Showing posts for "United States"
Fiscal policy has moved off the front pages. That’s both good and bad news. The good news is a growing confidence that the next round of fiscal cliffs will be navigated without disruption to the economy. The bad news is a rising pessimism about the prospect for a fiscal grand bargain that addresses the long-term drivers of our deficit. Several factors appear to be at play:
Jaret Seiberg has an excellent summary of Ben Bernanke’s speech and Q&A today on financial sector regulation and reform. This follows on Dan Tarullo’s speech Friday that highlighted the need for additional capital aginst short-term wholesale funding, an earlier Jeremy Stein discussion on liquidity regulation and the value of price-based regulation (rather than quantitiative limits on bank size favored by some in Congress), and similar comments by the OCC. We now have as clear a signal as possible that U.S. regulators are ready, in Seiberg’s words, “to go beyond Basel 3 to impose to additional capital requirements on the biggest banks…[using]…a combination of a more restrictive leverage limit, a capital surcharge based on reliance on short-term debt, and a long-term debt requirement.” It also underscores the divergent approaches toward reform in the U.S. and Europe, where, against the backdrop of weak growth and credit constraints, the pressures appear to be leading to a slower, more bank-friendly path.
Does the large drop in the U.S. labor force participation rate justify a monetary policy that is easier, for longer, than suggested by our models or the Fed’s current description of its policy? Chris Erceg and Andy Levin, two senior researchers at the Fed now on leave at the IMF, argue yes. Their analysis will provide fuel to the monetary policy doves who argue the Fed is failing to meet its employment mandate, and points to a battle ahead. But it doesn’t really settle questions about whether monetary policy is an effective tool for bringing these workers back into the work force, or whether it can be done without creating inflationary pressure (which speaks to other leg of the Fed’s mandate). Still, their paper is an important read.
House Republicans want to tie an increase in the debt ceiling due in September/October to a concrete process for corporate tax reform, as reported here and here. One idea is to couple a short-term debt limit increase to a mandate for the House to pass a tax-reform plan. The debt limit would increase further when the House passes its plan, and again when the Senate passes a plan.
How does the attack on the two academic’s work change the landscape for macro policy, if at all?
The reasons why employment has lagged in the recovery remains a central challenge for macro policymakers, influencing the fiscal debate as well as figuring prominently in Federal Reserve justification for its current unorthodox policies. My colleague Dinah Walker points out a growing body of evidence that the problem of long-term unemployment is at the heart of the puzzle.
Long-term budget forecasts are more art than economics. Small changes in assumptions and initial conditions, extrapolated over 25, 50 or 75 years, produce dramatically different outcomes. Should one assume current law remains in effect, producing structural improvement in the deficit over time, or rather that Congress acts as in the past in extending temporary cuts, adjusting tax brackets, and easing spending constraints as new needs arise? Will the recent slowdown in the rate of increase in health care costs persist? Your answer to these questions can swing the budget in the long term from unsustainable deficit to surplus. Still, these forecasts matter, as a statement of principle, as a description of philosophy, and in framing the debate.
Does today feel different? Did the earth shake? Packing your lunch rather than buy out?
Welcome to the sequester.
Chris Krueger of Guggenheim Securities today has an excellent piece on how the sequester might be resolved. A few takeaways:
Jeremy Stein’s speech today–“Overheating in Credit Markets: Origins, Measurement, and Policy Responses”–provides valuable insight on the issue of credit bubbles that could result as a consequence of current Federal Reserve policy. As such, it speaks to the upcoming debate over the Fed’s exit strategy. It’s a must read.
Macro and Markets examines the forces influencing the global economy, macroeconomic policies, and financial markets.
Facebook
Twitter
LinkedIn