Dollars and Jens
Friday, January 29, 2010
GDP was even stronger than expected, though, as expected, a lot of it was driven by inventory adjustments. Insofar as one is worried about final demand, this might be cause for concern, but note that inventories were still shrinking in Q4, just not nearly as quickly as in Q3. (The growth in GDP might not be sustainable, but the new level is more in line with recent levels of final sales; if final demand keeps up as it did last quarter, there's no particular reason we would have to "give back" much of the inventory boost.)

Fixed investment finally turned positive as well; "nonresidential structures" are still decreasing, but housing is (slightly) positive, and chattel investment was significantly up. (No, nobody calls it that. Just me.)

The slight drop in durable goods is, remember, affected by the expiration of cash-for-clunkers; if that were backed out, presumably durable goods purchases would be up as well.
IV 06I 07II 07III 07IV 07I 08II 08III 08IV 08I 09II 09III 09IV 09
Gross domestic product3.
Nondurable goods.93.48-.13.33.27-.49.35-.94-.78.29-.29.23.67
Durable goods.
Change in private inventories-1.08-.61.32.19-.63-.21-1.25.26-.64-2.36-1.42.693.39
Fixed investment-.91-.43.59-.04-.66-.99-.41-1.30-3.28-6.62-1.68-.15.43
Net exports of goods and services1.94-.29.661.362.24.362.35-.10.452.641.65-.81.50
Government spending.


Thursday, January 28, 2010
Bernanke reconfirmed
Bernanke received 70 votes, and will get a second term.

Wednesday, January 27, 2010
FOMC statement
Note that this is the meeting at which the set of regional reserve bank presidents who vote on the committee changed, and one of the new ones dissented. Most of the other changes are changes in tense; what was previously beginning to happen is now happening, in the estimation of the committee.

The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in November December suggests that economic activity has continued to pick up strengthen and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be Household spending is expanding at a moderate rate , though it but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls ; they continue to make progress in bringing . Firms have brought inventory stocks into better alignment with sales. Financial While bank lending continues to contract, financial market conditions have become more remain supportive of economic growth. Although economic activity the pace of economic recovery is likely to remain weak be moderate for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen continuing to restrain cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. . The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of ongoing improvements in the improved functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve's special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve's announcement of June 25, 2009. These facilities include Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. The Federal Reserve will also be working with its central bank counterparties to close its In addition, the temporary liquidity swap arrangements by between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve expects that amounts provided under the is in the process of winding down its Term Auction Facility will continue to be scaled back in early 2010. : $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh; and Janet L. Yellen. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.


Friday, January 22, 2010
Berkshire stock split
You can now buy into Berkshire Hathaway for about $70 plus commissions. The class B shares, each of which used to have economic rights equal to 1/30 of a class A share, split 50:1.

Friday, January 15, 2010
too-big-to-fail resolution
There has been some recent move toward creating a bankruptcy chapter better constructed to handle financial institutions; Luigi Zingales was talking about such things in October of 2008 (search for "Bebchuk" — note that his proposal makes legacy counterparties senior to bondholders, who are nominally pari passu), but there now seems to finally be an interest in this in Congress. One idea I've been batting around in my head for perhaps a year now, at least as a tool to help with these things, is the creation of a new kind of credit that the government could issue, which I call TTL cash; I know I've shared it with my brother, but I don't think I've mentioned it here.

The idea is that when a highly-connected company (AIG) gets into trouble, the government lets it go bankrupt, but any creditor who is thereby impaired is given $1 in TTL cash for every dollar the creditor lost to the bankruptcy. The TTL cash is essentially nontransferable (and thus useless) except in bankruptcy, where, in the idea's simplest form, the government redeems it for actual money. The government has not bailed out AIG, or its creditors, but it has bailed out the creditors of AIG's creditors, insofar as they are impaired by AIG's failure; the chain reaction that regulators are eager to avoid is arrested.

The slightly more general case would allow different levels of TTL cash, each of which is redeemed for the next one down; the government could decide instead to bail out the creditors of the creditors of the creditors by issuing level 2 TTL cash, redeemable in bankruptcy for level 1 TTL cash, redeemable in bankruptcy for the real thing. "TTL" stands for "time-to-live", a term used in IP, the internet protocol; each time a router forwards an IP packet to another router it decrements a TTL counter, so that if some routing error causes the packet to wander off in the wrong direction or go around in circles, it eventually gets dropped rather than continuing to be passed around.

This is, of course, still a bailout, but on a practical level the moral hazard issues are much reduced from a standard bailout; everyone is responsible for assessing the credit quality of their debtors, at least to a significant extent. One of the major practical strengths of a decentralized economy vis-à-vis a centralized one is that it recognizes the information-handling limits of agents and asks them largely to make decisions based only on local information. If you lend entities money, or even just enter into contracts with them, you have to know something about their financial condition and their other dealings that affect it; if you have to know everything about their business, including everything about their potential creditors; capping this two levels down under certain circumstances seems to me a reasonable moral hazard price to pay for the benefits of a distributed system.

to-big-to-fail tax
Mankiw on the new proposed bank tax:
President Obama has proposed a special tax levied on large financial institutions.  In general, I am skeptical of narrow-based taxes, as they feed a particularly nasty kind of politics, where the majority gangs up on a minority.  And I am turned off by the populist rhetoric coming from the administration, which suggests the issue pits Wall Street fat cats against ordinary Americans.  Nonetheless, on the economic merits, there may be a case for the bank tax.
The case being, more or less, that it offsets failure-insurance that is otherwise being provided for free — or, certainly, being perceived to be provided for free, which has the same effect on investors — by the American taxpayer.

Mankiw notes that, in actual political practice, any new tax law
certainly won't be perfect. But it is possible that it will be better than doing nothing at all, watching the finance industry expand excessively, and waiting for the next financial crisis and taxpayer bailout.
What Obama has proposed I believe fits this description, insofar as I've heard any details that exist; Congress seems to have developed a habit of taking decent or defensible ideas from Obama and making them disasters, though, so while it's not obvious to me how they can impair this idea that badly, I'm not going to say they can't pull it off.

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