Market Talk

You're not the only one worrying, buddy.

So much for all the uncertainty surrounding Ben Bernanke’s re-confirmation.

The White House went on an all-out blitz over the weekend, endorsing the Fed chairman for a second term and pushing for the necessary 60 votes needed in the Senate.

Confirmation, of course, isn’t a certainty. But a recent Dow Jones Newswires survey shows 31 senators were publicly committed to Bernanke whereas 17 were opposed. WSJ has the details:

“He’s going to have bipartisan support in the Senate and I would anticipate he’d be confirmed,” Sen. Mitch McConnell of Kentucky, the Republican leader, said Sunday on NBC’s “Meet the Press.” But he wouldn’t say which way he would vote. The No. 2 Senate Democrat, Dick Durbin of Illinois, also predicted that Mr. Bernanke would prevail.

The debate over a second term for the 56-year-old Mr. Bernanke is eclipsing party affiliations in the Senate, drawing liberals and conservatives into unusual alliances. It has also reinforced the Fed’s weakened standing with the public and Congress, and the threat to its long-cherished posture as independent from elected politicians.

Even though Bernanke likely has enough support for another term, a fresh debate’s brewing in the blogosphere over whether he’s the best man for the job. “I’m agonizing – which isn’t a place I ever expected to be,” Princeton economist Paul Krugman writes at Conscience of a Liberal.

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If Paul Volcker is a winner for his role in influencing President Obama’s proposed bank plans, is Tim Geithner the biggest loser?

It’s certainly hard to ignore Geithner’s role (or lack thereof) in Obama’s press conference yesterday. The President began his speech by thanking Volcker and Bill Donaldson for their advice and influence regarding his new bank regulations, even calling the new policy “The Volcker Rule.”

“That in itself is shocking,” Henry Blodget writes at Clusterstock, as Volcker, a former Fed chairman, is now just an advisor to Obama whereas Geithner is Treasury Secretary.

Even the lineup on stage at yesterday’s press conference was astounding. Volcker stood right by Obama’s side, followed by Barney Frank and then a distant Geithner, who may as well have been caddy-cornered on the side of the stage.

“At the very least, yesterday’s press conference seemed designed to tell America that Tim Geithner has been marginalized, that Obama is now (finally) committed to change,” Blodget says.

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It's okay Ben, just don't tell us you had nothing to do with it.

Ben Bernanke’s speech yesterday is getting a lot of press not for what he said, but for what wasn’t said.

Piggybacking off of Paul’s earlier post, Bernanke was adamant that lax regulation, and not low interest rates, was the main cause of the housing bubble. The comments aren’t surprising, especially coming from a Fed chairman. Still, Princeton economist Paul Krugman says it was a “somewhat odd” speech, as Bernanke should’ve been more forthright about the Fed’s “undoubted failures.”

Bernanke would’ve been better focusing on the Fed’s inability to acknowledge subprime lending risks, Krugman says, as well as recognizing the housing bubble as it was happening in real time.

“And I would add that focusing on unconventional mortgages is awfully 2007,” Krugman notes. “We now know that many perfectly conventional mortgages went bust; we know that commercial real estate was at least as overblown as housing.”

It’s clear the housing bubble was about much more than subprime mortgages, he adds. “Where regulation really needs to focus is on making the financial system less fragile.”

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The decade's data aren't pretty, no matter how you slice them.

It’s been a “lost decade” in more ways than one, and the future doesn’t look much brighter.

Stocks are down in the 2000s and the job market has shrank throughout the decade. In October, private sector companies employed 108.4 million people, which is one million fewer than in October 1999.

“Not since the Labor Department began tracking payroll employment in 1939 has there been such a stretch with no net job gains,” WSJ’s Real Time Economics says. The two recessions as well as the recent burst of productivity growth can be blamed for diminished jobs.

Overall, employment is higher now than a decade ago thanks to the government producing two million additional jobs  during that stretch.

“The labor market would indeed be worse if it weren’t for those two million extra government jobs,” blog says. “But this hardly seems like the path to prosperity.”

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Dubai’s s debt crisis has been the topic du jour as a global selloff followed news that Dubai asked for a “standstill” on its debt payments. WSJ’s Heard on the Street columnist Simon Nixon says the reaction isn’t surprising, considering the Dubai government announced the news ahead of a four-day holiday weekend.

Still, he believes markets are severely over-reacting to the news as there’s Dubai’s problems aren’t large enough in scope to threaten the global financial system. From Nixon:

At this stage, however, the risk of contagion is small. Most at risk would be neighboring Middle Eastern markets where there has been no shortage of similarly reckless spending. Dubai’s neighbors are also among its biggest creditors. But unlike Dubai, the other Gulf states have vast oil wealth, making it unlikely they will lose access to funding.

But so long as central banks continue to pump extraordinary liquidity into the system, the markets should be able to accommodate local shocks. With interest rates low and signs of recovery around the world, that liquidity will continue to find its way into risky assets. The real risk will come in 2010, as the liquidity starts to be withdrawn and the full scale of government deficit problems become apparent. At that point, risk premia may start to rise, leading to higher interest rates and the dreaded “double dip,” forcing a new wave of losses. Dubai has provided a necessary wake-up call to frothy markets currently pricing in a robust recovery. But the greater systemic risks are likely to lie elsewhere.

Still, the cost of insuring Dubai’s debt continues to soar, although Bespoke Investment Group notes the cost hasn’t exceeded full-year highs achieved in February.

The news is getting more attention this time around because it’s an isolated event on the Friday after Thanksgiving, a day in which Wall Street trading is typically thin.

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Full unemployment's just around the bend. But beware, it's much further than it looks.

The downward revision in 3Q GDP isn’t a surprise, but it also shows that anyone expecting a rapid recovery may need to think again.

The government said GDP rose 2.8% in 3Q, down from its initial 3.5% estimate, reflecting a wider trade deficit and lower consumer spending. The growth measure fell 0.7% in 2Q.

Nearly 3% growth is a welcome change from a declining figure, but the Economist’s Free Exchange blog reminds that the economy needs multiple quarters of even more rapid growth to reduce the unemployment rate.

In the two years following the 1982 recession, the economy grew at a more than 5% annual rate, but unemployment still hovered above 7%.

“The key takeaway is that cyclical unemployment is very high, and growth rates are not high enough, at present, to bring unemployment down,” blog says. “That both the Fed and the federal government are sitting on the sidelines is quite troubling.”

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This ought to be big enough, right?

That AIG bailout just keeps coming back to haunt, well, everybody, but lately it’s taking down the folks who engineered it in the first place.

A government audit released earlier this week shows the NY Fed caved in to demands by AIG creditors that they be paid in full for complex and risky securities they insured with AIG. WSJ has the details:

The audit, which was conducted by the special inspector general for the Troubled Asset Relief Program, faulted the New York Fed for not using its leverage as the regulator of some of these banks to get them to accept lower prices for more than $60 billion in credit-market bets, which were tied to souring mortgage-linked securities that had fallen in value.

The banks that were paid off in full included Goldman Sachs Group Inc., Merrill Lynch and large French banks Société Générale and Calyon, the investment bank unit of Credit Agricole Group, which were represented by the French bank regulator in negotiations with the New York Fed last November, the report said.

Not surprisingly, outrage has followed the report.

“There was absolutely no reason to pay 100%,” on the dollar, Yves Smith writes at naked capitalism.

“It’s simply embarrassing and pathetic,” Barry Ritholtz notes at The Big Picture.

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Fed chairman Ben Bernanke can talk all he wants about the strengthening US economy, but nothing can hide the fact that unemployment remains in a dire situation without much hope for a turnaround in the near future.

The notoriously bearish Nouriel Roubini penned a NY Daily News op-ed yesterday cautioning the worst is yet to come on the unemployment front. He expects job losses will continue until the end of 2010 at the earliest, unemployment will peak near 11% and will remain elevated for at least two years.

From Roubini:

In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back.

He says government should pass another round of stimulus that will put people back to work sooner rather than later.

There’s really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation.

Roubini isn’t the only doomsayer who’s predicting the jobs market to get even worse than it already is. Gluskin Sheff chief economist David Rosenberg predicted last week that the unemployment rate could hit as high as 12%-13%. Goldman Sachs chief economist Jan Hatzius has also said the jobless rate could reach 11%.

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It's hard to cheer when we're all looking for work.

If there’s one thing folks should learn from last week’s GDP reading, it’s that a better-than-expected headline number must be taken with a grain of salt.

GDP’s 3.5% rise in 3Q is a welcome stat and is certainly better than a shrinking economy. But it’s still not nearly enough growth to offset the troubled labor market, Paul Krugman writes at Conscience of a Liberal. (Editor’s note: we’ve got Krugman on the brain here today, obviously.)

The unemployment rate currently sits at 9.8% and there’s a good chance it could hit double-digits when the monthly nonfarm payroll data is released Friday. While Wall Street might have already “priced in” double-digit unemployment, it’s a hard to see a real recovery occurring when one out of six Americans are either unemployed or underemployed.

If the economy grows at a similar 3.5% rate over the next eight years, unemployment would likely from 9.8% to a still “uncomfortably high” 6.3%, Krugman says.

“It would take us around a decade to reach more or less full employment,” Krugman says. “We need much faster growth.”

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Okay, 700 words on the economy...and go.

So John and I were tied up the past two weeks writing a special column for the WSJ about earnings, “The Wrap,” which kept us from filing much here. The good news, for you, is that with earnings season largely over, you’ve got us back. The bad news, for us, is we’re not getting our names in the paper anymore.

But, that just gives us more time to catch up with what other folks are saying, and to spend more time fleshing out our thoughts here. And speaking of other folks, yes, they’re competitors, but you can still learn something from reading the New York Times.

While I did not need to Times to tell me it’s time to hit the big, red panic button on the New York Football Giants, I did get something out of Paul Krugman’s column, although I don’t think it’s exactly what he intended for me to get out of it.

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