Archive for January, 2013

AMERICA has lately seemed to levitate above the economic difficulties plaguing other rich countries, from Europe, to Britain, to Japan. This morning’s news, that the American economy shrank at a 0.1% annual pace in the last three months of 2012, may therefore come as a bit of a shock to many. A slowdown from the 3.1% growth notched in the third quarter was expected, but outright contraction was not. The surprise may fuel muttering about the threat of a double-dip recession, but the news is less bad than it seems. Calling a new recession would be premature, for several reasons.First, it is important to note that this is the government’s advance report, which will subsequently be revised several times. Growth in the third quarter was initially reported at just 2.0% before being revised up more than a percentage point. Second, the bad number is driven by a few one-off peculiarities in the data. Federal defence spending shrank at a striking 22% annual pace in the fourth quarter, knocking 1.28 percentage points off of growth. That was mostly (though not entirely) due to typical shifting of spending into the third quarter ahead of the end of the fiscal year in September. (Correspondingly, the 0.64 percentage-point defence contribution to growth in the third quarter was somewhat overstated.) A big change in private inventories also knocked 1.27 percentage points off of growth. …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/01/americas-economy-1?fsrc=rss

WHY have so few gone to jail for the financial crisis? The boom and bust in S&L lending in the 1980s ended with nearly one thousand people sent to jail for financial fraud—and that experience was quite mild compared to the recent cycle. A few days ago, America’s public television channel ran a special documentary programme about this curious phenomenon called “The Untouchables.” (You can watch the whole thing here*) The government’s prosecutors argued that it is very difficult to prove fraudulent intent beyond a reasonable doubt. They said that it is more rewarding from the perspective of the public interest to reach negotiated settlements rather than go to trial and lose. After all, America’s Justice Department failed to convict two Bear Stearns hedge fund managers of lying to investors about their exposure to subprime losses, despite initial expectations that the case would be easy. The Securities and Exchange Commission, which had opened a civil lawsuit against the duo, decided to avoid a trial and settled with the accused on terms dismissed by the presiding judge as “chump change.” Most subsequent civil suits launched by the SEC have been targeted at firms rather than individuals, which means that shareholders were the ones who had to pay, rather than anyone who may have been directly responsible. This track record has led others, including several …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/01/prosecuting-financial-crisis?fsrc=rss

UK Only Article: 
standard article

Issue: 

The gambler

Fly Title: 

The economy

Rubric: 

Some risks, but less fear, as the second term gets under way

Location: 

WASHINGTON, DC

WHEN Barack Obama took office four years ago, the economic figures were terrifying. A financial crisis and a savage recession were in full swing, and house foreclosures were soaring. As he was sworn in, panic about the banks sent the Dow Jones Industrial Average down more than 300 points. At the start of his second term, by contrast, the Dow hit a five-year high, while a widely followed index of investor fear called the VIX reached a near-six-year low (see table).
This change in mood is understandable. The financial crisis and recession ended more than three years ago. The housing market is firmly on the mend. Employment is growing. The euro zone, though feeble, is no longer about to collapse. And the threat of home-grown crisis appeared to recede when Republicans in the House forbore to use the threat of default …

via Economic Crisis http://www.economist.com/news/united-states/21570738-some-risks-less-fear-second-term-gets-under-way-looking-better?fsrc=rss

UK Only Article: 
standard article

Issue: 

The gambler

Fly Title: 

Productivity

Rubric: 

A dive into Britain’s productivity puzzle uncovers a serious risk to the economy

BRITAIN’S economy has had an odd five years. In output terms, things have been terrible. The slump that started in 2008 is far worse than the 1930s depression; only the years after the first world war were harsher. Consumption has been dragged down by weak real wage growth, investment has been held back by tight credit and exporters have struggled with weak demand in the euro zone. The initial estimate of GDP growth in the fourth quarter of 2012, due shortly after The Economist went to press, was expected to contain more bad news.

Yet the job market is humming. Data released on January 23rd show that employment has topped previous peaks (see first chart). The combination of economic slowdown and plentiful jobs means output per worker has fallen 12% further than at the same stage in previous recessions. That is equivalent to the loss of the entire manufacturing sector. Britain is now …

via Economic Crisis http://www.economist.com/news/britain/21570692-dive-britains-productivity-puzzle-uncovers-serious-risk-economy-job-rich?fsrc=rss

ON THE surface, the nomination of Mary Jo White to head the Securities and Exchange Commission (SEC) by President Back Obama ticks all the requisite boxes. Currently the head of litigation at Debevoise & Plimpton, a private law firm, Ms White will add a female voice to Mr Obama’s second-term team, which is so far dominated by men. More importantly, the former federal prosecutor for the Southern District of New York has experience policing Wall Street, which fell under her jurisdiction. Mr Obama has slammed bankers for their role in the financial crisis and ensuing recession. The choice of Ms White seems to signal his resolve in getting tough with the banks.The appointment is not without controversy. Ms White has benefited from the revolving door between public service and private practice. In the aftermath of the crisis, financial firms sought the assistance of former regulators with strong ties to the government. In a scathing article on Bloomberg’s website, Jonathan Weil notes that Ms White participated in the defence of many people and institutions at the heart of the financial collapse. In October 2008 she was cited in a critical report by the SEC’s inspector general for receiving “relevant information” that was not publicly available. Some will ask whether she is truly a poacher turned gamekeeper or simply setting herself up for another lucrative …

via Economic Crisis http://www.economist.com/blogs/schumpeter/2013/01/mary-jo-white?fsrc=rss

WHEN Barack Obama was sworn in four years ago, the economic figures were terrifying. A financial crisis and a savage recession were in full swing, and house foreclosures were soaring. The day of his inauguration, panic about the banks sent the Dow Jones Industrial Average down more than 300 points. At the start of his second term, by contrast, the Dow hit a five-year high, while a widely followed index of investor fear called the VIX reached a near-six-year low (see table).The change in mood is understandable. The financial crisis and recession ended more than three years ago. The housing market is firmly on the mend. Employment is growing. The euro zone, though feeble, is no longer about to collapse. And the threat of home-grown crisis appeared to recede when Republicans in the House forbore to use the threat of default to extract spending cuts. On January 18th they said they would raise the Treasury’s statutory ceiling until May 18th; previously, the Treasury had expected to run out of borrowing authority as early as mid-February.On average, the economy performs less well in a president’s second term than in his first (see chart). That pattern probably does not apply to Mr Obama. Since his first term was so difficult, the next, by rights, ought to be better.What could spoil matters? Some of the risks are illustrated by the experience of Franklin Delano …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/01/americas-economy-0?fsrc=rss

I WANT to offer a slight correction to last week’s post on Japan and a few additional comments on the Japanese situation. First, the correction. Last week, I used a chart showing the path of nominal output in Japan (and Britain). The nominal output series I used, however, was in dollars rather than national currency; thanks to a big appreciation in the yen over the period, this had the effect of overstating NGDP growth. When one looks instead at NGDP growth in current yen you get this:

Japan’s nominal output performance has been remarkably poor since about 1997, the year before Japan first bumped up against the zero lower bound. Its tolerable performance in the 2000s coincided with a return to ever-so-slight growth in NGDP, but nominal spending has since taken another sharp dive. Indeed, the last 30 years have been a period of near constant deceleration in nominal output growth. In the 1980s Japanese NGDP grew at an average annual pace of 6.2%. This dropped to 1.3% in the 1990s and -0.5% in the 2000s (it has averaged -0.7% over the past two years). Whatever the structural troubles in the Japanese economy, the dramatic drop-off in demand growth must have exacerbated them and then some.Is there now new hope? Last week I worried that fiscal stimulus might be ineffective, because:Successful stimulus would lead interest rates to rise. Crowding out of private …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/01/japanese-economy-0?fsrc=rss