Some extracts from consistently the most provocative and sentient economics blog. For those of you interested in the way we live now, I strongly recommend you sign up for RSS feeds from Willem Buiter's blog.
"The Fed...is not the party designed to orchestrate an insolvency-preventing bail out. That’s what the Sovereign Wealth Funds are for. If there is no private solution, a fiscal bailout financed, directly or indirectly, by the US Treasury, perhaps through the FDIC, is required if and only if systemic risks are deemed to be present. Personally, I don’t believe that, with effective deposit insurance in place, any US bank is too large to fail. But fortunately that is a judgment I will not be asked to act upon.
"The Fed should do no more than act as MMLR, however. US interest rates are already too low to maintain the credibility of the price stability objective of the Fed, and of its medium term implicit inflation target. The Fed should certainly not cut the target for the Federal Funds rate simply to prevent or delay the insolvency of US banks or other financial institutions, unless this action is also warranted by the need to meet its triple mandate: maximum employment, stable prices and moderate long-term interest rates.
"A falling actual unemployment rate and a rising natural unemployment rate call for higher rates
"The latest labour market figures show a large fall in employment and an even larger fall in labour supply, resulting in an actual decline in the unemployment rate to 4.8%. There is also evidence to support the view that the natural (equilibrium) rate of unemployment in the US is increasing. The combination of a declining actual unemployment rate and a rising natural unemployment rate means that there are now higher domestic inflationary pressures associated with any observed level of employment and unemployment than before.
"It makes economic sense that the US natural rate of unemployment is increasing, if only because of compositional changes in the labour force that are reducing, on average, its quality and employability. The post-9/11 imposition of additional obstacles to the immigration of skilled labour are one factor reducing labour force flexibility. So is the long-standing decline in the numeracy and literacy standards of the high-school graduates.
"The US needs to restore external balance through an increase of (at least) six percentage point of GDP in the saving - investment balance. This should be achieved through an increase in the national saving rate rather than a reduction in domestic capital formation. The slowdown/recession the country is experiencing now is the (almost) inevitable by-product of this necessary rebalancing. It is in principle possible to have the ex-ante trade surplus rise instantaneously and by the same amount as the increase in ex-ante saving over ex-ante investment. In practice, the world is stubbornly Keynesian in the short run, and a decline in economic activity will tend to accompany an increase the the planned national saving rate. This is why the Fed, the White House and the Congress are so misguided about wanting to prevent a significant weakening of consumption at all cost.
"The other side of the required rebalancing of the US external account is a large shift of resources from the non-traded sectors (e.g residential construction) into the traded sectors. At least a six percentage points of GDP increase in the production of exportable and import-competing goods and services and reduction in the production of non-traded goods and services is required, matching the increase in the saving-investment balance."
"The Fed...is not the party designed to orchestrate an insolvency-preventing bail out. That’s what the Sovereign Wealth Funds are for. If there is no private solution, a fiscal bailout financed, directly or indirectly, by the US Treasury, perhaps through the FDIC, is required if and only if systemic risks are deemed to be present. Personally, I don’t believe that, with effective deposit insurance in place, any US bank is too large to fail. But fortunately that is a judgment I will not be asked to act upon.
"The Fed should do no more than act as MMLR, however. US interest rates are already too low to maintain the credibility of the price stability objective of the Fed, and of its medium term implicit inflation target. The Fed should certainly not cut the target for the Federal Funds rate simply to prevent or delay the insolvency of US banks or other financial institutions, unless this action is also warranted by the need to meet its triple mandate: maximum employment, stable prices and moderate long-term interest rates.
"A falling actual unemployment rate and a rising natural unemployment rate call for higher rates
"The latest labour market figures show a large fall in employment and an even larger fall in labour supply, resulting in an actual decline in the unemployment rate to 4.8%. There is also evidence to support the view that the natural (equilibrium) rate of unemployment in the US is increasing. The combination of a declining actual unemployment rate and a rising natural unemployment rate means that there are now higher domestic inflationary pressures associated with any observed level of employment and unemployment than before.
"It makes economic sense that the US natural rate of unemployment is increasing, if only because of compositional changes in the labour force that are reducing, on average, its quality and employability. The post-9/11 imposition of additional obstacles to the immigration of skilled labour are one factor reducing labour force flexibility. So is the long-standing decline in the numeracy and literacy standards of the high-school graduates.
"The US needs to restore external balance through an increase of (at least) six percentage point of GDP in the saving - investment balance. This should be achieved through an increase in the national saving rate rather than a reduction in domestic capital formation. The slowdown/recession the country is experiencing now is the (almost) inevitable by-product of this necessary rebalancing. It is in principle possible to have the ex-ante trade surplus rise instantaneously and by the same amount as the increase in ex-ante saving over ex-ante investment. In practice, the world is stubbornly Keynesian in the short run, and a decline in economic activity will tend to accompany an increase the the planned national saving rate. This is why the Fed, the White House and the Congress are so misguided about wanting to prevent a significant weakening of consumption at all cost.
"The other side of the required rebalancing of the US external account is a large shift of resources from the non-traded sectors (e.g residential construction) into the traded sectors. At least a six percentage points of GDP increase in the production of exportable and import-competing goods and services and reduction in the production of non-traded goods and services is required, matching the increase in the saving-investment balance."
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