Monday, February 1, 2010

Economic Events of the Week

Monday February 1 - President Obama submits FY11 Budget to Congress, Construction, ISM Manufacturing
Tuesday February 2 - Pending Home Sales Index
Wednesday February 3 - ADP National Employment Report
Thursday February 4 - Productivity and Costs
Friday February 5 - Employment Situation and Consumer Credit

e21 Exclusive
Rethinking "Too Big to Fail" -  What Does Failure Mean Anyway? (Papagianis)

Front Page News
Obama's $3.8 Trillion Budget Heading to Congress (Washington Post)

Washington Update
Budget Arrives Same Week As Jobs, Debt Limit Measures (Congress Daily)
Deficit to Hit All-Time High (Wall Street Journal)

Financial Markets News
Concerns Grow Over Recovery and Sovereign Risk (Financial Times)
The Loneliness of the Long Distance Runner (Bank of America)

Editorials and Commentaries
Good and Boring (Krugman in New York Times)
America Can Square Its Fiscal Circle (Crook in Financial Times)
What To Do Before Spending More on Health Care (Samuelson in Washington Post)
Deficit Lip Service (Wall Street Journal Editorial)

e21 Exclusive

Rethinking "Too Big to Fail" - What Does Failure Mean Anyway? (Papagianis)

Much of the debate about reforming financial regulation revolves around a single question: are certain financial institutions “too big to fail”?  This piece contrasts the cases of Lehman Brothers, AIG, and Bear Stearns to reveal that a true understanding of the “too big to fail” phenomenon requires a more precise definition of failure.

Front Page News

Obama's $3.8 Trillion Budget Heading to Congress (Washington Post)

The $3.8 trillion budget blueprint President Obama plans to submit to Congress on Monday calls for billions of dollars in new spending to combat persistently high unemployment and bolster a battered middle class. But it also would slash funding for hundreds of programs and raise taxes on banks and the wealthy to help rein in soaring budget deficits. Obama proposes to spend about $100 billion immediately on a jobs bill that would include tax cuts for small businesses, social safety net programs and aid to state and local governments. To reduce deficits, he would impose new fees on some of the nation's largest banks and permit a range of tax cuts to expire for families earning more than $250,000 a year, in addition to freezing non-security spending for three years. Despite those efforts, the White House expects the annual gap between spending and revenue to approach a record $1.6 trillion this year as the government continues to dig out from the worst recession in more than a generation.

Washington Update

Budget Arrives Same Week As Jobs, Debt Limit Measures (Congress Daily)

President Obama sends his FY11 budget request to Capitol Hill today, kicking off the process at a time of offsetting demands: the need to spend to address the unemployment rate and the economy, and pressure to control spending. Those two issues will come into sharp focus as the Senate prepares to unveil a multibillion-dollar jobs package and the House takes up legislation to raise the federal debt ceiling to $14.3 trillion, a $1.9 trillion boost. The debt limit legislation, while raising the amount of money the government can borrow, will include a provision to give pay/go budget rules the force of law, requiring spending and tax cuts to be offset. Giving pay/go the force of a statute has been a priority for House Democratic leaders.

Deficit to Hit All-Time High (Wall Street Journal)

President Barack Obama will propose on Monday a $3.8 trillion budget for fiscal 2011 that projects the deficit will shoot up to a record $1.6 trillion this year, but would push the red ink down to about $700 billion, or 4% of the gross domestic product, by 2013. The budget embodies Mr. Obama's larger predicament of needing to contain the deficit without harming the economy, which remains fragile. The deficit has become a major political issue, as antigovernment activists swing independents against what they describe as Mr. Obama's big-government policies and Republicans try to regain the mantle of fiscal responsibility after the Bush years saw surpluses swing to deficits.

Financial Markets News

Concerns Grow Over Recovery and Sovereign Risk (Financial Times)

A strong set of US growth figures published on Friday offered only limited reassurance to investors at the end of a week of escalating concerns about the global recovery and sovereign risk. Although the data initially rekindled superficial optimism about the US economic outlook, economists warned that the data offered little clarity given the sharp slowdown in the rate of inventory run-down. Sovereign risk fears ballooned as fears about Greece’s fiscal position mounted. The spread of the Greek 10-year government bond yield over its German counterpart – a measure of the risk premium demanded to hold Greek debt – reached a record above 400 basis points at one stage, although it narrowed slightly yesterday. The cost of insuring against a Greek sovereign default also hit a record – and the worries impacted elsewhere in the eurozone.

The Loneliness of the Long Distance Runner (Bank of America)

By 2011, we believe the healing in the economy will be far enough advanced to handle fiscal tightening. However, we have seen this movie before: in Japan, where policy makers repeatedly declared victory too early, short-circuiting the economic recovery. We worry that politicians will put fiscal policy on an automatic tightening track, when flexibility is warranted. Also, relentless attacks on the Fed, a close vote for Bernanke’s reconfirmation and the sight of Bernanke being forced to solicit votes has probably had a small negative impact on the Fed’s anti-inflation credibility and may have added a small risk premium to bond yields.

Editorials and Commentaries

Good and Boring (Krugman in New York Times)

In times of crisis, good news is no news. Iceland’s meltdown made headlines; the remarkable stability of Canada’s banks, not so much. Over the past decade the United States and Canada faced the same global environment. Both were confronted with the same flood of cheap goods and cheap money from Asia. In the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened. What did the Canadians do differently? Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.

America Can Square Its Fiscal Circle (Crook in Financial Times)

American voters want more public services than they are willing to pay for. That is the country’s fiscal problem in one sentence. When it comes to public finance, the “live now, pay later” mentality that caused the economic collapse still prevails. Washington’s paralysis on fiscal policy reflects attitudes in the country. People are concerned about overborrowing – and right to be, since the US is headed for fiscal collapse. But they are also devoted to outlays in excess of revenues. The sensitivity of Congress to public opinion is in most respects a virtue of American democracy. National bankruptcy of the sort that Britain experienced in the 1970s or Latin America in the 1980s would break the impasse, and this is what it might take. This would be my prediction, if I had to make one. But there are better cures for alcoholism than liver failure.

What To Do Before Spending More on Health Care (Samuelson in Washington Post)

By now, it ought to be obvious why President Obama has wanted his health-care overhaul passed quickly. It would be (and now will be) inconvenient to promote expanded government health spending while simultaneously pledging to rein in future budget deficits -- when unrestrained health spending is a major cause. It's like promising to go on a diet but first treating yourself to one last binge. Could big deficits one day trigger much higher interest rates or a run on the dollar? How to reconcile today's need for deficits -- to promote economic recovery -- with the long-term dangers? Good questions without easy answers. Before spending more, we need to spend better. If we don't, all possible outcomes are bad: high deficits or higher taxes; stunted take-home pay (squeezed by insurance premiums and taxes); lower spending on other programs; or meat-cleaver cuts in health spending.

Deficit Lip Service (Wall Street Journal Editorial)

President Obama promised—again—to get serious about the deficit in last week's State of the Union address. If you thought those were ironic smiles and hoots of approval in the Congressional audience, you were right. The new antideficit Beltway posturing is phony. Congressional liberals are already howling about Mr. Obama's proposed spending freeze, vowing to fight even this token gesture. If Americans want deficit reduction, they'll have to elect legislators who want to cut spending.

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