Assorted

A Tale of Two Charts

More Reasons Not To Take The Candidates' Budget Proposals Too Seriously

Make Diplomacy, Not War

Anne-Marie Slaughter on China;

One of the best books I read on China was Susan Shirk’s “Fragile Superpower,” which argues that for all its energy and emerging power, China is fragile precisely because its political system is just one layer deep. If the Communist Party were to lose power, there is no back-up in place — only the specter of in-fighting fragmentation, chaos, and even civil war. Which is precisely why the government is so worried to stamp out any spark that could potentially ignite wider unrest.

The fragility extends to the economy. If ordinary Chinese suddenly cannot get jobs, or can’t get jobs that will allow them to put food on the table or gas in their motorbikes in an era of rising food and energy prices, there are no years of experience with the business cycle of expansion and recession to cushion the shock of unemployment and belt-tightening. Our current development has happened over decades, fairly steadily since the Depression, but with plenty of bumps along the way. Those psychological layers, just like the layers of our infrastructure, create resilience and strength.

These Olympics, Americans will compete as hard as we possibly can for the gold. Those of our athletes who lose, however, will know that they or their successors will have the chance to compete again; that the nation’s honor does not rest once and for all on their shoulders. America has hosted the Olympics before and will again.

For China, the veneer is much thinner and the stakes are much higher. Beijing has built fantastic Olympic buildings and will put on a dazzling show to tell all the world that it has resumed its rightful place on the global stage. But for all China’s accomplishments, and they are accomplishments, the architecture, infrastructure, economy and even the political system are only one layer deep.

Assorted

The cost of the prevailing policy framework in finance

A graphical playground

Feldstein's Heresy on Fiscal Policy?

Summers on economic dog days

Hummel on Central Banking

On time management

The crisis: a tale of two monetary policies

Measuring the value of NBA players

How To Talk to a Search Engine

The Street Porter and the Philosopher

Feldstein on Fiscal Policy

Economists predict whether the host country will rule the Beijing Olympics.

10 reasons why mind mapping software should be the foundation of your personal productivity system

Six Rules Doctors Need to Know

The former Fed chairman calls for a new way to deal with a crisis;

Mr Greenspan says a high-level panel of American financial officials should be given broad power to seize any financial institution whose failure threatens the entire economy, bail out its creditors and close it down. “We need laws that specify and limit the conditions for bail-outs” and do so transparently with taxpayers’ money, “rather than circuitously through the central bank, as was done during the blow-up of Bear Stearns,” he writes in “The Age of Turbulence”. (Penguin is to release the paperback on September 9th.)

If that means the government has to wade in, so be it. “Our country has long since abandoned the notion that we should leave crises to be resolved solely by the marketplace,” he says. “The critical need…is to formalise…the procedures improvised in the case of Bear Stearns. This should ensure that in the future, government financial assistance to lending institutions does not impact the Federal Reserve’s balance-sheet and monetary policy.”

Accounting rules for public duty and private failure

Confessions of a risk manager

A housing slump helped cause the credit crisis. But its effect on spending may have been exaggerated

An OECD study in 2004 put the marginal propensity to spend out of financial wealth at between 0.01 and 0.07 for rich countries: that is, if wealth rises by $1, spending rises by between one and seven cents. The Federal Reserve’s model puts the wealth effect in America at 0.0375.

The Fed’s model assumes the same wealth effect for housing as for financial assets. From the perspective of lifetime income, a dollar of housing wealth is the same as a dollar of stockmarket wealth. But some argue that the negative wealth effect from falling home values may be larger than for other assets. One reason is that housing wealth is spread more evenly than financial wealth, which is concentrated among rich households whose spending is less sensitive to the changing tides. Another is that housing slumps are rarer than stockmarket downturns. Consumers are likely to consider a fall in house values as a durable change in wealth and may cut spending more sharply in response.

Which CEO Characteristics and Abilities Matter?

Macro-Modelling for Poor Countries- case of Mali

Going over Mali's Poverty Reduction Strategy Paper's I came over the following under 'Capacity building in macro-economic modelling and analysis';

-Preparation of micro-simulation model (MEGC) for analysis of impacts of exogenous shocks and policy measures on poverty and income distribution (World Bank financing)

-Macro-sectoral forecasts model, as tool for analysis of growth-oriented sectors.

For Comment: How much economic modelling is required before you can reduce poverty?

Related;

The country's budget planning gets an 'A' according to one rating;

Mali’s MTEF had the top “A” rating in its 2004 HIPC tracking exercise (question 7). However, a more recent assessment finds inadequate integration among the many tools developed to support reforms, including the MTEF, the sector MTEFs, the macroeconomic framework, the new budget nomenclatures, and the multi-year investment program. Timetables of the different exercises aren’t properly synchronized. Sector MTEFs are prepared mainly to satisfy donors, and are separate from the program budget process.

Promises from the latest Letter of Intent;

Mali is vulnerable to external or natural exogenous shocks. Without the fiscal space to respond rapidly to ad hoc demands, there is a risk that macroeconomic stability and the development program will be undermined. The Government considers that in the mediumterm, a zero basic balance is the most appropriate budget target for responding to emergent needs. In 2008 the deficit in the basic balance should be 1.9 percent of GDP, compared with 1.1 percent in 2007, reflecting the budgetary impact of the terms of trade. The aim is to reduce the deficit to 1 percent of GDP in 2009 and achieve balance in 2010. In order to respect the programming of expenditure to reduce poverty, measures have been implemented to correct the downward trend in the tax to GDP ratio observed since 2005....

Improving the quality of public spending remains a top priority. In coordination with our external partners, measures have been included in the Government Action Program for Improving and Modernizing Public Finance (PAGAM-GFP) to respond, among other things, to the conclusions of the Public Expenditure and Financial Accountability (PEFA) exercise. An action plan incorporating PEFA measures has been prepared for 2008. Efforts are under way to pursue implementation of the PAGAM-GFP/PEFA action plan, in particular by completing the connection of authorizing officers (ministries, institutions, regions) to the computerized expenditure system; improving the execution rate of programs by devolving parts of the Procurement Office to the regions; reviewing the Procurement Code; shifting gradually all donors from projects to budget support; and putting in place an economic and financial analysis unit to help strengthen the capacities of the Finance Committee of the National Assembly.

Mali - Public expenditure review

Mali- Creating Fiscal Space
Public Expenditure Management in Francophone Africa: A Cross-Country Analysis

Development of the cities of Mali : Challenges and priorities

Mali budget calendar

• Ministry review of budget-programmes
• Preparation of macro-fiscal framework as part of the Medium Term Budget Framework (MTBF)
• Preparation of Budget Circular (including ceilings and donors disbursement projections)
• Preparation by sector ministries of draft annual budget estimates, including the detailed budget-programmes, on the basis of sector expenditure ceilings in line with the CBMTMEF review of ministries’ budget requests, including the budget-programmes
• Budget negotiations and finalisation of draft Budget d’Etat
• Adoption of draft Budget by Council of Ministers
• Government submits the draft Budget d’Etat to the National Assembly
• Examination and adoption of the Loi de Finances by the National Assembly

Doing business 2008 Mali

Austerity for Saudi Kings- can it work?

Saudi Arabia’s central bank governor on Tuesday called on the government to fight inflation by curbing public expenditure, warning that economic policies in the kingdom faced “a critical situation”.

The call by Hamad al-Sayari followed a government announcement that it would invest in agricultural and livestock projects in foreign countries to ensure food security and control commodity prices....

Saudi Arabia’s oil-fuelled boom is producing massive investment in infrastructure projects but is also leading to growing social pressure as inflation spirals, reaching 9.6 per cent in March year on year. Although lower than in Qatar and the United Arab Emirates, the inflation rate is tormenting a country accustomed to near zero inflation.

Insisting that inflation is driven by domestic factors – mainly housing and foodstuffs – the central bank has resisted calls to drop the riyal’s peg to the dollar, thus limiting its ability to use monetary policy.

“Powerful and contradictory factors put economic policymakers before difficult choices,” said Mr Sayari at a Euromoney conference, pointing to the need to promote economic growth but also the burden inflation was putting on low-income families.

“The Saudi Arabian Monetary Agency [the central bank] has taken steps to reduce domestic liquidity by raising the statutory reserve requirement several times. Given the dominance of fiscal policies on the economy, it is necessary to reprioritise spending and programme it to fit the absorptive capacity of the national economy,” Mr Sayari added.

-Call to Saudis to curb spending

Related;

A Royal Order was issued on 28/11/1428H (8/12/2007) granting a subsidy of SR1,000 per ton on imported rice, and increasing the flat subsidy on baby milk from SR2 to SR12 per kilo.

Assorted on Government Budgets

Earmarks 101

Iris Lav, tax policy specialist at the Center on Budget and Policy Priorities, talks with Bloomberg's Tom Keene from Washington about state budget deficits in 2009 and the impact of a U.S. slowdown.

World Bank writer on IMF blog

Minding the Gaps: Integrating Poverty Reduction Strategies and Budgets for Domestic Accountability

Assorted Pakistan

Demand Analysis For Tax Reform In Pakistan
Angus Deaton and F. Grimard

Abstract: Pakistan, like many LDCs, derives most of government revenue from indirect taxation. However, the system of taxes and subsidies has grown up piecemeal over the years. Previous exercises in price reform for Pakistan have been forced to make very restrictive assumptions about consumer preferences, and have typically used demand systems that prejudge what are the desirable directions of price reform. In this paper, the methodology of Deaton (1988, 1991) is extended and applied to the 1984-85 Household Income and Expenditure Survey. A theory of quality variation based on separable preferences is developed, and the implications for welfare and empirical analysis laid out. The prices of oils and fats and of sugar do not vary very much in the survey data, and the symmetry and homogeneity restrictions from the theory play an important part in obtaining sharp estimates of own and cross-price elasticities. The parameter estimates suggest that there are significant cross-price elasticities between the high-calorie foods and the presence of these substitution patterns means that the effects of potential price reforms are quite different from those that would be estimated using the traditional assumptions. Based on demand patterns alone, it would be desirable to raise government revenue by raising the consumer price of rice. However, in Pakistan it is not generally possible to decouple the producer and consumer prices of rice.

Zakat and Inequality: Some Evidence from Pakistan

This paper presents empirical evidence on the extent to which zakat---a form of religiously-mandated charity under Islam---achieves its intended objective in Pakistan. Detailed income and expenditure data from Pakistan's Household Income and Expenditure Survey for 1987-88 are used to construct two income distributions---one containing the distribution of income which would have obtained if relevant forms of charity were not given, and one containing the distribution of income which obtains under a regime in which such charitable giving takes place. Atkinson-Kolm-Sen (AKS) ethical relative indices of income inequality are computed for Pakistan and each of its four provinces, for each of these two income distributions, and are compared over a range of parameter values. Evidence is found that zakat does redistribute from the better off to the worse-off, and so achieves some reduction in measured income inequality in Pakistan. Both intra-province and inter-province components of over-all inequality decline, though the amount of change is generally small. These conclusions are shown to be robust to a wide range of normative values the investigator may select.

An Islamic Perspective on Inequality in Pakistan;

This paper examines the distribution of income in Pakistan, and in each of its four provinces, from an explicit and formal Islamic perspective. A cardinally significant Atkinson--Kolm--Sen relative index of inequality reflecting that perspective is proposed and computed from the full HIES data series for the years 1984-85, 1985-86, 1986-87, and 1987-88. There is evidence of a significant decline in overall inequality in Pakistan from 1984-85 to 1987-88, but the level of inequality remains very high. Inter--province and inter--urban/rural differences in inequality profiles within Pakistan and each of its provinces are found to be generally less significant than intra--province and intra--urban/rural differences.

Assorted on Fiscal

The Fiscal Implications of Climate Change

A New Fiscal Rule: Should Israel go Swiss?

Conditional cash transfers in education : design features, peer and sibling effects evidence from a randomized experiment in Colombia

The effectiveness of boards of directors of state owned enterprises in developing countries

Fiscal Policy: Fully Account for the Budget, Stick to the Budget, and Work with the Other Party

An Official Primer on the US Budget System

Optimal Disaster Insurance

On the Optimal Design of Disaster Insurance in a Federation
by Timothy J. Goodspeed and Andrew F. Haughwout

Abstract: Recent experience with disasters and terrorist attacks in the US indicates that state and local governments rely on the federal sector for support after disasters occur. But these same governments are responsible for investing in infrastructure designed to reduce vulnerability to natural and man-made hazards. This division of responsibilities – regional governments providing protection from disasters and federal government providing insurance against their occurrence – leads to the tension that is at the heart of our analysis. We explore these tensions building on the model of Persson and Tabellini (1996). We show that when the federal government is committed to full insurance against disasters, regions will have incentives to underinvest in costly protective measures. We derive the structure of the optimal second-best insurance system when regional governments choose investment levels non-cooperatively and the central government cannot verify regional investment choices. Surprisingly, second-best transfer levels (and the corresponding regional investment levels) can be greater or less than their first-best counterparts, depending on the relative probability of a disaster. If the probability of a disaster is low, secondbest transfers will be designed to reward regions that succeed in avoiding disasters and punish those that do not, thereby giving regions an incentive to increase investment in protective infrastructure. However, this raises the further question of whether the central government can credibly commit to such a scheme, and we find that ex-post an optimizing central government will decrease transfers if a region provides protective infrastructure that increases its expected future income, generating a soft-budget constraint for regions. This provides an additional incentive for regions to underinvest in protective infrastructure. We discuss these results in light of recent disaster policy outcomes in the US.

Making Indian Bureaucrats happy

India's Pay Commission Report is out;

With poll calculations dominating the UPA government’s agenda, the more than four million-strong central bureaucracy is in for a windfall. The Sixth Pay Commission’s recommendations, given to the finance minister on Monday, could mean a revision in pay and allowances that can range from 40% to 60% if all benefits are taken into account.

The recommendations are likely to be considered soon by the Cabinet. Finance minister P Chidambaram had made necessary elbow room in his Budget speech last month, while the railway budget included a provision for implementation of the report presented by Justice B N Srikrishna.

The report is expected to be welcomed by the babus as well as defence and paramilitary employees. As reported earlier by TOI, the highest pay in the government has been pegged at Rs 90,000 for the cabinet secretary, while a secretary would draw Rs 80,000 a month. The three service chiefs would get the same salary as the cabinet secretary if the recommendations are accepted.

Although the commission claimed a 1:12 lowest-to-highest pay ratio, the biggest beneficiaries would be officers of the level of joint secretary and above, giving the recommendations a pro-IAS tilt. The benefits for other central service officers, especially at director level, are not so attractive.

The government would be pleased to offer benefits to the vast bureaucracy, seen as an important constituency. Just as farmers have a loan waiver and the middle class higher tax exemptions, the Pay Commission report is a sop for government servants. It is likely to be extended by state governments to their employees as well. Haryana chief minister Bhupinder Hooda had already promised to do so.

Ajay Shah has more.

I don't think anyone understands the impact of this on the consolidated expenditure of centre, states, local government, autonomous bodies, grant-in-aid institutions, etc.

Related;
Battling the babu raj

Including railway workers, who comprise one of the world's biggest payrolls, India's central government employs around 3m civil servants and the states another 7m. They include vast armies of paper-shuffling peons. The number of senior “Category One” bureaucrats—broadly speaking, “decision-makers”, according to Satyananda Mishra, boss of the Department of Personnel and Training (DPT), which runs the civil service—is only 80,000. And the elite IAS, which mostly runs India, numbers a mere 5,600.

Its ranks include almost all the collectors of India's 604 districts, and over 60% of senior officials and managers working in government ministries and publicly owned corporations. (The rest are mostly police and railway officers.) As the successor to the colonial Indian Civil Service—the “steel frame” of British rule, according to one prime minister, Lloyd George—the IAS was designed to perform the same unifying function. It is a national and permanent service, theoretically apolitical, and recruited and trained at the centre. Yet its members serve mostly in the states—the main exception being 600 of the most senior babus who, in Whitehall fashion, advise ministers and draft policy in Delhi.

Across India, the IAS commands both reverence and contempt. Male recruits are among India's most marriageable: more suitable, it is said, than the elite geeks of the country's booming computer-services industry. Indeed, India's recent run of 8% economic growth has if anything increased their prestige, by creating more senior positions for which IAS officers are required. This year 140 people will be recruited into the IAS from around 200,000 applicants, one of the biggest intakes ever.

Yet the steel frame has now become a serious bind on badly needed reforms. As the author of a typical recent IAS history and former mandarin, Sanjoy Bagchi, puts it: “Overwhelmed by the constant feed of adulatory ambrosia, the maturing entrant tends to lose his head and balance. The diffident youngster of early idealistic years, in course of time, is transformed into an arrogant senior fond of throwing his weight around; he becomes a conceited prig.”

What's holding India back?

Write-offs as high as an elephant's eye

Econ Talks

"Health Care: Capturing the Opportunity in the Nation's Core Fiscal Challenge"
Peter Orszag, Director, U.S. Congressional Budget Office

"Diminishing Returns: Income Inequality in the United States"
Panelists: Alan Krueger, the Bendheim Professor of Economics and Public Policy and Director of the Survey Research Center at the Woodrow Wilson School; Douglas Massey, the Henry G. Bryant Professor of Sociology and Public Affairs at the School; and Viviana Zelizer, the Lloyd Cotsen '50 Professor of Sociology at Princeton.

Viviana Zelizer on Money and Intimacy

From Sub-Prime to Prime-Time -- A Debate On the Current Financial Crisis
Guillermo Calvo, Professor of Economics, International and Public Affairs, Columbia University; former Chief Economist, Inter-American Development Bank.
- Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia University.
- Richard Clarida, C. Lowell Harriss Professor of Economics and International Affairs, Columbia University; former Assistant Secretary for Economic Policy, US Treasury, 2001-2003.
- Vincent Reinhart, Resident Scholar, American Enterprise Institute, Washington, DC; former Director of the Division of Monetary Affairs, and Secretary and Economist of the Federal Open Market Committee.

The Three Trillion Dollar War

For soft landing try fiscal

Achieving a Soft Landing: The Role of Fiscal Policy

Summary: This paper utilizes an open-economy New Keynesian overlapping generations model to assess the extent to which fiscal policy, along side an inflation-forecast-based monetary policy, could enhance macroeconomic stability in Colombia. The model simulations indicate that, in addition to stabilizing output and inflation, a stronger response of the fiscal balance to excess tax revenue would reduce the burden on the central bank of adjusting interest rates, lessen the associated degree of exchange rate volatility, and contribute to a more stable external current account balance. The analysis also assesses how the success of fiscal policy in enhancing macroeconomic stability depends on the type of shock, the response of monetary policy, and the length of fiscal policy implementation lags.

Paul Volcker the practical monetarist

FT coverage of the Volcker interview;

He told CBS Charlie Rose show: “We have seen the Federal Reserve take more extreme measures in some respects than any that have been taken in the past to deal with a financial crisis.”

He said the decision to lend cash to Bear Stearns and make emergency fin-ance available to other primary dealers was “understandable” but raised “real questions” as to the appropriate division of labour between US authorities.

The former Fed chief said the US central bank had not been thought of as a place “where you put in bad assets, possibly bad assets” – an apparent reference to the collateral backing the $30bn credit line extended by the Fed as part of the Bear rescue takeover deal.

“At some point the government, in my view, ought to be taking responsibility for that kind of action, not the Federal Reserve,” Mr Volcker said.

He added that the Fed’s latest move “stretches their authority to the limit”. The problem of what to do with bad housing loans was “basically a governmental responsibility”.

He urged the government to channel funds into the market through Fannie Mae and Freddie Mac, the government-sponsored agencies – possibly by activating a longstanding Treasury credit line to these institutions.

Echoing the message from the Fed this week, which cut interest rates by less than the market had expected and highlighted concern about inflation, Mr Volcker said “there are limits to how much you can reduce interest rates”.

He warned that the threat of resurgent inflation was “lurking not very far in the background”. That would be “the ultimate destructive result of this”, he said. “We just must not let that happen.”

The former Fed chief also said the administration’s strong dollar rhetoric had “become meaningless”.

He said a weak dollar allowed the US to increase exports and reduce its reliance on foreign savings but “begins to raise questions” as to its role as a world currency.

In addition to above Volcker raised the issue compensation packages of investment bankers that may be providing incentives to take greater risks.

Related;
Former Fed chair Volcker: financial crisis not over

The realignment of the regulatory powers

Second, the more commitments made by the Fed, the more we lose the (quasi) independence of our central bank; for a large commitment Treasury sign-off is needed. The realignment of the regulatory universe will eventually emerge as a big story from the current crisis, though it is hardly commanding much attention right now.

How to deal with banking crises;

One lesson is that trouble is all too common. Most members of the IMF have undergone at least some distress since the late 1970s. Crises in poorer countries tend to be deeper and more costly, often because they are twinned with collapsing currencies. According to a 1996 survey of insolvencies by economists at the World Bank, the bail-out of Argentina's banking system in the early 1980s cost a stunning 55% of GDP to fix.

The rich world's banking troubles have not been cheap either. The bill for bolstering Finland's banks in the early 1990s came to 8% of GDP; Sweden's bail-out was scarcely less dear. America spent more than 3% of GDP cleaning up the savings-and-loan crisis, its priciest to date. That suggests that the possible cost of today's troubles, though alarming, is not off the charts. The best, though still highly uncertain, estimate of prospective lending losses is around $1.1 billion, less than half of which would be borne in America by banks, investors and in forgone taxes: $460 billion is equivalent to about 3% of last year's GDP.

History shows wide-ranging reasons for recessions

How Paul Volcker became a practical monetarist;

It always seemed to me that there is a kind of commonsense view that inflation is too much money chasing too few goods. You could oversimplify it and say that inflation is just a monetary phenomenon. There are decades, hundreds of years, of economic thinking relating the money supply to inflation, and people to some extent have that in their bones. So I think we could explain what we had to do to stop inflation better that way than simply by saying that we've got to raise interest rates. It was also true that we had no other good benchmark for how much to raise interest rates in the midst of a volatile inflationary situation.

At least as important was the idea to discipline ourselves. People in the Federal Reserve don't like to raise interest rates. So the danger is you're always too little too late. I think that would apply to the current situation [April 2000]. So, when inflation really had the upper hand, it was, I think, very important to put something out there so you could discipline yourself. For that kind of a commitment, you've got to know what's at stake, and it does make some broad sense if you have that much inflation [pp. 178-179].

What really propelled me to make the change was when we raised the discount rate for the second time, when I was first down there. The vote was 4-3. I thought it was a reasonably strong move and we'd get a favorable reaction in the market, but we didn't. The response was, "Well, gee, the Federal Reserve is behind the curve anyway, the vote was 4-3, and that's the last increase of the discount rate we'll see." So the market reacted very badly, which surprised me. I guess I was a little naive. I remember very clearly, I didn't bend over backwards to try to twist the arms of the three people who voted the other way. I knew I had four votes. If we had to increase the discount rate again, we'd have another 4-3 vote. But that's not the way the market read it. Then I realized that we had this credibility problem worse than I thought. That got me off and really thinking operationally about the other approach [basing policy on target growth for the monetary aggregates]. But when it was sprung on them, everybody was very much in favor, even those who were voting against the increases in interest rates [pp. 178-179].

Fannie and Freddie: The End of the Punishment is Nigh

Cost of insuring bank debt falls after Bear bail-out

The cost of protecting the senior debt of the 25 European banks in the iTraxx Financials index has fallen 44bp this week, or about 28 per cent. It now costs an average of €114,000 per year to insure €10m of the banks' debt against default over five years, €44,000 less than it did on Friday.

Defending Market-Value Accounting

The Prisoner of Wall Street

So central banks, including the Fed, should stand ready to act as market maker of last resort, accepting a wide range of private securities as collateral in repos (or purchasing such securities outright) from a wide range of counterparties at a wide range of maturities. Likewise, individual systemically important financial institutions should have recourse to lender of last resort facilities, including the discount window.

The Fed has recently extended access to its discount window to the 20 (or is that now 19?) primary dealers. Other non-deposit-taking institutions will no doubt be granted the same privilige before long. The restriction of the new PDCF to overnight finance only should also be lifted. The same terms as those available to deposit-taking institutions (up to 90 days) should be available. Provided the collateral is priced appropriately (which means the prompt abandonment of the approach outlined on the Fed’s website that “…the pledged collateral will be valued by the clearing banks used by the primary dealers to access the new facility, based on a range of pricing services.” - an invitation to stuff the Fed with fools’ gold priced as bullion), this will stop the unavoidable and fundamentally warranted solvency problems of a number of households and financial institutions from triggering a system-wide liquidity crisis and a system-wide fundamentally unwarranted solvency problem, and will do so with minimal damage in terms of moral hazard.

Seeing Red at the Fed

Home Sweet Investment

Can’t Grasp Credit Crisis? Join the Club

“If anything goes awry, these dominos fall very fast,” said Charles R. Morris, a former banker who tells the story of the crisis in a new book, “The Trillion Dollar Meltdown.”

This toxic combination — the ubiquity of bad investments and their potential to mushroom — has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm depends largely on other firms having confidence that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio, regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns.

Bear Economists Snipe at Bernanke
But in their most recent economics report released Wednesday — titled “Apart From That, Mrs. Lincoln, How Was the Play?” — Bear Stearns economists detail their sometimes sarcastic critiques of Mr. Bernanke, and lay their firm’s inescapable demise squarely on his shoulders.

Post-Bailout Punditry

Interesting Paper

Monetary and Fiscal Policies in a Sudden Stop: Is Tighter Brighter?

In this paper we ask whether tighter monetary and fiscal policies are the right way to face a sudden stop (a sudden curtailment in capital flows) in a typical emerging economy. We develop exogenous measures of fiscal and monetary policy response and conclude that tighter policies are associated to larger falls in output. The conclusion of the analysis is not so much that macro policies should be relaxed upon a crisis, but that countries should prepare themselves by creating the conditions to be able to act countercyclically upon such events. This entails among other things reducing balance sheet mismatches or strengthening fiscal results during expansions.

Take Credit, Avoid Blame- the politics of budget

A good background for students of government budgeting- see how law makers think of the Nations priorities.


U.S. House of Representatives, Committee on the Budget, grilling Treasury Secretary Henry M. Paulson, Jr., Secretary on the budget (Year 2008 budget)

Two good books;

America's Priorities: How the U.S. Government Raises and Spends $3,000,000,000,000 (Trillion) Per Year
by Charles Konigsberg

The Federal Budget: Politics, Policy, Process
By Allen Schick, Felix LoStracco

Related;
Dr. Allen Schick on Budget Tools and Rules

A Primer on Accrual and Cash Deficits--Understanding Similarities and Differences

The Citizen's Guide to the 2007 Financial Report of the United States Government

Quote of the Day

"The Iraqis have a budget surplus," said U.S. Comptroller General David Walker. "We have a huge budget deficit. . . . One of the questions is who should be paying."


Related;
Iraq: War and Reconstruction

The Challenges to Mauritius

According to IMF;

"The economic recovery is accelerating with strong growth in tourism, construction, finance, and services. Foreign investment is growing rapidly in response to the reform efforts, notably those which have improved the business environment and lowered tax rates. Real economic growth is projected to rise to about 7 percent in 2007/08. Unemployment has been moderating, but inflation remains a concern. Fiscal policy has been tightened as revenues have risen in response to tax reforms and expenditure has been contained. The external current account deficit has widened somewhat on strong foreign investment-stimulated import growth. The institutional framework for monetary policy has been revised to strengthen the focus on reducing inflation. Increased efficiency in the management of public funds is needed to support monetary policy in the face of large capital inflows.

"The challenge is to sustain the reform effort to improve competitiveness and address bottlenecks to economic growth. The budget deficit needs to be reduced further over the medium term to lower public debt and counterbalance the impact of strong foreign capital inflows on aggregate demand. Efforts to improve the effectiveness of social assistance and expand the tax base should be continued to create the fiscal space needed for education and the retraining of the labor force as well as to raise investment spending on much needed infrastructure. Structural reforms, including those to improve labor market flexibility, stimulate greater competition in goods markets, and lower costs of doing business need to be carried forward to improve the supply response to the foreign investment stimulus. Efforts to protect vulnerable groups and ensure that the benefits of economic recovery are widely distributed are also vital.

Related;
The Time is Ripe for Means-Testing

Assorted

"Fisking" Modern Monetarism

Tabulating the Credit Crunch's Effects: One Educated Guess

UK vs US taxes

Did you say “decoupling”?

Real interest rates are now negative

Why public opinion polls are garbage

Separating Good Polls From Bad

What the Unemployment Rate Misses
Unemployment and the Unemployment Rate
Labour isn't working
A very long post about labor force participation that you should read anyway

The Citizen's Guide to the 2007 Financial Report of the United States Government

Institutions and Development: The Second Wave

Fed Officials Downplay TIPS Inflation Signal


CBO analysis of the President’s budget

If the President’s proposals were enacted, the federal government would record deficits of $396 billion in 2008 and $342 billion in 2009. Those deficits would amount to 2.8 percent and 2.3 percent, respectively, of gross domestic product (GDP). By comparison, the deficit in 2007 totaled 1.2 percent of GDP.

McCainomics

McCain's Economy Platform: Big Tax Cuts, With Caveats

More on India's budget

Finance Minister Palaniappan Chidambaram's budget speech on Friday once again reflected the government's mounting concern that a vast majority of Indians are not benefiting from the economic boom. The budget was laced with populism, involving giveaways systematically targeted at major vote banks. Spending hikes were announced in education, health care and a rapidly expanding employment guarantee program. Tax concessions were thrown in to keep the middle class engaged, and the manufacturing sector also got some relief in the form of a 2% reduction in the value-added tax.

But this budget will be most remembered for a massive $15 billion loan waiver that covers a large part of all outstanding farm loans -- and constitutes 3% of the entire banking system's credit portfolio. Apart from being the single biggest write-off in recent memory, this one measure also reveals a lot about the government's current mindset. It shows how eager the government is to reach out to a vote bank of 40 million workers at any economic cost and also demonstrate how keen it is to co-opt the communist parties' slogan of "compassion" towards the poor.

More importantly, the loan waiver suggests that the few reformers at the helm of economic affairs can no longer keep out bad ideas. From the outset of this government's formation in May 2004, it was clear that the main agenda of the reformers in power -- and the finance minister has to count as one of them -- was to prevent spending from spinning out of control rather than to usher in any new reforms. This is partly because of the way the last national election results were interpreted. Just because the then-ruling Bharatiya Janata Party's "India Shining" campaign line didn't work with voters in 2004 -- the first year of a step-up in India's growth trajectory -- the political class impulsively came to the conclusion that economic performance doesn't matter.

The strident call from political quarters following that election was to engage in a tax-and-spend policy mix. Mr. Chidambaram was largely able to keep spending under control by repackaging old plans, giving the impression to his political masters that the government was indulging in pursuing more inclusive growth. Consequently, India's total fiscal deficit continued to narrow to 7% last year, from a peak level of 10% in 2002. Such consolidation was largely achieved by strong revenue growth of 25% over the past four years, running well above the nominal gross domestic product growth of 14%.

But over the past year, fiscal discipline began to show signs of some serious cracking, and the biggest sign of slippage was this Friday's budget. Even though Mr. Chidambaram projected a decline in the central government's headline deficit to less than 3% of GDP, it has become routine in India to fund oil, food and fertilizer subsidies outside of the budget by issuing separate government bonds and not including them in the budget calculations. Subsidies on these items have been rising rapidly due to the sharp increase in international prices. The government has only passed a small part of the price increases to the consumer. By most estimates, the budget deficit would be higher by more than 2% of GDP after incorporating these off-budget subsidies.

The budget deficit is likely to come under further pressure if India's growth rate moderates even slightly in line with global trends. The torrid pace of expansion over the past few years has led to robust corporate profitability and in turn strong revenue growth. Typically, corporate revenues tend to be very sensitive to cyclical changes in GDP growth. Given the prospect of a global slowdown, the finance minister would have served the local economy and finances better by cutting India's corporate tax rate, which at a peak level of nearly 34% is much higher than levels in East Asia.

The economy could have also done with some further supply-side stimulus to ease infrastructure bottlenecks with a cut in customs duties. A spirited supply-side response is the best antidote to stagflation -- the whiff of which is currently in the air across the world. As in many other emerging markets, Indian monetary authorities are more consumed with fighting inflation, leaving the onus of ensuring continued economic momentum to other policy tools.

It would have been helpful to buy some insurance against the souring of global business sentiment caused by all the negative news emanating from the United States. Mr. Chidambaram could have kept alive the animal spirits by announcing further economic liberalization. Interestingly, the finance ministry released its annual economic survey just a day before the budget. The document listed many potential reform measures for the government, ranging from private participation in coal mining to further opening up retail and insurance sectors to foreign investors.

-Budget Binge