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821. The Fed's Dilemma

Author:
John H. Makin
Publication Date:
07-2008
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The Fed is in a bind, pulled toward easier monetary policy by a weak economy and fragile credit markets, while simultaneously needing to resist higher inflation. On Monday, June 9, after a weekend of headlines regarding a half-percentage-point rise in the unemployment rate, Federal Reserve chairman Ben Bernanke gave a pathbreaking speech entitled "Outstanding Issues in the Analysis of Inflation" at the Federal Reserve Bank of Boston's fifty-third Annual Economic Conference. In that speech, after suggesting that the risks of a substantial  economic downturn had diminished over the past month and citing further progress in the repair of financial and credit markets, he proceeded to address the problem of rising inflation. In two sentences, he contributed to a sharp, fifty-basis-point rise in two-year bond yields and boosted the market's assessment of the chance of a fifty-basis-point rise in the federal-funds target rate at the September 16 meeting of the Federal Open Market Committee (FOMC) from virtually zero to nearly 70 percent.
Topic:
Economics and International Trade and Finance
Political Geography:
United States

822. What if the United States Sneezed and Latin America Didn't Catch a Cold?

Author:
Megan Davy
Publication Date:
05-2008
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Latin American and Caribbean (LAC) economies, usually susceptible to international financial turmoil, are especially vulnerable to even minor tremors in U.S. markets. Regional policymakers and entrepreneurs, therefore, have been closely watching the current U.S. subprime credit crisis. Here is the good news: all signs point to relatively minor symptoms in LAC countries—despite a rocky financial history during the 1980s and 1990s—thanks in large part to reforms undertaken in response to previous financial crises, as well as continued high commodity prices that will likely buoy export markets. Although the economic downturn in the United States and other global markets will likely expose lingering weaknesses in the region's economy, this latest crisis can provide an impetus to complete the unfinished business of building more modern, resilient economies.
Topic:
Development, Economics, and Emerging Markets
Political Geography:
United States, South America, Latin America, and Central America

823. Barack Obama's Social Security Donut Hole

Author:
Andrew G. Biggs
Publication Date:
03-2008
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Until recently, Senator Barack Obama (D-Ill.) was surprisingly responsible regarding Social Security, noting the urgency of reform and saying all options should be on the table. But having cornered himself with Democratic activists whose attitudes toward Social Security reform range from demagoguery to denial, his solution to the system's problems has veered leftward. He now plans to fix Social Security exclusively with higher taxes. The new Obama plan would not only fail to resolve the system's long-term problems, but would also impose significant costs on the economy as a whole.
Topic:
Demographics, Economics, and Politics
Political Geography:
United States

824. Stern Lessons on Fed Policies and Actions

Author:
Amity Shlaes, Vincent R. Reinhart, Allan H. Meltzer, and John L. Chapman
Publication Date:
04-2008
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
How fragile is our financial system? What are the implications of the Fed's actions on Bear Stearns? Do we need new ways of thinking about the risks the system entails? In recent articles, four AEI scholars have looked closely at the evidence of what went wrong and what is ahead.
Topic:
Economics and Government
Political Geography:
United States

825. Benefit Growth That We Cannot Afford

Author:
Alan D. Viard
Publication Date:
04-2008
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Buried in the 227-page Social Security trustees' report are some dramatic numbers about Social Security's future promises. AEI resident scholar Alan D. Viard tells us that "a typical worker retiring in 2050 has been promised 47 percent more than today's retirees, and one retiring in 2080 has been promised more than double today's benefits." To address the program's financial problems, he says, the rules need to be changed to link future retirees' benefits to inflation. That move, he says, would go a long way toward solving the system's problems.
Topic:
Security, Economics, and Political Economy
Political Geography:
United States

826. The Wealth Trajectory: Rewards for the Few

Author:
N. Gregory Mankiw
Publication Date:
04-2008
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Income inequality is rising, and in this article, AEI visiting scholar N. Gregory Mankiw looks at the statistical evidence and causes. Government policy, he says, is unlikely to be the culprit because inequality has risen in Democratic and Republican administrations--we need to look instead at skills-based technological change and educational attainment. Education, Mankiw says, is key to understanding the broader trends, but it cannot fully explain the incomes of the super-rich.
Topic:
Economics and Education
Political Geography:
United States

827. Fallout from a Bailout

Author:
Vincent R. Reinhart
Publication Date:
05-2008
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The Senate Banking Committee approved legislation on May 20 that would empower the Federal Housing Administration to provide relief to mortgage borrowers teetering on the brink of default. The House has already passed similar legislation. Only two months ago, mortgage aid was viewed as unlikely, but the odds now favor it becoming law. For this change of fortune, the legislation's chief sponsors, Senator Chris Dodd (D-Conn.) and Representative Barney Frank (D-Mass.), should thank one person in particular: Federal Reserve chairman Ben Bernanke.
Topic:
Economics and Government
Political Geography:
United States

828. It's Only Going to Get Worse

Author:
Lawrence B. Lindsey
Publication Date:
06-2008
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
America has not had a nationwide housing crash since the 1930s. At one point during that calamity, an estimated 60 percent of all mortgages were in technical default. The rather primitive housing credit system of the time, which relied on five-year balloon mortgages, certainly exacerbated the problem, but the bulk of the problem was related to the general economic downturn. There have been some regional housing crashes that were short and relatively mild, most notably in California, Texas, and New England in the late 1980s and early1990s. Most of those were caused by declines in key local industries: oil in Texas, aerospace and defense in Southern California and Massachusett.
Topic:
Economics and Markets
Political Geography:
United States, California, and England

829. Obama Turns FDR Upside Down

Author:
Lawrence B. Lindsey
Publication Date:
06-2008
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Two AEI scholars have recently assessed the merits of Senator Barack Obama's approach to fixing the Social Security system's problems. In a March On the Issues, Andrew G. Biggs argued that the senator's plan would not fix the system's long-term problems and would impose significant costs on the economy as a whole. To read Biggs's article, visit www.aei.org/publication27704/. In June, Lawrence B. Lindsey wrote that requiring higher-end workers to pay additional taxes without getting additional benefits linked to their extra contributions would be “a big step toward turning Social Security from a contributory pension scheme into just another welfare program.” Below, Lindsey spells out the details.
Topic:
Economics, Political Economy, and Politics
Political Geography:
United States

830. Tipping Point

Author:
John H. Makin
Publication Date:
08-2008
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The annual report of the Bank of International Settlements (BIS)—the central bankers' central bank—which appeared in late June, was somewhat schizophrenic. On the one hand, the BIS called for world interest rates to rise in order to deal with a “clear and present threat” from global inflation while, on the other hand, it warned that the global economy may be close to a “tipping point” into a “slowdown severe enough to transform the current period of rising inflation into a period of falling prices.” The simultaneous rise in oil prices and the fall in yields in government securities occurring as the BIS released this ambivalent statement captured well the tensions inherent in the stagflationary crosscurrents facing the global economy. Against this ominous background, the release of the BIS report coincided with the onset of a global bear market in equities.
Topic:
Economics, Markets, Oil, and Political Economy
Political Geography:
United States