(Mostly Window Dressing)

The much ballyhooed stress tests to be given to systemically important banks are mostly window dressing, but could still have serious consequences by giving the regulators an occasion to do whatever they want to do.

I call them window dressing because stress tests using various assumptions, including dire assumptions, have long been a routine bank practice insisted on by the regulators. Moreover, regulators routinely embed themselves inside major banks on an ongoing basis. They pretty much know all there is to know about the condition of the banks they supervise and regulate, including the quality of and the results from the stress tests. If the condition of a major bank deteriorates, the number of examiners present is increased.

Given the routine stress testing already done routinely, the announcement of uniform stress tests has very little meaning, except to buy some time and give the regulators a public "occasion" to take action if they choose to do so. The word "uniform" in a uniform stress test could also turn into something of plausible significance, but only if the regulators wish it so. It is doubtful they will, however, since another term for systemically significant banks is too big to fail.

Making much of new, uniform, stress testing could backfire on the regulators by triggering calls for "transparency" in a practice that has previously been confidential, and for good reason. Opening up a bank's books to the uninitiated could be problematic since everyone knows, in theory, that no bank-even the soundest of banks-can withstand a run.

"Sticks and stones may break my bones, but words will never hurt me."

Not so when the word is nationalization. That word appears to have trimmed a few more percentage points off the stock averages in the past few days.

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In my previous piece I focused on a simple trap that we all fall into when we count what happens (jobs) but forget to count what doesn't happen (other jobs). We forget to net it out.

In this piece, also mercifully short, I hope, I would like to make the case that "job creation" is not a worthy goal of economic policy anyway. Sure, we want jobs for everybody who wants one, but jobs should come as a by-product of producing something or providing a service that is needed. Focusing on the job per se, rather than on what is produced with the job, leads to waste. There is always more work to be done than there are people able and willing to do it. It is the work that should drive the process; not just a job for a job's sake.

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Not Necessarily the Same Thing

Once again I'm going to be brave and state the obvious and run the risk of a "Duh" response.  While my point is embarrassingly obvious, I haven't heard anyone make it during the debate on the recently passed stimulus package.

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"Don't forget, there's a big gladiator show coming up the day after tomorrow. Not the same old fighters either. They've got a fresh shipment in. There's not a slave in that batch. Just wait. There'll be cold steel for the crowd, no quarter and the amphitheatre will end up looking like a slaughterhouse. There's even a girl who fights from a chariot."

Petronius in AD 60
(History Learning Site)

"The wild beast hunts, two a day for five days, are magnificent. There is no denying it. But what pleasure is there in seeing a puny human mangled by a powerful beast or a splendid animal killed with a hunting spear."

Cicero in 50 BC
(History Learning Site)

Do you know how Daniel kept from being eaten when he was thrown into the lions' den?

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Shooting Hogs with a Shotgun

A couple of years ago a friend invited me to go hunting with him on his place. He dropped me off at a likely spot for either wild turkeys or wild hogs. He left me with a shotgun for the turkeys and a rifle for the hogs. Not being experienced in such matters, I was afraid of getting it wrong. I keep mumbling to myself over and over: shotgun for turkeys; rifle for hogs.

The original stimulus package, passed by the House, was huge-do you know that a trillion dollars is a million times a million dollars-yet the spending was so scattered and unfocused that it seemed unlikely to be effective anywhere. It didn't target areas of particular need. It didn't target areas with high concentrations of unemployment. It didn't focus on the housing problem. It didn't focus on "shovel ready" infrastructure projects. Huge and expensive as it was in the aggregate, it was too scattered and unfocused to be effective. They were trying to kill a wild hog with a shotgun.

The president has assumed the role of head cheerleader for the package. He began selling it before it was written, which he apparently left to his party's far left wing. He continues to emphasize the need for speed and denigrates those who question its substance. Debate over content is derided as uncooperative in a national emergency. But some of us believe that content matters.

Over the week-end, they put a little lipstick on the hog, but not enough. As they say, you can put lipstick on a hog, but it's still a hog.

By the way, I got a turkey with the shotgun and a hog with the rifle. The hog went down, lay there for a minute, then jumped up and ran off. We never could find that hog. You don't suppose . . . .

No Silver Lining Here 

Adverse trends in the labor market accelerated in January. Payroll employment declined 598,000, bringing the total decline in the past 13 months to 3.6 million. About half of that total came in the past 3 months.

The unemployment rate, calculated from the separate household survey, rose to 7.6 percent in January-up from 7.2 percent in December and 4.9 percent from a year earlier. The ranks of the unemployed numbered 11.6 million persons in January, up 4.1 million in the past year.

The labor force participation rate declined further to 65.5 percent and the percentage of the population employed declined 0.5 percent in January and is down 2.4 percentage points over the past year.

I find no good news in the overall picture-no silver lining. You may want to look for yourself here.

Chairman Bernanke Told Us So

The December estimates brought inflation down to zero. Well, the CPI actually increased one tenth of one percent from December 2007 to December 2008. That's close enough for government work.  The core CPI increased 1.8 percent over that period. The PPI for finished goods declined 0.9 percent over the past 12 months. Furthermore, the momentum in both consumer and producer prices is strongly down, not up.

These numbers vindicate Chairman Bernanke's priority over the past year of dealing with the financial crisis and expecting it and the inevitable slowdown in the economy to reduce inflation without a tightening of monetary policy, as some economists and policymakers had urged.

Bernanke's battle to thaw the credit markets has not been won yet, but it wouldn't be nearly as close as it is had he tightened monetary policy prematurely because of concern about an inflation that was likely to take care of itself. Whether it was clairvoyance or luck, I'll take it.

Buddy Holly's Plane Crash Stopped the Music 50 Years Ago Today

I paid tribute to Buddy Holly last year; so I'll be brief today. Last year I mentioned my PBS interview with Bob Edwards when he asked me if it was true that I had visited Buddy Holly's grave. I admitted it; so, he then asked me what Buddy Holly ever contributed to the economy. I said Buddy's Rave On would have made a great anthem for the new economy of the late 1990s.

A reader emailed me to suggest another Buddy Holly song for today's economy: Crying, Waiting, Hoping. Yes, precisely. But hopefully, we can Rave On again soon.

Real GDP declined at an annual rate of 3.8 percent in the 4^th quarter. However, that includes additional inventory "investment" worth 1.32 percentage points. Excluding inventory changes, "real final sales" declined at an annual rate of 5.1 percent, the more meaningful number since the inventory building was likely involuntary and doesn't auger well for the current quarter.

Additions and subtractions from growth from the 3^rd to 4^th quarter 2008 were as follows:

Real GDP -3.8 percent (third to fourth quarter)

Consumption (personal)                   -2.47 percentage points
Investment (private domestic)          -1.80 percentage points 
Net exports (goods & services)        +0.09 percentage points
Government spending                      +0.38 percentage points 
                                                     ___________________

                                                     -3.80 percentage points

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