Economy: G-20 To Meet About Continuing Financial Support
• "The Group of 20 leading nations will agree this weekend it is too early to pull the plug on emergency support for the global economy and launch a new system of checks to help rebalance world growth and prevent future crises," Reuters reports. "British finance minister Alistair Darling is hosting the third meeting of G20 finance ministers and central bankers this year in St Andrews, Scotland" today, "aiming to put flesh on the bones of agreements made at a leaders' summit in Pittsburgh in September."
• "A senior House Democrat said Thursday he would push to extend unemployment insurance benefits through all of 2010 before the end of this year, when the eligibility window for new enrollees will shut down or begin to phase out for existing beneficiaries," CongressDailyAM (subscription) reports. "The projected cost of such a program is potentially $80 billion to $85 billion, according to preliminary estimates."
• "No large financial firm should be too big to fail, said two members of the U.S. Senate Banking, Housing and Urban Affairs Committee," Bloomberg News reports. Republican Bob Corker of Tennessee and Democrat Mark Warner of Virginia "are sponsoring legislation to give the Federal Deposit Insurance Corp. the authority to force large bank holding companies into receivership. Any firm that benefits from a government-funded orderly wind-down would be required to close its doors permanently to avoid a perpetual series of government bailouts."
The New York Times reports that a group of 10 senators (none of them Republican) has called for creation of a bipartisan commission on the budget, akin to the Base Realignment and Closure Commission, that would come up with a long-term plan to reduce budget deficits, including a solution to the impending funding shortfalls for Medicare and Social Security. House Speaker Nancy Pelosi, D-Calif., is opposed, and no prominent Republicans have endorsed the idea. Is there any hope for this idea, could it work, and what other approach might be more effective? Without a credible plan to reduce deficits, how soon would it affect economic growth?
-- John Maggs, NationalJournal.com
4 responses: James K. Galbraith, James R. Horney, Isabel Sawhill, Charles Calomiris
What do you think of the Treasury and Federal Reserve actions to limit compensation for executives at large financial companies? The Treasury action would reduce compensation by 90 percent for the highest-paid 25 executives at each of the seven companies that received federal bailout aid, and soon extend this to the top 100 executives. The Fed plans to review compensation as part of its supervision of large banks (a duty it would lose according to Senate reform proposals.) Among other questions, the securities industry is wondering whether the new Fed rules would cover executives for bank-owned subsidiaries.
Is the Treasury plan mostly politics? A powerful incentive to pay back TARP funds and avoid the risk of future bailouts? Will it be possible to attract competent management at those companies? Can the Fed be trusted to curb compensation when it never recognized that as a problem before?
-- John Maggs, NationalJournal.com
4 responses: Grover Norquist, Charles Calomiris, Douglas Elliott, John Maggs
Debate is heating up over whether the Obama plan for financial regulation goes far enough to curb institutions that become "too big to fail." Simon Johnson and Charles Calomiris discussed the issue here on NPR, and more attention came after Alan Greenspan made a strong statement on behalf of doing more to limit the size of financial institutions. What should be done through regulation, and is any regulation of "systemic risk" inevitably going to designate some banks as TBTF?
-- John Maggs, NationalJournal.com
4 responses: Martin Baily, Charles Calomiris, Robert Litan, Alan Meltzer
The New York Times has sparked interest in the idea of a tax credit for job creation, an idea in recent Democratic presidential campaigns (John Kerry and Barack Obama both proposed it) and one that apparently now has some Republican support. According to one version, it might work as a refundable tax credit, with subsidies to money-losing firms or nonprofits. Greg Mankiw summarizes the problem of winnowing out jobs that would have been created anyway. Can this be done efficiently, and should it be done now (or six to eight months from now, the minimum for when it might be enacted)? Are there better tax incentives to spur hiring?
-- John Maggs, NationalJournal.com
There has been widespread speculation that the credit crisis and the recession would lead to a long-term shift in household saving. And saving did rise from the very low levels before 2008 and increased more or less steadily through this spring. But as the "green shoots" improvement in the economy took hold, saving has been dropping, and fell to 3 percent in August. Will this continue, and is it an unequivocal good thing? Low saving was alternately credited during the boom and blamed during the bubble. Will saving need to rise to very high levels, as many economists have argued, to erase deficits, and what are the implications for growth if it does (or interest rates, if it doesn't)?
-- John Maggs, NationalJournal.com
The Obama administration's financial reform plan proposes creating a category of "systemically important," or "Tier 1," financial companies that would be more heavily regulated than other companies, but also eligible for bailouts and other government intervention. Can Obama avoid the moral hazard of such an arrangement (akin to what happened with Fannie Mae and Freddie Mac) simply through strict regulation?
-- John Maggs, NationalJournal.com
4 responses: Peter Wallison, Alan Meltzer, Gary Burtless, Charles Calomiris
As time goes by and data piles up, the debate is heating up over whether President Obama's $787 billion stimulus bill is responsible for the apparent improvement in the economy. Economists John Cogan, John Taylor and Volker Wieland argued in the negative, based on their reading of income and spending data. The latest, fullest case from the White House came in an August speech by Council of Economic Advisers Chair Christina Romer. Do Cogan and his co-authors have enough data to draw the conclusions they do? How much hard evidence is there that the stimulus is affecting spending and investment?
-- John Maggs, NationalJournal.com
3 responses: Desmond Lachman, Charles Calomiris, William Gale
Does the country risk a renewed financial crisis if the reform process bogs down? How much moral hazard has been created by the rescue, and how soon must it be diminished to avoid excessive risk-taking by financial companies? Has that excess begun already? Would it be a bad mistake for Obama to allow Congress to dominate the legislative process on financial reform, as he did with health care? Or has the financial system healed enough, and are banks and investors chastened enough, to allow a deliberate process for reform that takes longer but yields a more far-reaching law?
-- John Maggs, NationalJournal.com
What do you think of Paul Krugman's lengthy and provocative argument "How Did Economists Get it So Wrong?" in Sunday's New York Times Magazine? Is his taxonomy of competing schools of macroeconomics a fair one? And his account of which failed and how? Krugman says the crisis points to a muddy future for economic theory and a greater legitimacy for behavioral economics, among other conclusions. Is he right?
-- John Maggs, NationalJournal.com
7 responses: James K. Galbraith, Martin Baily, Isabel Sawhill, Rob Atkinson, Charles Calomiris, Ted Truman, Jeffrey Frankel
In their paper delivered at the Fed's Jackson Hole meeting Aug. 22, Alan Auerbach and William Gale note that fiscal stimulus in the Great Depression and in Japan's Lost Decade was inconsistent at the federal level and further undermined by tax increases and spending cuts at the state and local level. In America, with states expected to cut spending or raise taxes by $350 to $450 billion by the end of 2010 and more thereafter, how potent is the risk of a similar undermining of the Obama stimulus, most of which hasn't yet been spent? Is it a strong argument for a second stimulus, targeted to states?
-- John Maggs, NationalJournal.com
3 responses: Grover Norquist, Brian Riedl, Charles Calomiris
