Thursday, August 19, 2010

Economic Events of the Week

Thursday – Jobless Claims, CBO Announcement of 2010 Budget and Economic Outlook Update
Friday – Regional and State Unemployment

Featured Story
A Price Worth Paying to Make Banks Safer (Stephen Cecchetti in Financial Times)

Washington Update
How the Fight Over Tax Breaks Affects Your Bottom Line (Washington Post)
Frank: Abolish Fannie and Freddie (Hot Air)

Financial Markets News
FOMC Warms Up the Helicopter (Roubini Global Economics)
Every 1% Increase in Bank Capital = 0.19% Lost in GDP (Alphaville)
US Banks Receive Basel III Boost (Financial Times)

Editorials and Commentaries
Fed Wavers as the World Gets Sweats (Richard Cookson in Financial Times)
PAYGO For Thee But Not For Me (KeithHennessey.com)
From Paul Ryan, A Plan That Isn't (The Washington Post)

Featured Story

A Price Worth Paying to Make Banks Safer (Stephen Cecchetti in Financial Times)

The motive for regulation is that, if banks are left to their own devices, they hold too little capital and too little liquidity. Lower capital means higher returns on equity but a smaller buffer against loan defaults and investment losses. A clear lesson of this crisis was that the safeguards in place were too weak. But reinforcement is not free. Fortunately, the short-term adjustment costs are likely to be small and transitory, while the benefits of a stronger and healthier financial system will be there for years to come.

Washington Update

How the Fight Over Tax Breaks Affects Your Bottom Line (Washington Post)

Bush-era tax cuts enacted in 2001 and 2003 are set to expire at the end of the year, and lawmakers are battling over whether to extend any or all of them before November's congressional elections. Most Republicans want to extend all of the cuts, saying that any increase in taxes will hold back the economic recovery. Obama and Democratic leaders are proposing to extend many of the cuts but say tax breaks for top earners should expire to help pare down growing national deficits. Each plan would affect average tax rates for income groups differently. Click through for a great info graphic showing the various tax situations.

Frank: Abolish Fannie and Freddie (Hot Air)

Call it the New Modesty. Barney Frank suddenly can’t understand why government should push home ownership, nor why government should be involved in mortgages at all. In an interview with Neil Cavuto on Fox Business, Frank called not just for the liquidation of Fannie Mae and Freddie Mac, but also for curtailing federal government interest in home ownership.

Financial Markets News

FOMC Warms Up the Helicopter (Roubini Global Economics)

This week we've been parsing the statement from the August FOMC meeting to anticipate the Fed's next move. So far, all signs point to an impending monetary policy shift. Prior to the August 10 meeting, the emergence of a string of unimpressive economic data—including a dismal jobs report, examined in this RGE Analysis—put significant pressure on the Fed to show some cognizance of the stalling recovery. As expected, the Fed maintained its pledge to keep the federal funds target low for an extended period, but it also announced that the principal payments on its mortgage-backed securities and agency debt would be reinvested in Treasurys.

Every 1% Increase in Bank Capital = 0.19% Lost in GDP (Alphaville)

It is more expensive for banks to fund assets with capital than with deposits or wholesale debt. This suggests that, while banks facing stronger capital requirements will seek to increase capital levels by retaining earnings and issuing equity as well as reducing non-loan assets, they may initially increase the interest rates they charge borrowers and reduce the quantity of new lending. Any increase in the cost and decline in the supply of bank loans could have a transitory impact on growth, especially in sectors that rely heavily on bank credit. In the longer term, however, as banks become less risky, both the cost and quantity of credit should recover, reversing the impact on consumption and investment.

US Banks Receive Basel III Boost (Financial Times)

Big US banks should be able to meet tighter global capital requirements without having to raise substantial amounts of new equity, according to calculations by Barclays Capital. The analysis by BarCap’s debt capital markets group estimates that the 35 largest US banks will have to come up with half as much new capital as had been expected following last month’s rewrite of proposed requirements by the Basel Committee on Banking Supervision. The banks had argued – and some regulators agreed – that a tougher package could impede the still-patchy economic recovery by crimping new lending.

Editorials and Commentaries

Fed Wavers as the World Gets Sweats (Richard Cookson in Financial Times)

It may seem strange, at a time when Germany has notched up its fastest quarterly growth since unification – about 9 per cent at an annual rate – to worry about growth. But, apart from Germany and one or two other developed economies, growth concerns abound. There does not seem to be a consensus at the Fed – or any other central bank – for further monetary loosening via the printing press, either because central bankers do not think it yet necessary; or because they are worried about expanding their balance sheets further; or, in the case of the US, perhaps because they want to put pressure on Congress not to tighten fiscal policy (for now, at least) by allowing the Bush tax cuts to expire.

PAYGO For Thee But Not For Me (KeithHennessey.com)

The Obama Administration and its allies in Congress argue that upcoming tax increases should be prevented for “the middle class” but not for “the rich.” They say we need to prevent tax increases on the middle class, but that we should not extend the Bush tax cuts for the rich. Both sides have violated PAYGO in the past. The whole point of a PAYGO principle is to prioritize deficit reduction over other desirable policies. If you apply a principle to block the policies you don’t like but exempt yourself from it for policies that you favor, then it’s not much of a principle.

From Paul Ryan, A Plan That Isn't (The Washington Post)

In recent days Ryan-mania has reached a wonky fever pitch. Paul Krugman says you're "the flimflam man." The Wall Street Journal's editorial page fired back that your "Roadmap for the Future" features "radical honesty." The Times says you'll be at the center of events if Republicans win big this fall. And The Post even featured you on Page One. Which is why it's important to be clear that your vaunted plan to get our fiscal house in order, and to restore a culture of self-reliance rather than dependency on government, isn't a "plan" at all.

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