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Wednesday, March 21, 2012

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Economic Events of the Week

Wednesday – Existing Home Sales
Thursday – Jobless Claims
Friday – New Home Sales

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e21 Reaction & Commentary
e21 Event Video: How Much Do Federal Loan Programs Really Cost?

Washington Update
The Ryan Budget Proposes Lower Deficits and Less Debt than the Obama Budget (KeithHennessey.com)
Congress’ Tax Experts Say Buffett Rule Tax on Wealthiest Would Raise Just $47B Over 11 years (Washington Post)

Market Talk
U.S. Housing Heals as Starts Near Three-Year High: Economy (Bloomberg)
Banks Seek Delay on ‘Volker Rule’ (Wall Street Journal)

Editorials & Opinions
Surprise, We Might Actually Begin Meaningful Housing Reform This Year (Christopher Papagianis in Reuters)
The Reform Republicans (Wall Street Journal Editorial)
Paul Ryan’s Dangerous Budget (Washington Post Editorial)

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e21 Reaction & Commentary

e21 Event Video: How Much Do Federal Loan Programs Really Cost?

How the federal government reports the costs of its rapidly expanding loan programs seems like an arcane accounting matter. But a burgeoning debate over exactly that issue promises to affect many wide-reaching federal programs such as student loans, the Federal Housing Administration, Fannie Mae and Freddie Mac, and new proposals for infrastructure spending. In recent years, some have argued that the current accounting rules are flawed – they systematically exclude a portion of the risks taxpayers bear in the government’s loan programs and therefore understate the cost of every federal loan program. This flaw makes all of the major loan programs appear profitable for the government, even though the programs make or guarantee loans at terms below market rates. A growing body of research shows that using a more comprehensive measure of risk (i.e. fair value) shows that federal loan programs aren’t profitable and in fact provide subsidies to borrowers at a cost to taxpayers.


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Washington Update

The Ryan Budget Proposes Lower Deficits and Less Debt than the Obama Budget (KeithHennessey.com)

Over each year of the next decade the Ryan budget would result in lower deficits, less debt, and a better long-term debt trend than the President’s budget. The Ryan budget proposes a 5% deficit for FY13, lower than the President’s proposed 6.1% deficit for that same year. Chairman Ryan’s proposed deficits are lower than the President’s proposed deficits in each year of the next ten. The gap widens over time to a maximum of two percentage points in 2021. Under the Ryan budget debt would peak at 77.6% of the economy in 2014. Under the President’s budget debt would peak at 80.4% of the economy in that same year. The Ryan budget would cause debt to steadily decline to 62.3% of GDP by the end of the decade.  Under the Obama budget debt would flatten out by 2018 and end the decade at 76.3% of GDP, 14 percentage points higher than under the Ryan budget. At the end of 10 years debt would be declining relative to the economy under the Ryan budget, while it would be flat under the President’s budget.

Congress’ Tax Experts Say Buffett Rule Tax on Wealthiest Would Raise Just $47B Over 11 years (Washington Post)

A bill designed to enact President Barack Obama’s plan for a “Buffett rule” tax on the wealthy would rake in just $47 billion over the next 11 years, according to an estimate by Congress’ official tax analysts obtained by The Associated Press. That figure would be a drop in the bucket of the over $7 trillion in federal budget deficits projected during that period. It is also minuscule compared to the many hundreds of billions it would cost to repeal the alternative minimum tax, which Obama’s budget last month said he would replace with the Buffett rule tax. The Buffett rule has become a leading symbol of Obama’s and congressional Democrats’ election-year efforts to persuade voters that they are the party championing economic fairness. Republicans have mocked it as one aimed at scoring political points that would have little real budgetary impact.


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Market Talk

U.S. Housing Heals as Starts Near Three-Year High: Economy (Bloomberg)

Housing starts in the U.S. hovered in February near a three-year high and building permits rose, adding to signs that the industry at the heart of the last financial crisis is stabilizing. Builders broke ground on 698,000 homes at an annual rate, in line with the median forecast of economists surveyed by Bloomberg News and down 1.1 percent from a January pace that was stronger than previously reported, Commerce Department figures showed today in Washington. Building permits, a proxy for future construction, climbed to the highest level since October 2008.

Banks Seek Delay on ‘Volker Rule’ (Wall Street Journal)

For Wall Street banks worried about the controversial "Volcker rule," help may be on the way. Senators from both parties are working to give regulators more time to write the rule, potentially easing banks' concerns that their activities will run afoul of the law as a July deadline passes. The Volcker rule, which restricts banks' ability to trade with their own money, is set to take effect July 21, whether or not regulators have a final rule in place, according to the 2010 Dodd-Frank financial overhaul law. Federal Reserve Chairman Ben Bernanke said last month that regulators likely wouldn't have a rule in time. A group representing banks and others involved in bundling and selling loans is warning that deals worth hundreds of billions of dollars may need to be shut down because of wording in the law requiring compliance with a rule that doesn't yet exist.


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Editorials & Opinions

Surprise, We Might Actually Begin Meaningful Housing Reform This Year (Christopher Papagianis in Reuters)

Last week, I spotlighted three ominous trends in consumer banking. The last one spotlighted a brewing war “between the private bank sector and the government over who exactly controls the allocation of consumer credit in this country.” By far, the most important front in this battle is over the future of housing finance. Today, the government is underwriting or assuming 100 percent of the credit risk on practically every new mortgage that’s originated. With regard to outstanding mortgages, the government is responsible for 100 percent of the default risk on about $6 trillion of the roughly $10 trillion market. Thankfully, there is some real hope that a somewhat clandestine reform effort is about to commence that would start to shift a portion of this credit risk back to the private sector. The leader of this effort is the much-maligned regulator of the government-sponsored enterprises Fannie Mae and Freddie Mac.

The Reform Republicans (Wall Street Journal Editorial)

The introduction of Paul Ryan's House fiscal 2013 budget yesterday is an important political moment even if it has no chance of becoming law this year. It shows that the reform wing of the Republican Party is alive and well, one year after Democrats and the press corps had called Mr. Ryan's fiscal 2012 budget political suicide. Perhaps you remember the TV spot in which Democrats had an actor resembling Mr. Ryan dump grandma in a wheel chair off a cliff. Democrats chortled that the Budget Chairman's Medicare reform would help them retake the House in 2012, and President Obama chipped in by trashing Mr. Ryan as he sat in the front row as a White House-invited guest to a speech at George Washington University. But a funny thing happened on the way to oblivion. Mr. Ryan survived. GOP candidates in special elections beat back the Mediscare onslaught. Slowly, the causes of entitlement and tax reform have advanced, picking up converts and forcing GOP Presidential candidates to embrace them at least in part.

Paul Ryan’s Dangerous Budget (Washington Post Editorial)

There is no credible path to deficit reduction without a combination of spending cuts and revenue increases. This is the fundamental conclusion of every responsible group that has examined the issue, most prominently the Simpson-Bowles commission, and it is the fundamental failure of the budget blueprint released Tuesday by House Budget Committee Chairman Paul Ryan (R-Wis.). Instead, and unfortunately, Mr. Ryan’s plan lunges in the opposite direction. He dangles the carrots of lower income and corporate tax rates. He says he would maintain tax revenue and in fact have it grow to 19 percent of the gross domestic product by 2025. Yet he fails to do the hard, and politically treacherous, work of specifying what deductions and credits he would eliminate in order to make all that happen. Mr. Ryan’s plan envisions, though again does not spell out, draconian spending cuts.


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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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2011, e21: Economic Policies for the 21st Century


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