Tuesday, March 2, 2010

Economic Events of the Week

Tuesday March 2 - House Financial Services Committee hearing on housing finance reform
Wednesday March 3 - ADP National Employment
Thursday March 4 - Productivity and Costs, Pending Home Sales Index
Friday March 5 - Employment Situation and Consumer Credit

e21 Exclusive
Shareholder Activism: Background and Policy Lessons (Papagianis)

Front Page News
Obama to Outline Tweaked Healthcare Proposal, Process Wednesday (Congress Daily)

Washington Update
Senate Panel Said to Scrap Obama's Consumer Agency (Bloomberg)

Financial Markets News
Bill Gross' March Investment Outlook (Pimco)
European Sovereign Credit Risk: A New Phase of the Financial Crisis (Deutsche Bank)

Editorials and Commentaries
The Post-Crisis Fix: Regulatory or Monetary Policy Remedies? (Roach of Morgan Stanley)
Building Momentum for Fiscal Responsibility (Majority Leader Steny Hoyer Speech)
Lawrence Summers on High US Unemployment (Financial Times Video)

e21 Exclusive

Shareholder Activism: Background and Policy Lessons (Papagianis)

A recent article in Barron’s highlighted the outsized returns generated by “activist investors” in 2009. The “shareholder activist” is an investor or investment manager who buys shares in a corporation with the intent of directly influencing management. While the “causes” pursued by activists differ widely, the dominant form of activism in 2009 related to corporate governance – existential questions about how to run a business. According to the research firm 13D Monitor – 13D is the SEC filing that must be made when an investor’s ownership interest exceeds a 5% threshold – corporate governance activism yielded outsized returns. The share prices of large firms with these “shareholder activists” increased by 84.3% in 2009 relative to 16.1% overall increase for the S&P 500.

Front Page News

Obama to Outline Tweaked Healthcare Proposal, Process Wednesday (Congress Daily)

President Obama Wednesday will outline both a streamlined healthcare overhaul proposal that could include some Republican ideas and the process he thinks Congress should follow to get the measure passed. Democrats have discussed a scenario under which the House passes the overhaul the Senate passed in December and a separate bill through the budget reconciliation process that would make changes to the Senate measure. Obama's proposal, which he originally released on Feb. 22, is based on the Senate bill to allow for that scenario. Both chambers disagree on the order in which the bills should pass since the House has no assurances that the Senate can get 51 votes for the reconciliation measure.

For more, read Keith Hennessey's detailed post on the challenges of the two bill strategy and Republican Whip Eric Cantor's vote-counting memo in which he argues there are only 203 yes votes in the House (15 votes short of a majority).

Washington Update

Senate Panel Said to Scrap Obama's Consumer Agency (Bloomberg)

Senate Banking Committee negotiators, working through the weekend, agreed to drop the stand-alone consumer agency sought by the Obama administration and opposed by the banking industry, removing an obstacle that has stalled new U.S. financial rules. The negotiations focused on President Barack Obama’s Consumer Financial Protection Agency, which stalled talks on the overhaul, with Dodd proposing a bureau in the Treasury and Senator Richard Shelby, the committee’s top Republican, suggesting such powers go to the Federal Deposit Insurance Corp.

Financial Markets News

Bill Gross' March Investment Outlook (Pimco)

The fundamental economic problem of our age is a lack of global aggregate demand. How did we get to where we are today? First, twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries’ workers, forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an “aggregate demand” gap. Second, the bursting of the credit bubble led to the Great Recession and private sector deleveraging, the beginning of government policy reregulation, and gradual deglobalization. For awhile it seemed that all was well, that the government’s checkbook could replace the private market’s wallet and credit cards. However, Dubai, Iceland, Ireland and recently Greece pointed to a potential flaw in the model. Shaking hands with the government was a brilliant strategy in 2009 when it was assumed that governments had an infinite capacity to leverage themselves.

European Sovereign Credit Risk: A New Phase of the Financial Crisis (Deutsche Bank)

The financial crisis began with the deterioration in real estate crisis in early 2007 and spread to a global banking crisis in 2008 and 2009. We are now entering the third phase of the global financial crisis: sovereign credit risk. In addition to examining the problem and potential solutions, we focus on a full range of potential implications including: impact on bond market conditions, the U.S. economy, the European economy, U.S. banks, European banks, Central Bank policies, bank credit facilities, sovereign debt markets, capital flows, foreign exchange markets, commodities and financial regulatory reform.

Editorials and Commentaries

The Post-Crisis Fix: Regulatory or Monetary Policy Remedies? (Roach of Morgan Stanley)

The early betting is that post-crisis remedies will be concentrated in a new approach to regulatory oversight—specifically the imposition of new “macro-prudential” regulations aimed at the twin concerns of systemic risk and financial stability. While this approach undoubtedly has considerable merit, it may not be enough to prevent another crisis from occurring in the not-so-distant future. Also needed, in my opinion, is a major reworking of the mandate that guides the role and conduct of monetary policy. Specifically, the addition of a financial stability mandate could go a long way in forcing central banks to face up to the destabilizing perils of asset bubbles and the imbalances they have spawned in the mix of global saving as well as on the real side of increasingly asset-dependent economies.

Building Momentum for Fiscal Responsibility (Majority Leader Steny Hoyer Speech)

When it comes to budgeting, what is politically easy is often fiscally deadly. It is easier to pay for tax cuts with borrowed money than with lower spending; easier to hide the true costs of war than to lay those costs before the people; easier to promise special cost-of-living adjustments than explain why an increase is not justified under the formula in law; easier to promise 95% of Americans that we won’t consider raising their taxes than to ask all Americans to contribute for the common good. Those kinds of easy choices are so often selfish choices—because they leave the chore of cleaning up to someone else. Easy choices may be popular—but the popularity is bought on credit.

On Hoyer's speech, Bruce Bartlett crows that "we have been looking for a real leader in Congress for some time who does more than pander...perhaps Mr. Hoyer is the man" while Don Marron also praises Hoyer for "building a reputation as one of our most thoughtful leaders when it comes to budget matters."

Lawrence Summers on High US Unemployment (Financial Times Video)

The Financial Times' Washington bureau chief talks President Obama's director of the National Economic Council discussing the high level of American joblessness, the crisis in Greece and its broader impact on Europe, the continuation of economic imbalances between the US and China and the ongoing debate on the effects of last year's economic stimulus.

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