Financial markets

An event at the Brookings Institution launched a new report, Rethinking Central Banking, by a team of economic eminences including Barry Eichengreen, Raghu Rajan, Eswar Prasad, Carmen Reinhart, Kenneth Rogoff, and others. I’ve only skimmed it so far but the presentation was interesting and the report looks valuable. The basic thesis is that central banking has become a lot more complicated than it used to be, and the “dominant framework guiding central banking practice” therefore needs to change.

Slate’s John Dickerson takes the new Gang of Six plan (whose details are still sketchy) more seriously than TNR’s Jonathan Chait. Dickerson says a small bargain is no easier to get than a grand one, so you might as well be ambitious:

So now that McConnell’s face-saving deal looks as hard to get as the big deal, the big deal is back in play (at least for this sliver of the news cycle). All along the president has been saying that since a small deal was just as hard as a big one, why not go for the big one and at least get the credit? Yes, such a deal would require some kind of creative tax solution that would appeal to the president’s desire for balance. But it would also allow fiscal hawks to point to a big amount of savings as well as cuts in entitlement spending, which they have long sought.

Chait says the House Republicans will simply never agree to it:

In theory, you could image a minority of the House GOP caucus supporting such a plan along with a strong majority of Democrats. But remember that John Boehner needs the support of most House Republicans to keep his job. I suppose it’s possible to imagine a sequence of events in which Boehner supports a Gang of Six-style Grand Bargain, it passes over the objection of most House Republicans, and then Boehner quickly discovers a burning desire to help humanity via a private sector job.

Barring such a scenario, I don’t see how this goes anywhere.

I agree with Chait, mostly. Much as I wish they would, I don’t see how House Republicans can row back from their opposition to any and all revenue increases. But this does not mean that the Gang of Six resurgence is unimportant.

Its real significance–and the reason why Obama supported the new initiative so strongly (without knowing much about what it actually says)–is that it increases the risk to the House Republicans of refusing to agree to any deal. With an authoritative bipartisan proposal back in play, rejecting any and all compromise is a little harder to sustain: the House GOP looks even less reasonable and even more isolated. The political pressure on them to accede to a McConnell-like outcome (which calls for no increase in revenues) thus increases.

In other words, the (apparent) revival of the grand bargain improves the (actual) chances for a small bargain.

 

 

A less than electrifying performance. I understand the difficulties and sympathize. There’s little Obama can do in the short term about the refusal of House Republicans to budge. As long as they are willing to destroy the nation’s credit standing if that is what it takes to win, Obama’s choice essentially boils down to capitulation in the national interest or mutually assured destruction. Even so, the press conference was dispiriting. Obama seemed unusually hesitant and unsure of himself. I’m not sure what he hoped to achieve by it.

Hard to know whether to laugh or cry at the Republican party’s response to Mitch McConnell’s debt-ceiling proposal. One segment of conservative opinion sees it as a shrewd idea, a masterstroke even. Another regards it as a sell-out of historic dimensions. And a third appears to think it is both, and is trying to clarify its position.

Amid disturbing signs that the US recovery has stalled, President Barack Obama took a huge gamble in his approach to the debt-ceiling talks last week. Believing he had an understanding with John Boehner, leader of the Republicans in the House of Representatives, he declared he wanted a $4,000bn “grand bargain” on the budget. Barely a day later, Mr Boehner said the deal was off. By Sunday evening, with talks about to resume at the White House, the president’s gambit appeared to have failed.

With Obama raising the stakes in the game of debt-ceiling brinkmanship–going so far, according to some reports, as to threaten to veto a small-scale stop-gap deal–Bruce Bartlett clarifies some important points in a piece about five debt-ceiling myths. I find it hard to believe that the president really would veto a small bargain, by the way. If he did actually say that, he was bluffing.

Bartlett’s link to Garrett Epps on the 14th Amendment is worth following. I wonder what Treasury lawyers are telling the president about the constitutionality of the debt ceiling.

Update: Here’s what Lawrence Tribe is telling him: the debt ceiling can’t be ignored.

Yesterday I said I’d be surprised if the US agreed to let the number 2 job at the IMF go to a non-US candidate, as recommended by Mohamed El-Erian. Today I ran into Stephan Richter at the Aspen Ideas Festival, and he drew my attention to an interesting possibility, which he wrote up earlier for The Globalist: a co-directorate, with Agustin Carstens as deputy director.

I don’t know whether Carstens would want the job, but the idea does have big advantages both for the US (which would have to agree to it) and for the world order. The US gets a top-class Chicago-trained economist in a key role–a de facto American economist, is how Richter puts it–while retaining a veto over Fund policies through its executive director on the Fund’s board. The rest of the world gets an end to the traditional US-Europe stitch-up, and an excellent official at the top of the IMF.

In backing this notion the US could look selfless while shrewdly advancing its interests.

Disappointing but unsurprising that Christine Lagarde has got the top job at the IMF. I don’t say this because I thought she was a weak candidate or won’t do a good job, By all accounts she is very capable. The sad thing is that even under these extraordinary circumstances, it is business as usual when it comes to running such a critical institution.

If this was not the moment to make a break with the old arrangements, and to declare that these positions are no longer filled according to a system of entitlement, one wonders what it will take — especially when such outstanding alternative candidates (Agustín Carstens, Stan Fischer) were in the running.

Peter Diamond’s decision to withdraw from contention for a seat on the Fed board is a very low moment in US politics. Diamond is an indisputably brilliant economist with no ideological baggage and highly relevant expertise–contrary to what his GOP critics say, and as he explains in his NYT article.  It ought to be shocking, but it no longer is, that a man of his distinction could not get confirmed to the position. At times the US seems a country hell-bent on its own failure.

It’s enough to make Paul Krugman regret the “polarisation of our politics”. Not something you see every day. Or am I misreading him?

The thing is, the Fed was supposed to be above and aside from the partisan brawl. It never was, completely — but that was an ideal to be striven for. No more.

Was that really an ideal to be striven for until just now? On the view that one side in US politics is irredeemably evil and the other basically right about everything–on Krugman’s view, I mean–why would one want the Fed to avoid taking sides? That’s the kind of thing you’d expect a feeble centrist to say. You know the type.

I expect Paul is expressing nostalgia for a long-vanished past. In that case, though, he can hardly criticise the GOP for today’s partisan brawling. That’s what Washington is for nowadays, is it not–a fight to the finish by any means necessary? It is the one thing the two tribes seem to agree about.

God help the country.

 

In Madrid on Monday I moderated a discussion on global finance organized by the Aspen Institute Espana. The speakers were Paul Volcker, Agustin Carstens (head of the central bank of Mexico, and a candidate to succeed Strauss-Kahn at the IMF), and Henrique Meirelles (until recently head of the central bank of Brazil, now in charge of preparations for the Rio Olympics). In due course I might be able to post a link to a recording. Meanwhile, three things struck me as notable.

First, none of the speakers had much time for the idea that Greece’s debt would have to be restructured. Paul Volcker’s impatience with this idea especially surprised me. He is usually willing to be outspoken and has no particular reason (unlike Carstens, for instance, a serving rather than former central bank chief) to avoid controversy and choose his words carefully. He usually says what he means. His point was that a modest restructuring would make no great difference to Greece’s fiscal problem–it has to get to a primary budget surplus regardless–and so was probably not worth the risk. Yes, I suggested, but who said anything about a modest restructuring? An immodest restructuring, together with “internal devaluation” (lower wages) and further fiscal tightening, still seems to me the least bad of the terrible alternatives that Greece and the EU are now contemplating. The central bankers weren’t having it.

Clive Crook’s blog

This blog is no longer updated but it remains open as an archive.

I have been the FT's Washington columnist since April 2007. I moved from Britain to the US in 2005 to write for the Atlantic Monthly and the National Journal after 20 years working at the Economist, most recently as deputy editor. I write mainly about the intersection of politics and economics.

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