Tuesday, March 9, 2010

Economic Events of the Week

Tuesday March 9 -
Wednesday March 10 - Wholesale Trade, Regional and State Employment and Unemployment, Treasury Statement
Thursday March 11 - Initial Claims Weekly, Trade Balance
Friday March 12 - Advance Retail Sales, Business Inventories, European Union Trade Commissioner begins three day visit to Washington to seek progress on the Doha round of talks

Front Page News
Obama Launches Attach On Health Insurance Companies (Washington Post)

Washington Update
Bair Seeks Upfront Levy on Big Banks (Financial Times)

Financial Markets News
Preparing for a Smooth (Eventual) Exit (Speech by Vice President of NY Fed)
State Finances Face a Tough Road Ahead (Wells Fargo)

Editorials and Commentaries
Health Care Reform CPR (KeithHennessey.com)
False Alarm Over Chinese Bubbles (Roach in Morgan Stanley)
The Deficit Commission Trap (Wall Street Journal Editorial)

Front Page News

Obama Launches Attach On Health Insurance Companies (Washington Post)

Obama and his health secretary staged a two-pronged attack Monday in a stern letter to health insurance chief executives and a speech in which the president castigated insurance companies 22 times. "How much higher do premiums have to rise," he demanded, "before we do something about it?" The messages are part of a strategy that Obama and those around him have begun to employ lately, to ratchet up the pace and the populist appeal of their rhetoric against the health insurance industry. The barbed tone moves far beyond that of the 2008 presidential campaign, when Obama began to say that medical coverage should be accessible and affordable for more Americans.

For more on controlling health care costs, read Secretary Sebelius' letter to insurance company CEOs in which she calls on the executives to "publicly justify health insurance premium increases." Harvard Professor David Cutler writes in the Wall Street Journal that his own calculations "suggest that the reforms will save nearly $600 billion over the next decade and even more in the subsequent one" while the New York Times reports that state insurance officials worry that under Obamacare "they would be left to police the solvency of health insurance companies while federal officials pressured insurers to reduce premiums." At the EconLog blog Arnold Kling stages a debate on the causes of health care inflation between himself and Daniel Callahan.

Washington Update

Bair Seeks Upfront Levy on Big Banks (Financial Times)

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, on Monday called for an upfront levy on large financial institutions to pay for the costs of their failure – but she signalled willingness to compromise. As regulatory reform talks grind towards a conclusion in the Senate, Ms Bair told the Financial Times that she was still pushing for a pre-funded “resolution authority” to wind down the next Lehman Brothers-style failure even though the biggest banks faced an additional $90bn tax announced by President Barack Obama.

Financial Markets News

Preparing for a Smooth (Eventual) Exit (Speech by Vice President of NY Fed)

When the time comes to tighten monetary policy, the Federal Reserve will be embarking on a tightening cycle like no other in its history. First, this tightening cycle will have two policy dimensions, in that the FOMC will have to decide on the path of its asset holdings in addition to the path of the short-term interest rate. Second, we will be using tools to drain reserves that are new and that will have to be implemented on a scale that the Fed has never before tried. And third, we will be operating in a framework of interest on reserves that has not been fully tested in U.S. markets. For excerpts, see the Real Time Economics Blog.

State Finances Face a Tough Road Ahead (Wells Fargo)

Even with the recovery finally taking hold, the outlook for state finances remains bleak. The exceptionally weak labor market, with high and unusually long-term unemployment, continues to restrain personal income tax receipts, while falling home prices and disappointing retail sales are hitting property and sales tax collections. State lawmakers already closed a cumulative budget gap of $158.5 billion earlier in fiscal year 2010, but new gaps have emerged as revenues have failed to keep pace with spending. Midyear budget gaps bring the total shortfall for fiscal 2010 to $196.2 billion.

Editorials and Commentaries

Health Care Reform CPR (KeithHennessey.com)

The President’s chance of legislative success is way above the 10% I projected shortly after the Brown election when I declared a comprehensive bill dead.  Was I wrong, or have things changed dramatically?  A little of both, I think. As of this posting, Intrade estimates about a 50% chance of success.  That seems a little high.  I’ll guess it’s a coin toss as to whether the Speaker can round up 216 votes for two bills, multiplied by an 80% chance that if she does they can overcome other hurdles to get two signed laws.  That puts me at a 40% chance President Obama gets to declare victory, but with lots of uncertainty. Click through for an analysis of vote counting, timing, process, and the probability a comprehensive bill becomes law.

False Alarm Over Chinese Bubbles (Roach in Morgan Stanley)

Once again, the China skeptics are out in force. Tales of asset bubbles—property and credit— and/or an imminent banking crisis are making the rounds. These fears are overblown. Unlike Japan and the United States, where speculative activity in both asset markets and the real economy was followed by major post-bubble aftershocks, there are solid underpinnings to China’s resilience. The demand side of Chinese residential property markets draws support from a massive wave of rural-urban migration that is running at 15–20 million citizens per year. Moreover, like all developing nations, China can always use more infrastructure. Nor has the equity market formed a new bubble. While domestic Chinese equity prices surged by 85% during 2009, the market remains at half the peak levels of 2007.

The Deficit Commission Trap (Wall Street Journal Editorial)

Now that they have raised federal spending as a share of GDP to 25% and don't want to return to the 20.7% 40-year average, Democrats are looking for political cover to pay for it. They want the commission to declare that there's no way you can cut future spending enough to balance the budget, and then to propose ways to raise huge new chunks of revenue beyond the current tax code. Mr. Obama's nominees will endorse both propositions, and if GOP appointees go along the headline will be: Bipartisan Commission Says Taxes Only Way to Balance Fisc. One way to increase the odds of dodging this trap would be for Senate Minority Leader Mitch McConnell to name the likes of former Texas Senator Phil Gramm as one of his three appointees.

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