May 10, 2012

Economic Events of the Week

 Thursday – Speech by Ben Bernanke at the 48th Annual Conference on Bank Structure and Competition
Friday – Producer Price Index

e21 Reaction & Commentary
e21 Commentary: Today’s Student Loan Recipients are Tomorrow’s Economic Elite

Washington Update
Fannie Mae Reports Profit For First Quarter (The Washington Post)
Republicans Seek to Curb Obama Administration Policies in Spending Bill (CQ)
Harry Reid: No Rollback Of Automatic Budget Cuts (Politico)
House Passes Ex-Im Bank Reauthorization, With Senate Expected to Follow (CQ)

Market Talk
Volcker Says Prop Trading Poses Bank Conflicts of Interest (Bloomberg)
FDIC to Lay Out Plan for Big Bank Failures (The Wall Street Journal)
Mortgage Brokers Face New Rules (The Wall Street Journal)
Bernanke Gets 75% Approval From Investors in Global Poll (Bloomberg)

Editorials & Opinions
Stimulus Spending Keeps Failing (Robert Barro in The Wall Street Journal)
Hedge Funds Head For Big Banana Skin (Hugh Hendry in Financial Times)
Taxing Jobs Out of Existence (George Will in The Washington Post)

e21 Reaction & Commentary

e21 Commentary: Today’s Student Loan Recipients are Tomorrow’s Economic Elite

The broader point is that income and educational attainment in America are highly correlated. Individuals have a strong financial incentive to gain additional education because the present value of the increase in lifetime earnings exceeds the cost of tuition. Subsidies to encourage prospective students to enroll in college are therefore not necessary and very likely counterproductive. Moreover, the notion that the costs of education subsidies can be pushed off onto “the rich” through higher taxes is fatuous, since the best educated are also the ones likely to be in the highest income tax brackets.

Washington Update

Fannie Mae Reports Profit For First Quarter (The Washington Post)

Mortgage giant Fannie Mae on Wednesday reported a $2.7 billion profit during the first three months of the year, saying it would not require additional taxpayer aid for the first time since the government seized the troubled firm in 2008. The company had reported a $2.4 billion loss the previous quarter and a $6.5 billion loss during the same period a year ago. Fannie Mae attributed its positive numbers largely to improvements in the nation’s housing market, including stabilizing home prices, falling mortgage delinquency rates and brisk sales of foreclosed homes. In addition, the firm said that it plans to set aside fewer reserves against potential losses as the housing market begins to heal, and it said that it expects its financial results in 2012 to be “significantly better” than last year.

Republicans Seek to Curb Obama Administration Policies in Spending Bill (CQ)

House Republicans on Wednesday made bids to insert an array of policy riders into a fiscal 2013 Commerce-Justice-Science spending bill, including proposals that would restrict the authority of the Obama administration. The House began consideration of the $51.1 billion measure on Tuesday under an open rule. By Wednesday evening, the chamber had worked through dozens of amendments, advancing the bill toward passage as early as Thursday. Among the amendments backed on Wednesday was a proposal by Marsha Blackburn, R-Tenn., that would prohibit funds in the bill from being used to defend the 2011 health care overhaul. That amendment was adopted 229-194.

Harry Reid: No Rollback Of Automatic Budget Cuts (Politico)

In his strongest words yet, Senate Majority Leader Harry Reid warned Wednesday that he is not prepared to stop automatic spending cuts in January unless Republicans accept a more “balanced” approach to deficit reduction including revenues. The Nevada Democrat took aim first at his House Republican adversaries but also appeared to lay down a new marker for his own party to hang tough behind the Budget Control Act as the strong medicine needed to jolt the political system toward some budget deal. “Is the sequester the best way to achieve that balance? No,” Reid told the Senate. But he immediately went on to describe the mechanism as “a hard pill to swallow. But it was the right thing to do” “The sequester, which in effect would take $600 billion from domestic programs and $600 billion from defense programs, was designed to be tough enough to force the two sides to reach a balanced deal. It hasn’t happened yet.”

House Passes Ex-Im Bank Reauthorization, With Senate Expected to Follow (CQ)

The Senate on Thursday could clear a House-passed reauthorization of the U.S. Export-Import Bank that includes higher temporary lending caps for the agency. Senate Majority Leader Harry Reid announced late Wednesday that he hopes to reach an agreement to consider the bill. “I can’t imagine why anyone would want to slow that one down,” Reid, D-Nev., said before signaling that he would file cloture if necessary. The House on Wednesday passed the bill (HR 2072), which would reauthorize the bank’s charter through Sept. 30, 2014, and incrementally increase its lending cap. By fiscal 2014, the bank would be authorized to lend up to $140 billion, up from $100 billion under current law. The bank’s current charter would expire May 31.

Market Talk

Volcker Says Prop Trading Poses Bank Conflicts of Interest (Bloomberg)

Former Federal Reserve Chairman Paul Volcker, commenting in support of the Dodd-Frank Act rule that bears his name, said it is impossible for banks to handle the potential customer conflicts presented by trading activities. “Imposing on those essential banking functions a system of highly rewarded –- very highly rewarded -– impersonal trading dismissive of client relationships presents cultural conflicts that are hard -– I think really impossible -– to successfully reconcile within a single institution,” Volcker said today in remarks prepared for a Senate Banking subcommittee hearing in Washington. The Senate panel met to discuss risks posed to the by the size and interconnectedness of financial firms. Lawmakers and regulators have been looking at ways to reduce risk in the financial system since the 2008 economic crisis, when Wall Street’s largest banks required a $700 billion taxpayer bailout.

FDIC to Lay Out Plan for Big Bank Failures (The Wall Street Journal)

When the next crisis brings a major financial firm to its knees, U.S. regulators will seize the parent company but allow its units around the globe to keep operating while the mess is cleaned up, according to a planned announcement Thursday from the Federal Deposit Insurance Corp. The equity stakeholders of the large bank or other financial firm will be wiped out, and bondholders will face losses as their holdings are swapped for equity in a new entity, as a part of the FDIC's plan. Nearly four years after the massive government bailouts of the financial crisis, regulators are looking to chip away at the tacit understanding that the government will step in to save top financial institutions seen as vital to the economy or banking system.

Mortgage Brokers Face New Rules (The Wall Street Journal)

Federal regulators this summer might propose new rules for mortgage-lending fees that would require mortgage lenders to charge a flat fee for processing a loan, and limit the amount by which borrowers can reduce their interest rate through "discount points." The Consumer Financial Protection Bureau Wednesday said it could bar mortgage brokers from the widespread practice of calculating origination fees —the fees borrowers pay to compensate loan officers—as a percentage of the loan size. Instead, brokerage firms and creditors would have to charge a flat fee. The origination-fee proposal is designed to keep loan officers from steering borrowers into more costly loans solely to receive greater compensation. But the change could spark significant opposition from the mortgage market's smallest firms. Discount points are fees borrowers pay to lower the interest rate on a mortgage. The agency said it wants to ensure that when consumers pay these fees, which are calculated based on the loan amount, they see a meaningful reduction in their monthly loan payments.

Bernanke Gets 75% Approval From Investors in Global Poll (Bloomberg)

Global investors give Federal Reserve Chairman Ben S. Bernanke his highest approval rating since 2009 and expect him to take further action this year to accelerate a revival in the U.S. economy and financial markets. Bernanke, whom Republican presidential candidate Mitt Romney said he wouldn’t reappoint for running too lax a monetary policy, receives a favorable assessment from three of four of those surveyed in the latest Bloomberg Global Poll. Respondents to the survey of investors, analysts and traders who are Bloomberg subscribers also rate U.S. financial markets highly: 46 percent say they will be among the best performers over the next year, double the percentage that select China, in second place. “There is no other choice than the U.S.,” Kenichi Katsuhara, a poll participant and credit default swap trader with Aozora Bank Ltd. in Tokyo, says in an e-mail. “Companies in the U.S. are chugging along” while consumers could benefit from a “drop in commodity prices.”

Editorials & Opinions

Stimulus Spending Keeps Failing (Robert Barro in The Wall Street Journal)

The weak economic recovery in the U.S. and the even weaker performance in much of Europe have renewed calls for ending budget austerity and returning to larger fiscal deficits. Curiously, this plea for more fiscal expansion fails to offer any proof that Organization for Economic Cooperation and Development (OECD) countries that chose more budget stimulus have performed better than those that opted for more austerity. Similarly, in the American context, no evidence is offered that past U.S. budget deficits (averaging 9% of GDP between 2009 and 2011) helped to promote the economic recovery. Two interesting European cases are Germany and Sweden, each of which moved toward rough budget balance between 2009 and 2011 while sustaining comparatively strong growth—the average growth rate per year of real GDP for 2010 and 2011 was 3.6% for Germany and 4.9% for Sweden. If austerity is so terrible, how come these two countries have done so well?

Hedge Funds Head For Big Banana Skin (Hugh Hendry in Financial Times)

For the moment, let us forget the chances of a hard landing in China. Forget the drama of Europe’s circus of politically inspired economic incompetency. Forget that the good news of the US economy’s succession of positive economic surprises is really bad news as fixed income managers have sold copious amounts of too cheap volatility and because it has made equity investors turn bullish, sending stock market volatility back to 2007 levels. This is dangerous. Improved US data may represent a classic short-term cyclical upturn amid a profound global deleveraging cycle. Such moves have been commonplace for the past three years and have yet to prove a harbinger of any structural upswing. I worry that the pathological course of the last several years will see volatility rise sharply once again. Even so, there exists, in terms of my parochial world of hedge fund investing, a bigger issue.

Taxing Jobs Out of Existence (George Will in The Washington Post)

Bill Hewlett and David Packard, tinkering in a California garage, began what became Hewlett-Packard. Steve Jobs and a friend built a computer in the California garage that became Apple’s birthplace. Bill Cook had no garage, so he launched Cook Medical in a spare bedroom in an apartment in this university town. Half a century ago, in flight from Chicago’s winters, he settled here and began making cardiovascular catheters and other medical instruments. One thing led to another, as things have a way of doing when the government stays out of the way, and although Cook died last year, Cook Medical, with its subsidiaries, is the world’s largest family-owned medical devices company. In 2010, however, Congress, ravenous for revenue to fund Obamacare, included in the legislation a 2.3 percent tax on gross revenue — which generally amounts to about a 15 percent tax on most manufacturers’ profits — from U.S. sales of medical devices beginning in 2013. This will be piled on top of the 35 percent federal corporate tax, and state and local taxes. The 2.3 percent tax will be a $20 billion blow to an industry that employs more than 400,000, and $20 billion is almost double the industry’s annual investment in research and development.

e21: Economic Policies for the 21st Century is a nonprofit, nonpartisan organization dedicated to economic research and innovative public policies for the 21st century. Drawing on the expertise of practitioners, policymakers, and academics, we aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.

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