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Monday, February 13, 2012

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Economic Events of the Week

Tuesday – Retail Sales
Wednesday – FOMC Minutes
Thursday – Housing Starts, Producer Price Index
Friday – Consumer Price Index

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e21 Reaction & Commentary
e21 Commentary: Don't Repeat Costly Policy Mistakes with Employer-Provided Pensions (Charles Blahous)

Washington Update
Obama’ Budget Much Ado About Nothing (Congress Daily)
Lew Defends Obama’s Spending Plan (Washington Post)

Market Talk
Charting the Federal Reserve’s Assets 1915-2012 (Zero Hedge)
Reading the Bump in Inventories (Macro Blog)
Quarter of Work Force Drop Outs Go on Disability (Sober Look)

Editorials & Opinions
Break Up the Banks? Here’s the Alternative (Tyler Cowen in New York Times)
What Is Bernanke Saying About Housing? (Arnold Kling in EconLog)
Is Capitalism in Crisis? (Gary Becker’s Blog)
Why Greece and Portugal Out to Go Bankrupt (Wolfgang Munchau in Financial Times)

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e21 Reaction & Commentary

e21 Commentary: Don't Repeat Costly Policy Mistakes with Employer-Provided Pensions (Charles Blahous)

The risk that the nation’s pension insurance system will become untenable continues to climb, threatening dire future choices between widespread worker benefit losses and a taxpayer-financed bailout. Last November it was revealed that the deficit in the PBGC pension insurance system (the shortfall of its assets relative to its projected liabilities) had reached $26 billion, and that the cost of “reasonably possible” terminations of insured pension plans had jumped to a sobering $250 billion. PBGC’s net deficit is now the highest in its history. As policy makers confront this situation, they must take care not to repeat past policy mistakes that are virtually certain to lead to future disaster.


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Washington Update

Obama’ Budget Much Ado About Nothing (Congress Daily)

If there was ever a year to ignore the president’s annual budget proposal, this is it. The White House plan to be released on Monday is a starting pistol in a long budget fight more than it is a blueprint for a Congress that mostly ignores the plan. The gun will be more muffled than ever this year. That’s because lawmakers have already agreed on a fiscal 2013 discretionary spending cap that both sides acknowledge will be what appropriators use as a limit for the year. Democrats say the $1.047 trillion cap, included in last year’s Budget Control Act, is for all intents and purposes, a budget. That is what Senate Majority Leader Harry Reid, D-Nev., insisted when he said he will not bring a fiscal 2013 budget resolution to the floor, even if the Senate Budget Committee passes one. Appropriators, after all, allocate discretionary funding a year at a time. One year of discretionary funding is exactly what the measure caps. Budget resolutions suggest other spending restrictions but do not require them.

Lew Defends Obama’s Spending Plan (Washington Post)

White House Chief of Staff Jacob J. Lew on Sunday dismissed Republican criticism of President Obama’s latest spending plan, arguing that it charts a long-term strategy for tackling the national debt while offering a short-term boost to the recovering economy. The budget request, due on Capitol Hill on Monday, calls for spending $3.8 trillion in 2013, according to sources with knowledge of the document, including fresh increases for roads, infrastructure, manufacturing and education, as well as a year-long extension of emergency unemployment benefits and a temporary payroll tax holiday. The White House says those investments would “construct an economy that is built to last.” But they would also keep annual budget deficits above or hovering near $1 trillion for a fifth straight year. Congressional Republicans seized upon the deficit projections when they were released Friday, noting that Obama has failed to keep a 2009 promise to cut the deficit in half by the end of his first term.


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Market Talk

Charting the Federal Reserve’s Assets 1915-2012 (Zero Hedge)

Here we present a history of the Fed in charts. As you’ll surely glean from the below — the Fed has degenerated from a by and large passive institution (dealing only in high-quality self-liquidating commercial paper and gold) to an active pursuant of junk, an enabler of wars, a ‘benevolent’ combatant of the depressions of its own creation, a central planner of employment & prices and of course a forgiving friend to inconvenient market follies.

Reading the Bump in Inventories (Macro Blog)

Last week’s wholesale trade report, with its positive surprise in December inventory accumulation, has estimates of fourth quarter gross domestic product (GDP) on the rise again. For the advance GDP release, the U.S. Bureau of Economic Analysis assumed that the book value of merchant wholesale inventories rose by $17 billion (at a seasonally adjusted annual rate, or SAAR) in December. The wholesale trade report suggests the book value instead may have risen by $56 billion SAAR. Our own calculations suggest fourth quarter GDP may be revised up from 2.8 percent to around 3.1 percent. A piece of that revision comes from positive sales activity, which would appear to be an unambiguous plus. The inventory piece is trickier. Forecasters have a tendency—because the statistics have a tendency—to take a larger-than-expected inventory buildup in one quarter out of growth estimates for the next quarter. The implication in present tense is, of course, that 2012 may start out on the slow side as the fourth quarter inventory swell is run off.

Quarter of Work Force Drop Outs Go on Disability (Sober Look)

How does one survive after losing unemployment benefits? Clearly people struggle. One way to pay the bills however is to file for and receive the federal disability benefits - assuming of course one has a disability. Interestingly enough, the Great Recession and the slow recovery somehow generated many more disability recipients. As of January over 8.5 million individuals were receiving federal disability payments (an additional 2 million spouses and children of disabled workers also received disability payments). Since the onset of the recession and the subsequent slow recovery, this figure has accelerated and grown faster than the overall size of the potential labor force— currently 5.3% of the population aged 25-64 is on federal disability, up from 4.5% when the recession began.


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Editorials & Opinions

Break Up the Banks? Here’s the Alternative (Tyler Cowen in New York Times)

Bailing out financial institutions deemed “too big to fail” has become wildly unpopular, as people across the political spectrum are now talking about splitting up America’s large banks. But such breakups are probably not the best way forward, because they would penalize size instead of failure. There is a better alternative: expanding the liability for major financial institutions. If a shareholder invests a dollar in a big bank, why not make that shareholder liable for the first $1.50 — or more — of losses as insolvency approaches? In essence, we would be making the shareholders liable for the costs that bank failures impose on society, and making the banks sort out the right mixes of activities and risks.

What Is Bernanke Saying About Housing? (Arnold Kling in EconLog)

There will be a housing market equilibrium when: (a). The excess stock of housing has been absorbed. It does not matter whether this absorption takes the form of renting or owner-occupancy. (b). Households are no longer consuming excess housing services relative to their incomes. My guess is that the biggest barrier to achieving equilibrium has been policies aimed at preventing foreclosure. Such policies clearly impede (b). They also impede (a), because the longer you delay foreclosure, the more the property gets trashed and the harder it is to sell. To Bernanke's credit, his speech does not champion foreclosure prevention. The policy suggestion that he pushes the most is to reduce institutional barriers to converting foreclosed houses into rental properties. If such barriers truly are important, then his suggestions would hasten (a). However, my view is that housing is fungible enough for (a) to take care of itself.

Is Capitalism in Crisis? (Gary Becker’s Blog)

Capitalism in Crisis is the title of a long series of articles in the Financial Times by many participants. No doubt, the severity of the Great Recession has temporarily weakened the respect for capitalism, for “free” markets, and among other things, for the Chicago school of economics. Yet I will argue that the FT’s title should have had a question mark, as in: Is capitalism in crisis? My answer is that while certain aspects of the economic organization of capitalist countries like the United States should be changed to reduce the chances of future severe recessions, it remains true that economies which are competitive and capitalistic have the best prospects for sizable long-run economic growth. The Great Recession reinforced the lesson of prior panics and financial crises, lessons forgotten during the Great Moderation from about mid 1980s to 2006, that the financial sector has a fundamental built-in instability. In the past this was mainly associated with “runs” on banks, as during the Great Depression of the 1930’s. The instability of modern financial institutions is no longer much related to bank runs because of deposit insurance; rather it is mainly the result of the incentive for financial institutions to raise their profits by increasing their assets relative to their capital.

Why Greece and Portugal Out to Go Bankrupt (Wolfgang Munchau in Financial Times)

Two years ago, most European policymakers still believed that Greece would pull through. They lacked experience in managing financial crises. They did not even consult with policymakers in other parts of the world who had dealt with crises in previous decades. Armed with ignorance and arrogance, they ended up repeating everyone else’s mistakes. They thought they were clever when they came up with the idea of an expansionary fiscal contraction. And they thought that a voluntary private sector involvement could really help. Having failed to learn from the mistakes of others, some of them are now beginning to learn from their own. In some northern European capitals, policymakers are beginning to understand that the Greek programme has been an unmitigated failure. They have lost trust in Greek politics. As we enter year five of a depression, and the certainty that Greek gross domestic product will fall further under the influence of austerity, they are on the verge of giving up on Greece.


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