Friday, June 8, 2012

Economic Events of the Week

Friday – International Trade

Story of the Day
Ben Bernanke Signals No Imminent Steps to Aid Economy (Politico)

Washington Update
Whatever High Court Decides, GOP Still Committed to Health Care Law Repeal, Boehner Says (CQ)
Secret Talks Under Way About 'Fiscal Cliff' (Politico)
Reid Makes Counteroffer on Student Loans (National Journal)

Market Talk
Steepest Global Slide Since Recession Pushes Rate Cuts (Bloomberg)
Capital Rule Is One Size Fits All (The Wall Street Journal)
Fed's Q1 Flow of Funds: Household Real Estate Value increased in Q1 (Calculated Risk Blog)

Editorials & Opinions
Romney is Wrong On Tax Cuts (Fareed Zakaria in The Washington Post)
You Don’t Need to Be A Lefty to Support Krugman (Samuel Brittan in Financial Times)
Bernanke's Cliffhanger (The Wall Street Journal Editorial)

Story of the Day

Ben Bernanke Signals No Imminent Steps to Aid Economy (Politico)

Ben Bernanke didn’t tip his hand to Congress Thursday. Democrats and Republicans at a hearing of the Joint Economic Committee repeatedly pumped Bernanke for a preview of future action on stimulating the economy — with Wall Street hanging on his every word. But the Federal Reserve chairman was adamant that nothing has been decided. “My colleagues and I are still working on our own assessments,” Bernanke said. Bernanke said they were weighing whether disappointing job numbers in April and May were a seasonal blip or the start of an economic slowdown that could require outside action to break. Politicians and investors alike will get their answer following the Federal Reserve’s June 19 and 20 meeting, where Bernanke and his team will determine what immediate attempts at stimulus — if any — they’ll make.

Washington Update

Whatever High Court Decides, GOP Still Committed to Health Care Law Repeal, Boehner Says (CQ)

House Speaker John A. Boehner on Thursday reiterated his party’s commitment to a full repeal of the 2010 health care law, but he didn’t rule out that the House GOP would take steps before the election to address some of the law’s popular benefits if the Supreme Court strikes down the entire overhaul. At a press conference Thursday, Boehner was asked if the law is thrown out what House Republicans would do to protect young adults from being kicked off their parents’ insurance plans, individuals with pre-existing conditions from losing coverage and seniors from falling into the coverage gap known as the doughnut hole. “Well, what we won’t do, is we won’t pass a 2,700-page bill in the middle of the night that no one has read,” said Boehner, R-Ohio. “What we won’t do is expect and tell the American people that we have to pass a bill before we know what’s in it. Republicans believe in a step-by-step, common-sense approach to fixing the problems within our current health care system.”

Secret Talks Under Way About 'Fiscal Cliff' (Politico)

A growing number of lawmakers are alarmed that Congress’s do-nothing posture ahead of the year-end fiscal cliff could provoke a massive voter backlash and economic catastrophe if they don’t start laying the groundwork right now to cut a deal. So behind the scenes, there’s a scramble taking shape. A dozen senators ranging from Oklahoma Republican Tom Coburn to Delaware Democrat Chris Coons have begun to organize closed-door briefings with leading economic experts to prod Congress into action. Some lawmakers like Sen. Lamar Alexander (R-Tenn.) are quietly pushing to have a major tax and budget package ready by September so a bill can be introduced immediately after the November elections and passed by Christmas. Others like Sen. Bob Corker (R-Tenn.) have taken matters into their own hands by privately preparing bills they hope will shape the post-election debate. “There’s a genuine concern that a downturn in Europe or another place will force our hand: It’s far better for us to start working on this earlier rather than later, and there’s a lot of work to be done,” Senate Majority Whip Dick Durbin (D-Ill.) told POLITICO. “If we can present something immediately after the election that is a good solid starting point, I think it’s going to restore confidence in the business community.”

Reid Makes Counteroffer on Student Loans (National Journal)

Senate Majority Leader Harry Reid, D-Nev., on Thursday put out a new proposal to pay for a one-year freeze on interest rates for need-based student loans, which will double to 6.8 percent if Congress doesn’t act by June 30. The freeze would cost $6 billion. The offer is part of a back-and-forth between the House and the Senate that entails more fingerpointing than actual negotiating. Reid has proposed using a revenue-raiser that originally passed as part of a Senate transportation bill. The idea comes with a stinger. If House Republicans accept the offer, it would leave those negotiating a highway bill scrambling for the cash to pay for the federal highway program. “If House Republicans are still not ready to pass the transportation jobs bill, I suggest that we use part of these offsets to pay for the student-loan legislation,” Reid wrote to House Speaker John Boehner, R-Ohio, and Senate Minority Leader Mitch McConnell, R-Ky. Boehner spokesman Michael Steel said that Boehner would analyze Reid’s proposal only if it passed the Senate.

Market Talk

Steepest Global Slide Since Recession Pushes Rate Cuts (Bloomberg)

Monetary-policy makers from around the world are being pressed into action to shore up a global economy that is suffering its steepest slowdown since the recession ended in 2009. On the heels of a June 5 interest-rate cut by Australia, China yesterday unveiled its first reduction in borrowing costs in more than three years to counter what Premier Wen Jiabao has called increasing downward economic pressure. European Central Bank President Mario Draghi left the door open at a June 6 press conference to a rate cut, while highlighting the limitations of the ECB’s tools in countering the region’s financial turmoil. And Federal Reserve Chairman Ben S. Bernanke told a Congressional committee yesterday that policy makers will discuss later this month whether to do more to spur growth, though he said the steps they could take may have “diminishing returns.” “Across the board, we’re seeing the central banks being galvanized into action by weak growth around the world,” said Nariman Behravesh, chief economist in Lexington, Massachusetts, at IHS Inc.

Capital Rule Is One Size Fits All (The Wall Street Journal)

The Federal Reserve shocked bankers Thursday by approving a proposal that would force even the smallest lenders to comply with the elaborate international bank-capital standards known as Basel III. The draft requirements would apply to all 7,307 U.S. banks, according to a proposal circulated by the Fed. Many bankers had expected regulators to exempt some small lenders from the new rules, which are aimed at shoring up the biggest global banks whose troubles fueled the financial crisis. While the core Basel III rules will apply to all banks, other aspects of the new regime single out the biggest, most complex banks for tougher treatment than their smaller peers. The Fed, for instance, has embraced slapping a handful of the biggest U.S. banks with a capital surcharge of between 1% and 2.5%. The Fed has yet to introduce the specific proposal. The tougher capital rules backed by the Fed Thursday won't take effect until 2019 but will come as an unwelcome surprise to small bankers struggling amid uneven economic growth, tough new rules limiting fees and technological and regulatory moves that have made larger banks more profitable.

Fed's Q1 Flow of Funds: Household Real Estate Value increased in Q1 (Calculated Risk Blog)

The Federal Reserve released the Q1 2012 Flow of Funds report today. According to the Fed, household net worth peaked at $67.5 trillion in Q3 2007, and then net worth fell to $51.3 trillion in Q1 2009 (a loss of $16.2 trillion). Household net worth was at $62.9 trillion in Q1 2012 (up $11.6 trillion from the trough, but still down $4.6 trillion from the peak).The Fed estimated that the value of household real estate increased $372 billion to $16.05 trillion in Q1 2012. The value of household real estate has fallen $6.3 trillion from the peak.

Editorials & Opinions

Romney is Wrong On Tax Cuts (Fareed Zakaria in The Washington Post)

By contrast, Mitt Romney’s first major ad is substantive — and wrong. He tells us that on his first day in office — after approving the Keystone XL pipeline — he will “introduce tax cuts . . . that reward job creators not punish them.” The one idea that is almost certain not to jump-start this economy is a tax cut.Why can we be sure of this? Because that is what we have done for the past three years. For those who think President Obama’s policies have done little to produce growth, keep in mind that the single largest piece of his policies — in dollar terms — has been tax cuts. They actually began before Obama, with the tax cut passed under the George W. Bush administration in response to the financial crisis in 2008. Then came the stimulus bill, of which tax cuts were the largest chunk by far — one-third of the total. The Department of Transportation, by contrast, got 6 percent of the total to fix infrastructure. That wasn’t the end of it. There was the payroll tax cut, the small business tax cut, the extension of the payroll tax cut, and so on. The president’s Twitter feed boasted: “President Obama has signed 21 tax cuts to support middle class families.” And how has that worked out?

You Don’t Need to Be A Lefty to Support Krugman (Samuel Brittan in Financial Times)

The remedy for too little spending is more spending. Everything else is commentary. This is the moral I draw from Paul Krugman’s End This Depression Now! Although it is not without flaws, I hope without much confidence that the book’s wide readership includes the UK prime minister and chancellor. Mr Krugman follows Keynes’s definition of a depression as “a chronic condition of subnormal activity without any marked tendency either towards recovery or towards complete collapse”. Can anyone doubt whether this – or worse – is the condition of many western economies? With the exception of Canada, output in the G7 countries is still no higher than at its 2007-2008 peaks. In the UK  and Italy it is now 4-6 per cent below those peaks. It is difficult to imagine Mr Krugman cheering for the Republicans. Nevertheless I cannot sufficiently emphasise that there is nothing essentially “leftwing” about his analysis. Consumers will not spend because of a backlog of indebtedness and businesses will not invest because of pessimism about market prospects. Central banks can inject money, but there is a limit to what they can do when nominal interest rates are near zero. The Bank of England’s “no change” decision on Thursday illustrates these limits as well as the native caution of most central banks. This leaves governments to fill the gap.

Bernanke's Cliffhanger (The Wall Street Journal Editorial)

Everyone is suddenly waking up to the horrors of the "fiscal cliff" that arrives on January 1, 2013, but the real clear and present danger keeps getting misdiagnosed. It's the taxes, not the spending. On Capitol Hill Thursday, Federal Reserve Chairman Ben Bernanke didn't endorse one more round of monetary easing. But he did join the Keynesian chorus decrying "a severe tightening of fiscal policy at the beginning of next year that is built into current law—the so-called fiscal cliff [which] would, if allowed to occur, pose a significant threat to the recovery." His recommendation to Congress: "I am telling you, try to avoid a situation where you have a massive cut in spending and an increase in taxes hitting all at the same time, as opposed to spreading them out over time." Just what Congress needed: a lecture not to cut spending. At least Mr. Bernanke got it half right. There are two distinct fiscal cliffs ahead: first, the rise in tax rates because the Bush reductions are set to expire under current law. This is dangerous and should be postponed pending a reform of the tax code.

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