Wednesday, May 30, 2012

Economic Events of the Week

Wednesday – Pending Home Sales
Thursday – GDP, Jobless Claims
Friday – Employment Situation, Personal Income & Outlays, ISM Manufacturing Index

Story of the Day
Banks’ Hyper-Hedging Adds to Risk of a Market Meltdown (Bloomberg)

Washington Update
Congress Taking No Action to Address ‘Fiscal Cliff’ (CQ)
Mitt Romney: Economy Improving ‘In Spite’ of Obama (Politico)
House Republicans’ Summer Schedule Heavy on Jobs and Repealing ‘Obamacare’ (The Washington Post)

Market Talk
How Do Consumers Feel? It’s Anyone’s Guess (The Wall Street Journal)
Help U.S. Economy With Visas for the Best and Brightest (Bloomberg)
Case-Shiller Seasonal Factors (Calculated Risk Blog)

Editorials & Opinions
A Fiscal Union Won't Fix the Euro Crisis (Austan Goolsbee in The Wall Street Journal)
US Homebuilders: Stops and Starts (Financial Times Editorial)
Getting the Biggest Bang for the Buck in Fiscal Policy (Miles Kimball Blog)

Story of the Day

Banks’ Hyper-Hedging Adds to Risk of a Market Meltdown (Bloomberg)

JPMorgan Chase & Co.’s lost billions remind us that modern finance has changed the world, and not in ways that we should celebrate. Nothing demonstrates this more than the use of hedging. It is debatable whether hedging makes individual banks such as JPMorgan “safer,” and very debatable whether it makes them, on balance, more profitable over time. But even supposing that hedging does, or can, assist individual firms, their trading has an unseen and pernicious effect on markets overall. Just as football players armed with kryptonite-strength helmets hit more aggressively, leading to more concussions, hypertrading by firms -- each thinking of their own preservation -- has exposed markets to meltdowns and routs. Market participants themselves are mostly unaware of their effect on the group because they have grown up in a culture that celebrates trading -- hedging, in particular. The attitudinal change, fostered by technology, has been gradual but vast, and only visible if one steps back and remembers how things were.

Washington Update

Congress Taking No Action to Address ‘Fiscal Cliff’ (CQ)

With strong words on taxes and spending flying back and forth, it’s as if negotiations were under way toward resolving the “fiscal cliff” issues that will confront Congress and the country at the end of the year. But in reality, nothing like that is happening. Neither side is ready to budge, and the increasingly aggressive rhetoric from Republicans and Democrats is aimed at reinforcing positions, closing party ranks and setting up the political dynamics that each side hopes will drive a post-election deal. Despite warnings from the Congressional Budget Office, the Federal Reserve and others about dire economic consequences if taxes rise and spending drops as scheduled under current law come Jan. 1, no one is suggesting that anything will be resolved until voters are heard from in November.

Mitt Romney: Economy Improving ‘In Spite’ of Obama (Politico)

President Barack Obama’s campaign is “trying to find a twig to hang on to,” Mitt Romney told a Tuesday morning crowd here. “This president is looking for someone to blame,” Romney told a crowd of locals and bused-in coal-miners in this town of 9,000. “Of course he started off by blaming George Bush, and that worked for a while but, you know, after three and a half years that wears kinda thin. And so then he started to blame Congress. But we remember that he had a super-majority in both the House and the Senate in his own party for his first two years, so you can’t blame Congress. This man is out of ideas, he’s out of excuses and in November we’re going to make sure to vote him out of office.” “Now his campaign these days is trying to find a twig to hang on to, some little excuse they can grab and say, ‘Look, things are getting a little better, aren’t they?’ And the answer is yeah, things are getting a little better in a lot of places in this country, but it’s not thanks to his policies.”

House Republicans’ Summer Schedule Heavy on Jobs and Repealing ‘Obamacare’ (The Washington Post)

House Republicans plan to hold a series of votes this summer on bills designed to curtail the Obama administration’s health-care law, rising gas prices and any last-minute attempt by President Obama to make regulatory changes — if he loses the White House. Most of the bills have no chance of consideration in the Democratic-controlled Senate, but should provide GOP lawmakers with fresh campaign-trail fodder as they prepare to return home to run for reelection. Forgive the analogy, but with baseball season in full swing, the proposed schedule suggests the House is set to hit a series of singles and doubles in the next two months — no home runs and nothing terribly controversial. Just enough to generate support among conservative supporters and independent voters disillusioned with Obama to help House Republicans make it across the finish line and sustain a majority after the November elections. In an overt nod to the party’s base and the sustained popularity of Rep. Ron Paul (R-Tex.), Republican leaders even have promised an up or down vote in July on Paul’s proposal to audit the Federal Reserve — an effort sure to score points for GOP lawmakers among ardent tea party supporters.

Market Talk

How Do Consumers Feel? It’s Anyone’s Guess (The Wall Street Journal)

U.S. consumers are feeling better or worse about the economy in May, depending on whom you ask. The Conference Board said Tuesday that its confidence index tumbled to 64.9 this month, the lowest level since January. The unexpected drop was in sharp contrast with last week’s jump in the consumer sentiment index put out by Thomson Reuters/University of Michigan. The sentiment index rose to its highest reading since October 2007. “How U.S. consumers are feeling at the moment is anyone’s guess,” wrote Chris Williamson, chief economist at data provider Markit. Household attitudes are important since the U.S. economy relies heavily on consumers to keep demand growing. And while less confidence doesn’t always mean less spending, there is some correlation. Economists at Credit Suisse calculate that in a simple regression, the consumer expectations index is consistent with 2.0% real consumer spending growth. That’s good, but not great. What’s worrisome is the renewed pessimism about the job markets within the board’s survey. (Another finding in stark contrast to the Michigan report.) In May, 41.0% of consumers think jobs are “hard to get,” up from 38.1% saying that in April. Looking out six months, 15.8% expect there to be more jobs, down from 16.9% saying that last month.

Help U.S. Economy With Visas for the Best and Brightest (Bloomberg)

A combination of economic necessity and demographic change makes immigration reform -- even limited progress like the Startup Act 2.0 -- more crucial than ever. The growth rate of the U.S. labor force is declining. Fewer young workers are entering the labor market as older ones retire, a combination that exerts a drag on economic growth. This has been compounded by the 2008 financial crisis and the job losses that ensued. From 2007 to 2011, the rate of new business creation slowed by 23 percent. Even before the recession, trouble was apparent; from 2000 to 2007, job creation in the U.S. was weaker than for any decade since the 1930s. If jobs aren’t being created, why does the U.S. need more immigrants? A survey by the McKinsey Global Institute found almost two-thirds of companies say they have “positions for which they often cannot find qualified applicants, with management, scientists and computer engineers topping the list.” A Kauffman Foundation report found that in 2011 immigrants were more than twice as likely to start businesses as native-born Americans. A Duke University study found that immigrants helped start more than a quarter of the technology and engineering companies established in the U.S. from 1995 to 2005.

Case-Shiller Seasonal Factors (Calculated Risk Blog)

Economist Tom Lawler wrote today:  “I put “seasonally” in quotes, as there have substantial changes in the purported “seasonal” pattern of home prices since the housing market cratered. The reason, of course, is that there is a marked “seasonal” in the distressed-sales share of home sales, which peaks in the late winter months and hits a trough in the summer months. Not coincidentally, the “shift” in the “seasonal” pattern of home prices has been one where home prices are “seasonally” much weaker than they used to be in late winter, and “seasonally” much strong than they used to be in the summer. Everyone “knows” why, and since the “cause” of the apparent wider “seasonal” swings is known (and someday will go away), it’s not rightly correct to call such swings “seasonal.”

Editorials & Opinions

A Fiscal Union Won't Fix the Euro Crisis (Austan Goolsbee in The Wall Street Journal)

Recently Kurt Bills, a candidate for the U.S. Senate and a devotee of Ron Paul, introduced a bill to consider an alternative currency for Minnesota and its citizens. When I heard this idea I thought what every mainstream economist probably thought: Wow is that nuts. Yet many observers (and online betting markets suggest a majority) believe that Greece must return to its own currency. The economies of Greece and of Minnesota are about the same size (2% of U.S. gross domestic product), so why is an independent currency viable for one and quackery for the other? One key economic difference is the existence of a fiscal union in the United States. Increasingly, euro-zone hardliners have called for putting in a disciplined, unified fiscal arrangement similar to the one we have in the U.S. Unfortunately, their vision of fiscal union has badly missed the essence of the U.S. experience and would not fix the euro crisis.

US Homebuilders: Stops and Starts (Financial Times Editorial)

A house is something to live in, not an investment. So most Americans have been forced to conclude after a miserable six years: the Case-Schiller home price index is down a third from its 2006 highs. But homebuilding companies are not houses, and investors have done nicely betting on those lately. Shares in the five biggest by sales (Pulte, DR Horton, Lennar, NVR and Toll Brothers) have returned an average of 50 per cent in the past six months, crushing the wider market. Both the macro environment and the performance of the companies themselves, supports the rally. Yes, prices continue to fall, but the pace of year-over-year declines has slowed, to under 3 per cent in March, and the month-over-month results have turned positive. Housing starts rose 30 per cent year on year – to an annualised rate of 717,000 – in April and have been growing for eight months. Aggregate home sales revenues for the five big builders were up nearly a fifth in the most recent quarter, with both units and prices showing improvement, after declining last year.

Getting the Biggest Bang for the Buck in Fiscal Policy (Miles Kimball Blog)

Last week, on Monday, May 14, I was one of ten outside academics invited to present a briefing to the Board of Governors of the Federal Reserve on the topic of consumption.  All of the Governors, Eric Engen, the Federal Reserve Board economist who had organized the briefing, and all ten academics were seated around the gigantic oval table where the Federal Open Market Committee (FOMC) makes monetary policy decisions.  Bob Hall, a Stanford Professor who is one of my favorite macroeconomists, was the moderator.  In my ten-minute presentation, I proposed an addition to the toolkit of fiscal policy: “Federal Lines of Credit” or FLOC’s.  Here is the idea.  Imagine that the economy is in a recession and the President and Congress are contemplating a tax rebate.  What if instead of giving each taxpayer a $200 tax rebate, each taxpayer is mailed a government-issued credit card with a $2,000 line of credit?  ($4,000 for a couple.)  Even though people would spend a smaller fraction of this line of credit than the 1/3 or so of the tax rebate that they might spend, the fact that the Federal Line of Credit is ten times as big as the tax rebate would have been means it will probably result in a bigger stimulus to the economy.  But because taxpayers have to pay back whatever they borrow in their monthly withholding taxes, the cost to the government in the end—and therefore the ultimate addition to the national debt—should be smaller.  Since the main thing holding back the size of fiscal stimulus in our current situation has been concerns about adding to the national debt, getting more stimulus per dollar added to the national debt is getting more bang for the buck.

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.

2011, e21: Economic Policies for the 21st Century