De la bouche du gourou

Nathalie Elgrably-Levy
26 mars 2009

Cela fait déjà quelques semaines que j’ai envie de vous parler de l’Australie, mais ce n’est ni pour ses marsupiaux ni pour son célèbre Opéra. C’est plutôt parce que nous aurions intérêt à tirer quelques enseignements économiques de son histoire.

À l’instar de nombreux pays, l’Australie n’a pas échappé à la Grande Dépression. Mais le défi que cette île du bout du monde devait relever était d’autant plus considérable qu’elle était relativement désavantagée: elle était peu peuplée; son économie, relativement petite, reposait sur l’agriculture et les exportations minières; sa base industrielle était limitée; les investissements manquaient et, pour couronner le tout, les grèves étaient très fréquentes.

Mais, contre vents et marées, l’Australie réussit à se sortir de la Dépression plus rapidement que les États-Unis. Ainsi, en 1932, les taux de chômage aux États-unis et en Australie étaient respectivement de 23,6% et de 23%. En 1938, il atteignait encore 19% chez l’Oncle Sam, mais avait diminué à 8,9% au pays des kangourous.

L’Australie avait-elle accompli cet exploit grâce à un plan de relance encore plus ambitieux que le New Deal? Avait-elle généreusement aidé les entreprises en difficulté? Sa Banque Centrale avait-elle injecté d’importantes quantités de monnaie? Non! Rien de tout cela. Exception faite de dépenses minimes en infrastructures, l’Australie n’avait aucun plan de relance d’inspiration keynésienne, aucun plan de sauvetage, aucun budget de crise.

En revanche, le gouvernement de Canberra adopta le «Premiers’ Plan» dès 1931, par lequel il s’engageait à réduire les dépenses gouvernementales de 20%, y compris les dépenses militaires, à maintenir l’équilibre budgétaire, et à réduire aussi bien les salaires des travailleurs du secteur public que ceux du secteur privé.

Ces mesures, aux antipodes de l’interventionnisme que J. M. Keynes prônait alors, n’étaient pas le produit des délirantes élucubrations du premier ministre australien, James Scullin. Elles n’étaient que la concrétisation des bonnes vieilles théories économiques classiques selon lesquelles, comme l’exige le gros bon sens, un pays doit réduire sa consommation, épargner, investir et être plus productif s’il veut prospérer.

Presque huit décennies plus tard, l’héritage de Keynes domine encore l’économie politique. Faisant fi des enseignements de l’histoire, politiciens et commentateurs restent convaincus de la nécessité de dépenser massivement et de générer un déficit pour stimuler l’économie.

Exception faite du Nouveau-Brunswick qui a récemment annoncé d’importantes compressions de la fonction publique et un allégement du fardeau fiscal des contribuables et des entreprises, le reste du monde semble vouloir imiter, à divers degrés, les initiatives keynésiennes de Washington.

Au Québec, la ministre des Finances, madame Monique Jérôme-Forget, a fait également référence à J.M. Keynes pour justifier son dernier budget. Manifestement, le célèbre économiste britannique est devenu le gourou de la plupart des décideurs publics dont le comportement moutonnier n’a d’égal que leur manque de culture économique.

Pourtant, s’ils se donnaient la peine de se renseigner convenablement, ils apprendraient que les déficits, même s’ils sont suivis d’un retour à l’équilibre budgétaire, ne sont pas une panacée. Bien au contraire! Ils réaliseraient également que la pensée keynésienne qu’ils vénèrent tant a été totalement discréditée entre autres par Friedrich Hayek, récipiendaire du prix Nobel d’économie de 1974.

Mais surtout, ils découvriraient que, dans un article posthume, publié en 1946 dans le Economic Journal, Keynes lui-même admet avoir eu tort de dédaigner la pensée de l’école classique qu’il juge finalement empreinte d’une grande vérité. Ces politiciens qui veulent paraitre instruits en invoquant la pensée de Keynes auraient vraiment intérêt à lire ses écrits plutôt qu’à répéter ce que certains leur soufflent!

Nathalie Elgrably-Lévy est économiste senior à l'Institut économique de Montréal.

* Cette chronique a aussi été publiée dans Le Journal de Québec.

D'Asie, un message libéral

Guy Sorman
24 mars 2009


En ces temps de crise de la pensée autant que de l’économie, qui veut entendre un éloge raisonnable de l’économie de marché et du libre échange devra s’éloigner de l’Europe et partir vers l’Orient. À l’Ouest et à l’Est, les analyses et les comportements se trouvent radicalement contraires. En Europe, l’incertitude politique répond à la récrimination sociale : persuadés d’agir pour le bien commun, les gouvernements de toute appartenance creusent des déficits publics qu’à terme, il faudra bien financer par l’impôt ou par l’inflation. Le bénéfice de ces relances ? Peu démontrable, elles restent, pour l’instant, sans effet concret. Ne serait-ce pas, se demande-t-on en Europe, du capitalisme même dont il conviendrait de se défaire ? Le retour de l’Etat est très à la mode, mais en quoi rétablirait-il la prospérité ? On ne nous le dit pas. Il se crée même – en France il est vrai - des partis Anticapitalistes : ils sont contre mais se gardent de proposer des alternatives. Quant aux grèves rituelles, celles des fonctionnaires en France ou en Italie, on ne voit pas non plus par quel mécanisme, elles adouciraient le sort des chômeurs ?

Passons à l’Est. Au Japon, en Corée, à Taiwan, il m’a été impossible de lire ou d’entendre le moindre débat idéologique sur le capitalisme ou le libre échange. En Asie - à l’exception de la Chine où le socialisme fut importé depuis l’Occident- il n’a jamais existé de tradition autre que celle du marché : en temps de crise ou pas, le capitalisme est vécu en Orient comme étant la forme naturelle de l’économie. « Il nous est arrivé de nationaliser des banques », reconnaît Il Sakong, le chef de la stratégie économique du gouvernement coréen, mais « il est clair chez nous que ces sauvetages sont provisoires ». Il n’appartient pas à l’Etat, dit Il Sakong, de se substituer aux entrepreneurs.

En Corée, l’Etat ne répond-il pas, lui aussi, à la crise par des dépenses publiques ? « La baisse des taux d’intérêt ne suffit plus à stimuler la demande », reconnaît Il Sakong. On distribue donc des fonds directement à la population : mais c’est seulement pour aider les chômeurs et les plus pauvres dans une société où n’a jamais existé d’Etat providence. Ces aides sont destinées à rester ponctuelles et brèves : « Nous ne voulons pas du modèle européen qui démotive l’esprit d’entreprise et installe de la dépendance permanente », conclut Il Sakong. Autre trait, ancré dans la civilisation des lieux : les ouvriers de Hyundai partagent volontairement salaires et temps de travail de manière à ce que nul ne soit licencié.

Au Japon, dont on tend à oublier qu’il reste la deuxième puissance mondiale, la prudence est comparable : Heizo Takenaka, l’économiste le plus réputé du pays, inspirateur de la libéralisation des services publics, quand il fut ministre des Finances au début des années 2000, soutient lui aussi des aides sociales si elles restent ponctuelles ; et il nous met en garde contre la « stimulation ». Ne tombez pas, dit Takenaka, dans « l’erreur japonaise » des années 1990 : au cours de cette « Décade perdue », les gouvernements japonais s’étaient acharnés à relancer l’activité par la dépense publique : il en a résulté dix années de stagnation. La demande publique s’était substituée à l’investissement privé et à l’esprit d’entreprise. La stimulation, dit Heizo Takenaka, n’est acceptable que pour passer un cap difficile ; mais « au-delà de deux ans, il faut arrêter », pour ne pas courir le risque de détruire l’innovation.

Dans cette Asie, qui doit sa fortune à l’exportation, remettrait-on en cause un modèle économique fondé sur le libre échange ? « Ceux qui sont restés à l’écart du libre échange, comme la Corée du Nord ou la Chine de Mao Zedong, » rappelle Ma Ying Jeou, Président de Taiwan, « n’ont connu que la misère ». C’est par plus de libre échange, ajoute Ma, que l’Asie rebondira. À Taipei, Tokyo ou Séoul, on prépare déjà ce rebond : les entreprises qui ne survivent pas à la crise sont « restructurées » avec l’aide de l’Etat, les chômeurs sont assistés provisoirement mais la priorité publique va à l’innovation. Ainsi, au Japon et en Corée, les universités se voient-elles accorder plus d’autonomie, de manière à se rapprocher du modèle américain. « Il nous faut de meilleures universités, pour devenir plus novateurs et plus créatifs sur le marché mondial », commente Ahn Byong-man, le ministre coréen de l’Education, de la Science et de la Technologie. Dans cette même logique, le marché du travail coréen deviendra plus flexible pour faciliter la « destruction créatrice » et attirer les investisseurs étrangers.

La crise incite les dragons d’Asie vers plus de libéralisme. Sans panique, mais avec une seule crainte : le protectionnisme des Etats-Unis ou de l’Europe ou d’interminables stimulations publiques à la Obama qui prolongeraient la récession. Au sommet du G20 à Londres, le 2 avril, espère le Président coréen Lee Myung Bak, l’annonce (en principe acquise) d’un accord de libre échange entre l’Union européenne et la Corée du Sud devrait réveiller l’Occident et bousculer les Etats-Unis : de cette crise, nous dit-on en Asie, on sortira par l’échange, pas par l’étatisme ni le protectionnisme.

Where's The 'Change'?

Lorne Gunter
Monday, March 23, 2009

So much for "change." Will Barack Obama's pledge of "hope" be the next to go? If this week's scandal in the United States over $165-million in retention bonuses paid to executives of the failed American International Group (AIG) insurance company proves anything, it's that politics as usual -- rather than the politics of change--dominates in Washington.

President Obama's promise to bring a new, bipartisan and meritocratic philosophy to government was an illusion. His vow to take money out of policy calculations and replace it with fact and reason was a farce.

Just who was the U. S. Senate's second-largest recipient of donations from AIG in the 2008 election cycle? Why, then-senator Barack Obama of Illinois, with over $100,000 received. And who was number one? Democratic Senator Chris Dodd ($103,000), who, as chairman of the Senate's banking committee, was responsible for inserting an amendment into President Obama's stimulus bill last month exempting all bonuses "executed on or before Feb. 11, 2009."
(John McCain was third on the AIG donations list at $59,000. So it's clear the company was trying to cover itself, no matter who won last fall's presidential race.)

Essentially, the AIG bonuses that have provoked such outrage among ordinary Americans were legal because the White House's own stimulus bill made them so. Only the handful of bonus packages negotiated between companies and their executives in the five weeks since the stimulus bill passed would have been forbidden. And how many of those could there possibly be?
I'm not trying to say none of this is the Republicans' fault, or that all of it can be pinned on the Democrats. My point is simple: No new clean-sweeping broom followed Mr. Obama into office. The same old feather duster that merely redistributes the particles every four or eight years is still in use.

Interestingly, though, the White House has tried to hang Senator Dodd out to dry over the AIG bonuses, and, specifically, the Feb. 11 exemption. But Dodd's original amendment would have given the U. S. Treasury Secretary discretionary authority to roll-back bonuses negotiated -- and even those paid -- since last fall.

According to The Wall Street Journal, the Feb. 11 limit was inserted into the final version under pressure from the Obama administration, which was eager to get bankers to accept money from the President's stimulus package. The White House was afraid bankers would turn down bailouts if they contained too many restrictions on executive compensation, so it pressured members of Congress to insert the bonus-exemption clause.

Also, according to the political donations monitoring site opensecrets.org, many of the biggest recipients of stimulus and bailout cash so far have been among the top-20 donors to Mr. Obama's presidential campaign: Goldman Sachs, Citigroup, J. P. Morgan, Morgan Stanley and others.

Now consider that Mr. Obama won last fall with a lot of help from unions, who mobilized their members to come out and vote for him. In return, President Obama is backing the cynically named Employee Free Choice Act, which permits unions to win certification on job sites without a secret ballot vote by workers. If union organizers can get enough workers to sign certification cards -- something that can easily be achieved through intimidation--no vote need be taken.

And the President has enlisted the voter registration group ACORN to help with the next U. S. census, the results of which determine not only federal funding to cities and counties by population, but also how many congressional districts each state will have and where. This is an interesting choice, considering ACORN was previously mired in controversy for adding people's names to voters' rolls without their knowledge and for allegedly added deceased and imaginary voters.

It is little wonder, then, that many recent opinion polls show Mr. Obama losing the support not just of Republicans, but of independent voters, too. While still over 50%, his approval ratings are flirting with those of George W. Bush at the same early stages of his presidency.

The more thing change ...

lgunter@shaw.ca

George Washington Patrols the Pacific : Anchored by its nuclear-powered carrier, the Seventh Fleet protects global trade.

Winter 2009 vol. 19, no. 1

Guy Sorman
23 mars 2009

On a gorgeous morning this autumn, at Yokosuka, south of Tokyo, I was expecting a huge popular demonstration, maybe even a riot. The U.S. aircraft carrier George Washington was about to enter Yokosuka's harbor, the base of the Seventh Fleet in the Pacific. Never before had a nuclear-powered vessel been based in Japan. It was a clear demonstration of how the U.S. was reinforcing its presence in this part of the world - a danger zone, with China, Korea, Taiwan, and Japan itself, all historical rivals, ranged around it. Japan has a long tradition of pacifist, antinuclear, and anti-American protests, and until now, the only country to have been bombed with nuclear weapons had always opposed hosting nuclear ships.

Yet no riot erupted; in fact, there was no trace of protest. Yokosuka was quiet. The only crowd on hand was on the base: 1,000 Japanese - mostly local dignitaries, politicians, and representatives of the Japanese Navy - joined a group of American officials to attend the majestic and complex maneuver of the George Washington from the high seas to the pier.

Speeches were numerous. The American speakersambassador to Japan J. Thomas Schieffer, Secretary of the Navy Donald Winter, and a number of admiralspredictably lavished praise on U.S.-Japanese friendship and expressed their commitment to peace in the Pacific. The surprise came from the Japanese side. Yokosukas mayor, Ryoichi Kabaya, said that while the Japanese had felt some initial reluctance about hosting a nuclear-powered ship in the port city, they had eventually concluded that the George Washington posed no safety threat. Japan's newly appointed foreign affairs minister, Hirofumi Nakasone, was even more enthusiastic. He declared that no better friends existed on earth than Japan and America and that their alliance was the cornerstone of peace and prosperity in Asia. I wondered if the good feelings hadn’t received a boost from the recent rekindling of the North Korean nuclear program.

The George Washington eventually reached the pier. Following a Navy tradition, the first men to come ashore were fathers whose children were born in Japan while they were away at sea. Several family reunions ensued, demonstrative enough to embarrass the reserved Japanese.

“The purpose of the Navy,” Vice Admiral John Bird, commander of the Seventh Fleet, tells me, “is not to fight.” The mere presence of the Navy should suffice, he argues, to dissuade any attack or attempt to destabilize the region. From Yokosuka, Guam, and Honolulu, the Navy is sending its ships on missions to locales as far away as Madagascar. On board the Blue Ridge, the vice admiral’s command ship anchored at Yokosuka, huge display screens allow officers to track the movements of any country’s military vessels cruising from the international date line in the east to the African coast in the west—the range of the Seventh Fleet’s zone of influence.

How dangerous and unstable would Asia become without the Seventh Fleet? The Navy points to two different threats. The first is China, which has territorial claims against most of its neighbors. Taiwan comes immediately to mind, of course, but the Chinese government is also disputing ownership of the oil-rich Spratly Islands with Vietnam and the Philippines. If North Korea were to collapse, moreover, the Chinese Army could take over its territory before South Korea or the U.S. had time to intervene. China is building a very large deepwater fleet—the first in its history. (South Korea and Japan are similarly increasing their naval power.) Thus far, this Chinese fleet seldom moves far from China’s territorial waters, something that surprises the Seventh Fleet leadership. The lack of a high-seas tradition, perhaps?

The other peril comes from Islamic terrorism: a loose network of al-Qaida affiliates operating in East Java, northern Sumatra, the southern Philippines, and southern Thailand. The dream of an Islamic caliphate based in northern Sumatra, a revival of a former Arab kingdom, foments instability in Indonesia and the Philippines, both already shaky. U.S. Special Forces are active in the region, especially in Mindanao.

We have to project simultaneously our hard power and our soft power,” Bird says. The Seventh Fleet’s missions are often humanitarian, taking care of local medical or infrastructure problems. The largest recent effort of this kind took place in the aftermath of the 2005 tsunami that devastated Indonesian and Thai coastal areas. “The image of the U.S. in Indonesia has been transformed by our intervention there,” Bird observes. “Suddenly, Indonesians, who had never met real Americans before, saw the U.S. as a compassionate and helpful nation.”

Friendship is also growing with India. After some 50 years of “neutrality,” including a long pro-Soviet period, India has become a strong American ally, thanks to the active diplomacy of Bill Clinton and George W. Bush. “We were surprised to discover our common background,” notes Bird. The American and Indian navies share a British maritime culture, which made joint operations smooth. India now seems as committed as Japan to an alliance with the U.S.—and as uneasy about China; India also finds itself more destabilized daily by domestic Islamic radicals.

For a stark example of what the region would be like without the American presence, look at the piracy occurring these days along the Somali coast, an area that America does not patrol. Pirates hijack and ransom tankers, interrupting the flow of oil, increasing insurance premiums, and ultimately raising the price of gas. In the Pacific, however, pirates act cautiously or not at all because they know that the Seventh Fleet is never far off.

In the long run, says Bird, regional conflict in the Pacific could even disappear, thanks to expanded global trade. But the presence of the Seventh Fleet is exactly what makes global trade possible here—and no other country has the power and the inclination to do it. The ultimate role of the U.S. Navy, the vice admiral concludes, is to keep the channels of commerce and communication open and safe, just as the British Navy did in the nineteenth century. “I am a disciple of Adam Smith,” he says wryly. “Peace can be reached by free trade, but free trade requires that the sea be policed by a strong navy.”

Guy Sorman, a City Journal contributing editor, is the author of numerous books, including the forthcoming Economics Does Not Lie.

Roi ou pantin?

Nathalie Elgrably-Levy
Le Journal de Montréal, p.29
19 mars 2009

C’est aujourd’hui que la ministre des Finances, madame Monique Jérome-Forget, dépose son budget, et on peut raisonnablement s’attendre à ce qu’elle propose des mesures pour encourager la consommation. Le Mouvement Desjardins a d’ailleurs récemment publié une étude fortement médiatisée dans laquelle les auteurs insistent pour qu’elle emprunte cette voie. Et puis, comment pourrait-elle faire autrement alors qu’on nous martèle que la frugalité des consommateurs fait régresser l’économie? Pourquoi n’incriminerait-elle pas les acheteurs puisque les économistes de nos institutions financières les accusent avec véhémence?

Le discours actuellement véhiculé est sans équivoque: dépenser prudemment est un geste antipatriotique; épargner nous rend coupables de terrorisme économique. Si seulement nous, consommateurs individualistes et narcissiques, pouvions délier les cordons de notre bourse, tout irait mieux. C’est du moins ce qu’on tente de nous faire croire. Et, si on suit cette logique, les acheteurs compulsifs et les accros du shopping seraient des mécènes, de grandes âmes dont le comportement permet aux entreprises d’être rentables et aux travailleurs, de conserver leurs emplois.

Dans l’ordre du monde qu’on nous présente, les consommateurs sont au service des entreprises. Ils n’existent que pour permettre aux vendeurs d’écouler leurs marchandises. Et quand ils ne se conforment pas aux attentes, quand leurs goûts, leurs habitudes ou leurs priorités changent, on les blâme de saboter le système. Quand ils épargnent, on leur reproche de provoquer une crise économique.
Cette interprétation du système économique est tordue. On achète des biens pour combler nos besoins, non pour satisfaire les entreprises. Ce sont elles qui doivent répondre aux attentes des acheteurs, et non l’inverse. Si elles produisent des biens qui ne trouvent pas preneurs, c’est leur problème, non celui des consommateurs. Il n’y a pas si longtemps, une entreprise qui rencontrait des difficultés devait revoir son modèle d’affaire. Aujourd’hui, l’État imagine des moyens pour nous forcer à acheter ses produits. Jadis, le consommateur était roi. À présent, c’est un pantin à la disposition des producteurs. Nous étions libres de consommer ou d’économiser, mais cette époque est révolue. Après la société de consommation, voici maintenant l’ère de la consommation par coercition!

Certes, cette coercition est bien intentionnée, mais elle reste irrationnelle. On le sait, l’État doit financer ses programmes destinés à stimuler la consommation. Il doit donc taxer. Ainsi, il commence par réduire le pouvoir d’achat des individus pour ensuite l’augmenter. Il déprime la consommation pour après la stimuler. Or, si nos bons gouvernements étaient moins gourmands, s’ils résistaient à l’envie de vider nos poches, ils n’auraient pas besoin de nous «gratifier» de plans de relance.

Ce n’est pas tout. Tout le monde s’entend sur le fait que l’État réduit la rentabilité des entreprises et les décourage d’investir ou de prendre de l’expansion en raison d’une fiscalité étouffante et d’une bureaucratie débilitante. Or, quand les entreprises rencontrent des difficultés, quand elles sont incapables de compétitionner sur les marchés, on accuse les consommateurs de dépenser trop peu. N’est-il jamais venu à l’idée de nos élus que le secteur de la production se porterait mieux si on le laissait respirer un peu? N’ont-ils pas compris que le plus efficace des plans de sauvetage est celui qui délivre l’entrepreneurship de l’étau qui l’étrangle?

Malgré tout, on peut s’attendre à ce que le budget d’aujourd’hui présente des mesures de relance aussi illogiques qu’inutiles. Du bling-bling économiquement stérile, mais électoralement rentable. Pourtant, ce dont l’économie a besoin, ce n’est pas que l’État lui administre un antidote, c’est qu’il cesse de l’empoisonner!

Nathalie Elgrably-Lévy est économiste senior à l'Institut économique de Montréal.

* Cette chronique a aussi été publiée dans Le Journal de Québec.

Fed to Buy $1 Trillion in Securities to Aid Economy

By EDMUND L. ANDREWS
Published: March 18, 2009

WASHINGTON — The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.

Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed’s measures in the last year.

The action makes the Fed a buyer of long-term government bonds rather than the short-term debt that it typically buys and sells to help control the money supply.

The idea was to encourage more economic activity by lowering interest rates, including those on home loans, and to help the financial system as it struggles under the crushing weight of bad loans and poor investments.

Investors responded with surprise and enthusiasm. The Dow Jones industrial average, which had been down about 50 points just before the announcement, jumped immediately and ended the day up almost 91 points at 7,486.58. Yields on long-term Treasury bonds dropped markedly, and analysts predicted that interest rates on fixed-rate mortgages would soon drop below 5 percent.

But there were also clear indications that the Fed was taking risks that could dilute the value of the dollar and set the stage for future inflation. Gold prices rose $26.60 an ounce, hitting $942, a sign of declining confidence in the dollar. The dollar, which had been losing value in recent weeks to the euro and the yen, dropped sharply again on Wednesday.

In its announcement, the central bank said that the United States remained in a severe recession and listed its continuing woes, from job losses and lost housing wealth to falling exports as a result of the worldwide economic slowdown.

“In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability,” the central bank said.

As expected, policy makers decided to keep the Fed’s benchmark interest rate on overnight loans in a range between zero and 0.25 percent.

But to the surprise of investors and analysts, the committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying.

In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on all types of loans.

All these measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. The central bank also said it would probably expand the scope of a new program to finance consumer and business lending, which gets under way this week.
In effect, the central bank has been lending money to a wider and wider array of borrowers, and it has financed that lending by using its authority to create new money at will.

Since last September, the Fed’s lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion, from $900 billion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.

Despite a trickle of encouraging data in the last few weeks, Fed officials were clearly still worried and in no mood to cut back on their emergency efforts.

Fed policy makers sharply reduced their economic forecasts in January, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment could approach 9 percent by the end of the year and that there was at least a small risk of a drop in consumer prices like those that Japan experienced for nearly a decade.
The Fed rarely buys long-term government bonds. The last occasion was nearly 50 years ago under different economic circumstances when it tried to reduce long-term interest rates while allowing short term rates to rise.

Ben S. Bernanke, the Fed chairman, has been extremely cautious in recent weeks about predicting an end to the recession, saying that he hoped to see the start of a recovery later this year but warning that unemployment, a lagging indicator, would probably keep climbing until some time in 2010.

In contrast to several recent Fed decisions, with the presidents of some regional Fed banks dissenting, the decision at Wednesday’s meeting of the 10 members of the Federal Open Market Committee, the central bank’s policy making group, was unanimous.

Jan Hatzius, chief economist at Goldman Sachs, said the Fed had adopted a “kitchen sink” strategy of throwing everything it had to jolt the economy out of its downward spiral.
But while Mr. Hatzius applauded the decision, he cautioned that the central bank could not solve the economy’s problems by expanding cheap money.

“Even if the Fed could make interest rates negative, that wouldn’t necessarily help,” Mr. Hatzius said. “We’re in a deep recession mainly because the private sector, for a variety of reasons, has decided to save a lot more. You can have a zero interest rate, but if you just offer more money on top of the money that is already available, it doesn’t do that much.”

Fed officials have been wrestling for months with the fact that lenders remain unwilling to lend and borrowers are unwilling or unable to borrow. Even though the Fed has been creating money at the fastest rate in its history, much of that money has remained dormant.

The Fed’s action is an expansion of its effort to bypass the private banking system and act as a lender in its own right.

The Fed and the Treasury are starting a joint venture this week called the Consumer and Business Lending Initiative in their latest effort to thaw the still-frozen credit markets. The program will start out with $200 billion in financing for consumer loans, small-business loans and some corporate purposes.

Fed officials have said they hope to expand the program next month, possibly to include the huge market for commercial mortgages, and both the Fed and Treasury hope the program will eventually provide up to $1 trillion in total financing.

Has the Economy Hit Bottom Yet?

By VIKAS BAJAJ
Published: March 14, 2009

The economist John Kenneth Galbraith once said, “The only function of economic forecasting is to make astrology look respectable.”

Still, we have to ask: was that the bottom we just hit?

After months of punishing economic news, the gloom seemed to lift last week if only for a moment. The stock market shot up 12 percent in four days. Two of the nation’s biggest banks said they had returned to profitability. General Motors said it wouldn’t need another $2 billion in government help this month. And retail sales were better than expected.

Then again, perhaps that’s what passes for good news these days.

The market is still down by more than 50 percent since its high 17 months ago. Yes, the banks made money, but for just two months, and never mind the billions of bad assets that remain on their books. G.M. will still, in all likelihood, need billions in taxpayer help down the road and there’s no guarantee it will survive. And those retail sales numbers? They were still bad, just not as bad as analysts were expecting.

Still, there was a sense among some economists and Wall Street analysts that if the bottom was not touched, perhaps the freefall was at least slowing. No less than Lawrence Summers, President Obama’s top economic adviser, said on Friday that while the economic crisis would not end anytime soon, there were early signs that it was easing.

Which leads to a question: When we do hit the bottom — this year or years from now — how will we know?

There’s no easy answer.

Mr. Galbraith was not the first or last economist to acknowledge fallibility at predicting turning points. (Just think back to assurances by top government officials in early 2007 that the growing problems with subprime mortgages were “contained.”)

Forecasting the end of the current recession is even more difficult because it will hinge on how quickly and efficiently governments resolve the crisis in the banking system. Many investors continue to worry that the world’s biggest financial institutions are insolvent, despite assurances from Washington that those firms have plenty of capital.

How political leaders diagnose and fix the banks will be critical. Analysts say misguided and erratic government responses exacerbated Japan’s “lost decade” in the 1990s and the Depression of the 1930s. “The things that can screw it up are bad policies,” said Thomas F. Cooley, dean of the Stern School of Business at New York University.

In the end, there’s probably no way to know for sure that we’ve hit bottom until we’re on the rebound. Still, analysts say there are some key indicators that might help in spotting a bottom and recovery at a time when it can be hard to see past the despair.

STOCKS

History shows that the stock market usually hits bottom before the economy does.
In October, Warren E. Buffett, one of the world’s most successful investors, said he was buying American stocks because they usually rise “well before either sentiment or the economy.” But even he acknowledged not having “the faintest idea” what would happen in the next month or year.

Since then, stocks have dropped by another 20 percent, and with the market at levels last seen in 1997, stocks are cheap by historical standards. The price-to-earnings ratio — which investors use to gauge how much they are paying for each dollar of corporate profit — is around 13, about 20 percent lower than the average of the last 130 years.

But many investors remain on the sidelines. Money market funds have swollen to $3.8 trillion, up from $2.4 trillion two years ago. And the cash banks are holding in their vaults and at the Federal Reserve has more than doubled in the last nine months.

What has made the current recession so pernicious is the eroding pressure of deflation, the general decline in prices that has hurt both businesses and consumers. They earn less and the value of their businesses and homes has fallen, yet they still owe as much as they did before, said Russell Napier, a consultant with Credit Lyonnais and author of “Anatomy of the Bear: Lessons From Wall Street’s Four Great Bottoms.”

He said he believed stocks would not rise until deflation ended and businesses could charge higher prices to pay off debts. Early indications suggest that this may be happening and that the stock market may be near the bottom, Mr. Napier said. He pointed to three indicators that often signal that economic growth and inflation are on the way — the prices of copper, corporate bonds and inflation-protected Treasury securities. Prices for all three are higher today than they were in November.

“All the indicators suggest you should be buying and not selling,” he said. Still, Mr. Napier acknowledged that stocks, while cheap, could fall further. Measured by their 10-year price-to-earnings ratio, stocks were a lot less expensive in the early 1980s, when the ratio fell to less than seven, and in the 1930s, when it was below six.

Nouriel Roubini, the economics professor from New York University who predicted much of the current crisis, has warned that corporate earnings and stock prices could continue to fall, perhaps precipitously.

HOME PRICES

To determine whether home prices are still inflated, economist use ratios that compare the cost of buying a home to renting or to median family income. If the ratios move sharply higher, as they did in recent years, it suggests home prices might be inflated. When they are falling, as they are across the country and particularly in places like San Diego, Phoenix and Tampa, owning a home becomes more affordable.

Barry Ritholtz, a professional investor who writes the popular economics blog The Big Picture, has a simpler, more subjective, approach: Assume a young couple earning two modest incomes is looking to buy a two- or three-bedroom starter home in a middle-income neighborhood in your city. Can they qualify for a mortgage and afford to buy it?

“If the answer is no, then you are not at a bottom in housing,” said Mr. Ritholtz, who estimates that the decline in national home prices is only half-complete.

Just as prices in the bubble did not go up uniformly in all parts of the country, they will not reach bottom together, said Ronald J. Peltier, chief executive of Home Services of America, a real estate brokerage firm.

In places like Riverside, Calif., and Miami, where homes are selling for half or less than what they sold for three or four years ago, real estate may be close to the bottom. One telling sign is that first-time home buyers and investors are snapping up homes, though they are mostly buying from banks selling foreclosed properties at deep discounts. Sales of existing homes in California jumped by more than 50 percent in January from a year earlier. But the median price was down more than 40 percent, to $224,000.

At the same time, prices have come down a lot less in urban areas like Manhattan and, not surprisingly, the number of homes being sold is down by as much as 50 percent from a year ago. Prices in these urban areas will have to fall much more before many young couples can afford starter homes.

Of course, those who bought at the peak of the market will suffer the greatest pain if they are forced to sell. But Mr. Peltier and other specialists say the current dismal market will only be resolved by lower prices, easier lending and an improving economy.

CONSUMER SPENDING

Americans like to buy things, and for at least the last decade, many economists assumed they would continue to spend on cars, clothes and the latest digital toy, good times or not. Consumer spending has rarely declined in the post-World-War-II era and when it has, it bounced back quickly.

The current recession is severely testing that article of faith. Personal consumption fell by about 1 percent in the second half of last year — the first sustained decline since 1980. Economists say consumption will be slow to recover because debt-saddled Americans are saving more or paying down debt. The savings rate — the amount of money consumers did not spend — jumped to about 3 percent late last year, from practically zero, still far below its postwar average of 7 percent.

A sign that consumption has hit bottom may come when the savings rate begins to flatten. Spending should then rebound as pent-up demand gives way. Car sales, for instance, have fallen to levels last seen in 1981, when the population of the United States was about three-quarters of what it is today. Many families are deferring car purchases and making do with what they have. Eventually, however, they will have to replace their aging vehicles.

In a study of economic cycles, Edward E. Leamer, an economist at the Anderson School of Management at the University of California at Los Angeles, found that auto sales and home building tended to lead recoveries.

An increase in international trade would be another early indicator that consumer spending here and abroad has hit the floor and begun to rebound.

After growing at an average of 7 percent a year for most of this decade, global trade was little changed from March to September last year, according to the Organization for Economic Co-operation and Development. Many large economies including the United States, Japan and China have reported a sharp drop in exports and imports in recent months. There was more bad news on Friday, when the Commerce Department reported that exports from and imports to the United States fell by about 12 percent in January.

“Seeing global trade pick up would be a very positive sign,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and now a professor at Harvard.

Tobias Levkovich, chief United States equity strategist at Citigroup, has another indicator for spotting when we have hit bottom: When we stop behaving like children in the backseat of the car asking their parents, “Are we there yet?”