Thursday, August 26, 2010

Economic Events of the Week

Thursday – Jobless Claims, Federal Reserve Retreat in Jackson Hole, WY
Friday – Q2 GDP

e21 Reaction & Commentary
e21 Commentary: The Future of Finance is Very Uncertain (Papagianis)
e21 Reaction: Responding to Podesta and Greenstein on the Looming Tax Increase

Washington Update
2011-2012: Can You Spell Federal Budget Gridlock? (Capital Gains and Games)
Lawmaker Want Deficit Commission Co-Chair Ousted (Congressional Quarterly)

Market Talk
Another Record Low for Housing (Economix)
Durable Goods Orders Surprisingly Weak (Wells Fargo)
As Economy Slows and Fed Voices Conflict, Markets Look to Bernanke for Guidance (Washington Post)

Editorials & Opinions
The Fed Is Running Low On Ammo (Alan Blinder in Wall Street Journal)
Investors Should be Prepared to Face Financial Oppression (Don Marron in Seeking Alpha)

e21 Reaction & Commentary

e21 Commentary: The Future of Finance is Very Uncertain (Papagianis)

The next stage of financial regulatory reform in the U.S. will be through regulatory rulemakings – government agencies will convert legislative guidance from Congress into concrete rules to govern the operation and risk-taking of financial firms. The Dodd-Frank Act requires 243 rulemakings and 67 studies. Then there is the Basel Committee on Banking Supervision – an international cooperative forum that develops global guidelines and supervisory standards for banks – which is working to update its own capital and liquidity rules.

e21 Reaction: Responding to Podesta and Greenstein on the Looming Tax Increase

In today’s Financial Times, co-authors John Podesta and Robert Greenstein add their voices to those calling for higher marginal tax rates for the top two brackets. Unsurprisingly, Podesta and Greenstein claim that a tax increase on the wealthiest 2% won’t significantly slow economic growth and that the new tax revenue should be used for deficit reduction instead. We have discussed the importance of not increasing taxes right now in order to support the (feeble) economic recovery (see here and here). In our view, the spending side of the federal ledger deserves more attention. Recent CBO data shows that the new revenue from this sort of a tax increase would not meaningfully shift the long-term deficit outlook for the U.S. Why? Because spending is out of control.

Washington Update

2011-2012: Can You Spell Federal Budget Gridlock? (Capital Gains and Games)

Assuming there are no big changes between now and election day (that is over just 10 more weeks), Republicans either will have narrow majorities in one or both houses of Congress or the Democrats will have smaller majorities in the House and Senate than they have now. In general, that's not a situation conducive to compromises, cooperation, and large changes. Try to imagine spending or revenue changes being considered in this environment and ask yourself how much of anything -- stimulus, deficit reduction, the deficit reduction commission's report (if there is one), budget process changes, Medicare and Social Security revisions, new Pentagon priorities -- will get done.

Lawmaker Want Deficit Commission Co-Chair Ousted (Congressional Quarterly)

Two lawmakers called Wednesday for the ouster of the top GOP member of President Obama’s fiscal commission over controversial comments he made about Social Security. Sen. Bernard Sanders, I-Vt., and Peter A. DeFazio, a Democratic House member from Oregon, complained in an Aug. 25 letter to President Obama that former Republican Senator Alan Simpson has failed to meet a responsibility to be “serious, deliberate, and sober” when he compared, in an e-mail message, Social Security to a “milk cow” on which 310 million Americans feed.

Market Talk

Another Record Low for Housing (Economix)

New-home sales were at their lowest level in July since the government began keeping track in 1963. This follows a comparably terrible report on Tuesday on existing-home sales. It’s now looking increasingly as though residential investment will be a strong drag on economic growth in the third quarter. As a result of the housing and durable goods reports on Wednesday, Macroeconomic Advisers, a respected forecaster, has lowered its third-quarter gross domestic product estimate to an annual rate of 1.7 percent. On Tuesday, its forecast was 2.1 percent.

Durable Goods Orders Surprisingly Weak (Wells Fargo)

Durable goods orders for July increased a meager 0.3 percent in July, which were far weaker than consensus expectations. Even worse, excluding volatile transportation, new orders fell 3.8 percent. Outside of the increases in non-defense aircraft orders and vehicles and parts orders which rose 75.9 percent and 5.3 percent respectively, durable orders hit a rough patch in July. Though it is important to note that orders can be volatile month to month and are still up 8.6 percent from a year ago. Still with the plunge in existing home sales and recent rise in jobless claims, this release will increase fears of a double-dip.

As Economy Slows and Fed Voices Conflict, Markets Look to Bernanke for Guidance (Washington Post)

With the housing market retreating, unemployment lingering and top officials at the Federal Reserve in open disagreement over what to do, Fed Chairman Ben S. Bernanke is under rising pressure to offer solutions in an address Friday that is likely to be his most important since the end of the financial crisis. The central bank's policy intentions have been unusually muddled in the past two months, according to a widespread view among economists and people in the financial world. They say it is unclear how likely it is that the Fed will undertake major new efforts to try to support the economy, what economic conditions would trigger such actions and what form those actions would take.

Editorials & Opinions

The Fed Is Running Low On Ammo (Alan Blinder in Wall Street Journal)

At its Aug. 10 meeting, the Federal Open Market Committee shifted attention away from its former concern—how to tighten a bit—and toward a new concern: how to loosen a bit. By central bank standards, this turnabout came at warp speed. To give quantitative easing more punch, the Fed may have to devise imaginative ways to purchase diversified bundles of assets like corporate bonds, syndicated loans, small business loans and credit-card receivables. Serious technical difficulties beset any efforts to do so without favoring some private interests over others. And the political difficulties may be even more severe. So the Fed will go there only with great reluctance.

Investors Should be Prepared to Face Financial Oppression (Don Marron in Seeking Alpha)

That’s the conclusion of a new report by Morgan Stanley analyst Arnaud Mares. And what, you may ask, is financial oppression? Speaking from the perspective of investors in sovereign debt, Mares defines it as “imposing on creditors real rates of return that are negative or artificially low.” Mares sees sovereign creditors as tempting targets when over-indebted governments decide which of their many fiscal promises they can’t keep. His piece is definitely worth a read if you want to consider a bearish view on U.S. and European sovereign credit.

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.

2010, e21 - An initiative for 21st Century Economic Policies