Tuesday, June 13, 2012

Economic Events of the Week

Tuesday – Import and Export Prices, Treasury Budget
Wednesday – Senate Banking Committee Hearing - "A Breakdown in Risk Management: What Went Wrong at JPMorgan Chase?" JPMorgan Chase’s Jamie Dimon Testifies, Producer Price Index, Retail Sales, EIA Petroleum Status Report
Thursday – Jobless Claims, Consumer Price Index
Friday – Industrial Production

Story of the Day
Americans Saw Wealth Plummet 40 Percent From 2007 to 2010, Federal Reserve Says (The Washington Post)

Washington Update
Baucus Lays Out Broad Vision for Tax Code Overhaul (CQ)
Three Iron Truths of the (Not-Fine) Recovery (National Journal)
Obama to Revisit Economic Debate (The Wall Street Journal)

Market Talk
Home Refinancing Boosts Florida, Nevada: Economy (Bloomberg)
Banks Eye Intangible Assets As Collateral (Financial Times)
CoreLogic: Impact of negative equity on the Supply of Unsold Homes (Calculated Risk Blog)

Editorials & Opinions
Obama's Real Spending Record (Arthur Laffer & Stephen Moore in The Wall Street Journal)
Dodd-Frank’s Liquidation Plan Is Worse Than Bankruptcy (Peter Wallison in Bloomberg)
It’s The Public Sector That’s ‘Doing Fine’ (Marc Thiessen in The Washington Post)
A Presidency of Excuses (Bret Stephens in The Wall Street Journal)

Story of the Day

Americans Saw Wealth Plummet 40 Percent From 2007 to 2010, Federal Reserve Says (The Washington Post)

The recent recession wiped out nearly two decades of Americans’ wealth, according to government data released Monday, with ­middle-class families bearing the brunt of the decline. The Federal Reserve said the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That puts Americans roughly on par with where they were in 1992. The data represent one of the most detailed looks at how the economic downturn altered the landscape of family finance. Over a span of three years, Americans watched progress that took almost a generation to accumulate evaporate. The promise of retirement built on the inevitable rise of the stock market proved illusory for most. Homeownership, once heralded as a pathway to wealth, became an albatross. The findings underscore the depth of the wounds of the financial crisis and how far many families remain from healing. If the recession set Americans back 20 years, economists say, the road forward is sure to be a long one. And so far, the country has seen only a halting recovery. “It’s hard to overstate how serious the collapse in the economy was,” said Mark Zandi, chief economist for Moody’s Analytics. “We were in free fall.” The recession caused the greatest upheaval among the middle class. Only roughly half of middle­-class Americans remained on the same economic rung during the downturn, the Fed found. Their median net worth — the value of assets such as homes, automobiles and stocks minus any debt — suffered the biggest drops. By contrast, the wealthiest families’ median net worth rose slightly.

Washington Update

Baucus Lays Out Broad Vision for Tax Code Overhaul (CQ)

The Democratic chairman of the Senate Finance Committee offered a centrist vision for overhauling the tax code Monday, arguing a streamlined system with fewer tax breaks and lower tax rates could be a catalyst for economic growth. Delivering prepared remarks at the Bipartisan Policy Center, Max Baucus of Montana said he was “making progress on a detailed tax reform proposal that will attract bipartisan support.” But he did not say when, or even if, he would release such a plan, apart from noting it would be difficult to do so before the November election. Baucus said a tax overhaul should accomplish four goals: create jobs, improve business competitiveness, encourage innovation and increase social mobility. “Since the last major tax reform in 1986, the world has changed drastically,” Baucus said. “Our tax code hasn’t kept up, and now it’s acting as a brake on our economy when we need to move at full speed.”

Three Iron Truths of the (Not-Fine) Recovery (National Journal)

The U.S. economy is not doing fine. Not in the private sector, and especially not in the public sector. President Obama was wrong to say otherwise – that the private sector is fine – last week. Mitt Romney was wrong to suggest laying off teachers and firefighters hasn’t hurt. And congressional Republicans are wrong to say the whole situation would improve if we just had more “certainty” around taxes and regulations. Data tell us these things – real, hard numbers that sketch out a pretty convincing story of what’s happened to the economy since the Great Recession ended officially three years ago.   Broadly speaking, we know three really important things right now. 1. The recovery is slow and weak, but progressing. It turns out we had a financial and housing crisis; those turn out to be hard things to recover from. What we’ve seen over the last three years is a steady drop in unemployment, but still way too many – nearly 13 million – Americans looking for work who can’t find jobs...

Obama to Revisit Economic Debate (The Wall Street Journal)

President Barack Obama will use a campaign policy speech Thursday to contrast his preferred approach for the country's economic future with ideas proposed by his likely Republican opponent, Mitt Romney, people familiar with the speech said. Mr. Obama's address in Cleveland, described by his aides as a "framing" speech, isn't expected to include any major new proposals. While some of his political advisers had pushed for that, his economic team made clear they don't see many fresh options, particularly when Congress hasn't passed the bulk of a jobs bill that the president unveiled nine months ago, according to people familiar with the discussions. In September, Mr. Obama sought increased funding for infrastructure projects he said would employ construction workers, money for state governments to hire teachers and emergency responders, and a tax break for small-business owners who boost hiring. A payroll-tax holiday was one of the few elements that Congress approved.

Market Talk

Home Refinancing Boosts Florida, Nevada: Economy (Bloomberg)

The combination of easier lending standards and record-low mortgage rates is beginning to shore up real estate markets in states where home values plunged. It has breathed new life into some regional economies as Americans spend the savings at malls and auto dealers, spurring a pickup in sales-tax receipts that is also helping replenish state coffers. “HARP and refinancing more broadly is providing a meaningful boost to homeowners’ cash flow, particularly in the stressed housing states like Florida,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who testified last month on the program before the Senate Banking Committee. “This is going to be a big plus for stressed homeowners in very stressed markets with negative equity.” Reports today showed the global economy is slowing as Europe deals with is debt crisis. French factory output dropped in April and Italy’s economy shrank in the first quarter as consumers, businesses and governments across the continent retrenched.

Banks Eye Intangible Assets As Collateral (Financial Times)

Several US banks want to tap the value of the intellectual property holdings of their borrowers as a way of trimming their capital requirements, which are to be made tougher under Basel III rules. Under the terms of many loans, banks have the right to seize a borrower’s patents and trademarks as part of a foreclosure proceeding. But these intangible assets cannot generally be counted towards the loan’s security for regulatory capital assets because they are considered too difficult to value. Now some banks – faced with tougher safety rules that begin to take effect in January – are exploring whether they can use the assets to reduce their estimates of expected losses in case of a default, in turn reducing the risk weight of the loan and overall capital requirements. The banks seek deals in which an insurer agrees to buy a borrower’s intellectual property – anything from a mobile phone patent to a logo or recipe – for a fixed price in case of default. That price could then be counted against the expected losses, in the same way the expected proceeds from a credit default swap can be used today.

CoreLogic: Impact of negative equity on the Supply of Unsold Homes (Calculated Risk Blog)

CoreLogic released their June Market Pulse Report today. Here is a brief excerpt from a piece by Sam Khater, CoreLogic senior economist, on the impact of negative equity on housing supply:  “While the rapid decline in months’ supply is typically good news because it indicates a better balance between demand and supply, this decline is occurring less because of an increase in sales and more because of a drop in unsold inventory as a result of negative equity. Negative equity is typically a demand-side obstacle to sales and refinances, but currently is also restricting the supply of homes for sale. Analysis of the 50 largest markets reveals the metropolitan areas with the lowest levels of months’ supply also have the higher shares of negative equity. Markets with negative equity share of 50 percent or more have an average months’ supply of 4.7 months, compared to 8.3 months’ supply for markets with less than a 10 percent negative equity share. The presence of negative equity not only drives foreclosures, reduces the availability of purchase down payments and impedes refinances, but also restricts the ability of owners to list their homes for sale as the demand side of the market improves.” Paradoxically, as the flow of REOs has slowed over the last 18 months, negative equity has become a positive force in real estate markets by restricting supply in the face of increasing demand.

Editorials & Opinions

Obama's Real Spending Record (Arthur Laffer & Stephen Moore in The Wall Street Journal)

President Obama shocked us the other day when he said, "Since I've been president, federal spending has risen at the lowest pace in nearly 60 years." Having heard him champion the "multiplier effects" of deficit-financed stimulus spending, we saw him as an enthusiastic supporter of throwing other people's money at just about any problem. Thus began our quest to see where we had strayed from the straight and narrow. Here's the picture. In the chart nearby we've plotted federal government spending on a National Income and Product Accounts (NIPA) basis as a share of total U.S. GDP from 1990 to the present. The NIPA numbers are used here as opposed to appropriations or outlays to capture the actual periods when production occurs. The stories the chart tells are amazing. The first is how much government spending fell during President Bill Clinton's eight years in office and how low it was when he left office. When he became president in 1992, government spending was 23.5% of GDP, and when he left in 2001 it was 19.5% of GDP. President Clinton, in conjunction with a solid Republican Congress, cut government spending by more than any other president in modern times, and oversaw one of the greatest periods of economic growth and prosperity in U.S. history.

Dodd-Frank’s Liquidation Plan Is Worse Than Bankruptcy (Peter Wallison in Bloomberg)

Some of the key provisions of the Dodd-Frank Act of 2010, advertised as crucial to preventing a new financial crisis, won’t live up to the claims of its sponsors. We have a nice example of this in the plan that the Federal Deposit Insurance Corp. revealed last month for how it expects to deal with troubled financial institutions under the Orderly Liquidation Authority outlined in the new law. Under the plan, the agency would create a bridge institution to assume the assets and liabilities of a failed firm and could force some creditors to take equity in place of their debt holdings. The firm’s subsidiaries would continue operating with funds the FDIC is permitted to borrow from the U.S. Treasury. Whatever costs the FDIC incurs would be assessed against the largest members of the financial community. As with most things in Dodd-Frank, the public knows little about the liquidation authority, although it has been touted by the Obama administration and others as solving the problem of bailouts for firms seen as too big to fail. But it does nothing of the kind; instead it makes the problem worse.

It’s The Public Sector That’s ‘Doing Fine’ (Marc Thiessen in The Washington Post)

“It’s very clear that private sector jobs are doing just fine.” Sound familiar? These words are not President Obama’s. They were spoken six months ago by Senate Majority Leader Harry Reid. While pushing a Democratic proposal to spend another $35 billion we don’t have to help states hire more public workers, Reid declared: “It’s very clear that private-sector jobs have been doing just fine; it’s the public-sector jobs where we’ve lost huge numbers.” At last week’s news conference, Obama simply repeated the point Reid made last October.Jared Bernstein, a former Obama economic adviser, said the president’s gaffe won’t do lasting damage “because that’s not the way he sees it.” But as Reid’s comment demonstrates, that is precisely how Obama and Democratic leaders on Capitol Hill see it. They’ve been saying for months that the private sector is doing fine and that the solution to our unemployment problems is to spend even more taxpayer money to hire more government workers. Obama and Reid have it precisely backward: It’s the public sector that’s doing fine.

A Presidency of Excuses (Bret Stephens in The Wall Street Journal)

In 1997 Asia's economy imploded. Currencies collapsed, countries had their ratings downgraded to junk, millions of people lost their jobs, governments were replaced, regimes fell. In October a jittery Dow, fearing the effects of "Asian contagion," lost 7.2% of its value in a single day. Trading had to be halted twice. And yet the American economy was unscathed. In 1997 GDP grew by 4.5%. In 1998 it grew again by 4.5%, this time despite the Russian ruble crisis. In 1999, annual growth reached 4.9%, a pace it hasn't exceeded since. Unemployment fell to 4.2%. The government ran a surplus. Bear this not-so-ancient history in mind as the Excuse-Maker-in-Chief cites another imploding region to explain 1.9% growth and 8.2% unemployment. "Right now, one concern is Europe, which faces a threat of renewed recession," Mr. Obama said Friday, rehashing one of his preferred economic alibis. "Obviously this matters to us because Europe is our largest trading partner."

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