Financial Markets

Paul Krugman: “A lot of the debate over the Sanders insurgency hinges on whether you see Obama-era reforms as trivial, utterly inadequate to the problems, or as a half loaf that’s a lot better than none.”

Krugman argues that when it comes to financial reform, “it partly depends on what you consider the problem … too-big-to-fail is not the key issue, so that the fact that big banks remain big is, um, no big deal. The real question — or so I’d argue — is leverage within the financial sector, and in particular the kind of leverage with no safety net that characterizes shadow banking.”

“So Matt O’Brien weighs in with evidence that leverage has in fact declined substantially, and continued to decline even as the economy expanded — probably because of Dodd-Frank. This is certainly right; the same decline shows up in other measures, as in the chart above showing financial sector debt securities as a percentage of GDP.”

“Dodd-Frank’s rules — especially, I think, the prospect of being classed as a SIFI, a strategically important institution subject to tighter constraints, have had a real effect in reducing risk … The reality of the Obama era, for progressives, is a series of half loaves. But after all the defeats over the previous 30 years, aren’t those achievements something to celebrate?”

Matt O’Brien in The Washington Post: “Markets sure seem to think that the Federal Reserve has made a big mistake.”

“It hasn’t just been stocks selling off 10 percent to start the year. It has also been bonds saying that they don’t think the Fed will come close to hitting its target of 2 percent annual inflation anytime in the next 10 years. Markets, in other words, have done everything short of holding a boom box outside of Fed Chair Janet Yellen’s window to beg her not to raise interest rates any more after the Fed hiked them in December for the first time in nearly a decade. And it just might work. After all, there’s no such thing as an atheist in a foxhole or an inflation hawk in a stock market crash, especially when prices were barely rising to begin with.”

“The fact, then, that the S&P 500 seems to be saying that the recovery is falling apart should make even the most committed inflation-fighter wonder whether there is actually anything to fight.”

“So will the economy fall into recession? On the one hand, it’s hard to see how the economy could be heading that way when it’s been adding an average of 284,000 jobs the last three months … On the other hand, though, things still seem fragile enough that it wouldn’t take a lot of bad news to turn our slow-and-steady recovery into none at all.”

Ylan Q. Mui: “Central banking is a long game. The Fed’s decisions take months — even years — to influence the economy. That’s why officials insist that they do not react to every hiccup in the markets. In a speech about a week ago, New York Fed President William C. Dudley said his outlook for the economy ‘has not changed much’ despite the volatility on Wall Street. Though some data have been weaker than anticipated, the job market has been stronger, he said.”

Bloomberg: What will 2016 bring for the world economy? Financial markets are sending a mixed message: There’s reason to believe that the U.S. will outperform other major developed nations, but also to be wary about the health of American companies.

“One big question is which economies will expand fast enough to justify [a rate] increase. As of Wednesday, traders in futures markets were putting their money on the U.S.: They expected the three-month dollar deposit rate to reach 1.24 percent by December 2016, a gain of about 0.64 percentage point.”

At the same time, though, markets for credit derivatives — which provide a sort of insurance against defaults — are displaying mounting concern about the finances of U.S. corporations. As of Wednesday, the cost of five-year insurance on $10 million in debt issued by a basket of investment-grade U.S. companies stood at almost $89,000, up more than $22,000 from a year earlier.

“The mixed signals illustrate the complexity of the task facing the Fed. A robust U.S. expansion is crucial for the rest of the world, given decelerating growth in China and a painfully slow recovery in Europe. Yet the planet’s largest economy is still showing signs of weakness, and may be unusually vulnerable to rate increases. As Bloomberg View has noted, this means the central bank will have to act cautiously, and be ready to change course if 2016 doesn’t go according to plan.”

Paul Krugman says “the U.S. Economy isn’t doing too badly. So what did we do right?”

“The answer, basically, is that the Fed and the White House have mostly worried about the right things. (Congress, not so much.) Their actions fell far short of what should have been done; unemployment should have come down much faster than it did. But at least they avoided taking destructive steps to fight phantoms.”

“The result of these not-so-bad policies is today’s not-so-bad economy. It’s not a great economy, by any measure: Unemployment is low, but that has a lot to do with a decline in the fraction of the population looking for work, and the weakness of wages ensures that it doesn’t feel like prosperity. Still, things could be worse.”

“Fed officials believe that the solid job growth of the past couple of years — which happened, by the way, as Obamacare, which conservatives assured us would be a job killer, went into full effect — will continue even if rates go up. I’m among those who believe that America is facing growing drag from the weakness of other economies, especially because a rising dollar is making U.S. manufacturing less competitive. But those officials could be right, in which case waiting to raise rates could mean some acceleration of inflation.”

Paul Krugman comments on what he sees as something relatively new on the GOP policy front: “an increasingly unified Republican demand for hard-money policies, even in a depressed economy.”

“Republicans have turned their back on [Milton] Friedman, whether they know it or not, and draw their monetary doctrine from ‘Austrian’ economists like Friedrich Hayek … when they aren’t turning directly to Ayn Rand.”

“This turn wasn’t driven by experience. The new Republican monetary orthodoxy has already failed the reality test with flying colors: that ‘debased’ dollar has risen 30 percent against other major currencies since 2011, while inflation has stayed low … But years of predictive failure haven’t stopped the orthodoxy from tightening its grip on the party. What’s going on?”

“My main answer would be that the Friedman compromise — trash-talking government activism in general, but asserting that monetary policy is different — has proved politically unsustainable. You can’t, in the long run, keep telling your base that government bureaucrats are invariably incompetent, evil or both, then say that the Fed, which is, when all is said and done, basically a government agency run by bureaucrats, should be left free to print money as it sees fit.”

Gallup: “Hawaii residents had the highest financial well-being in the nation in 2014, followed closely by Alaska residents. Mississippi residents had the lowest financial well-being, with Tennessee not far behind.”

“Midwestern states earned six of the 10 highest financial well-being scores, while Southern states accounted for all of the 10 lowest financial well-being scores. Differences in income, employment and age — all of which are linked to financial well-being — could help explain the regional pattern.”

“While they avoided being among the bottom 10 states for overall financial well-being, New Jersey had the lowest percentage of residents reporting that they did not worry about money in the past week, and Rhode Island had the lowest percentage of residents saying they were satisfied with their standard of living.”