According to MGI, the McKinsey’s economics research arm, petrodollar investors — including central banks, sovereign wealth funds, and individual magnates based mostly in the Middle East and Russia — will see the value of their foreign assets soar to at least $9 trillion by 2013, up from an estimated $5 trillion at the end of 2008.

Similarly, foreign financial assets held by Asia’s sovereign investors will collectively swell to $7.5 trillion by 2013, up from $4.8 trillion in 2008. The projected rate of growth between 2009 and 2013 will be the slowest since 2000, but, as the report notes, “impressive” nonetheless.

What explains these two group’s ability to sail right through financial turmoil that wrecked some of the West’s biggest and boldest investors? Mostly, it’s the nature of the assets they hold, says one of the report’s co-authors Charles Roxburgh. As the economy rebounds, oil prices will go up responding to growing demand for gasoline products tied to greater economic activity. Likewise, when global trade picks up again, Asian reserves will resume building up, reflecting those countries’ ample trade surpluses.

In other words, both petrodollar and Asian investors have a hedge over other institutional investors not so much because of the investment decision they’ll make but because their existing portfolios will benefit from “structural flows that will bring money in,” as the world economy heads toward recovery, says Mr. Roxburgh.

At least some of these structural advantages may wind down in the long run –China, for example, is slowly steering its economy more towards satisfying domestic demand — but in the short-term, they’ll help tick the financial power balance increasingly toward the economic power centers in the developing world.

One risk connected to continued growth in petrodollars and Asian sovereign investment assets is that so much idle money will end up, yet again, feeding assets bubbles around the world as it did in the run-up to the current recession, warns the MGI report.

But history needs not repeat itself, says Mr. Roxburgh. Big investment funds in the developing world are sharpening their strategies and diversifying their portfolios. As the Journal reported Monday , for example, China Investment Corp., a sovereign-wealth fund, has appointed an international advisory board of economic and investment experts — including former World Bank President James Wolfensohn – to guide its growing investments abroad. Developing world investors are getting smarter and most sophisticated, and this, says Mr. Roxburgh, is a “natural and healthy trend.”

Kohn

In the latest Wall Street Journal survey of economists, 68% of respondents said the Fed’s independence has been damaged or reduced by the financial crisis and its responses to it. “Fed independence is at more risk today than I have seen in many decades,” said Wells Fargo economist Scott Anderson.

In its efforts to prevent an economic catastrophe, the Fed has rescued major financial institutions and more than doubled its balance sheet to fund special lending programs. And lawmakers, even those who were happy to leave the hardest decisions to independent central bank officials, are taking shots at the Fed. Some lawmakers want to block the Obama administration’s proposal to give the Fed new authority over the financial system. Many have signed their names to legislation seeking increased auditing of the Fed, including of its monetary policy functions that are now excluded.

Will the Fed make it out without too many scars? Ian Shepherdson of High Frequency Economics said the extent of the damage to the Fed’s independence is “as yet unquantifiable.” Lou Crandall of Wrightson ICAP also says Fed independence has been damaged, “but not irreparably.”

Bernanke

The Sunday, July 26 recording at the Federal Reserve Bank of Kansas City is being billed as “Bernanke On the Record.” The NewsHour says an audience of “local citizens” (in addition to Lehrer) will ask questions for a three-segment program to air on The NewsHour with Jim Lehrer the following Monday, Tuesday and Wednesday. Local PBS stations also will get the full feed for a special program to air that Wednesday.

That could amount to the largest TV audience Mr. Bernanke has reached since he began doing on-the-record media appearances this year, a way for the former college professor to explain the crisis and the central bank’s handling of it. (Of course, it also conveniently comes in the final year of Mr. Bernanke’s four-year term as Fed chairman, as he’s awaiting a reappointment decision from the White House.)

Mr. Bernanke attended an on-the-record lunch at the National Press Club in February that was the closest we’ve seen to a press conference by a Fed chairman. The following month, he appeared on two segments of CBS’s 60 Minutes taped at the Fed headquarters in Washington and in his hometown of Dillon, S.C. — with Mr. Bernanke sitting on a bench on Main Street.

Discussions of the housing crisis generally lead to the reasonable conclusion that the housing market became divorced from economic fundamentals. But Kahn, formerly a New York Fed vice president (and now a Yeshiva University professor), argues it was actually economic fundamentals that helped spark the boom-bust cycle. Productivity swings influenced workers’ income growth and income expectations, which helped determine the price of housing.

“When productivity growth accelerates, consumers begin to see stronger income growth and to become more optimistic about future income—conditions that strengthen the demand for housing,” he writes. “This increased demand in turn drives up the price of land and hence the price of houses. The optimism of home buyers, moreover, is likely to extend to lenders, who will regard mortgages as less risky insofar as income and house prices [are] growing more rapidly than before.”

Looking at productivity trends and house-price movements across 45 years helps explain the 1990s surge in home prices (when productivity soared) and the sharp drop in recent years. Even by mid-2007, data — when initially released — showed that homebuyers and homeowners had cause to be optimistic about productivity advances and their income prospects, Kahn says. But revised data show that productivity growth actually was slowing, leading people to cut their spending.

That slide could be one reason the central bank “does not seem ready to undertake the last margins of monetary easing, despite having such a low inflation outlook,” wrote Julian Callow, European economist with Barclays Capital in London, in a note to clients.

All other things being equal and broadly speaking, when an economy’s growth outstrips its long-run potential, inflation pressures build. A lower long-run potential growth rate could give central bankers twitchy fingers, since it would take less expansion to fuel inflation.

The ECB has cut its key rate to 1%, but policy makers have signaled they’re unwilling to go lower unless the economic outlook deteriorates markedly. The ECB’s 60-billion-euro bond-buying program is also smaller than asset-purchase programs in the U.S. and U.K. Annual euro-zone inflation, which the ECB aims to keep just under 2%, fell below zero to -0.1% in June. Central-bank forecasts see inflation around 0.3% this year and 1% in 2010.

Estimates traditionally put the 16-nation euro-zone’s long-run potential growth rate at around 2-2.5%, the ECB report says. The bank takes those estimates seriously. Back in June 2007, when ECB staff forecast the bloc would expand 2.6% that year compared to 2006, the ECB increased its key rate to 4% from 3.75%.

Now, though, the financial crisis may have dealt the bloc’s potential growth rate a serious blow. “At the current juncture, annual rates of potential output growth are … forecast to fall below 1% in the period 2009-10,” the ECB says.

The report takes care to note that annual potential growth rates, like annual growth rates, jump around a lot. But it warns the current slide may not be a short-term shift: “A longer-term moderation in the rate of growth of potential output may emerge in the current downturn.”

Among the reasons: Rigid labor markets could keep people out of work; pricier, scarcer credit could dampen investment; and entire sectors — like manufacturing — could downsize, removing a onetime boost to productivity growth.

Governments could make things worse. “If the crisis were to lead to a long-run increase in the size of the public sector, taxes would sooner or later have to be raised, and the higher tax burden would dampen potential output growth.” To be fair, the ECB notes the opposite is also true — that if governments push through product and labor-market reforms, productivity growth could rise.

The last time ECB president Jean-Claude Trichet discussed the bloc’s growth potential in one of his post-rate-decision press conferences was September last year. Then, he said the crisis impact was likely to be “significant” but that the rate-setting board hadn’t come up with a new estimate. If Mr. Trichet is quizzed on this topic again at the bank’s next press conference, the answer may be different.

Writes Ron Puckett: “That we are even allowing a President to discuss what others should be paid without taking up arms is a testament to how far this country has fallen.”

Doctors are particularly peeved. Dr. M. Katz writes: “Pay for performance in medicine will be met with over diagnosis and over coding. Thus, pneumonia will be diagnosed more frequently than it would otherwise, resulting in skewed statistics. If Obama really wants to control healthcare costs, he should pay orthopedic surgeons like me NOT to operate, like crop subsidies.”

And several folks question Obama’s willingness to take on teachers’ union, citing his opposition to a voucher program in DC that gave some low-income families a shot at attending pricey private schools. “The vouchers are gone, the teachers union is happy, the kids and theirs parents get screwed, and BO gets the teacher union money, and you drink Kool-Aid, simple,” says Greg Bervy.

A few readers pick up on the notion, at the end of the column, that perhaps Washington ought to pay itself based on performance. Says James Domingo: “Let’s compensate the President and Congress based on the ‘retained earnings’ of the US economy. If there is a surplus, they get a bonus. If there is a deficit, they get a large reduction in pay or nothing at all. After all, they have total control of the purse strings and it is within their power to create a deficit or surplus in any given year. This is how it works in the business world. Hence no business can survive by spending more than it takes in year after year.”

Many large retailers reported their June sales numbers this week, with most of them coming out the morning of Thursday, July 9. Following an announcement in May, Wal-Mart and its units no longer publish monthly sales figures. Updates to come as more retailers report sales. (Last updated July 9, 2009)

Sort the chart below by company name, category, change in total or same-store sales, and total sales. Also, see May’s chart.

The plan for buying troubled assets — which was earlier announced as the central element of the administration’s financial stability plan — has been recently curtailed drastically. The Treasury and the FDIC have attributed this development to banks’ new ability to raise capital through stock sales without having to sell toxic assets. But the program’s inability to take off is in large part due to decisions by banking regulators and accounting officials to allow banks to pretend that toxic assets haven’t declined in value as long as they avoid selling them.

The toxic assets clogging banks’ balance sheets have long been viewed — by both the Bush and the Obama administrations — as being at the heart of the financial crisis. Secretary Geithner put forward in March a “public-private investment program” (PPIP) to provide up to $1 trillion to investment funds run by private managers and dedicated to purchasing troubled assets. The plan aimed at “cleansing” banks’ books of toxic assets and producing prices that would enable valuing toxic assets still remaining on these books.

The program naturally attracted much attention, and the Treasury and the FDIC have begun implementing it. Recently, however, one half of the program, focused on buying toxic loans from banks, was shelved. The other half, focused on buying toxic securities from both banks and other financial institutions, is expected to begin operating shortly but on a much more modest scale than initially planned.

What happened? Banks’ balance sheets do remain clogged with toxic assets, which are still difficult to value. But the willingness of banks to sell toxic assets to investment funds has been killed by decisions of accounting authorities and banking regulators.

Earlier in the crisis, banks’ reluctance to sell toxic assets could have been attributed to inability to get prices reflecting fair value due to the drying up of liquidity. If the PIPP program began operating on a large scale, however, that would no longer been the case.

Armed with ample government funding, the private managers running funds set under the program would be expected to offer fair value for banks’ assets. Indeed, because the government’s funding would come in the form of non-recourse financing, many have expressed worries that such fund managers would have incentives to pay even more than fair value for banks’ assets. The problem, however, is that banks now have strong incentives to avoid selling toxic assets at any price below face value even when the price fully reflects fair value.

A month after the PPIP program was announced, under pressure from banks and Congress, the U.S. Financial Accounting Standards Board watered down accounting rules and made it easier for banks not to mark down the value of toxic assets. For many toxic assets whose fundamental value fell below face value, banks may avoid recognizing the loss as long as they don’t sell the assets.

Even if banks can avoid recognizing economic losses on many toxic assets, it remained possible that bank regulators will take such losses into account (as they should) in assessing whether banks are adequately capitalized. In another blow to banks’ potential willingness to sell toxic assets, however, bank supervisors conducting stress tests decided to avoid assessing banks’ economic losses on toxic assets that mature after 2010.

The stress tests focused on whether, by the end of 2010, the accounting losses that a bank will have to recognize will leave it with sufficient capital on its financial statements. The bank supervisors explicitly didn’t take into account the decline in the economic value of toxic loans and securities that mature after 2010 and that the banks won’t have to recognize in financial statements until then.

Together, the policies adopted by accounting and banking authorities strongly discourage banks from selling any toxic assets maturing after 2010 at prices that fairly reflect their lowered value. As long as banks don’t sell, the policies enable them to pretend, and operate as if, their toxic assets maturing after 2010 haven’t fallen in value at all.

By contrast, selling would require recognizing losses and might result in the regulators’ requiring the bank to raise additional capital; such raising of additional capital would provide depositors (and the government as their guarantor) with an extra cushion but would dilute the value of shareholders’ and executives’ equity. Thus, as long as the above policies are in place, we can expect banks having any choice in the matter to hold on to toxic assets that mature after 2010 and avoid selling them at any price, however fair, that falls below face value.

While the market for banks’ toxic assets will remain largely shut down, we are going to get a sense of their value when the FDIC auctions off later this summer the toxic assets held by failed banks taken over by the FDIC. If these auctions produce substantial discounts to face value, they should ring the alarm bells. In such a case, authorities should reconsider the policies that allow banks to pretend that toxic assets haven’t fallen in value. In the meantime, it must be recognized that the curtailing of the PIPP program doesn’t imply that the toxic assets problem has largely gone away; it has been merely swept under the carpet.

AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC;

Angelo, Gordon & Co., L.P. and GE Capital Real Estate;

BlackRock, Inc.;

Invesco Ltd.;

Marathon Asset Management, L.P.;

Oaktree Capital Management, L.P.;

RLJ Western Asset Management, LP.;

The TCW Group, Inc.

Wellington Management Company, LLP.

This same principle — charge more to reduce use — has also proven effective in reducing parking congestion as well.

People living in the 439 metro areas surveyed in the report spent 36 hours in traffic in 2007, an hour less than in 2006 (”in traffic” is defined as wasted time that is above and beyond than the natural length of the commute). In the over 25 years of the TTI mobility report, this is the first time congestion time has fallen nationally, said David Schrank, a researcher at TTI and a co-author of the report. And declines are likely to continue through 2008 amid last year’s run-up in gas prices and a deepening recession.

Among the biggest drops in congestion were the San Francisco and Denver areas — both of which have regional rail systems — where congestion fell three hours each. Washington D.C. — which has been buffered from the recession by increases in federal spending and employment- - saw congestion increase by three hours.

Recession, it seems, is the only good way to reduce traffic. While congestion had never fallen nationally before, Mr. Schrank says in past recessions many regional markets saw drops in congestion hours. In the early 1990s recession, for instance, congestion dropped in Los Angeles, Orange County and San Diego — all very congested places that were hit hard by the loss of aerospace jobs.

Mr. Schrank says that he expects congestion to continue to shrink or at least plateau as long as the recession persists. Indicators including vehicle mile traveled (down) and passenger miles on public transportation (still up from a few years ago) are consistent with lower levels of congestion. Of course, once the economy gets better, traffic will pick up as well.

Annual Wasted Hours per Traveler

Source: Texas Transportation Institute