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Fundranker Blog—Economy Category—Page 1

When Will Fed Raise Rates?

The Federal Open Market Committee met most recently on March 17 and 18. Its policy statement released at the end of that meeting no longer referred to being “patient” on raising rates. But Fed Chair Janet Yellen emphasized in her press conference after the statement, “Just because we removed the word ‘patient’ from the statement doesn’t mean we’re going to be impatient ... In particular, this change does not mean that an increase will necessarily occur in June, although we can’t rule that out.”

Federal Reserve Bank of Richmond President Jeffrey Lacker, in remarks Tuesday, March 31, at the Richmond Fed, said “... the case for raising rates will remain strong at the June meeting.” Lacker is considered to be hawkish on rates. He dissented at all eight FOMC meetings 2012 in favor of tighter monetary policy, but he has voted with the majority at both meetings held in 2015. Lacker rotated out of a voting position on the FOMC during 2013 and 2014.

On April 1, Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, told reporters “The weakness of the first quarter got my attention. I still believe the factors are transitory. We will see a pick-up.” He feels an interest rate hike is likely in the June to September period. Lockhart is considered a centrist on the FOMC.

At the March 17-18 meeting, officials also cut their median estimate for the federal funds rate at the end of 2015 to 0.625% from 1.125% in their December forecasts, leading many market participants to expect the FOMC’s rate “lift-off” to be in the fall rather than mid-year.

The FOMC will meet six more times this year in April, June, July, September, October, and December.

Posted 4/5/15 12:32pm ET in Economy | Permalink | Comments (0)

Aggressive Fed Stimulus

The Federal Open Market Committee of the Federal Reserve System showed that its considerable concern over the struggling U.S. jobs situation outweighs political concerns by announcing another aggressive economic stimulus program today despite how close we are to the presidential election. The Federal Reserve will buy $40 billion of mortgage-related debt per month until the jobs outlook improves significantly as long as inflation remains in check.

The FOMC tied the Fed’s new stimulus program directly to economic conditions, stating "If the outlook for the labor market does not improve substantially, the Committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."

In another show of concern over the health of the economy, the FOMC said "the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015." That extends from late 2014 their earlier low federal funds rate guidance.

Investors apparently approved the announcement wholeheartedly. The broad market S&P 500 Index was up 1.55% at 3:00pm today.

Posted 9/13/12 3:28pm ET in Economy, Market | Permalink | Comments (0)

Outlook for 2012

The New York Times published an excellent article on December 31 that gathers viewpoints from six leading economists on the economic outlook for 2012. Check it out here.

N. Gregory Mankiw wants the Federal Open Market Committee to offer even more clarity about its contingency plans.

Christina D. Romer calls for action to combat our unsustainable long-run budget deficit and persistent high unemployment.

Tyler Cowen forecasts that Europe won’t get out of its mess anytime soon and not without more pain.

Robert H. Frank discusses his “toil index” and growing income inequality.

Robert J. Schiller calls for a tax credit to fix our housing crisis.

Richard H. Thaler wants to nudge employers to make getting healthy easier and, in turn, to combat our health care spending crisis.

Posted 1/24/12 9:55am ET in Economy | Permalink | Comments (0)

New Private Sector Jobs

The new ADP National Employment Report released November 2 shows an improvement, albeit small, in the jobs picture. Private U.S. employers added 110,000 jobs in October, higher than the 101,000 jobs that economists expected. In addition, the number of private sector jobs added in September was revised upward to 116,000 from 91,000 previously reported. A separate report showed that planned layoffs decreased significantly in October. These three positives are small in comparison to the overall dismal jobs picture, but they are at least a move in the right direction and a welcome sign that points toward an improving economy.

Posted 11/2/11 6:25pm ET in Economy | Permalink | Comments (0)

Bull vs. Bear

Through June 29, the S&P 500 Index (as measured by Fidelity’s Spartan 500 Index - Investor Class Fund), the Nasdaq Composite Index (as measured by Fidelity’s Nasdaq Composite Index Fund), and Fundranker’s Top Eight Model Portfolio fell 14.1%, 15.5%, and 17.7%, respectively, from bull market highs they reached on April 23. That put them way into correction territory, generally defined as a 10% decline from bull market highs, and much closer to bear market territory, generally defined as a 20% decline from bull market highs, than any of us would like.

Paul Krugman, Nobel Prize winning economist and NY Times columnist, wrote recently that he fears we are heading into a third depression, which he says primarily will be a failure of policy. Governments around the world seem overly concerned with inflation, when he says the real problem is deflation, and they are preaching the need for austerity when the real problem is inadequate spending to make sure we emerge completely from the Great Recession.

So what does our current situation mean for our economy and markets? Will the bull market that started in March, 2009, with the beginning of recovery from the Great Recession be able to overcome this correction, or will it turn into a bear market? Will private business be able to take over the spending necessary to keep the world economy expanding when governments begin curtailing their stimulus spending?

We’re convinced here at Fidelity Select Fundranker that our system of regularly moving into better performing Fidelity Select funds will stand us in good stead however the market reacts to future events. It’s unlikely that we’ll see markets react again like they did when world financial systems nearly collapsed in 2007 and 2008; there almost always will be at least a few sectors that perform well, and Fundranker will find them.

Posted 6/30/10 11:54am ET in Economy, Fundranker, Market | Permalink | Comments (0)

Greek and European Debt

Greek and European debt weighed heavily on world markets during the first trading week of May. Many financial observers feared that Greece's financial situation could spread to other European nations, possibly setting in motion an even more widely spread downturn in world economies.

European Union nations are tied together with their common currency, the euro, which limits individual members solutions to debt problems, such as Greece’s current situation. Normally, a country would be able to devalue its currency to ease debt problems, but Greece is unable to do that unilaterally.

Paul Krugman, New York Times columnist and winner of the Nobel prize for economics, has a great blog entry today about Greece’s situation and weekend announcments from European Union ministers and the European Central Bank.

World markets have reacted strongly and positively to those announcements in today’s trading. The Nasdaq Composite and the S&P 500 Indexes were up 100 and 45 points, respectively, at 10am today, May 10.

Posted 5/10/10 10:37am ET in Economy, Market | Permalink | Comments (0)

Economy Continues to Grow

The U.S. economy expanded for the third consecutive quarter in the first quarter of 2010. Gross domestic product grew 3.2%. In the third and fourth quarters of 2009, GDP grew 2.2% and 5.6%.

Consumer spending increased significantly, growing at an annual rate of 3.6%, the strongest growth in three years. Consumer spending grew at an annual rate of only 1.6% last quarter.

Businesses must be seeing a more rosy economic future, as well. Their purchases of capital goods increased 13.4% in the first quarter, adding to a 19% increase last quarter. Even more telling, for the first time in two years, businesses increased their goods inventories during the first quarter.

Jobless claims have fallen for two consecutive weeks. Although the recovery has been labeled as “jobless” so far, perhaps this situation is beginning to change.

Posted 5/4/10 9:32am ET in Economy | Permalink | Comments (0)

Great Recession

Many pundits are calling the recession that started in December, 2007, the Great Recession, which seems to capture succinctly what it has done to our economy--worse than other recessions, but not as bad as the Great Depression. We like this name, and we will refer to this recession as the Great Recession in future blog entries.

Posted 12/3/09 6:58pm ET in Economy | Permalink | Comments (0)

October Downturn

After hitting rally highs on October 19, the Nasdaq Composite and the S&P 500 Indexes turned down dramatically, falling seven of the last nine trading days of October. This downturn has not reached the point of calling it a correction, defined as a drop of 10%, but it did produce the first monthly loss for the market since this rally began in March. Several economic reports this week played into the downturn.

New home sales fell 3.6% in September, contrary to economists’ expectations of a seventh monthly increase in a row. Due to the coming November 30 expiration of the $8,000 first-time home buyer tax credit, potential home buyers may be rethinking their plans. Legislators are working now to renew the credit.

The Consumer Conference Board’s Consumer Confidence Index and the Reuters/University of Michigan Consumer Sentiment Index both declined in October, although the Nielsen Global Consumer Confidence Survey reported that their U.S. reading had risen since their last survey in July.

The only good news this week was that the GDP rose 3.5% in the third quarter, and it sparked a sizeable market rebound on Thursday, October 29.

However, the Labor Department reported Friday morning, October 30, that consumer spending fell and personal income was flat in September, which worried investors enough to undo Thursday’s rebound.

Even though the economy expanded in the third quarter, it is by no means out of the woods. Consumer spending is the mainstay of the U.S. economy and is directly affected by consumer sentiment, which in turn is affected by the current high unemployment rate, now at 9.8%, and which economists expect to continue to rise as high as 10.5% through the middle of next year. The recovery is likely to be weak and slow until the jobs picture brightens.

Remember though, that consumer sentiment is largely a trailing indicator, meaning that it reflects more on what has happened in the past than what will happen in the future, making it a favorite indicator for contrarian investors.

Posted 10/31/09 9:07am ET in Economy, Market | Permalink | Comments (0)

Select Automotive Shines

Select Automotive is up 18.8% for July 1 though 24, 38.9% for May 1 through July 24 (nearly three months), and 131.8% for February 2 through July 24 (nearly six months). It is only down 5.6% for August 1, 2008, through July 24 (almost 12 months). Given that two of the three major American automakers were bailed out by the federal government earlier this year and also made speedy trips into and out of bankruptcy in the last few months, this incredible runup indicates a lot of investor confidence in the automotive sector. Investors must like the new direction American automakers are taking, and they must think that consumers are willing, able, and starting to buy cars again.

The American automotive industry is hugely intertwined in the American economy as well as the world economy. Consumers buy cars all over the world, automakers hire lots of people to build them, their suppliers hire lots of people to build various parts for the cars, and all those workers go out and spend the money they earn. It’s a self-feeding circle of economic improvement that can’t help but bode well for the economy.

Posted 7/24/09 11:01pm ET in Economy | Permalink | Comments (0)

Rally Resumes

The spring rally we enjoyed, after pausing for four weeks, has turned into a summer rally. The Nasdaq Composite climbed 11 sessions in a row through July 22, 2009, hitting new rally highs every day since July 15. The S&P 500 rose seven sessions in a row through July 21, hitting new rally highs on July 20 and 21. Fundranker nearly matched the Nasdaq Composite, climbing 10 sessions in a row through July 22, finally hitting a new rally high that day.

As of July 22, the Nasdaq Composite (as measured by Fidelity’s Nasdaq Composite Index Fund), the S&P 500 (as measured by Fidelity’s Spartan 500 Index Fund), and Fundranker’s Top Eight Model Portfolio are up 52.1%, 42.3%, and 35.2%, respectively, since the bear market lows of March 9.

Investors apparently are pleased with second quarter earnings and future outlooks companies have been reporting recently. Although economic indicators are mixed at best, the stock market seems to be fulfilling its roll as an advance indicator of economic recovery.

Posted 7/23/09 11:15am ET in Economy, Fundranker, Market | Permalink | Comments (0)

Rally Pauses Four Weeks

The spring rally we enjoyed has gone on pause the last four weeks. After hitting rally highs during the week ended June 12, 2009, the Nasdaq Composite and Fundranker fell three of the last four weeks, and the S&P 500 fell all four weeks. As of July 10, the Nasdaq Composite (as measured by Fidelity’s Nasdaq Composite Index Fund), the S&P 500 (as measured by Fidelity’s Spartan 500 Index Fund), and Fundranker’s Top Eight Model Portfolio are still up 38.6%, 31.0%, and 20.1%, respectively, for the rally since March 9, but they are down 5.5%, 7.0%, and 9.6%, respectively, since June 12.

Second quarter earnings season is upon us and quickly will tell us if and how much the economy and individual companies are beginning to recover from the recession. Given the past four weeks action in the stock market, investors clearly want to see some improvement before buying into the rally again. Several key companies will report earnings this week: Yum Brands Inc. (owns KFC, Pizza Hut, Taco Bell), IBM Corp., Marriott International Inc., Harley-Davidson Inc., and Bank of America Corp. Earnings reports from these companies will provide investors with penetrating looks at just how much the economy is beginning to recover.

Posted 7/12/09 11:38am ET in Economy, Fundranker, Market | Permalink | Comments (0)

Rally Falters

The spring rally faltered during the week that ended June 19, the last week of spring, and started summer with a precipitous drop on June 22. Is the rally taking a temporary breather, or are we seeing a more determined correction to the three-month runup we have enjoyed? The Conference Board’s Index of Leading Economic Indicators, which rose in both April and May, shows that the recession is losing steam. Economists predict a gradual recovery beginning later in 2009, so it’s more likely we’re seeing a temporary and healthy hesitation in a continuing market upturn.

The Nasdaq Composite (as measured by Fidelity’s Nasdaq Composite Index Fund), the S&P 500 (as measured by Fidelity’s Spartan 500 Index Fund), and Fundranker’s Top Eight Model Portfolio fell 1.7%, 2.6%, and 4.5%, respectively, for the week that ended June 19. As of June 22, the Nasdaq Composite, the S&P 500, and Fundranker have gained 39.4%, 33.0%, and 20.6%, respectively, from their March 9 lows and are 7.3% higher, 3.2% lower, and 7.9% lower, respectively, than their January 6 highs.

Posted 6/23/09 10:42am ET in Economy, Fundranker, Market | Permalink | Comments (0)

DJIA Changes

The Dow Jones Industrial Average, made up of 30 U.S. industrial stocks chosen by the managing editor of the Wall Street Journal, changed last week. As of Monday, June 8, General Motors Corp., which declared bankruptcy on June 1, and Citigroup Inc. were removed from the average. Travelers Companies Inc. replaced Citigroup and Cisco Systems Inc. replaced General Motors.

General Motors had to be replaced because a company in bankruptcy is on a different playing field than competitive businesses, and it can no longer contribute to an index that tries to reflect the market as a whole. Although Citigroup is not in bankruptcy, it also was replaced because it is headed into a period of significant restructuring, and the Wall Street Journal felt its stock would reflect that process more than it would the banking sector.

The decision on which companies should replace General Motors and Citigroup was tied to the last time a DJIA component was changed. AIG was replaced by Kraft Foods last September, so Travelers Companies was chosen to renew an insurance presence in the DJIA. Also because of the earlier addition of Kraft Foods, the Wall Street Journal did not need another consumer goods company to replace General Motors. They chose Cisco Systems because they felt its products were relevant to economic and cultural adjustment to the digital age, much as automobiles influenced economic and social changes in the 20th century.

Posted 6/16/09 9:41am ET in Economy, Market | Permalink | Comments (0)

Wall of Worry

It’s said that bull markets like to climb a wall of worry. Although investor and consumer sentiment gauges have risen lately, they are still low by historical standards. Recent unemployment, manufacturing, retail, and other economic data paint varying pictures of the economy, some positive, some negative. Banks are raising capital and want to return TARP money to the government, but General Moters and Chrysler are both in bankruptcy and face major restructuring to remain viable businesses. So is there enough worry to propel this rally further? Shall we worry even about the amount of worry? Do we dare call this rally a fledging bull market?

Posted 6/9/09 10:02am ET in Economy, Market | Permalink | Comments (0)

Rally Continues

The spring rally had nine straight weeks of new highs, fell during the week ended May 15, 2009, and rose (but not to a new high) for the week ended May 22. The Nasdaq Composite made a new rally high as of May 29, and the S&P 500 nearly did. Fundranker’s Top Eight Model Portfolio, the S&P 500 (as measured by Fidelity’s Spartan 500 Index Fund), and the Nasdaq Composite (as measured by Fidelity’s Nasdaq Composite Index Fund) have gained 26.17%, 36.63%, and 40.04%, respectively, since their recent March 9 lows. As of May 29, the Nasdaq Composite is nearly 8% higher than its January 6 high, the S&P 500 is within 1% percent of its January 6 high, and Fundranker is within 4% of its January 6 high.

The stock market shot up in the last half hour on Friday, May 29, and, despite continuing financial turbulance, such as General Motors declaring bankruptcy this morning, June 1, stock market futures are indicating that surge may continue today. It seems that this rally has staying power. Maybe it truly is an advance indicator that the economy is beginning to recover. See our Spring Rally post for earlier information on this rally.

Posted 6/1/09 9:30am ET in Economy, Fundranker, Market | Permalink | Comments (0)

Spring Rally

After nine straight weeks of new highs and after weathering the recent deluge of earnings reports, the spring market rally finally took a break during the week ended May 15, 2009. Fundranker’s Top Eight Model Portfolio, the S&P 500 (as measured by Fidelity’s Spartan 500 Index Fund), and the Nasdaq Composite (as measured by Fidelity’s Nasdaq Composite Index Fund) fell 5.65%, 4.87%, and 3.38%, respectively, for the week but still have gained 18.36%, 31.12%, and 32.48%, respectively, since their recent March 9 lows. As of May 15, the Nasdaq Composite is nearly 2% higher than its January 6 high, the S&P 500 is within 5% percent of its January 6 high, and Fundranker is within 10% of its January 6 high.

Despite this week’s setback, has the market turned the corner? The stock market generally begins a sustained recovery several months before it becomes apparent that the economy is recovering from a recession, although it also can stage bear market rallies and still hit new lows if true recovery doesn’t occur. Are tantalizing hints of economic recovery, such as improvements in bank-to-bank short-term lending, pending home sales, construction spending, existing home inventories, and consumer spending holding out real or false hope? Stay tuned to see if this spring rally regains its footing. See our March/April Rally and New Market Rally posts for earlier information on this rally.

Posted 5/17/09 11:59am ET in Economy, Fundranker, Market | Permalink | Comments (0)

Twelve-Year Lows

With the market close on February 23, the Dow Jones Industrial Average and the S&P 500 hit lows they haven’t seen since early 1997. Both indexes are about 50% lower than their October, 2007, highs. Fundranker bucked the trend when this bear market first started in November, 2007, and made new highs in May and June, 2008. It has fallen dramatically over the last eight months, but it has not been set back nearly as far as the DJIA and S&P 500. With the February 23 close, Fundranker hit lows it last saw in late 2004.

The markets are weighing in extremely negatively on the latest developments for fixing our financial system and stimulating our economy. Business, investor, and consumer confidence continue to fall to new lows. The picture couldn’t look much bleaker, and consensus on this by all the players couldn’t be much stronger. Contrarians believe that when everyone thinks alike, everyone is likely to be wrong. Let’s hope the contrarians are right. Also, remember that the stock market is an advance indicator for shifts in the economy. Perhaps this new low will be the turning point for the next bull market to begin.

Posted 2/24/09 11:21am ET in Economy, Fundranker, Market | Permalink | Comments (0)

Details Lacking

Treasury Secretary Tim Geithner’s new plan to rescue our ailing financial system, announced February 10, had some good points and some bad points. On the good side, it seems that the Obama administration and the Treasury Department really get the magnitude of the problem and are willing to put a ton of money to work solving it. He outlined a plan to inject as much as $2.5 trillion into our financial system. Part of that amount, $350 billion, comes from the remaining half of the Troubled Asset Relief Program, enacted by Congress and signed into law last year by President Bush. Geithner's plan stretches that money with funds from the Federal Reserve, using its ability to print money, but it also relies heavily on enticing private investors to step in with their money.

On the bad side, the Dow Jones Industrial Average fell nearly 400 points on February 10, making it clear that Wall Street received Geithner’s plan poorly, to say the least. Although Geithner strongly criticized the Bush administration for not acting boldly and quickly enough, he did not specify the details of his plan that would differentiate it from the plan implemented by President Bush and Treasury Secretary Henry Paulson last year. Leaving those details for another day negated Geithner's emphasis on bold and quick action, and the markets suffered dramatically. We can only hope that those details will come forth soon and that the program will be successful.

Posted 2/11/09 9:40am ET in Economy | Permalink | Comments (0)

Global Recession

The bad news just keeps on coming. The World Bank released a forecast this week saying that the world is on the brink of a rare global recession. It predicts that the global economy will eke out growth of 0.9% in 2009, down from 2.5% this year and 4% in 2006, but that world trade will fall next year for the first time since 1982. Deutsche Bank is even more pessimistic, forecasting global growth of only 0.2%, even less than the 0.3% recorded in 1982. Justin Lin, chief economist at the World Bank, summarized as follows, “We know that the financial crisis now is likely to be the worst since the 1930s.” The World Bank report gives hope that a recovery will begin to show results with 3% growth for the global economy in 2010.

Marc Ambinder, in his politics blog at the Atlantic magazine, recently wrote that it seems that Barack Obama’s economics transition team is very worried that the economy will get a lot worse before it gets better, as in double digit unemployment, huge declines in aggregate demand, and significant, persistent deficits. However, he also says that the general level of concern among Obama advisers and transition staffers is reassuring; that they actually get the magnitude of the problems and are paying attention.

The news these days has been inundating us with bits and pieces of the current bad economic climate. The World Bank and Deutsche Bank forecasts along with articles like Marc Ambinder’s help paint the big picture for us, and a bleak picture it is.

Posted 12/11/08 12:13pm ET in Economy | Permalink | Comments (0)

NBER Recession Declaration

The National Bureau of Economic Research announced on December 1 that our economy entered a recession in December, 2007. This is par for the course for NBER, which in its own words, always waits long enough so that the existence of a recession is not at all in doubt and until it can assign an accurate date. Apparently, NBER is not in the business of calling recessions in a timely fashion; it is only in the business of saying when they begin and end, and it waits until it is absolutely certain to make its announcements. Despite this completely unsurprising announcement coming an entire year after the recession started, there is not much doubt that it contributed to the DJIA’s 678 plunge on December 1. Maybe this final and definitive corroboration of the fact of recession was like the straw that broke the camel’s back.

The NBER is equally careful on saying when recessions end. It did not announce the end date of the last recession (November, 2001) until July 17, 2003, nearly two years later. In fact, the NBER did not announce the beginning of the last recession (March, 2001) until November 26, 2001, which turned out to be the month it ended.

It seems pretty safe to say that is not the case this time, as there is little doubt we are still in recession and will be into 2009, if not longer. It remains to be seen how huge economic bailout and stimulus plans, both recent and soon to come, will impact the eventual end date of this recession. The only safe bet now is that this recession will be over long before the NBER tells us so.

Posted 12/7/08 7:45pm ET in Economy | Permalink | Comments (0)

Retail Sales

The Christmas shopping season is not looking so good this year, or is it? On one hand, retailers cut prices enough to get lots of shoppers out the day after Thanksgiving, nicknamed Black Friday because it traditionally is when large retailers finally have enough sales to go from operating in the red to operating in the black for the year. But the deep discounts needed to get shoppers out combined with Thanksgiving falling late in November have really cut into profits this year. For example, Abercrombie & Fitch’s November same store sales were down 28%, Kohl’s were down 17%, Target’s were down 10.4%, and Costco’s were down 5%. Wal-Mart stood out with November same store sales that increased 3.4%. Same store sales declined an average of 2.5% for 40 retailers that reported on Thursday, according to TNS Retail Forward, a market research and consulting firm. A year ago, the same retailers reported same store sales had increased an average 4.3% from 2006.

But take a look at how Select Retailing has performed in December, gaining 6.45% in the first five trading days this month, more than any other Select fund. The stock market is usually an advance indicator for the economy. Is Select Retailing’s gain just an anomaly, or is the market trying to tell us something about retail sales?

Posted 12/5/08 9:35pm ET in Economy | Permalink | Comments (0)

Two Opinions

Two opinion pieces in the October 9 NY Times point out both cause to worry about the financial crisis and reasons not to worry too much.

Paul Krugman, NY Times Op-Ed columnist and professor of economics and international affairs at Princeton University, calls this the moment of truth. He feels that the United States and European Union responses to the crisis have been woefully inadequate. Finally, though, the British government on Wednesday announced a plan to inject massive new capital into banks and provide extensive guarantees for financial transactions between banks, and now U.S. Treasury officials say they plan to do something similar, which Congress allowed in the rescue package, even though, until a few days ago, the U.S. Treasury remained resolutely opposed to it. He questions whether these moves are too little, too late, but hopes for a credible announcement this weekend of a new financial rescue plan involving not just the United States but all the major players. Because top financial officials from the major advanced nations are meeting today and the annual International Monetary Fund/World Bank meeting takes place over this weekend, Krugman says this is a golden opportunity for a new global rescue plan to be put in place.

Casey B. Mulligan, professor of economics at University of Chicago, makes a very different case. He contends that using some of the $700 billion in the rescue package to buy ownership stakes in banks is based on two faulty assumptions: first, saving America's banks won’t save the the economy, and second, the economy doesn't really need saving—it’s stronger than we think. He says the economy outside the financial sector is healthier than it seems and bases his reasoning on the profitability of non-financial capital, which economists call the marginal product of capital. When this measure of profitability is higher than average, future rates of economic growth also tend to be above average. Since World War II, the marginal product of capital has averaged 7 to 8 percent per year. In 2007 and 2008, when oil prices spiked and housing prices collapsed, the marginal product of capital was 10 percent per year, much higher than average. Mulligan also points out that third-quarter earnings reports from some companies already suggest that America’s non-financial companies are still making plenty of money.

Posted 10/10/08 4:06pm ET in Economy | Permalink | Comments (0)

Reverse Auction

To give maximum flexibility to the U.S. Treasury and the Federal Reserve, the newly legislated financial rescue plan is short on specifics on how the troubled assets will be priced and purchased by the government. A clever reverse auction process is one of the key ideas and deserves serious consideration. In this process, financial firms would offer to sell their troubled assets to the government at prices of their own choosing, and the government would buy the troubled assets in ascending order.

Presumably, the more anxious a financial firm is for help, the more they would lower the price they ask for their troubled assets. To make a reverse auction work most efficiently from the taxpayer viewpoint, the government would need to set up separate reverse auctions for various homogenous groups of assets, specify the total amount of money for each reverse auction, and set a maximum price it would pay for individual assets.

Posted 10/8/08 9:31am ET in Economy | Permalink | Comments (0)

Bailout Defeated

The U.S. House of Representatives rejected the bailout bill in a close vote 228 to 205. Even before the news of the bill’s failure reached Wall Street, the Dow Jones Industrial Average started falling. After the vote, it plunged even faster, falling 777 points for the day, its largest one-day point loss ever. Democrats supported the bill in greater numbers than Republicans, but significant percentages of both parties’ legislators voted against it.

What’s next? Conventional wisdom is that Congress must do something, and do it soon, but there is much concern that this particular bailout package is not necessarily the best plan. The stock market has given its snap opinion on doing nothing. Will Congress regroup and work this through to develop and pass a plan with strong bipartisan support before they adjourn for the year? Perhaps if Congress slows down a little, commits to working on the plan for a week or two weeks, it can give both Wall Street and Main Street more confidence that a viable solution to our financial system problems can be found and implemented.

Posted 9/29/08 7:02pm ET in Economy | Permalink | Comments (0)