"By Sara Murray
A roundup of economic news from around the Web.
- Recession Recovery & Unemployment: CalculatedRisk explains the scenario that would have to play out in initial unemployment claims to indicate the recession was ending. “Typically the four-week average peaks near the end of a recession. Also important - in the last two recessions, initial unemployment claims peaked just before the end of the recession, but then stayed elevated for a long period following the recession - a ‘jobless recovery’. There is a good chance this recovery will be very sluggish too, and we will see claims elevated for some time (although below the peak). We need to see a significant decline in the four-week average before we start talking about the peak. In a note today, Goldman Sachs economist Seamus Smyth estimated a significant decline as: ‘Roughly speaking, a 20,000 decline in the 4-week moving average corresponds to a 50% probability that the peak has already been reached, and a 40,000 improvement to a 90% probability.’ So we need to see the four-week average decline by 20,000 to 40,000 or more. Don’t hold your breathe…”
- GSEs, Take Two: Peter J. Wallison, writing on AEI about the Obama Administration’s plan for restructuring the financial system, argues that “it is no exaggeration to say that the proposal will create what are essentially government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac in every sector of the financial economy,” by designating some companies as systemically important. Among the potential consequences: “The dangers to competition inherent in the administration’s plan arise in two ways: direct benefits to firms that offer products enhanced by the apparent financial soundness of the firm that offers them, and indirect benefits through a lower cost of funds for firms that are perceived to be less risky than their competitors. In insurance, for example, where the financial soundness of a company could make a competitive difference, the companies that can boast that they are too big to fail are likely to be more successful in attracting customers than their smaller competitors. Similarly, but more indirectly, firms that can boast that they are systemically important and thus too big to fail would–like Fannie Mae and Freddie Mac–appear less risky as borrowers than firms that are not protected by the government, and this will produce lower financing costs. Eventually, these firms will be able to use their superior financing opportunities to drive competition from their markets. Overall, the systemically significant firms will be subject to less market discipline, will be able to take more risks than others, will grow larger in relation to others in the same industry, and will gradually acquire more and more of their less successful competitors. Eventually, we will see a market much like the housing market that Fannie and Freddie came to dominate, with a few giant companies, chosen by the government, that have pushed out all significant competition.”
- Bank Plan “Truths”: Brad Delong, writing on his blog, describes the three “truths” the Obama Administration could use to sell its banking programs. Among them, “The banks have us by the plums,” “We have to play out the hand before we ask for a New Deal,” and a particularly good one, “The government has a chance to make a fortune: Just as in 1999 and 2005 financial markets were ruled by irrational exuberance, now they are ruled by irrational pessimism. Because of this irrational pessimism, businesses selling stocks and bonds cannot obtain financing that makes it profitable for them to expand–and so unemployment is high. But the government is not irrationally pessimistic, and is ‘patient capital’: the government can buy up financial assets and so raise their price, boost employment, and then hold the assets until maturity and very likely make a fortune. It can do good for the economy and the country and do well by its own finances at the same time. It is true that financiers who ride-alongside, front-run, and manage the government’s portfolio are very likely to make fortunes too, but much smaller fortunes than the government…If the Obama administration were selling any of these three lines of narrative–or were selling all of them–it seems likely to me that it would be having more success is building support for its strategy. But I do not think that it is selling any of these narrative lines to make sense of its policies. Indeed, I do not know what the narrative story it wants to tell about the current situation is.”