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1. Recession in 2007?

Author:
John H. Makin
Publication Date:
03-2007
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
To the dismay and amazement of optimistic market players, not to mention Federal Reserve chairman Ben Bernanke, early in March former Fed chairman Alan Greenspan publicly assessed the probability of a recession this year to be one in three. This was a shock to those who had been carefully avoiding use of the “r word” while intensifying problems in the subprime mortgage market heralded the news that the housing correction, which had been declared “over” in January, was instead moving into a second, more intense, and unpleasant phase. Weaker investment (capital spending was actually a drag on fourth quarter growth) and an 8.7 percent drop in January durable goods orders further undercut hope for sustained general growth. The Fed's own economic outlook has looked to firmer capital spending as part of an economic recovery scenario.
Topic:
Development, Economics, Government, and Markets

2. Risk and Return in Subprime Mortgages

Author:
John H. Makin
Publication Date:
02-2007
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The slowdown in the housing sector that began early in 2006 subtracted over a percentage point from GDP growth during the second half of last year. Now, in 2007, analysts have declared that the worst of the housing slowdown is over. However, early in February, more serious problems emerged in the subprime mortgage market, the rapid growth of which supported the later stages of the housing boom in 2005 and 2006. Subprime mortgages are risky loans to weak borrowers who usually have to borrow the down payment on a home purchase, leaving them with mortgage obligations equal to 100 percent of the purchase price.
Topic:
Development, Economics, and Markets

3. U.S. Slowdown: Self-Correcting or Self-Reinforcing?

Author:
John H. Makin
Publication Date:
11-2006
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The U.S. economy has slowed to a level below its trend growth rate during the second half of 2006. Trend growth, the rate that can be sustained over time without rising inflation, is probably about 3 percent, having been reduced by a quarter of a percentage point by weaker productivity data. As has often been the case over the past five years, the slowdown itself has set into motion market adjustments that may mitigate or even reverse it. Since August, interest rates on benchmark tenyear treasuries have dropped by about 60 basis points. That reduction, coupled with a stock market that is rising in part because of lower interest rates, has caused an easing of financial conditions equal to nearly 100 basis points since late June on the Goldman Sachs Financial Conditions Index. Meanwhile, since August, the price of oil has dropped by about $18 per barrel—which, if sustained, would be enough to add about 0.7 percentage points to U.S. growth over the next year.
Topic:
Development, Economics, and Markets
Political Geography:
United States and America

4. China Needs to Float the Yuan--for China's Sake

Author:
John H. Makin
Publication Date:
05-2006
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
In their April 21 press release following their spring meeting in Washington, D.C., the G7 finance ministers and central bank governors added an important sentence to their usual bland statement that exchange rates should reflect economic fundamentals: Greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China, for necessary adjustments to occur. In their April 21 press release following their spring meeting in Washington, D.C., the G7 finance ministers and central bank governors added an important sentence to their usual bland statement that exchange rates should reflect economic fundamentals: Greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China, for necessary adjustments to occur. The G7, significantly, also called for an increased role for the International Monetary Fund (IMF) to help countries, including those in the G7 but also China and others in emerging Asia, meet the macroeconomic and financial policy challenge of globalization. Specifically, the G7 supported the strengthening of IMF surveillance, including through increased emphasis on the consistency of exchange rate policies with domestic policies and a market-based international monetary system and on the spillover effects of domestic policies on other countries. The G7s endorsement of greater exchange-rate flexibility and of an enhanced IMF role in implementing it is important. The IMF, having been founded after World War II to maintain stable exchange rates among major economies, has become an advocate on behalf of the major economies of global exchange-rate flexibility. The lesson regarding the need for G7 currency flexibility was learned after Americas August 1971 abandonment of fixed exchange rates, which was followed by a decade of adjustments to higher oil prices that would have wreaked havoc under fixed exchange rates. The lesson for needed currency flexibility in emerging markets was learned after the disastrous attempt, fostered in part by the IMF, to impose fixed exchange rates during the Asian and Russian crises of 1997 and 1998, which prolonged and exacerbated the market gyrations caused by the crises. Sadly, China response to the G7-IMF call for greater currency flexibility has been both negative and misguided. China's foolishly insouciant attitude, captured in a comment by Zhou Xiao-chuan, governor of the Peoples Bank of China, carries with it serious risks both for China and for the world economy. Zhous remark was quoted on April 24 in the Wall Street Journal: [T]he speed of moving forward (on yuan appreciation) is OK. Its good for China and welcomed by many other countries. China's currency has appreciated only 1.2 percent since its initial 2.1 percent revaluation last July 21. That is less than OK. The total 3.3 percent revaluation against the dollar really represents no adjustment at all in view of the 1 to 2 percent inflation differential (lower in China) that has persisted between the United States and China over the past two years. If China had allowed prices to rise instead of mandating caps on prices of important commodities like gasoline, there would be less pressure for the yuan to rise in value. Both the intervention to cap the yuans appreciation and the capping of domestic prices are building up potentially disruptive inflation pressure inside China, as we shall see below. The most dangerous aspect of China's increased efforts to prevent yuan appreciation, as measured by accelerating reserve accumulation over the past year, is the rising pool of liquidity inside China that has resulted. The level of excess reserves in Chinese banks is now larger, relative to GDP, than the level of excess reserves built up in Japan from 2001 to 2005 during the years of a prolonged, desperate struggle against deflation. China's currency undervaluation, coupled with the massive liquidity buildup in its banking system, has resulted in excessive investment in China's state enterprises that have close traditional ties with the liquidity-sodden banks. The usual Chinese response to excess reserves has been to boost reserve requirements for its banks. But to absorb the huge pool of excess reserves now in place, reserve requirements would have to be boosted by 5 percentage points to 12.5 per-cent, going far beyond previous moves of 0.5 to 1 percentage point, and far beyond what China's shaky, insolvent banks could endure. When the Peoples Bank of China boosted its one-year benchmark lending rate on April 26 by 27 basis points (to 5.85 percent), it took a tiny step that will do little to tighten China's monetary stance.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
United States, China, and Washington

5. Japan Gingerly Exits Deflation

Author:
John H. Makin
Publication Date:
02-2006
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
In August 2000, with the Japanese growth rate holding above 2 percent, the Bank of Japan decided to initiate an end to the zero interest rate policy that it had initiated in March 1999. This step was taken despite the existence of modest deflation, indicated by readings of minus 0.2 to minus 0.5 percent on various measures of inflation. At that time, no central bank had thought seriously about deflation as a threat since the depression of the 1930s.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
Japan, Israel, and East Asia

6. Why the Dollar Is Rising . . . Again

Author:
John H. Makin
Publication Date:
11-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Let's begin with a riddle: Why is the dollar like a Republican president? Answer: Because the dollar faces incessant predictions of imminent collapse, but in the end it wins out over weaker alternatives.
Topic:
Development, Economics, Government, and International Trade and Finance

7. Japan Moves toward Sustainable Recovery

Author:
John H. Makin
Publication Date:
10-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Japan's stock market, one of the world's strongest this year, is up about 20 percent since spring. It is doing remarkably well for a country whose nominal GDP is still below its 1997 level. By contrast, the U.S. stock market has been drifting lower all year. The S 500 Index is down about 4 percent in the last five months, even more when the highflying energy sector is excluded. This is the case despite U.S. nominal GDP having grown by a cumulative 46 percent since 1997. Clearly, stock markets are looking ahead and seeing a brighter future for Japan than for the United States.
Topic:
International Relations, Development, and Economics
Political Geography:
United States, Japan, Israel, and East Asia

8. Can Disasters Be Good for Growth?

Author:
John H. Makin
Publication Date:
10-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The U.S. economy was in recession when the 9/11 terrorist attacks struck New York and Washington, D.C. Yet within a few months, despite fears of a collapse in confidence, consumption growth surged to a fourth-quarter annualized rate of nearly 5 percent, up sharply from a 1 percent rate during the third quarter. That consumption surge was enough to drag the economy out of what turned out to be a mild recession. By the first quarter of 2002, overall growth reached a booming 5 percent rate.
Topic:
Development, Economics, Environment, and Terrorism
Political Geography:
United States, New York, and Washington

9. America's Resilient Consumers

Author:
John H. Makin
Publication Date:
08-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Among the more remarkable features of the U.S. economy over the past five years—through a tech-stock collapse (from which we have still not recovered), the 9/11 disaster, and numerous chastening corporate scandals —has been the extraordinary resilience of American consumers. To paraphrase H. L. Mencken, no one has ever gone broke (at least not recently) by overestimating the willingness of Americans to spend money.
Topic:
Development, Economics, and Government
Political Geography:
United States and America

10. Can the Fed Achieve a Goldilocks Tightening?

Author:
John H. Makin
Publication Date:
08-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The persistence of annualized economic growth of about 3.5 percent—despite crude oil prices between $50 and $60 per barrel—has led many analysts to claim that the U.S. economy has already "absorbed" the shock of $2.35-plus-pergallon prices for self-serve regular gasoline along with a rise in heating oil costs of more than 30 percent over the last year. As if to underscore their insouciance over energy costs, American consumers accelerated the volume of vehicle purchases in June, especially those of light trucks that get only twelve or thirteen miles per gallon.
Topic:
Development, Economics, and Government
Political Geography:
United States and America