A Federal Reserve Policy Maker Urges It to Do More

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I.M.F. Urges Washington to Repeal ‘Ill-Designed’ Spending Cuts

In its annual check of the health of the U.S. economy, the IMF forecast economic growth would be a sluggish 1.9 percent this year. The IMF estimates growth would be as much as 1.75 percentage points higher if not for a rush to cut the government's budget deficit.

The IMF cut its outlook for economic growth in 2014 to 2.7 percent, below its 3 percent forecast published in April. The Fund said in April it still assumed the deep government spending cuts would be repealed, but it had now dropped that assumption.

Washington slashed the federal budget in March, adding to the drag on the economy created by tax increases enacted in January.

The IMF said the United States should reverse the spending cuts and instead adopt a plan to slow the growth in spending on government-funded health care and pensions, known as "entitlements." The Fund would also like the United States to collect more in taxes.

"The deficit reduction in 2013 has been excessively rapid and ill-designed," the IMF said. "These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues."

The IMF warned cuts to education, science and infrastructure spending could reduce potential growth.

While the Fund said total debt across all levels of government would likely decline after 2015, public finances are nevertheless on an unsustainable path due to an aging population and higher spending on health care.

"Now our advice is not just to slow down (budget cuts)," IMF Managing Director Christine Lagarde said at a news conference. "Our advice is also to hurry up: hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability."

She said effects of higher spending on health care and other programs build up over time, so it was important to act quickly to address them.

KEEP EASING FOR NOW

The Fund recommended that the U.S. Federal Reserve keep up its massive asset purchases at least through the end of the year to support the U.S. recovery, but should also prepare for a pull-back in the future.

The Fed is currently buying $85 billion per month of Treasuries and mortgage-backed securities in an effort to lower borrowing costs and spur employment growth. Lagarde said the IMF has assumed that the Fed would begin trimming bond purchases next year.

Speculation over when the Fed might start to pare back its bond buying has roiled financial markets recently. Fed Chairman Ben Bernanke stoked market speculation last month when he said a decision to pare the Fed's current pace of asset purchases might happen at one of the Fed's "next few meetings" if the economy looked set to maintain momentum.

Recent outflows from bond funds and the rise in volatility offer a worrying glimpse of how markets are likely to behave as the Fed works to scale back its enormous monetary stimulus.

The IMF said unwinding the easy-money policies would likely present challenges, and it was key for the Fed to communicate effectively with markets.

It also said the long period of low interest rates could have unintended consequences in the future, sowing the seeds of future financial vulnerabilities.

(Additional reporting by Jason Lange; Editing by Andrea Ricci and Andre Grenon)

Report Urges Higher Pay for Texas Judges

Texas judges haven't gotten a raise since 2005, and they earn less than judges made in 1990 when considering inflation, says a recent report by the Judicial Compensation Commission.

Increasing judicial salaries for district judges, intermediate appellate justices and jurists of the two high courts by more than 21 percent is necessary to attract qualified lawyers to the bench and stop experienced jurists from leaving, says the report.

Former Texas Supreme Court Justice Dale Wainwright says financial considerations factored significantly into his decision to leave the high court in September. For a Supreme Court justice, he says, "The difference between what they are making in the public sector and what they could be making in the private sector can be several million dollars every few years."

Judges and their families make a financial sacrifice so the judge can serve, he says, and the relatively low salary shortens their tenures.

"I have the utmost respect to folks who do public service. … Anything the Legislature can do to help compensate the members of our judiciary better would only improve the bench," says Wainwright, partner in Bracewell & Giuliani in Austin.

Judicial Compensation Commission member Pat Mizell notes that judges' compensation is "extraordinarily low" compared to the pay of private-sector lawyers. For example, the salary of a district judge is much lower than a starting lawyer at his firm, Vinson & Elkins in Houston.

"It's $40- to $50,000 less than what a 25-year-old kid out of law school makes," he says, adding, "We're already in a situation where it is starting to affect the quality of the judiciary. Good judges are having a very difficult time making ends meet under the current salary structure."

The 80th Legislature created the commission, and the governor appoints members, subject to Senate consent.

THE REPORT

The state pays the entire salary of jurists of the two high courts. Intermediate appellate justices and district court judges receive the majority of their salaries from the state, with supplemental pay from counties. The commission recommends increasing state salaries across the board by 21.1 percent to 21.5 percent.

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Report Urges Higher Pay for Texas Judges

Texas judges haven't gotten a raise since 2005, and they earn less than judges made in 1990 when considering inflation, says a recent report by the Judicial Compensation Commission.

Increasing judicial salaries for district judges, intermediate appellate justices and jurists of the two high courts by more than 21 percent is necessary to attract qualified lawyers to the bench and stop experienced jurists from leaving, says the report.

Former Texas Supreme Court Justice Dale Wainwright says financial considerations factored significantly into his decision to leave the high court in September. For a Supreme Court justice, he says, "The difference between what they are making in the public sector and what they could be making in the private sector can be several million dollars every few years."

Judges and their families make a financial sacrifice so the judge can serve, he says, and the relatively low salary shortens their tenures.

"I have the utmost respect to folks who do public service. … Anything the Legislature can do to help compensate the members of our judiciary better would only improve the bench," says Wainwright, partner in Bracewell & Giuliani in Austin.

Judicial Compensation Commission member Pat Mizell notes that judges' compensation is "extraordinarily low" compared to the pay of private-sector lawyers. For example, the salary of a district judge is much lower than a starting lawyer at his firm, Vinson & Elkins in Houston.

"It's $40- to $50,000 less than what a 25-year-old kid out of law school makes," he says, adding, "We're already in a situation where it is starting to affect the quality of the judiciary. Good judges are having a very difficult time making ends meet under the current salary structure."

The 80th Legislature created the commission, and the governor appoints members, subject to Senate consent.

THE REPORT

The state pays the entire salary of jurists of the two high courts. Intermediate appellate justices and district court judges receive the majority of their salaries from the state, with supplemental pay from counties. The commission recommends increasing state salaries across the board by 21.1 percent to 21.5 percent.

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I.M.F. Urges U.S. and Europe to Act Decisively on Debt

TOKYO — World finance officials called on the United States and Europe to quickly resolve their debt problems on Saturday, saying that more decisive action was needed to restore confidence in the faltering global economy.

In a communiqué at the end of a three-day meeting here in Tokyo, the members of the International Monetary Fund warned that global growth was slowing as the continuing debt crises in developed countries dragged down growth in emerging markets. The statement said quick action was needed to “break negative feedback loops and restore the global economy to a path of strong, sustainable and balanced growth.”

“There was no objection to the recommendation that we gave to the membership, which was a-c-t,” said the I.M.F. head, Christine Lagarde, spelling out the word for dramatic emphasis.

The annual meetings here of the I.M.F. and the World Bank were focused on the negative impact on the world economy from the sovereign debt crisis in Europe, and the prospect of a so-called fiscal cliff looming in the United States as American political leaders remain deadlocked over how to reduce deficits.

The I.M.F. warned that economic stagnation in richer countries had spillover effects in poorer ones, which rely on exports to the developed world to lift themselves out of poverty. Its members also cautioned that the slowdown in the West was hurting growth in Asia, currently the world’s most dynamic economic region.

“Asia alone can’t carry the global economy,” the Australian treasurer, Wayne Swan, was quoted as saying by Reuters. “It is time for the other players to get off the benches and start to pull their weight on global economic growth again.”

The I.M.F. meeting was overshadowed at times by a different sort of problem that economists warn could also hurt growth in Asia: the region’s many territorial disputes. The finance minister and the central bank chief of China, Asia’s largest economy, decided not to attend the meetings in a show of displeasure with their host, Japan, with which China is locked in an emotional dispute over control of uninhabited islands in the East China Sea.

The news at the meetings was not all bad. Some I.M.F. members said that global growth prospects were brighter now than six months ago, citing European progress toward containing the Continent’s debt crisis. But the group also said that growth was still decelerating, due to the developed world’s debt problems and other lingering effects from the global financial crisis.

Much of the discussion at the I.M.F. meeting focused on the risks that the United States, the world’s largest economy, might face if the Obama administration and Congress cannot agree on deficit reduction, triggering legally mandated tax increases and federal spending cuts early next year. Hitting that “fiscal cliff” would reduce growth and eliminate jobs at a time when the anemic American economy is still struggling to recover from the 2008 crisis.

The scale of America’s fiscal problems was underscored just hours before the meeting in Tokyo, when the Obama administration announced that the budget deficit this year would reach $1.1 trillion, exceeding $1 trillion for a fourth straight year. While that is down from last year, United States deficits had never topped half a trillion dollars before the 2008 financial crisis.

Treasury Secretary Timothy F. Geithner said Saturday that the United States had made progress in fixing its debt problems, but still faced a long road ahead.

“It is important that we in the U.S. enact a balanced framework to bring down our fiscal deficit and debt over several years, while continuing to provide support for jobs and growth in the short term,” he was quoted as saying by The Associated Press.

Rajan, Adviser to India, Urges Changes to Economy

But instead of drawing a rebuke from India’s often thin-skinned leaders, he got a job offer. In August, Mr. Singh, who has frequently sought Mr. Rajan’s advice, called and asked him to take a leave from his job as a professor at the University of Chicago to return to India, where he was born, to help revive the country’s flagging economy. Within weeks, he was at work as the chief economic adviser in the Finance Ministry.

Analysts say the appointment of an outspoken academic like Mr. Rajan, along with the recent push by New Delhi to reduce energy subsidies and open up retailing, insurance and aviation to foreign investment, signal that India’s policy makers appear to be serious about tackling the nation’s economic problems.

Mr. Rajan has advocated changing India’s financial system, which is dominated by state-owned banks, by among other things loosening government restrictions on foreign banks and other financial institutions. He has also been critical of the country’s crony capitalism, likening its business tycoons to Russia’s oligarchs. He has argued that India needs to build stronger, impartial agencies to make the allotment of licenses and natural resources more transparent.

And India might finally be ready to make such changes, he said in an interview in his office here.

“I believe that one of the virtues of a functioning democracy is that they prevent things from getting too bad,” he said. “When things get bad, democracy creates the space to make improvements.”

Economists say Mr. Rajan, and his boss, the recently reappointed finance minister, Palaniappan Chidambaram, face daunting challenges in their effort to revive the slowing economy, which is expected to post growth of 5.5 percent this year, down from an average of 7.7 percent a year over the last decade. The credit rating agencies Standard & Poor’s and Fitch Ratings have warned that they may downgrade India’s sovereign debt to junk status if it doesn’t bring its ballooning budget deficit under control.

Many of the government’s proposals, including reduced subsidies for food and fuel, are deeply unpopular. Moreover, the governing alliance, led by the Indian National Congress Party, recently lost its majority in the lower house of Parliament, which will make it hard to enact legislation.

“Most emerging market governments only carry out reforms when they have their backs to the wall,” said Ruchir Sharma, an executive at Morgan Stanley and author of the recent book “Breakout Nations: In Pursuit of the Next Economic Miracles.” “The government is under siege and they are reacting to that.”

Though Mr. Rajan’s current post does not carry any executive authority, his return to India has attracted attention because many policy analysts consider him to be the leading candidate to take over the top job at India’s central bank, the Reserve Bank of India, next year when the current governor, Duvvuri Subbarao, retires.

Mr. Rajan, 49, became famous in the economics profession for his prescience in warning about the growing risks in the financial system at a Federal Reserve conference in 2005, three years before the failure of Lehman Brothers. He argued that innovations and deregulation appeared to have made the global financial system riskier, rather than safer and more stable as many economists and top policy makers like Alan Greenspan then believed.

The son of an Indian diplomat, Mr. Rajan grew up around the world and in New Delhi, earning degrees from prestigious Indian universities before studying economics at the Massachusetts Institute of Technology. His first big policy job came when he was appointed the chief economist of the International Monetary Fund. Since 2008, he has been an external adviser to Mr. Singh, who is his highest-placed champion in India and who also asked him to lead a committee to propose changes to the country’s financial system.

Jim Yardley contributed reporting.

Lagardere Urges Review of EADS-BAE Merger Plan

Arnaud Lagardere, the leading French industrial shareholder of Airbus parent EADS, threw an unexpected spanner into the plans by demanding the financial terms be reviewed, setting off a frenzy of briefings and counter-briefings from all sides.

"Despite the industrial and strategic potential attributed to it, this plan has not yet demonstrated that it was creating value for EADS," Lagardere's media firm said in a statement shortly before Paris trading.

The comments increased pressure on EADS Chief Executive Tom Enders and BAE Systems counterpart Ian King hours after they urged investors to back the deal, which has become mired in demands from European governments and volatile share prices.

Writing in an article published by three European newspapers, Enders and King dismissed what they termed "myths and misconceptions" about the plan, which has split industry and politicians ahead of an October 10 deadline to present its terms.

EADS Chief Executive Tom Enders embarked on shuttle diplomacy, meeting Lagardere in Paris and senior UK officials in London where he was expected to defend the merger plans at a previously scheduled speaking engagement in the British capital.

Experts on Europe's fractious defense industry said Lagardere's criticisms and a volley of remarks from Germany and elsewhere seemed designed to protect negotiating positions ahead of arm-twisting talks in coming days.

"It is like trade unions laying out their maximum demands before a pay negotiation," a person close to the talks said.

"LEAKS CAN RUIN EVERYTHING"

German Defense Minister Thomas de Maiziere expressed concerns about a rise of potentially harmful rhetoric.

"We don't want to add further fuel to the debate ... with more speculation. All the information leaks can lead to a result but they can also ruin everything.

"The ministers won't be party to this. Therefore, you can't make any assumptions about our positions. What you can assume is that we will find a common position. But it doesn't only depend on us."

A steep drop in global defense spending has prompted EADS and BAE to re-examine a tie-up to create a European giant to compete with U.S. rivals such as Boeing which almost came about in the late 1990s.

Lagardere, the French government and German automaker Daimler are part of a core shareholder pact which underpins EADS, which was formed in 2000 from major aerospace companies in Germany, France and Spain. Under the complex pact, Lagardere represents the combined French stake.

EADS and BAE have promised a "normalized" corporate governance structure under any merger, something considered essential to winning backing from UK and U.S. governments.

The joint CEO article touted the benefits of the deal but made scant reference to core shareholders who can block it, and Lagardere's statement served to remind the company and French government that its voice must be heard in any compromise.

Lagardere has said it wants to sell its 7.5 percent stake in EADS and will be keen to get the best valuation in any deal. It called the current proposed terms, which would give EADS shareholders 60 percent of a new company, "unsatisfactory".

"I think they just want the right parity for exit," one London-based arbitrage trader said of Lagardere's statement.

EADS shares have shed more than 4 billion euros ($5.2 billion) in value since news of the talks broke last month due to investors' misgivings. That means Lagardere's 7.5 percent stake has lost more than 300 million euros in value.

EADS and BAE both rose around one percent on Monday.

"GOLDEN SHARE"

Any deal would require agreement on the rights and/or ownership role of the British, German and French governments. Jobs are also an important component of the talks.

One source in Germany, who is privy to the negotiations, said a deal collapse was now more likely than reaching agreement among the three governments which all were pushing their interests in the complex commercial and political negotiations.

A UK defense ministry source said Britain would use a "golden share" in BAE to block a merger unless the new group's defense business is based in the United Kingdom with a British CEO. Other sources said this would not be a problem.

A source close to Daimler, meanwhile, said the company was keen for the matter to be resolved before next week's deadline, warning against lengthy talks.

"It has to be in the interest of EADS shareholders that there is certainty by October 10 whether a transaction can be carried out or not," the source said. "A needlessly drawn-out discussion would be harmful to both EADS and its shareholders."

German magazine Der Spiegel said on Sunday that France and Germany had agreed that each should hold a 9 percent diluted stake in the merged entity, citing high-level civil servants.

A spokesman for German Economy Minister Philipp Roesler declined to confirm or deny the report.

French officials were not immediately available to comment, but sources familiar with the matter denied the two sides were in agreement on the shareholding or how their relative interests should be guaranteed.

($1 = 0.7773 euros)

(Additional reporting by Blaise Robinson and Leila Abboud in Paris, Arno Schuetze in Frankfurt, Tim Hepher in London, Frank Siebelt in Germany.; Editing by Jason Neely and David Stamp)

DealBook: Geithner Urges an Overhaul of Rules on Money Market Funds

Andrew Harrer/Bloomberg NewsTreasury Secretary Timothy F. Geithner said changes in the rules for money market funds were “essential for financial stability.”

Treasury Secretary Timothy F. Geithner on Thursday urged the regulatory team that he leads to push ahead with new rules aimed at money market funds, which manage $2.6 trillion.

In a letter to the Financial Stability Oversight Council, a committee of senior regulators formed after the 2008 financial crisis, Mr. Geithner said the changes were “essential for financial stability.”

The Securities and Exchange Commission, which is the primary regulator for money market funds, had proposed the main changes favored by Mr. Geithner in his letter.

But the commission dropped its attempt at a money market fund overhaul last month after it became clear that a majority of its commissioners would not vote for the measures. Large mutual fund companies fiercely opposed the changes, saying they were unnecessary and could harm a type of investment fund that was popular.

“You can be sure that the firms on the receiving end won’t take this passively,” said Jay G. Baris, a lawyer at Morrison & Foerster, which represents money market funds.

During the 2008 crisis, investors fled money market funds, which worsened the credit freeze that gripped the banking system. The funds received a big bailout from the Treasury and the Federal Reserve.

Before the Dodd-Frank Act was passed, efforts to change the money market fund industry probably would have died after the commission dropped them. But the Financial Stability Oversight Council, set up by Dodd-Frank, can choose to take over from the commission.

In his letter, Mr. Geithner laid out a number of ways the council, which meets Friday, can act.

He urged it to gather public comments on a range of changes and then make a final overhaul recommendation to the S.E.C. The commission would be required to adopt those changes, or explain why it did not. Mr. Geithner said the council’s staff was already working on recommendations and said he hoped they would be considered at the council’s November meeting.

The recommendations would include two changes supported by the commission. One would require money market funds to hold loss buffers. The other would end the money market funds’ practice of valuing investors’ shares at $1 even when the funds’ assets should reflect a value slightly less than $1.

Mr. Geithner said in his letter that, while the S.E.C. is best positioned to regulate money market funds, the Financial Stability Oversight Council could proceed without waiting for the commission. The council, he wrote, could designate certain money market fund entities as systemically important and subject them to regulation by the Federal Reserve, which could then impose an overhaul.

Mr. Baris, the lawyer, said that designating a money market fund as systemically important could make it hard for it to stay in business. “Who would want to invest in a fund that has been designated by the federal government in this manner?” Mr. Baris said.

“It will drive investors away.” Mr. Baris said he believed that Mr. Geithner might face resistance on the council if any new rules were aimed at specific money market funds.

In addition, the council could designate money market fund activities as critical to the working of the financial system’s plumbing. That would allow regulators to impose heightened risk management standards on the funds.

Mr. Geithner wrote that without the changes, “our financial system will remain vulnerable to runs and instability.”

If the council acts, the mutual fund industry will almost certainly fight back. The industry’s lawyers will probably contest the council’s interpretation of Dodd-Frank and perhaps even the council’s authority to act.