shot” recession in the line. Comparably better, Euro zone is at least experiencing some dynamicity in its ECB policy rates (due to some inflation targeting).
This is the reason I am rhetorically shouting as an inflation hawk, to see some real dynamicity in the FFR rate. That would do just good enough to stall a double-dip recession, from my viewpoint.

The rest is-well, Mr. Bernanke knows.

The inherent risk of raising it too quickly yet again may result in counter-calamity similar to one above. What a dreadful trap it is- and where is the way out?

President Obama has a trademark answer. His oratory proposal of including an expansion of a cut in payroll taxes- and the much awaited mission on new spending on public works carving out $447 bn through 2012 may help infuse some “life” in the FFR rate and the economy. Well, only if it goes through in full part and parcel!

Else, there’s every possibility that a recession is too near at hand. There’s nothing to get bunged up however. And even if you don’t really need a PhD to buck up those things like business cycles, neither it requires you to be a financial geek. It’s that simple as ups and downs in our life cycle.
This is business cycle. Good old stories retold in new flavors. It’s gonna get moving as life goes on...they are looking at it, kid.

Sources: NY Times.

Politics of the Public Divided by Questions of Austerity and Affluence

Take it easy. Ease, easing makes it easier.

If they would have done those “easiest” things before, just by making things easier for (by bailing out) Lehman Bros and all those in the great line of fire back in the summer of September 2008, things would have been different today!

And now, that’s what the Fed actually is doing by instituting Episcopal policy of buying long-term debt which you may call “quantitative easing”. Perhaps, there are no other better options at hand and in practice. Get the economy moving, let the people borrow and set the platform where people unhoard cash and invest in productivity. Paying up such a great price for past indecisiveness!

One strange coincidence-sooner Greenspan left started the economic and financial firestorms!
Actually, this was what attempted by the Bank of Japan, quite unconventionally, but it did in fact some good job in the early 2000. And it was masterminded by the very same economist that we know today, Mr. Ben Bernenke, to whom we often entitle with adoration- Big Ben.

So, I am not much “optimistic” about those views and tell you why it might not work out in identical way, since; both are quite different economies; though they now seem to converge on a common theme- deflation trap. The commonalities are remarkably identical. Both Japan and the USA have ultra-low interest rates, both are not growing and both do not have any substantial inflation. Only, Japan scores better in employment and job creation, even in these hard times (Japanese unemployment rate @4.1%).

Rather, I am quite optimistically agreeable to Mr. Andrew Ross Sorkin’s ideas, a columnist of IHT who has quite fittingly noted that tax breaks wouldn’t help much. Let’s see why.

It is impulsively cheeky to conceive that tax breaks will help create new jobs. Betting on temporary tax cuts as a tool to combat unemployment and stimulate growth is not an ideal option anyway. That might primarily risk in tax revenue losses-which, the govt. is already losing money in all sides and from most corners (through bail-out programs)! But there is a compromise too. Well, this sounds tricky- as it would create an environment where every company would ask for tax breaks in future for a job- and in return, carving a niche to evade the radars of taxmen. Rather, what Obama administration has geared up for, say, pay-roll tax holidays to incentivize hiring? This sounds tricky too!

What a pity for the foreseers that would have them forced to observe this doomster side of the story- incentivizing employers to give employment. Well, not a bad idea, since, special programs have been underway as SEZ’s and as others’ in the emerging economies with great success-but not anything like this kind of horse-trading! The US govt. is in the line of begging jobs from the corporate sector for the sake of economic growth. What if even after such tax breaks they don’t hire quoting bleak business environment?

The sheer reality is; businesses tend to hire only when there is some business. And there is some business since there are demand for goods and services. And this “demand” comes from the consumers who opt to buy those services, and only when, they have enough discretionary savings (money and credit)!

So, I don’t see tax policy as a covenant tool to fight the malady of unemployment, yet, it is powerful enough to make the balance of statements go either way for other causes.

Back to the real story;

So, three things require get to be going “moved” if we really are to hope for some authentic change. First, inflation, and that would bring back growth(and with that if not jobs, then it would be terrible!), second, dynamicity in rates, and last but not the least of all, give a free hand to the Fed to use it’s interest rate choreographic tools and machineries to target inflation when that breaks the fence. To speak of, let’s talk about inflation hawks.

Those measures have seen rolling back the Japanese economy into growth path which foresaw a 25% rally in the Nikkei in 2003, the same year when Germany went into a recession. But things cooled off much faster, and in a much worst silhouette. When the world markets started to rally, the Japanese economy plunged back into a terrible stagflation from the beginning of 2007, and from which, it never regained which saw 3 Japanese Prime Ministers in and out of the game within a span of four years. Political chaos swapped economic doldrums. Who wants that in the long run- do you Mr. Krugman?

I think, Mr. Krugman might have perceived that those Fed announcements were rather awful.
So, the effect was rather transient and unsustainable. The reason I doubt what good would it do this time! Consider the scenario.

The strength, tenacity and resilience of the US economy seem to have disappeared. Even Big Ben’s rhetorical speech at the recently concluded annual Fed gathering at Jackson Hole failed to infuse renewed interests in the economy. Mr. Paul Krugman rightly embarked that the policy announcements are not in line and lacked substantive goals. The political as well as the economic ‘think tanks’ are thus struggling hard to envision an ideal economic policy path that may chart future growth prospects of the ailing economy plagued by uncertainty and despair. Some ideal growth-oriented policy shifts are required, and there is indeed urgency for that. Political opposition has almost crippled fiscal policy, according to great many policy makers. Markets are oscillating in a see-saw fashion, and volatility has become much trendy. Businesses are apprehensive of whether a repeat of 2008 is in the line. And job-holders are anxious about what appraisals would come in their way. While the East looks at the giant Western economy with few last hopes of any acts of extraordinary.

So, what has all this got to do with the job market? More Austerity measures- an easy answer. Note that Greece is already holed up austere ring!

With the scrambling economy and the uncertain macro-fundamentals, pink slips and layoffs are silently becoming symbolic these days. More than a dozen large banks in the United States have nearly lost faith in a growth rebound story told and retold many a times, and even with a historically low interest rates, bank lending has been depressed so far- a substantial source of bank revenue. Trading in volatile markets is expensive, and thus to maintain competitiveness, they have embarked on programs aimed at cutting operating costs and have emblematically announced layoffs as cost cutting initiatives that may further compound the problem of unemployment.

So, what did the Fed actually do to tackle the problem of fiscal melancholy? They are in fact going for quantitative easing policy. Can’t place a blame game here and above. They have indeed a very few policy options on balance. And measuring the efficacy of those is taking much time-precious enough to act on immediacy. But as Mr. Krugman has emphasized, Mr. Bernanke could have deviated from those orthodox measures which would have presented a different scenario had been he given enough freedom to embark on some unorthodox policies (say, PRP, or public reconstruction program-backed bond issuance- I would tell you, they would sell well as like China!). But something is holding on to that freedom- and which is almost killing the last few hopes of economic recovery, according to Mr. Krugman, and I really agree on this, and do thank him for such rhetoric expositions. But the reality of the fact is we cannot believe in what we see often; that this could ever have happened right in the US heartland- and that too ideally in the land of ultimate freedom as the Statue of Liberty stands aloft on the Liberty Island across the Manhatten.

Freedom of thinking, in actions and in policy making is what that is destined for every central bank established with those motives in place. And political firestorm and backlashes have cut down that freedom to act independently, and in demand as and when the situation calls for. This is not central banking- rather, eco-political despotism. The Fed, if given that independency could have unveiled new policies however unorthodox that might help lift the US economy from the ever depressing state of low demand and high unemployment.

As Prof. Krugman has mentioned, America is now very much in a Japan-like economic booby trap. I have also mentioned this a few days ago just before the Fed announcements. That the Fed has a lot of tools (stuffs), but most of them are limited in activity, except the great “FFR”. God knows when they will find their own righteous place (both Mr. Bernenke and his FFR).

· There are very few proponents of growth oriented policy practices and a great many opponents of those however; yet, there is hardly any promoter of economic stimulus thus so far...except Mr. Krugman.

Whoever had started the “tax-fire wall” back in 2004, they will require it to douse it someday or run for cover- I can only tell you this, not more. Better listen to Billy Joel’s oldies... “We didn’t start the fire...” and the debate will go on.

Keep reading.