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Monday, March 19, 2012

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Economic Events of the Week

Monday – e21 Event: How Much Do Federal Loan Programs Really Cost?
Tuesday – Housing Starts
Wednesday – Existing Home Sales
Thursday – Jobless Claims
Friday – New Home Sales

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e21 Reaction & Commentary
e21 Commentary: Fed Set to Sell CDOs From AIG Bailout: Why Policymakers Should Care
Guest Post: Jason Delisle on the Federal Student Loan Program (National Review's The Agenda blog)

Washington Update
House GOP’s Ryan to Unveil New Budget (Washington Post)

Market Talk
US Rakes Largest Monthly Deficit In History (Zero Hedge)
Cyclical Outlook: Navigating the Hurricane of Global Deleveraging (PIMCO)
February Container Volume Dips 15.2 Percent (Port of Long Beach)

Editorials & Opinions
The US Cruises Toward a 2013 Fiscal Cliff (Alan Blinder in Wall Street Journal)
Long-Term Understanding of the Economic Crisis (Robert Samuelson in Washington Post)
A Tax and Energy Plan to Re-Elect Obama (Harold Ford Jr. in Wall Street Journal)

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e21 Reaction & Commentary

e21 Commentary: Fed Set to Sell CDOs From AIG Bailout: Why Policymakers Should Care

Last Friday, the Wall Street Journal reported that large banks are interested in buying the “toxic assets” the Federal Reserve Bank of New York (FRBNY) acquired as part of the AIG bailout. Specifically, Goldman Sachs, Barclays, and Credit Suisse have all expressed interest in buying the FRBNY’s $47 billion portfolio of collateralized debt obligations (CDOs). The demand for these assets is partly a reflection of the current monetary policy environment, which has flooded the market with liquidity and substantially reduced expected returns across virtually all asset categories. The FRBNY’s CDO portfolio is one of the few places investors could buy assets with yields near 10%. According to the WSJ, the banks’ plan to buy the assets and then re-securitize them to create additional CDOs to meet their clients’ return targets.

Guest Post: Jason Delisle on the Federal Student Loan Program (National Review's The Agenda blog)

Why limit a government program that provides subsidies at no cost to taxpayers? That’s essentially the question Mike Konczal at the Roosevelt Institute asks regarding interest rates on federal student loans. After arguing that the loans are either profitable for the government or at least break-even he writes, “I’m not seeing the downside on [Congress] keeping [interest] rates lower. What am I missing?” It sounds like a fair question, but it’s loaded. See both Delisle and Konczal today at e21's panel discussion on federal loan programs in the Dirksen Senate Office Building at 2:30.


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Washington Update

House GOP’s Ryan to Unveil New Budget (Washington Post)

Congress is preparing to renew its bitter fight over government spending, as both parties eagerly await the arrival Tuesday of a new budget plan authored by Republican Rep. Paul Ryan (Wis.). A year ago, embracing Ryan’s budget with its deep spending cuts and a proposal to privatize Medicare, became a badge of loyalty for conservatives. Democrats, meanwhile, used the plan as a political cudgel, accusing the GOP of working to end the retiree health program. Even before the introduction of this year’s version of the plan, both sides have signaled that they are eager to relaunch the fight.


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Market Talk

US Rakes Largest Monthly Deficit In History (Zero Hedge)

A few days ago we noted that based on preliminary data, the February budget deficit would hit $229 billion (yes, nearly one quarter of a trillion in one month, about where real Greek GDP is these days) - the largest single monthly deficit in history. Unfortunately, this number was low: the final February deficit was just released and the actual print is $231.7 billion. It also means that in the first 5 months of the fiscal year, the US has raked up $580 billion in deficits, oddly matched by $727 billion in new debt issuance, 25% more new debt issued than needed to fund deficits... And that in itself would not be horrible - February is traditionally the worst month for deficits as the Treasury sees a surge in tax refund issuance - if it wasn't for something even more troubling. As the second chart below shows, through last Friday, and net of tax refunds, total US tax revenues were actually lower in the fiscal 2012 year to date period than compared to 2011.

Cyclical Outlook: Navigating the Hurricane of Global Deleveraging (PIMCO)

We expect the eurozone economy to experience a recession in 2012 on the back of continuing pro-cyclical fiscal austerity measures. We expect 2012 to be the year in which the residential construction sector begins to gradually contribute to U.S. economic growth after a long and painful five-year hiatus. Major emerging market economies are struggling with domestic over-investment, rising income inequalities and inflation risks. Therefore, PIMCO expects major emerging market economies to be less of a global engine of growth in 2012-13.

February Container Volume Dips 15.2 Percent (Port of Long Beach)

Container trade volume at the Port of Long Beach dropped 15.2 percent overall in February compared to the same period a year ago. Imports were down 18.1 percent, and exports dipped 1.6 percent. Port terminals handled 388,589 twenty-foot equivalent container units last month, compared to 458,336 TEUs in February 2011. The drop in imports in February is partly attributable to the early Chinese New Year. Import volumes typically fall following the New Year as factories in Asia close for a week or more during the holidays. Last year, the New Year fell on February 3 and the slow down was felt in the latter part of the month and into early March. This year, the New Year fell on January 23, putting the entire slow down period in February.


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Editorials & Opinions

The US Cruises Toward a 2013 Fiscal Cliff (Alan Blinder in Wall Street Journal)

At some point, the spectacle America is now calling a presidential campaign will turn away from comedy and start focusing on things that really matter—such as the "fiscal cliff" our federal government is rapidly approaching. The what? A cliff is something from which you don't want to fall. But as I'll explain shortly, a number of decisions to kick the budgetary can down the road have conspired to place a remarkably large fiscal contraction on the calendar for January 2013—unless Congress takes action to avoid it. Well, that gives Congress plenty of time, right? Yes. But if you're like me, the phrase "unless Congress takes action" sends a chill down your spine—especially since the cliff came about because of Congress's past inability to agree.

Long-Term Understanding of the Economic Crisis (Robert Samuelson in Washington Post)

Four years after the onset of the financial crisis — in March 2008 Bear Stearns was rescued from failure — we still lack a clear understanding of the underlying causes. Hundreds of studies and books have given us an increasingly detailed picture of what happened without conclusively answering why. Conventional wisdom has advanced competing theories: Wall Street types took too many risks, encouraged by lax government regulation; or pro-homeownership policies eroded mortgage-lending standards and created the housing bubble. Actually, both theories are correct — and neither is. It’s true that Wall Street took too many risks while government regulators watched passively; it’s also true that the government’s aggressive promotion of homeownership contributed to real estate speculation. But the fact that these theories are not mutually exclusive suggests that both were consequences of some larger cause. Just so. What ultimately explains the financial crisis and Great Recession is an old-fashioned boom and bust, of which the housing collapse was merely a part.

A Tax and Energy Plan to Re-Elect Obama (Harold Ford Jr. in Wall Street Journal)

The president kicked off the year with a number of strong initiatives including a plan to cut the corporate tax rate. It was a great start, but it doesn't go far enough and it could end up costing many American companies like FedEx, Apple and Caterpillar even more money. That's because his plan eliminates many tax deductions on foreign-based income these companies currently receive. Instead, the president should consider joining virtually every other industrialized nation by moving to a territorial tax system, which would tax income in the country in which it was earned and eliminate the threat of double taxation. This would help U.S. companies compete overseas and bring their profits home.


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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.

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