Krugman: Are we headed into a recession?

A Long Story from the NYT

I pretty much agree with his arguments. For some time, I’ve argued that the US was not headed into a recession, but somewhere along the line – after several indicators (perhaps hardest-hitting was the employment release) came out, I started to think that it might be a recession. And as Krugman points out, this recession may be relatively bad due to the combination of economic conditions now – though many economists think that the Fed can prevent recessions in magnitudes comparable to what we’ve seen in the past.

I guess we’ll just have to wait and see.

Bernanke’s midterm tests

Bernanke’s midterm tests, New York Times

I really can’t imagine that anyone wouldn’t reappoint Bernanke. To introduce someone new so quickly, especially after Greenspan’s long reign, may be more a sign of instability than anything. Adjustment takes time – being Fed chairman undoubtedly has quite a learning curve – and putting someone new in there probably won’t fix anything, especially since Bernanke has the academic credentials that should give him some credibility already.

Besides, it is recognized that a lot of what he has had to face was not caused by him – it’s the economy, and many factors were remnants of Greenspan’s reign (not blaming him, either, just saying – the issues preceded Bernanke). Think the housing market …

I don’t think the article mentions Bernanke’s latest transparency moves. I can’t say whether those are positive or not, though I think many view the newer policies as positive.

If it’s a midterm, the grading is going to be pretty subjective. Even if the effects -or state of the economy – is pretty obvious, whether or not it’s Bernanke’s fault, or just a poorly “written”/timed test, is still up for debate.

Fed’s next move

Excerpt from Dismal.com:

A U.S. economy that is on the edge of a recession, if not already in one; controlled inflation; and unsettled financial markets all argue for additional rate cuts when the Federal Open Market Committee concludes its two-day meeting on Wednesday. Today’s dour report on new-home sales and growing fears of a recession have led markets to increase their bets on a 50-basis point reduction in the target rate. According to fed funds futures, there is roughly a 90% probability that the Fed will cut interest rates to 3% from its current 3.5%, bringing the total reduction to 125 basis points in just more than a week.

——

I’ve heard from several sources that the FOMC is expected to cut rates about 50 basis points, consistent with the above excerpt. It’s a huge, quick drop, but I think it’s actually necessary, especially given the expectations. If the Fed doesn’t cut rates by 50 basis points, I’m afraid confidence in the economy’s going to moderate too much, and fears of recession will be higher than ever.

what I’m currently reading

Age of Turbulence, Alan Greenspan

I’m personally fascinated by this book, and though I got it a few days ago, I’m only about halfway through (a combination of really thinking through the economic ramifications of what he proposes, taking a slow pace to read it, and just not devoting that much time to read it). The first part of the book briefly runs through how Greenspan acquired the position he did (actually pretty interesting), and the book then follows him through some tough political interactions he had and Fed decisions he had to make. I sent an email to the Fed Challenge team, requesting that they read it – it’s really good for historical background (good to support arguments during Q&A for the competition) and to delve into the mind of a real Fed chairman.

That said, unless you’re willing to read about interest rates, stock market reactions, debt crises, and economic development, sometimes in a slightly “dry” sense (to the average reader, I’d guess), I’m not sure I’d recommend this. But if you’re like me – and absolutely love macroeconomics – I definitely recommend it. Worth every penny of your $35 and hours spent reading it (… for the record, I got the second-to-last copy at the Harvard bookstore at the after-holiday 50% sale … the monetary cost for me was much lower than the benefit obtained ).