Monday, September 20, 2010

Economic Events of the Week

Monday – Obama Town Hall on Job Growth with CNBC, NAHB Housing Market Index
Tuesday –  Housing Starts, FOMC Meeting Announcement
Wednesday – Obama Event on the Six Month Anniversary of The Health Care Law, FHFA House Price Index
Thursday – Existing Home Sales
Friday – Durable Goods Orders

e21 Reaction & Commentary
e21 Reaction: Thinking Again About Mass Refinancing Proposals
e21 Commentary: The Real Lesson About Ireland's Austerity Plan

Washington Update
What Might Boehner Do as Speaker? (Capital Journal)

Market Talk
An Interesting Week Ahead (Mohamed El-Erian in Alphaville)
How a Touch of Inflation Could Boost the Economy (Washington Post)
Still a Risk Ireland Will Access the EFSF and IMF (Alphaville)

Editorials & Opinions
Can the Fed Offer a Reason to Cheer? (Tyler Cowen in New York Times)
Tax Fight: GOP Won't Back Down (Eric Cantor in Wall Street Journal)

e21 Reaction & Commentary

e21 Reaction: Thinking Again About Mass Refinancing Proposals

In an oped published Sunday, Chris Mayer and Glenn Hubbard put forth a proposal to increase government-sponsored refinancing for millions of homeowners with a government agency mortgage. As Congress appears increasingly unlikely to authorize additional government spending, such plans have gained traction as a way to assist the housing sector without requiring Congressional approval. The hope is that lower market rates have created the possibility for a potentially “costless stimulus” to homeowners, as the savings for households with higher rate mortgages and large unpaid balances would be equivalent to a large tax cut. However, there are a number of problems with these proposals.

e21 Commentary: The Real Lesson About Ireland's Austerity Plan

For commentators like Paul Krugman and Joseph Stiglitz, it’s become an article of faith that credit markets will punish some of the governments that are pursing austerity plans or bold reductions in public spending. Their case study is Ireland. Krugman has asserted that Irish credit spreads have widened in spite of the austerity measures; Stiglitz has said “the belief that markets will get new confidence [from austerity] has been shown wrong” by Ireland’s budget cuts. Should Ireland seek a bailout from the International Monetary Fund or European Financial Stability Facility – as now seems increasingly likely – look for Krugman and Stiglitz to blame it on fiscal consolidation. This argument reflects a fundamental misunderstanding of the scale of the problems facing Ireland. It also badly mischaracterizes the policy steps taken by the Irish government. The problems facing Ireland are far greater than the solutions the government has proposed to date. It should be no surprise that market confidence has not returned because there is no reason for Irish creditors to be confident that they will be repaid in full.

Washington Update

What Might Boehner Do as Speaker? (Capital Journal)

President Barack Obama and other Democrats have been pounding away at House Minority Leader John Boehner for weeks, blaming him for the impasse over extending Bush-era tax cuts for middle-income families and standing in the way legislation to further stimulate the sluggish economy. With GOP prospects for a takeover of the House seeming to improve week by week, we take a look at what Boehner might be like as House speaker.

Market Talk

An Interesting Week Ahead (Mohamed El-Erian in Alphaville)

This coming week will be an interesting one. I am not just thinking of Tuesday’s FOMC meeting in Washington that will shed light on whether the Federal Reserve revises down its economic growth projections (it should and, I suspect, will) and expands non-conventional policies (it will, but probably not at this meeting). I am also thinking of two other issues which were left to simmer quietly over the last few months when most of the focus was on America’s “recovery summer” — or, to be more exact, the lack thereof. The first pertains to Europe. Solvency concerns are again on the rise there. The second issue pertains to the global configuration of currencies.

How a Touch of Inflation Could Boost the Economy (Washington Post)

Americans generally view rising prices as something to fear. But right now, a little inflation may be just what the economy needs. Consumer prices rose 1.2 percent over the 12 months that ended in August, the Labor Department said Friday, and only 0.9 percent when volatile prices for food and energy are excluded. That is well below the range of 1.5 to 2 percent sought by the Federal Reserve. Somewhat higher inflation could strengthen the ailing economy. Inflation would make the heavy debt that Americans carry a bit more manageable as wages rise but the amount owed stays the same. And it would create more incentive for businesses to invest their cash rather than sit on it, because inflation would reduce the value of hoarded money.

Still a Risk Ireland Will Access the EFSF and IMF (Alphaville)

No doubt about the main highlight of the week (apart from the FOMC meeting) — the Irish government’s attempt to find buyers for €1.5bn of four and eight year bonds on Tuesday. In an effort to calm nerves ahead of the auction, Ireland’s finance minister Brian Lenihan went on the offensive at the weekend, pointing out that the country had raised sufficient funds to finance its budget through to the middle of next year. He also said the government would provide the markets with a “definitive estimate” of the cost of recapitalising Anglo Irish by the end of the month. That, of course, is precisely what investors want to know. 

Editorials & Opinions

Can the Fed Offer a Reason to Cheer? (Tyler Cowen in New York Times)

Optimism, or lack thereof, may seem the province of psychology, not macroeconomics. But the issue is very relevant to the difficulties that policy makers face: a deficit of optimism has much to do with why the United States economy remains stalled today. The Federal Reserve, pondering what to do to stimulate the economy, has a number of tools at its disposal. But if it could just convince Americans that it was committed to monetary expansion and economic growth, it would help the economy pick up speed. Yet that is easier said than done. Here’s the problem: The economy needs help, but monetary policy, which is the Fed’s responsibility, has not been very expansionary. This is true even though the Fed has increased the monetary base enormously since the onset of thefinancial crisis.

Tax Fight: GOP Won't Back Down (Eric Cantor in Wall Street Journal)

As we enter the final stretch before the November midterm elections, all eyes have gravitated to the fight over the looming federal tax increases. President Obama and Speaker Nancy Pelosi want to keep the current rates on income, capital gains and dividends in place only for those who happen to fit their description of "middle class." In this moment of economic distress, will they get their way even though a bipartisan majority of the House disagrees with them? Or will present tax rates be extended for all American taxpayers—and most importantly for small businesses and investors, the nation's job creators?

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: Economic Policies for the 21st Century