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Thursday, March 15, 2012

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Economic Events of the Week

Thursday – Producer Price Index, Philadelphia Fed Survey
Friday – Consumer Price Index

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Story of the Day
The Villian (Roger Lowenstein in The Atlantic)

Washington Update
Democrats Move to Slow ‘Jobs’ Bill (CQ)
Half the Public Thinks Supreme Court Should Strike Down Health Law (Kaiser)

Market Talk
Fed Stress Tests: Too Harsh, Not Harsh Enough, or Just Right? (Real Time Economics)
Tarullo’s Revolution Reprograms Fed’s Regulation of Banks (Bloomberg)

Editorials & Opinions
Default and the Nature of Government (Alex Pollock in Wall Street Journal)
Why I am Leaving Goldman Sachs (Greg Smith in New York Times)
In Time of Stress (Financial Times Editorial)
Boosting the Economy Through Natural Gas Exports (Washington Post Editorial)

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Story of the Day

The Villian (Roger Lowenstein in The Atlantic)

The left hates him. The right hates him even more. But Ben Bernanke saved the economy—and has navigated masterfully through the most trying of times. The Federal Reserve was founded 99 years ago, as a bulwark to the banking system and an antidote to its frequent runs and panics. Strictly speaking, it was America’s third attempt at a central bank. The first, organized by Congress in 1791, was allowed to expire after 20 years, leaving the young republic with only a patchwork system of weaker state banks. During the War of 1812, Congress realized its error, and in 1816, it chartered a second bank, again for 20 years. Alas, President Andrew Jackson, a fierce opponent of both paper money and national banks, campaigned in 1832 against renewal of the charter, and indirectly against the bank’s brilliant but impetuous head, Nicholas Biddle. Resentment against financiers was running high, and the election became a referendum on the genteel Philadelphia banker versus the rough-hewn war hero—and a referendum on the bank itself. Jackson won, and the Second Bank was, per his promise, destroyed. The U.S. economy promptly plunged into a severe depression. Biddle died not long after, in semi-disgrace, but the battle between bankers and populists never went away. None of the invective heaped, of late, on Ben Bernanke would have come as a surprise to Biddle, and one doubts whether the Fed would fare much better with the electorate today than the Second Bank did in the 19th century.


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Washington Update

Democrats Move to Slow ‘Jobs’ Bill (CQ)

The Senate has agreed to begin debate Thursday on fast-moving legislation to loosen securities regulations that affect smaller companies, and, although passage appears certain, it is unlikely to occur before early next week. Democrats and Republicans generally remain at odds over how best to spur economic growth and curb still-high unemployment, but they have reached consensus on the desirability of helping small enterprises raise capital. That has led sponsors to say they are promoting a “jobs” bill, which, in turn, has pushed the bill toward enactment relatively quickly. A vote on passage in the Senate appears unlikely Thursday, said a Senate Democratic aide, and that probably means action on the measure will slip until at least March 20, as Democratic opponents of the measure try to bolster protections for investors.

Half the Public Thinks Supreme Court Should Strike Down Health Law (Kaiser)

As the Patient Protection and Affordable Care Act nears its second birthday, the latest Kaiser Health Tracking Poll finds that public opinion on the law remains evenly split with sharp divisions along partisan lines, much as it has been since the law was passed. With the Supreme Court preparing to hear challenges to the law later this month, about half the public thinks the Court should strike down the individual mandate, which has been and continues to be the law’s least popular provision. The public is not yet paying close attention to the legal proceedings, and opinions on what the Court should do about the mandate mirror views on the law overall, with most of those who oppose the law wanting the Court to find the mandate unconstitutional, and half of those who favor the law preferring the opposite outcome.


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Market Talk

Fed Stress Tests: Too Harsh, Not Harsh Enough, or Just Right? (Real Time Economics)

The vast majority of analysts seem to think the hypothetical downturn the Federal Reserve used for its latest round of stress tests was sufficiently harsh to provide a credible test of the nation’s 19 largest banks. “We’re talking about a practically apocalyptic economic scenario and the banks are still standing,” said Paul Ashworth, chief U.S. economist for Capital Economics. But not everyone thought the test was as vigorous as it should have been. Simon Johnson, the former chief economist at the International Monetary Fund, criticized the Fed’s test for not taking into account the impact of potential interest-rate risk, or the possibility that long-term interest rates could rise and cut into the value of bonds banks are holding on their books.

Tarullo’s Revolution Reprograms Fed’s Regulation of Banks (Bloomberg)

Not long after President Barack Obama picked Daniel Tarullo for a seat on the Federal Reserve Board, he sat down for the standard briefing with the staff and promptly turned the tables on them. Tarullo told them they had made mistakes in supervision, and he wouldn’t defend their past actions. Later, he told Richard Shelby, the leading Republican on the Senate Banking Committee, he endorsed Shelby’s view that regulators had fallen down. He said it was time to “reshape” regulation. In the past three years, no one has done more to strengthen government’s grip on the financial system. A former law professor and aide to President Bill Clinton, Tarullo, 59, has piloted implementation of the Dodd-Frank Act, the most sweeping overhaul of financial regulation since the 1930s. He has a larger say in banks’ day-to-day decisions on compensation, dividends, stock buybacks, mergers and risk-taking. And he has buried former Chairman Alan Greenspan’s light-touch regulation that kept the Fed from doing more about risky mortgage practices in the last decade.


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Editorials & Opinions

Default and the Nature of Government (Alex Pollock in Wall Street Journal)

Because governments always promote government debt and can pressure banks into buying it, future sovereign debt crises are inevitable. Twenty-first century economists, financial actors and regulators blithely talked of the "risk-free debt" of governments, and European bank regulators set a zero-capital requirement on the debt of their governments. The manifold proof of their error is that banks and other investors are now taking huge credit losses on their Greek government bonds. The only question is why anybody would be surprised by this. The governments of country after country defaulted on their debt in the 1980s, a mere generation ago. In a longer view, Carmen Reinhart and Kenneth Rogoff count 250 defaults on government debt from 1800 to the early 2000s. As Max Winkler wrote in his instructive 1933 book, "Foreign Bonds: An Autopsy": "The history of government loans is really a history of government defaults."

Why I am Leaving Goldman Sachs (Greg Smith in New York Times)

Today is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it. To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for. It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients.

In Time of Stress (Financial Times Editorial)

The latest round of US stress tests, conducted under the aegis of the Federal Reserve, has confirmed what was already known about the health of American banks. They are in a much ruder state than their sickly European counterparts. Having been swifter to recognise losses and restore depleted capital bases, they are less exposed to the headwinds of deleveraging. Health, however, is a relative concept. For the banks to support a US recovery, they must build up excess capital so they can expand their lending while maintaining the thicker capital cushions that more risk-averse investors now demand. In this respect, the strengthening of the US financial system remains incomplete. Yet for many banks the priority seems to be to jack up capital returns to shareholders. Regulators should treat such plans with caution.

Boosting the Economy Through Natural Gas Exports (Washington Post Editorial)

In an otherwise gloomy economic time for the United States, the boom in natural-gas production has been a dazzling bright spot. Thanks in large part to expanded production of previously inaccessible shale gas, the United States has passed Russia as the world’s largest gas producer, with an output of more than 23 trillion cubic feet in 2011. As the price of natural gas has plummeted, consumers have benefited from lower electricity rates, the cost of manufacturing in the United States has gone down, and thousands of jobs have been created. As recently as 2005, many experts thought that the United States would need more liquefied natural gas imports. Now, the U.S. industry is gearing up to export gas, including LNG. The Energy Department recently approved Cheniere Energy’s plan to export 2.2 billion cubic feet a day of LNG from a facility in Louisiana that was originally intended to take in imports. The department is considering applications from seven other companies. If the Energy Department approves them all, the United States would be capable of exporting a quantity of gas equal to almost a fifth of current consumption.


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