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Tuesday, February 21, 2012

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Economic Events of the Week

Wednesday – Existing Home Sales
Thursday – Jobless Claims, EIA Petroleum Status Report
Friday – Consumer Sentiment, New Home Sales

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Story of the Day
Congress Passes Payroll Tax Cut, Sends to Obama (National Journal)

Washington Update
Economic Report of the President (Council of Economic Advisors)
How Big is the Payroll Tax Cut? (TaxVox)

Market Talk
Officials Reach Bailout Deal for Greece (Washington Post)
US Corporates Lack Guidance (Financial Times)
S&P 500 Cheapest to Bonds (Bloomberg)

Editorials & Opinions
Bailout the FHA? (Washington Post Editorial)
Difference on Debt Reduction Not About “How Much” But “Who Pays?” (Treasury Note)
America Needs Its Own Infrastructure Bank (Rodney Slater in Financial Times)

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Story of the Day

Congress Passes Payroll Tax Cut, Sends to Obama (National Journal)

In a win for President Obama in an election year, the Senate joined the House in passing a $150 billion package extending an employee payroll-tax rate for the rest of the year. The conference report, which now heads to President Obama for his signature, also extends federal unemployment benefits and blocks a reimbursement cut for physicians who accept Medicare. The bill passed the Senate 60-36. The House passed the bill, 293 to 132 minutes earlier. Passage is a victory for Obama and congressional Democrats. Congressional Republicans bowed to political pressure and allowed the payroll portion of the package to be included without offsets. The payroll tax cut has been a key part of Obama’s campaign push for jobs legislation.


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Washington Update

Economic Report of the President (Council of Economic Advisors)

The problems that caused the deep recession that began at the end of 2007 and lasted until mid-2009 were a long time in the making and will not be solved overnight. But in 2011, the Nation continued to recover from the Great Recession and to make progress toward building a stronger foundation for more balanced and sustainable economic growth in the future. The economy has expanded for 10 straight quarters. As a result of this growth, by the third quarter of 2011, the real gross domestic product (GDP) of the United States had surpassed its peak level at the start of the 2007–09 recession. Sustaining and strengthening the ongoing recovery remains a top priority for the Obama Administration, while seeking to address the fundamental imbalances and other problems that had built up for decades and erupted with the financial and economic crisis in 2008.

How Big is the Payroll Tax Cut? (TaxVox)

The 2-percentage-point payroll tax cut extended by Congress in December and again last week will save workers a total of $114 billion this year, according to the Joint Committee on Taxation. Spread over nearly 160 million workers, that’s an average tax cut of $714. Yet the typical news report says “the average worker earning $50,000 [will] take home an extra $1,000.” That’s a big difference. What’s going on? The calculation implicit in the news report is simple arithmetic—2 percent of $50,000 is $1,000. But the average worker earns much less—just under $40,000 in 2010, according tothe Social Security Administration. That suggests that the average tax saving would be about $800, still more than $714.


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Market Talk

Officials Reach Bailout Deal for Greece (Washington Post)

After months in which Greece teetered on the verge of bankruptcy, European officials agreed Tuesday to give the country a second massive bailout in exchange for harsh austerity measures, as grim new estimates about the country’s economy pushed off a resolution until what some officials called the last possible day to reach one. The decision buys time for the Mediterranean country to try to fix its staggering problems, and gives assurances to the world that a Greek default — and its possibly disastrous ripple effects — will be forestalled, at least for now. If Greece had been cut loose, it would have defaulted in late March, and doubts about the viability of larger countries such as Spain and Italy might have grown. The euro jumped in value, surging 0.7 percent in minutes, to $1.328, as news of the accord emerged from the all-night meeting. Under the terms of the deal, private bondholders will take a larger loss than had previously been planned in an attempt to get Greece’s debt to what European officials consider a sustainable level by 2020. The officials also agreed to reduce the interest they charge Greece for the long-term loans.

US Corporates Lack Guidance (Financial Times)

US companies are more uncertain about the future than at any point since the financial crisis, with just one in five of the country’s biggest corporations making any predictions as they published fourth-quarter results. “We’re seeing a marked reluctance from companies to be concrete in their forecasts,” said Christine Short at data provider Standard & Poor’s Capital IQ. “When companies have talked about prospects for 2012, they have tended to make generic comments, which could apply to any company in any sector.” Some 410 companies in the S&P 500 index have reported results so far and just 86 of them offered an earnings per share forecast for the first quarter of 2012. That is on track to be the lowest number since the third quarter of 2009, when companies were still weighing up the impact of the financial crisis.

S&P 500 Cheapest to Bonds (Bloomberg)

The Standard & Poor’s 500 Index is approaching the cheapest level ever compared with bonds as Federal Reserve Chairman Ben S. Bernanke’s zero-percent interest rates drive investors and companies from cash. Profits that doubled since 2009 pushed the index’s so- called earnings yield to 7.1 percent, close to the highest on record when compared with the 10-year Treasury rate, according to data compiled by Bloomberg since 1962. American companies have boosted capital spending 35 percent over six quarters, the most since 2006. “Conditions are almost ideal for equity investors relative to all other investments,” Keith Wirtz, who oversees $14.6 billion as chief investment officer for Fifth Third Asset Management in Cincinnati, said in a Feb. 14 telephone interview. “The Fed’s keeping rates low for the foreseeable future to try to stimulate the environment for employee hiring and business activity. What does that mean for capital markets? Savers are not being rewarded.”


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Editorials & Opinions

Bailout the FHA? (Washington Post Editorial)

Is the Federal Housing Administration the solution to the current housing meltdown or the cause of the next one? Formerly an obscure agency with a limited mission — insuring mortgages with low down payments for creditworthy but low-income buyers — the FHA has filled the gap in mortgage liquidity left by the collapse of private-sector housing finance since 2008. According to supporters of the FHA’s expansion, its $1 trillion balance sheet represents the difference between the distressed housing market we have and the destroyed one we could have had. To critics, however, the use of the FHA to prop up a downward-spiraling real-estate market has set the stage for an inevitable taxpayer bailout. President Obama’s budget provides fresh ammunition for the critics. It includes a projection that the FHA will soon exhaust its capital because of mounting losses on its mortgage insurance portfolio, necessitating a $688 million infusion from the U.S. Treasury before Sept. 30.

Difference on Debt Reduction Not About “How Much” But “Who Pays?” (Treasury Note)

The Budget released by the President this week uses a balanced approach to achieve more than $4 trillion in deficit reduction over the next 10 years.  This level of savings and the manner in which they are accomplished are broadly consistent with the bipartisan deficit reduction proposals put forward by the Bowles-Simpson Commission and the Senate’s bipartisan “Gang of Six.”  Using this balanced approach, the President’s Budget reduces deficits from about 9 percent of GDP in 2011 to below 3 percent by 2018, and stabilizes the debt as a share of the economy by the middle of the decade. In general, there is little disagreement on the magnitude of savings that are needed over the next decade to put us on a sustainable fiscal course.  Rather, the main difference between the President and Republicans is related to the composition of these savings.

America Needs Its Own Infrastructure Bank (Rodney Slater in Financial Times)

America needs to invest in infrastructure. Despite signs of improvement, our economy is still in crisis. We could create millions of jobs by rebuilding our transport and water systems – ending the congestion that stifles our ports, airports, railroads and highways; increasing productivity; and empowering the US to compete with countries that are investing in infrastructure on a massive scale. Infrastructure financing tools are available, providing Washington wants to use them. They could bolster investment by leveraging hundreds of billions of dollars in private and international capital. The potential tools include a national infrastructure bank and other relatively minor legislative changes to encourage private investors off the sidelines. American mutual funds, pension funds and retail investors allocate relatively small portions of their $37,000bn in capital to new infrastructure initiatives. Creating a national infrastructure bank is not a new idea but it finally may be gaining traction.


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