Wednesday, April 28, 2010

Economic Events of the Week

Wednesday April 28 - Federal Open Markets Committee announces interest rate decision
Thursday April 29 - Jobless Claims, EIA Natural Gas Report
Friday April 30 - GDP Q1 (advance)

e21 Exclusive
OMB Says: Yes We're Raising Your Taxes by Over $1.7 Trillion

Front Page News
Greek Junk Contagion Presses EU to Broaden Bailout After Rout (Bloomberg)

Washington Update
Finance Bill Is Blocked Again (Wall Street Journal)
Obama Tells Debt Commission 'Everything Has to Be on the Table' (New York Times)

Financial Markets News
Consumer Confidence Rises Solidly in April (Wells Fargo)

Editorials and Commentaries
Yes, It's a Bailout Bill (Swagel in The American)
Why Cautious Reform is the Risky Option (Wolf in Financial Times)

e21 Exclusive

OMB Says: Yes We're Raising Your Taxes by Over $1.7 Trillion

In recent months, Americans across the country have expressed increasing concern about the new tax burden that will be necessary to finance exploding federal spending. In each of the years 2009-2011, this spending will be approximately equal to one-quarter of the entire economy, its highest level since the world war era. At a time when recession and baby boomer retirements were already swelling expenditures, the federal government has chosen to enact a trillion dollars in additional health care spending over the next decade. American taxpayers are unsurprisingly wondering just how much they will each have to pay for all of this.

Front Page News

Greek Junk Contagion Presses EU to Broaden Bailout After Rout (Bloomberg)

Europe’s worsening debt crisis is intensifying pressure on policy makers to widen a bailout package beyond Greece after a cut in the nation’s rating to junk drove up borrowing costs from Italy to Portugal and Ireland. As German Chancellor Angela Merkel delays approval of a 45 billion-euro Greek rescue, the crisis is spreading. Portugal’s benchmark stock index yesterday fell the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse, while the extra yield that investors demand to hold Italian and Irish debt over bunds rose to a 10-month high.??

Greece's two-year government note yields surged to more than 17 percent after S&P's cut the nation's credit rating three levels to BB+, or junk. Felix Salmon asks "is it now too late to save Greece?" (Short answer: yes.) Paul Krugman writes that "Greece seems to be spiraling over the edge into default" and shows how market pressure is building quickly on Portugal and Italy.

Washington Update

Finance Bill Is Blocked Again (Roundup)

In Tuesday's 57-41 roll call, Republicans moved for the second time in two days to block action on the floor. The Wall Street Journal reports that the "relationship between Sen. Ben Nelson and Warren Buffett's Berkshire Hathaway Inc. has thrown an unexpected wrench into the White House's bid to speed an overhaul of financial regulation. Democrats killed a provision Monday pushed by Mr. Nelson that would have helped Berkshire avoid a big financial hit related to its portfolio of derivatives."

While the Goldman Sachs hearing drama unfolded in the Senate, Republicans offered up an alternative financial reform proposal. The New York Times reviews how the Republican proposal compares to the Senate bill including a more limited consumer protection council, not designating any companies as systemically important, and establishing more explicit underwriting standards.

Obama Tells Debt Commission 'Everything Has to Be on the Table' (New York Times)

President Obama told his bipartisan debt commission on Tuesday that “everything has to be on the table,” while the Federal Reserve chairman, Ben S. Bernanke, suggested overhauling the nation’s tax code to raise more revenue. Yet even as the commission opened its first meeting, both liberals and conservatives were mobilizing to oppose one approach or the other. That assumes, however, that the commission will agree to one before its Dec. 1 deadline. Expectations are low given the party polarization, especially in an election year.

Financial Markets News

Consumer Confidence Rises Solidly in April (Wells Fargo)

The Consumer Confidence Index rose 5.6 points to 57.9 in April, reaching its highest level since September 2008, when the financial markets were sliding into the abyss. Consumers’ assessment of the present situation rose 3.4 points in April, while their expectations for future economic conditions rose 7.2 points. The split between the two series has been evident for well over a year and the improvement in the more heavily weighted expectations series has accounted for virtually all the improvement in the overall Consumer Confidence Index. The lack of improvement in the present situation index likely reflects the tepid recovery in the labor market.

Editorials and Commentaries

Yes, It's a Bailout Bill (Swagel in The American)

The debate over financial regulation is now focused squarely on the ability of the government to take over a failing financial institution such as a bank holding company or hedge fund—so-called non-bank resolution authority. A resolution regime that provides certainty against bailouts will reduce the riskiness of markets and thus help avoid a future crisis, while a reform that enshrines the possibility of bailouts will foster risky behavior and unwittingly make future bailouts more likely. President Obama’s approach, as embodied in Democratic Senator Chris Dodd’s bill, is for discretion and thus for bailouts.

Why Cautious Reform is the Risky Option (Wolf in Financial Times)

The role of big institutions is obviously problematic: they are, at one and the same time, the house, the biggest players at the gambling tables, agents for the other players and, if all goes wrong, beneficiaries of limited liability and implicit and explicit government bail-outs. So what is to be done? First, raise capital requirements. Second, institutions must also have substantial liabilities that can be converted into equity or treated just as if they were equity, in a bankruptcy procedure. Third, make capital requirements powerfully counter-cyclical. Fourth, make sure that banks hold a large stock of assets that are easy to value by lenders of last resort. Click through for the rest of Mr. Wolf's reform proposals.

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