Monday, July 23, 2012

Economic Events of the Week

Wednesday – New Home Sales
Thursday – Jobless Claims, Durable Goods Orders
Friday – GDP

Story of the Day
Poverty Levels on Rise (The Associated Press)

Washington Update
To Get More Cuts Later, Conservatives Dealing Now (CQ)
In Swing States, Economic Picture a Little Brighter for Obama (The Washington Post)
US Lawmakers Propose Greater SEC Powers (Financial Times)

Market Talk
Sales Slowdown Masked By Better-Than-Expected Earnings (Bloomberg)
Bleak Jobs Outlook Raises Heat on Fed (Financial Times)
U.S. Speeds Its Selloff of Bailout Securities (The Wall Street Journal)
The Fiscal Cliff and Rationality (Econbrower)

Editorials & Opinions
How Bernanke Can Get Banks Lending Again (Alan Blinder in The Wall Street Journal)
A Week in the Life of Libor (The New York Times Editorial)
The Medicaid Albatross (Robert Samuelson in The Washington Post)

Story of the Day

Poverty Levels on Rise (The Associated Press)

The ranks of America’s poor are on track to climb to levels unseen in nearly half a century, erasing gains from the war on poverty in the 1960s amid a weak economy and fraying government safety net. Census figures for 2011 will be released this fall in the weeks ahead of the November elections. The Associated Press surveyed more than a dozen economists, think tanks and academics, both nonpartisan and those with known liberal or conservative leanings, and found a broad consensus: The official poverty rate will rise from 15.1 percent in 2010, climbing as high as 15.7 percent. Several predicted a more modest gain, but even a 0.1 percentage point increase would put poverty at the highest since 1965. Poverty is spreading at record levels across many groups, from underemployed workers and suburban families to the poorest poor. More discouraged workers are giving up on the job market, leaving them vulnerable as unemployment aid begins to run out. Suburbs are seeing increases in poverty, including in such political battlegrounds as Colorado, Florida and Nevada, where voters are coping with a new norm of living hand to mouth.

Washington Update

To Get More Cuts Later, Conservatives Dealing Now (CQ)

Some conservatives are bargaining with GOP leaders on Congress’ next big spending decision, with an offer to temporarily support a small spending bump and possibly even interim funding for the health care overhaul in exchange for their support on an agreement to punt final fiscal 2013 budget decisions into next year. The negotiations suggest that Congress is more likely than ever to try to pass a continuing resolution well before Oct. 1, the start of the next fiscal year, sidestepping major issues until after the November elections and perhaps until early next year. Senate Majority Whip Richard J. Durbin of Illinois said senior Democrats are working to expedite the completion of a deal on the stopgap measure well before funding expires Sept. 30. “There’s even talk of trying to work out a spending agreement before we leave in August. That would be a breakthrough,” Durbin said, referring to Congress’ five-week summer recess.

In Swing States, Economic Picture a Little Brighter for Obama (The Washington Post)

Nationally, the economic picture is decidedly dismal — a sullen state of affairs that has led many political observers to conclude that President Obama is an underdog in his bid for a second term. But in the 12 (or so) swing states — where Democrats and Republicans will spend the lion’s share of their time and money in the 100 or so days between now and Nov. 6 — the economic picture is considerably sunnier. In seven of those 12 states — Iowa, New Hampshire, New Mexico, Ohio, Pennsylvania, Virginia and Wisconsin — the unemployment rate is below the June national average of 8.2 percent. In some, it is considerably less than the national average; the June rates in New Hampshire, Iowa and Virginia were below 6 percent. Even in Ohio, a state hit hard by the collapse of the manufacturing sector, the unemployment rate is a full percentage point below the U.S. average. Republicans note that the unemployment rate rose between May and June in Colorado, Iowa, New Hampshire and Virginia, among other swing states. In the four swing states where the rate is above the national average — Florida, Michigan, Nevada and North Carolina — the trend line is headed downward. Nevada’s June unemployment rate was an eye-popping 11.6 percent, but that was down from 13.8 percent in June 2011. Ditto Florida (10.7 percent in June 2011, 8.6 percent now), Michigan (10.6 percent in 2011, 8.6 percent now) and North Carolina (10.6 percent in 2011, 9.4 percent now).

US Lawmakers Propose Greater SEC Powers (Financial Times)

A bipartisan pair of senior US lawmakers are to introduce legislation on Monday that would expand the authority of the main securities regulator to pursue larger penalties against companies and individuals accused of wrongdoing. Jack Reed, Democrat from Rhode Island, and Chuck Grassley, Republican from Iowa, want the Securities and Exchange Commission to be able to levy fines equal to the amount of investor losses in the most serious fraud cases. The lawmakers cited the recent case of two former Bear Stearns hedge fund managers who were charged with fraud that cost investors $1.6bn. The SEC settled with both for a total amount of about $1m.

Market Talk

Sales Slowdown Masked By Better-Than-Expected Earnings (Bloomberg)

Better-than-forecast earnings are masking weaker sales growth in the most recent quarter as U.S. companies including International Business Machines Corp. (IBM) improve margins to top estimates. Sales rose an average 2.9 percent in the second quarter among 119 members of the Standard & Poor’s 500 Index that have reported results so far, the weakest since a decline of 9.6 percent in the third quarter of 2009, according to data compiled by Bloomberg. Only 42 percent of the reported companies have topped analysts’ estimates on sales, while 73 percent have beaten on profit, the data show. The gap in results signals companies may hold off hiring and expanding until demand rebounds globally. Federal Reserve Chairman Ben S. Bernanke told lawmakers last week that progress in reducing unemployment may be “frustratingly slow” with joblessness stuck above 8 percent since February 2009. Business investment is cooling because of the European debt crisis and possible fiscal tightening in the U.S., he said. “People are sitting on the sidelines right now waiting to see what happens,” Verizon Communications Inc. (VZ) Chief Financial Officer Fran Shammo said in a telephone interview last week after the New York-based company reported in-line second-quarter profit and sales. “This isn’t helping with growth, so I think we will continue to mosey along here in the states.”

Bleak Jobs Outlook Raises Heat on Fed (Financial Times)

The US will make little progress tackling high unemployment before 2014 unless the Federal Reserve eases policy further, one of the central bank’s leading officials has warned in the run-up to a meeting next week where the option of “QE3” will be on the table. The comments by John Williams, president of the Federal Reserve Bank of San Francisco, show how the weak economy is pushing the central bank towards action to support growth. In an interview with the Financial Times, he forecast that unless “further action” was taken, there would be a lack of progress in boosting the jobs market – where the unemployment rate has been stuck around 8.2 per cent since the start of the year – over the next 18 months. But he declined to call directly for a Fed move. “I think the argument against further action is the question of uncertainty around the effects, the costs and the benefits of doing so,” he said. Mr Williams is regarded as close to the centre of gravity on the rate-setting Federal Open Market Committee, of which he is a voting member this year. The FOMC will conclude its next meeting on August 1.

U.S. Speeds Its Selloff of Bailout Securities (The Wall Street Journal)

The U.S. government is speeding up efforts to sell billions of dollars of remaining assets that were acquired in the controversial bailout of the financial system four years ago, according to investors and government officials. The Treasury Department and Federal Reserve are planning to sell assets ranging from bank shares to troubled mortgage securities as part of a final push to extricate the government from the aid doled out in the financial meltdown. Some of the biggest names on Wall Street—including Blackstone Group LP, Allianz SE's Pacific Investment Management Co., Fortress Investment Group LLC and Oaktree Capital Management LP—are eyeing some of the assets, according to people at the firms. The government in 2008 invested hundreds of billions of dollars in banks, financial institutions and other companies and bought various mortgage assets as markets and the economy were reeling from a credit crisis. The moves were praised by some for stabilizing markets but criticized by others as saving Wall Street at taxpayers' expense. Some of the assets have appreciated in value, and the government has recouped most of its money and completed many sales at a profit, while others have languished. A positive conclusion to the bailout could reflect well on President Barack Obama as the election campaign heats up. To be sure, the government remains in the red on its investment in mortgage giants Fannie Mae and Freddie Mac. It also still holds large stakes in American International Group Inc., General Motors Co. and Ally Financial Inc. that it spent a total of $68 billion on and may not fully recover. The government says it has already made a profit on the emergency funds injected into banks at the time of the financial-industry bailout, and the Fed has fully recouped money spent on acquiring toxic assets from troubled companies.

The Fiscal Cliff and Rationality (Econbrower)

What should happen, what could happen, and what will happen? Let's begin by acknowledging the obvious: the United States faces a very significant long-run issue of fiscal solvency. The graph below, taken from a recent analysis by the Congressional Budget Office, plots projected federal expenditures as a percentage of GDP under two scenarios: The extended baseline scenario, which reflects the assumption that current laws generally remain unchanged; that assumption implies that lawmakers will allow changes that are scheduled under current law to occur, forgoing adjustments routinely made in the past that have boosted deficits. The extended alternative fiscal scenario, which incorporates the assumptions that certain policies that have been in place for a number of years will be continued and that some provisions of law that might be difficult to sustain for a long period will be modified, thus maintaining what some analysts might consider "current policies," as opposed to current laws.

Editorials & Opinions

How Bernanke Can Get Banks Lending Again (Alan Blinder in The Wall Street Journal)

The U.S. economy could use another boost, and it won't come from fiscal policy. Can the Federal Reserve provide it? Chairman Ben Bernanke keeps insisting that the central bank is not out of ammunition, and in a literal sense he is right. After all, the Fed has not yet exhausted its bag of tricks. It is still twisting the yield curve. It can purchase more assets. It can tell us that its federal funds target interest rate will remain 0-25 basis points beyond late 2014. It can even nudge the funds rate down within that range. The operational question is: How powerful are any of these weapons? Let's start with Operation Twist, which was recently extended through the end of this year. The Fed seeks to flatten the yield curve by buying longer-term Treasurys and selling shorter-term ones. And it's probably succeeding—a bit. But Federal Reserve activity in the Treasury markets is modest compared with the vast volume of trading. Realistically, the U.S. yield curve is probably influenced far more by daily developments in Europe. In any case, the Fed will be out of short-term Treasurys to sell by December.

A Week in the Life of Libor (The New York Times Editorial)

The Justice Department is now expected to file criminal charges this year against at least one big bank in connection with the rate-rigging scandal, while building cases against other banks and their employees. This is welcome news: prosecuting financial crimes is essential to restoring public trust in the banking system and in the willingness of the authorities to police it. Meanwhile, the furor over how banks fiddled with the London interbank offered rate, or Libor, for their own advantage is now in the buck-passing phase, as bankers and regulators alike attempt to minimize their role. It is a disturbing and disheartening spectacle. On CNBC last week, Treasury Secretary Timothy Geithner defended his actions in 2008, when he headed the Federal Reserve Bank of New York — a time when the New York Fed knew Barclays was reporting false rates but did not stop or expose the misconduct. Mr. Geithner told CNBC he briefed other American regulators and British authorities on his concerns that the Libor process was “flawed and vulnerable to misrepresentation.” But to hear him tell it, the issue was a plumbing problem, not a potentially criminal and certainly improper pattern of rate rigging.

The Medicaid Albatross (Robert Samuelson in The Washington Post)

It’s no secret that the states are in as much budget trouble as the federal government. Doubters should read a new report from a group headed by former Federal Reserve chairman Paul Volcker and former New York Lt. Gov. Richard Ravitch. By this account, states face four insistent forces: pension underfunding of at least $1 trillion; rapidly rising Medicaid spending; possible cuts in federal aid that provides $1 in $3 of state spending; and weak growth of tax revenue that, in 2011, remained 7 percent below its pre-recession peak. What looms are higher state taxes and reduced services, affecting schools, police, parks, prisons, public universities, roads and social services. Up to a point, cuts may not do much damage; every government has waste. But we are rapidly passing this point. Can we do anything? Well, yes. We could nationalize Medicaid — the federal-state health insurance program for the poor. We could transfer all its costs to the federal government; in exchange, the federal government would end state aid for K-12 education and transportation. Though initially a dollar-for-dollar swap, the change would give states more control over their budgets.

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