Prieur’s readings (September 16, 2009)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

Doug Kass ( Bearish arguments are roaring, September 14, 2009.
In summary, the market has discounted favorable expectations (certainly against forecasts four months ago!) and seems more “certain” of a self-sustaining recovery cycle outcome. Reflecting the gravity and weight of so many inhibiting factors, I see a much broader range of possible outcomes and less certainty than some of the newly printed bullish market participants. The credit expansion of the last several decades has reversed, it will take time to reverse the damage to net worth and confidence, the consumer remains in a fragile state, corporations will make do with more productive but fewer personnel (job growth could continue to disappoint), there are no apparent drivers to replace the role of housing (2002-06) and numerous nontraditional headwinds (most importantly higher marginal tax rates) will have an uncertain impact on aggregate growth.

• Jason Zweig (The Wall Street Journal): Should a shrinking dollar worry you?, September 12, 2009.
Over the course of time, currency fluctuations tend to wash out. And even a long-term decline in the dollar might not be disastrous; since 1950, South Africa has had one of the world’s weakest currencies, but one of the best-performing stock markets. The dollar is falling, but the sky isn’t.

• Martin Wolf (Financial Times): Do not learn wrong lessons from Lehman’s fall, September 15, 2009.
We were not so foolish as to risk a cascading failure of banks. Yet we cannot let stand the doctrine that systemically significant institutions are too big or interconnected to be allowed to fail. No normal profit-seeking business can operate without a credible threat of bankruptcy.

• Niall Ferguson (Financial Times): Why a Lehman deal would not have saved us, September 14.
If only Lehman Brothers had been saved, all would have been for the best in the best of all possible worlds. Actually no. A decision to bail out the bank would almost certainly have had worse consequences than letting Dick Fuld and his company go under.

• Ambrose Evans-Pritchard (Telegraph): US credit shrinks at Great Depression rate prompting fears of double-dip recession, September 14, 2009.
Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.

• Caroline Baum (Bloomberg): Federal spending is naked without the Fed, September 13, 2009.
If it sounds too good to be true, it is. Printing money increases aggregate demand in the short run but leads to higher inflation down the road. Any discussion of fiscal stimulus – whether it works, how big it should be, where it should be targeted – must therefore start and end with monetary policy. That’s what provides the stimulus. It would go a long way toward alleviating the confusion if we stopped referring to bridge building and farm-price supports as stimulus and called them by their proper name: government spending. By that name, it doesn’t smell as sweet.

• Deborah Solomon and Joh Hilsenrath (The Wall Street Journal), No easy exit for government as housing market’s savior, September 16, 2009.
The government’s extraordinary interventions in the economy are the primary reason the housing market is functioning at all, economists say, which makes an exit unlikely any time soon.

• George Magnus (Times Online): It’s time for the G20 to look forward, September 14, 2009. So while the G20 leaders are in Pittsburgh, they should look around the “Steel City” and understand how this fallen industrial star is surviving the recession better than many American cities and is reinventing itself and its labor force in medical science, education services and the green and high-technology sectors. If they really want to “provide a sound economic footing for our citizens and businesses”, the policies of financial repair and healing need to be more assertive and augmented by employment-generative economic programs, and strategies to harness new technologies to drive the next expansion.

Elyse Siegel, Julian Hattem, Jeff Muskus and Jenna Staul (Huffington Post): Priceless – how the Federal Reserve bought the economics profession, September 10, 2009.
The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

• Gideon Rachman (Financial times): China makes gains in its bid to be top dog, September 14, 2009.
In the year since the financial crisis broke, the Chinese government has become more assertive in how it talks to America.

• Simon Parry (Mail Online): Revealed – the ghost fleet of the recession, September 13, 2009.
The biggest and most secretive gathering of ships in maritime history lies at anchor east of Singapore. Never before photographed, it is bigger than the US and British navies combined but has no crew, no cargo and no destination  – and is why your Christmas stocking may be on the light side this year.

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