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I found myself in an interesting debate this week after reading Noam Scheiber’s Is Obama Really Breaking up the Banks?:

“Many of the press accounts describe how Volcker persuaded members of the Obama economic team to back his approach-most famously during a two-hour Christmas Eve lunch with Treasury Secretary Tim Geithner. There’s an element of truth to this. But when you ask administration officials exactly what they were persuaded of, it’s not that their theory of reform was wrong–that, say, bank size was a major cause of the financial crisis, or that proprietary trading did the banks in. They were mostly persuaded that they could append Volcker’s ideas to their original approach while keeping its essence intact. “Our view is it’s not counterproductive,” says an official.

Ironically, then, the practical upshot of the Volcker rule may be to advance the administration’s original reform agenda.”

Maybe it was wishful thinking on my part, but I hoped that wasn’t the case.

I pinged Scheiber back: “Adjustment at the margins? Have been living in a cave for the past year the “status quo duo” has been in charge? The Summers/Geithner policy has been dominant, and Volcker was banished from the White House grounds. Sorry, this is a FAIL — You are rationalizing a year of bad policy decisions.

To his credit, Scheiber patiently walked me through his thinking: He suggests the people in the White House and Treasury have no intention of making the Volcker plan — or any other structural change — the centerpiece of their regulatory reform effort. Its not that Volcker has triumphed over Geithner and Summers; rather, this is a thin coating of Volckerism stained over their original proposal.

This makes me wonder:  Has Volcker been coopted?

Scheiber argues that Tall Paul is not suddenly at the center of administration conversations over economic policy. Volcker was a periodic visitor to the White House and Treasury before December — but with the exception of the one or two presentations he made about spinning off proprietary trading, he’s still not a regular participant in high-level meetings of the administration’s economic team or the president’s senior aides.

And, he believes Geithner’s safe at least through the midterms; that Obama likes him personally, and thinks he’s gotten a bad rap after pulling the financial system back from the brink. Also, it’s not Obama’s style to give critics someone’s head.

If that is the case, color me hugely disappointed . . .

UPDATE 10:17am:

Noam adds the following:

I did go back and forth with Barry about this, and I think his description of our back-and-forth is generally accurate, but it slightly mischaracterizes my take in spots. My view on this is four-fold:

1) While the administration economic team has embraced Volcker’s proprietary trading idea, they haven’t abandoned their original approach to reg reform, and don’t plan on it.
2) They still don’t think proprietary trading was a major cause of the crisis, and don’t think it’s central to preventing the next one.
3) Having said that, as I write in my piece, they were largely persuaded that the *principle* the idea represents is sound, so it’s worth doing anyway in some form.
4) Volcker has not become a central player in administration internal debates about economic policy, although he is respected by the president, vice president, and many senior officials in the administration.

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Source:
Is Obama Really Breaking up the Banks?
Noam Scheiber
TNR, January 27, 2010

http://www.tnr.com/article/economy/obama-really-breaking-the-banks

This is the trailer for Wall Street 2 : Money Never Sleeps. Hence the title, ‘Wall Street 2 : Money Never Sleeps Trailer’…

Hat tip Jim

Q4 GDP rose 5.7%, better than expectations of 4.7% but nominal GDP was only .3% above estimates as the price deflator rose only .6%, .7% less than expected. Nominal GDP rose 6.3% vs estimates of 6%. Personal Spending rose 2%, .2% above forecasts. Inventories fell by only $33.5b, down from the $139b drop in Q3 and $160b fall in Q2. This added 3.4% to GDP. Real final sales rose by 2.2% and takes out the impact of inventories. Spending on equipment and software rose by 13.3% and added .8% to GDP. Spending on residential construction rose by 5.7%, the 2nd q in a row of gains but nonresidential structures fell by 15.4%. Trade added .5% to GDP as exports rose 18.1% while imports were up just 10.5%. Government spending fell by .2% but was led by a 3.5% fall in defense. Nondefense spending rose by 8.1%. Net-net, a great headline print but helped out by lower than expected inflation. The # is old news but in an oversold market, the headline is the focus.

We moved last night to new offices upstairs (I am thrilled with our new space). But I have no idea if internet or phones will be up and running today.

On the likelihood they won’t be by 8:30am, please update the GDP data in comments.

BEA: Most current data

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Wow — 5.7% — thats a huge number

I need to dissect that a bit, but since I was getting coffee at SBUX, I had to mention this.
• Bloomberg
• WSJ
• NYT

While everyone awaits GDP data this morning, why don’t we look at the best economic gauge you have never heard of:

It doesn’t appear on any economic calendars that I’m aware of. It flies under just about everyone’s radar.  Technically, it’s not a data point itself but a weighted amalgam of 85 other distinct economic data points, an all-in-one look at the United States economy.

And it does an excellent job of tracking the economy’s health.

It’s the Chicago Fed’s National Activity Index (CFNAI), and it just printed for December.

Say the folks in Chicago:

The CFNAI is a weighted average of 85 existing monthly indicators(pdf) of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

The 85 economic indicators that are included in the CFNAI are drawn from four broad categories of data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. Each of these data series measures some aspect of overall macroeconomic activity. The derived index provides a single, summary measure of a factor common to these national economic data.

Additionally, they advise us to focus on the three month moving average:

Month-to-month movements can be volatile, so the index’s three-month moving average, the CFNAI-MA3, provides a more consistent picture of national economic growth.

When the CFNAI-MA3 value moves below –0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun.

When the CFNAI-MA3 value moves above +0.70 more than two years into an economic expansion, there is an increasing likelihood that a period of sustained increasing inflation has begun.

That said, here’s the chart:

Source: Chicago Fed

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The MA3 has stalled since hitting -0.54 in September, recording -0.76, -0.68, and now -0.61 since then.  We’ve gotten the bungee bounce off the economic and market lows of almost one year ago. The question now — as I’ve been opining for quite some time — is to sustainability. We’re clearly faltering, with nary a green shoot in sight (witness the just-released Durable Goods orders and weekly Unemployment Claims, which were both weaker than expected). Lots of interesting numbers coming out over the next week, culminating with Friday’s jobs report. The stock market is, perhaps, starting to recognize the loss of momentum.

Interesting times . . .

Well, there you have it:

Ben S. Bernanke won Senate approval for a second term as Federal Reserve chairman, as supporters who credited his actions to stem the financial crisis and recession overcame opponents saying he failed to prevent them.

The Senate voted 70 to 30 to confirm the 56-year-old former Princeton University professor, the most opposition since the chamber started confirming Fed chiefs in 1978.

Discuss:

Some interesting reading I happened across today:

• Goldman Viewed as Favored by Regulators, Fed Says (Bloomberg)

• What Congress missed at AIG-Geithner hearing (NY Post)

• Volcker has the measure of the banks (FT)

• Mortgage Bulls Bid Fed Adieu (WSJ)

• Reinhart and Rogoff: Why we should expect low growth amid debt (FT)

• Ailing Banks Favor Salaries Over Shareholders (NYT)

• GOP Faces a Tough Balancing Act (WSJ)

• A world of connections (Economist) Online social networks are changing the way people communicate, work and play, and mostly for the better

•  Pogue: The Apple iPad: First Impressions (NYT Circuits)

• Richard Dawkins: the truth dogs reveal about evolution (Times UK)

What are you reading?

iBailout – Exclusive to the iPhone and iPod touch. Available in the Apple App Store. Product of the Hands-On Mobile Developer Network (HDN). Developed by Marroni Electronic Entertainment.

To put into perspective the 420 bps level of 5 yr Greece CDS, it is now just 55 bps from debt plagued Dubai and well above the following credits, Bulgaria (255 bps), Croatia (234 bps) Egypt (250 bps), Hungary (243 bps), Kazakhstan (210 bps), Lebanon (247 bps), Romania (250 bps), Russia (192 bps), and Turkey (196 bps). It remains though more than half the level of Venezuela (1038 bps), Argentina (1032 bps) and Ukraine (923 bps). The US trades at 43 bps, UK at 84 bps, Japan at 88 bps, Germany at 35 bps and the other stretched European sovereign credits such as Italy trades at 122 bps, Portugal at 169 bps, Spain at 135 bps and Ireland at 147 bps.

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