The Mess That Greenspan Made - Part 416

Time and again you hear pundits say that what the U.S. experienced in the last decade was a terrible boom/bust cycle for the housing and credit markets. But then, almost in the same breath, they oftentimes say the nation must do whatever it can to get those eight million jobs back that were “lost” when the housing bubble burst.

But, does that make any sense?

Were those jobs really “lost” or should a good many of them have never existed in the first place?

Anyone with a rudimentary understanding of economics would conclude that, since many of the jobs created early in the decade were related to housing – construction workers, mortgage brokers, etc. – that they won’t be coming back anytime soon, at least not as long as the housing bubble remains “popped” (which is a pretty good bet over the next few years).

Of course, since the early-2000s housing boom was, effectively, the cure for the stock market boom that went bust at the turn of the century, one could argue that what the government and central bank need to do is create a new and different asset bubble.

But, so far, Fed Chief Ben Bernanke and crew seem to be shooting blanks.


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The Uneasy Calm in European Bond Markets

Here’s another one of those neat graphics from Spiegel Online, this one related to a story yesterday about what they consider to be only a “temporary respite” from the credit market troubles that have accelerated in recent weeks and months.

If not for the swath of S&P credit downgrades in recent days, there would probably be even more sore arms in Europe from everyone patting each other on the back, that is, after a $500+ billion program of back-door money printing seems to have produced the desired effects on the red and yellow lines above.

Wednesday Morning Links

Internet regulation: Black ops – Economist
World Bank slashes global GDP forecasts – Reuters
IMF to Seek $1 Trillion Boost Amid Euro Crisis – Bloomberg
Half of U.S. Households Took Government Benefits in 2010 – Atlantic
Easing inflation fuels policy adjustment predictions – China Daily
China Said to Warn Banks as Local Officials Seek New Loans – Bloomberg
World from Berlin: ‘Ratings Agencies Are Not Responsible for Crisis’ – Spiegel
Ron Paul urges end to the Fed, gold standard. But is that possible? – Washington Post
Fannie-Freddie Fees Fail to Offset Lowest Loan Rates on Record – Bloomberg
Goldman Sachs faces backlash over $12.6bn staff pay pot – Telegraph
I’ve found the problem in Washington… it’s some sort of time warp – Mandelman
Will House Prices Keep Falling? – IMF

Report on China sends oil prices up – AP
Gold firms as IMF talk benefits euro – Reuters
Markets rise on talk of $1-trillion IMF boost – Globe & Mail
Portfolio Insights: The euro-crisis horror show – MarketWatch
IEA Cuts 2012 Oil Demand Forecast, Warns of Further Decline – Businessweek
Sprott Physical Silver Trust Announces Follow-on Offering – MarketWire
The phenomenal rise of the Chinese gold market – Mineweb
‘Gold and silver to regain shine in 2012’ – Commodity Online
Gold’s bull market may be nearing its end – GFMS – Mineweb

Recovery at risk as Americans raid savings – Reuters
Campaign Renews Scrutiny of Growing Food-Stamp Program – WSJ
Bank Data Supports Austrian Theory For Recovery – Daily Capitalist
U.K. Jobless Rate Rises to 16-Year High of 8.4% – Bloomberg
The Ultimate European Government Debt Chart – Credit Writedowns
Italy Warns of ‘Backlash’: Rome Demands German Refinancing Help – Spiegel
Germany Cuts 2012 Growth Forecast as Crisis Dims Export Outlook – Bloomberg
China’s property sector goes from bad to worse – FT Alphaville
Has President Obama’s housing policy failed? – CNN
Federal Reserve as a Hedge Fund: Higher Profits, Lower Pay – DealBook
Fed Open to Additional Easing as They Monitor Risks to Economy – Bloomberg
Ben Bernanke Is Finally Right For Being Wrong – Real Clear Markets


Prices are falling all around the world, or so it seems, and that’s a good thing for Bank of England Governor Mervyn King because every time the U.K. inflation comes in too hot – more than a percentage point above the official two percent target – he’s supposed to write a letter of apology to Chancellor George Osborne.

Based on this Telegraph story today, where it was learned that the annual inflation rate fell from 4.8 percent to 4.2 percent, another Dear George letter has likely already been delivered, but Mervyn might be able to take a break sometime this spring as some big tax hikes fall out of the year-over-year consumer price comparisons.

Like a lot of the things we do on this side of the pond, it’s all pretty silly.

I’m not sure if they still do this, but, back in 2007, the Telegraph used to publish the letter from the Bank of England along with the response from the Chancellor of the Exchequer as noted in this item at the old blog. Apparently, with all that’s happened in the aftermath of the financial crisis, no one cares as much about a little inflation.

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An Update on the Iceland Economic Recovery

They’ve yet to write the final chapter on how the path taken by Iceland in the wake of the financial crisis (i.e., letting its banks fail and allowing its currency to plunge while consumer prices soared, all of which seems to have led to a much swifter recovery) compares to the path chosen by the rest of the world (i.e. printing money, propping up the banks, and lots of can-kicking), but this Washington Post story brings readers up to date.

Iceland’s journey from financial ruin to fledgling recovery is a case study in roads not taken and choices not made by other countries faced with calamity in recent years.

By the time the United States and Europe began to wrestle with the fallout of the global financial crisis in 2008, this tiny island nation was experiencing full-fledged meltdown. Its bloated banks failed. Its currency collapsed. The prime minister invoked God’s help, and protesters filled the streets.

Iceland did what the United States chose not to do — allow its biggest banks to fail and force foreign creditors to take a hike. It did what troubled European nations saddled with massive debts and tethered by the euro cannot do — allow its currency to remain weak, causing inflation but making its exports more desirable and its prices more attractive to tourists.

Three years later, the unemployment rate has fallen. Tourism has increased. The economy is growing. The government successfully raised money from investors in the summer for the first time since the crisis.

It’s tempting to conclude that this country of 318,000 people simply handled the crisis more adeptly than others, like a pick-your-own-ending book in which Icelanders chose correctly. There is a sliver of truth in that, but the full story is more complicated.

There’s much more to this report and it’s well worth reading in its entirety.

If nothing else, it should be interesting to see how Iceland is doing three, five, or ten years from now as compared to other Western nations. According to the latest data from The Economist, the Iceland economy has been booming lately, though, for some reason, projections for the New Year are very U.S.-like.

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