Sir Mervyn King. Image by Getty.
Welcome to our live blog on Sir Mervyn King’s appearance at the Treasury select committee.
The governor has been called before the committee to field questions on the Monetary Policy Committee’s latest inflation report, which came out earlier this month.
Reporting by Claire Jones. All times are GMT.
17.16 This live blog is now closed.
17.14 Given that the hearing was supposed to be about the MPC’s inflation report, it was ironic that the governor ended up revealing more about what the FPC is likely to recommend in the financial stability report later this week. Read more
One of the biggest concerns at the Federal Reserve and within the Obama administration is the spike in long-term unemployment, which is at its highest levels in the post-second world war period. And there is a vigorous debate over what tools policymakers can and should use to fight it.
Today, the Treasury department issued a potentially encouraging report on the HIRE act, a new law passed in March which gives a payroll tax exemption to companies hiring workers who have been unemployed for more than two months.
Alan Krueger, chief economist at the Treasury, said that his research, based on the labor department’s current population survey, found that from February through May about 4.5m hires were eligible for the tax break, which is undoubtedly an impressive figure. But is there a catch? Read more
Since Monday’s announcement of the Office for Budget Responsibility, it has become apparent that the new fiscal watchdog will enter an academic and policy-making viper’s nest when it produces its first forecasts. On top of some of the OBR’s obvious flaws, George Osborne has given Sir Alan Budd the hospital pass of making an explicit assumption of the fiscal multiplier, something policymakers like to fudge (see below).
Why so? The OBR will produce its first growth and borrowing forecasts a few days before the 22 June Budget. The Treasury’s unit handling the OBR says these forecasts will be on the basis of no policy change from the 29 March Budget.
The forecasts will therefore be the Budget forecasts, adjusted for any fiddling of the figures under Labour, updating for almost three months extra data and, perhaps, including the £6bn spending cuts for 2010-11 to be announced on Monday. I say “perhaps” because these spending cuts are for one year only and will be offset thereafter by tax reductions, so it would be seriously misleading to include them in a forecast alone (improving the outlook for borrowing) without the subsequent and known tax reductions.
Then, the chancellor will make the substantive spending cuts and tax increases he promised in his FT interview. And then the OBR will have to produce a second set of growth and and borrowing forecasts, taking into account the additional fiscal tightening planned by the new Con-Lib coalition government.
Here the OBR will have to make an explicit assumption of the fiscal multiplier – the ultimate effect on the economy of changes to tax or public spending. Its assumption will be easy to derive from the way it changes its growth and borrowing forecast. This will be an extremely political act for the OBR and it had better be ready to put its reputation on the line. It can also be an iterative process – if cutting public spending reduces growth, which in turn cuts tax revenues, borrowing still falls short of the chancellor’s fiscal goals and this requires further cuts in public spending etc.
When you talk to OBR people in the Treasury, they say: “Ah… the second round effects …hmm, we’ll get back to you”. And they don’t. Let’s think through what the outcomes could look like.
In researching an article on the Treasury and its role in deficit cutting, I spoke to some senior officials in the building quite a while before the election. I have just looked back at my notes. One said that cutting borrowing would be a long grind, not something you sort out overnight. It would be hard work and require persistence and confidence, he continued, before stating that most important would be keeping a coalition in favour of consolidation.
If only other Treasury forecasts had been so accurate.
How hard will Chris Dodd, who’s on his way out of the Senate, push for the Shelby rule? It’s not clear. Mr Dodd, like ranking member Richard Shelby, expressed frustration at the end of the hearing that the ‘Volcker’ rules hadn’t been proposed earlier. He wants to pass a bi-partisan bill, he said, and some of the last minute changes made getting Republican support more difficult.
I don’t want to go to the floor of the United States Senate begging for a sixtieth vote. I’m not going to do that.
ORIGINAL POST (from 20:31):
Chris Dodd, chairman of the Senate banking committee, says he ‘strongly’ supports the ‘Volcker’ rules, which would prohibit commercial banks from engaging in proprietary trading.
But (shock of shocks) there was no initial bi-partisan consensus. Richard Shelby, the Republican ranking member, said he’d consider the proposal, but he was “quite disturbed” that the administration had waited so long to introduce it. Read more
Darrell Issa, the ranking Republican member of the House oversight committee who has been spurring on an investigation into the governments role in the AIG ‘backdoor bail-out’, today asked the committee’s chair to subpoena “all relevant documents from the Federal Reserve Board and the Treasury Department” and “obtain information” Ben Bernanke and Hank Paulson, the Treasury secretary at the time of the decisions.
It’s a significant move. Read more
AIG is back on the House’s radar.
Earlier this week, Edolphus Towns, the Chairman of the House oversight committee, said he would subpoena the NY Fed for documents related to AIG counterparty payments and today he said that Tim Geithner had confirmed that he would speak before the committee later this month.
And separately, in a tersely worded response to Spencer Bachus, the Republican Ranking Member on the House Financial Services Committee, Barney Frank, the committee’s Democratic Chairman, said the Fed’s role in the AIG bail-out would be back on his committee’s agenda.
It is not, of course, the idea of looking into Chairman Ben Bernanke’s role that has Mr Frank up in arms. Mr Bernanke was, after all, a Republican appointee, and the decision to bail-out AIG and its counterparties came while Mr Bush was still president. It’s that Mr Bachus is continuing to focus on Tim Geithner, then head of the NY Fed and now Treasury Secretary.
But enough background, here’s the statement: Read more
The Fed paid a record $46.1bn to the US Treasury in 2009, the central bank reported today, after riskier holdings boosted its income 40 per cent to $52.1bn over 2008.
“The significant increase in holdings was primarily due to increased securities holdings as a reseult of the Federal Reserve’s response to the severe economic downturn,” the Fed said in a statement. Read more
The Obama administration today released the long-awaited permanent modification data for the Making Home Affordable loan modification programme. Those who were expecting low rates of permanent modifications weren’t disappointed.
Only 31,382 of the 728,000 loans being modified in the trial phase – less than 5 per cent – have been made permanent. Read more
Alistair Darling’s task in the pre-Budget report was to improve the credibility of Britain’s deficit reduction plans for the public, the markets and for those running monetary policy. I am convinced this report will fail on all counts.
With a couple of hours digging through the numbers, the report strikes me as deeply political and its presentation extremely unhelpful. This is not the way to gain credibility. Why? Read more