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Wednesday, April 18, 2012

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Economic Events of the Week

Wednesday – President Obama Delivers Remarks on the Economy in Columbus, OH
Thursday – Existing Home Sales
Friday – e21/SOMC Spring Symposium featuring Rep. Kevin Brady

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e21 Reaction & Commentary
e21 Commentary: Large Banks Begin to Recognize Reality of Second Liens
e21 Commentary: Yes, the Health Law Worsens the Deficit (Charles Blahous)

Washington Update
Krueger: U.S. Can Thrive by Closing Income Gap (Politico)
Conrad Set to Offer Long-Term Debt Reduction Plan (CQ)
Stripped-Down Small-Business Tax Cut Lost Chance for Bipartisan Support (National Journal)

Market Talk
Industrial Production Unchanged in March, Capacity Utilization Declines (Calculated Risk Blog)
Fed’s Doves Lose Appetite for Easing (Financial Times)
New Short Sale Timelines and HARP Updates (Calculated Risk Blog)

Editorials & Opinions
It’s Not a Markup if You Don’t Vote (KeithHennessey.com)
The ‘Buffett Rule’ Does Damage to A Good Cause (Robert J. Samuelson in The Washington Post)
The Inequality Obsession (Holman Jenkins in The Wall Street Journal)dashed-line

e21 Reaction & Commentary

e21 Commentary: Large Banks Begin to Recognize Reality of Second Liens 

On Monday, Citigroup announced first quarter earnings that beat consensus expectations thanks to cost cutting and better credit performance.  Citigroup’s $1.2 billion net release of credit reserves during the quarter boosted earnings, as a decline in reserves translates to a dollar-for-dollar increase in the accounting value of the loans the bank owns.  Despite the overall good news on credit conditions, Citi did report a large increase in nonperforming second lien loans – such as a home equity loan or home equity line of credit (HELOC).  According to the earnings release, Citi classified $800 million in second liens as nonperforming, including $700 million that were actually current but subordinate to a first mortgage that was seriously delinquent.

e21 Commentary: Yes, the Health Law Worsens the Deficit (Charles Blahous)

Last week the Mercatus Center published my study showing that the health care law of 2010 (the ACA) will add at least $340 billion to federal deficits over the next ten years, and more than $1.15 trillion to net federal spending. The study has received a great deal of attention. The resulting debate has highlighted the need for wider public understanding of federal budget procedures. In this article I will explain some of those budget rules while further substantiating that my basic conclusion is correct.


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Washington Update

Krueger: U.S. Can Thrive by Closing Income Gap (Politico)

Alan Krueger thinks the case is clear: The income gap has hampered the recovery and threatens future economic growth — and the way to fix it starts with raising taxes on the wealthy.The chairman of the White House Council of Economic Advisers says a fundamental social shift backs his conclusion: After years of stagnant incomes, members of the middle class are drowning in debt and not spending as they should. By letting some of the tax breaks introduced by President George W. Bush expire next year, the administration can shield from deep cuts to the education and health care programs that would stop them from falling further behind. And he’s not too impressed by Republicans — including presumptive GOP presidential nominee Mitt Romney — who warn such moves would derail the recovery, arguing that money currently feeding job creation in the private sector would instead be funneled to a more wasteful government. Romney dismissed concerns about inequality in January as a mix of “envy” and “class warfare.”

Conrad Set to Offer Long-Term Debt Reduction Plan (CQ)

Senate Budget Chairman Kent Conrad won’t offer a conventional fiscal 2013 budget resolution at a markup scheduled for Wednesday, sparing Democrats potentially difficult election year votes on spending priorities. Instead, Conrad, D-N.D., will propose a long-term deficit reduction plan modeled on recommendations from the president’s 2010 fiscal commission. He hopes his proposal will jump-start negotiations on a bipartisan debt deal within his committee, but at this point he has not scheduled any votes on it. He said his decision to put forward a “bipartisan” proposal will “disappoint some on both sides of the aisle.” But Conrad, who served on the fiscal commission and has since advocated for a comprehensive, balanced deficit reduction plan as a member of the bipartisan “Gang of Six,” said he is “not interested in furthering the political divide” by putting forward a partisan plan.

Stripped-Down Small-Business Tax Cut Lost Chance for Bipartisan Support (National Journal)

The House this week considers a small-business tax cut that once received modest support from both sides of the aisle, but the stripped-down, partisan version approved by the Rules Committee on Tuesday will almost certainly fail to become law. The tax cut, sponsored by House Majority Leader Eric Cantor, R-Va., is the latest in a line of budget-related measures that achieve more in messaging than policy. The bill is scheduled to be considered by the full House on Thursday, but Democrats are dismissing the once-favored legislation as a handout to the wealthy. Senate prospects for the bill are almost nonexistent and an analysis by the Joint Committee on Taxation deemed the cut to have an economic impact “so small as to be incalculable.” The bill wasn’t always doomed. Previous versions of the $46 billion tax cut were most recently considered as one of 13 stimulus options weighed by both chambers at the end of 2011. When included in other legislation, the measure had bipartisan support.


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Market Talk

Industrial Production Unchanged in March, Capacity Utilization Declines (Calculated Risk Blog)

From the Fed: Industrial production was unchanged in March for a second month but rose at an annual rate of 5.4 percent in the first quarter of 2012. Manufacturing output declined 0.2 percent in March but jumped 10.4 percent at an annual rate in the first quarter. The gain in manufacturing output in the first quarter was broadly based: Even excluding motor vehicles and parts, which jumped at an annual rate of nearly 40 percent, manufacturing output moved up at an annual rate of 8.3 percent and output for all but a few major industries increased 5 percent or more. In March, production at mines rose 0.2 percent and the output of utilities gained 1.5 percent. For the quarter, however, the output of utilities dropped at an annual rate of 13.8 percent, largely as a result of unseasonably warm temperatures over the past several months, while the output of mining fell 5.4 percent. At 96.6 percent of its 2007 average, total industrial production for March was 3.8 percent above its year-earlier level. The rate of capacity utilization for total industry edged down to 78.6 percent, a rate 2.1 percentage points above its level from a year earlier but 1.7 percentage points below its long-run (1972--2011) average.

Fed’s Doves Lose Appetite for Easing (Financial Times)

The Federal Open Market Committee of the Federal Reserve is no longer expected to announce a further round of monetary easing when it concludes its two day meeting in Washington on Wednesday. The fact that the hawks have lost enthusiasm for more quantitative easing is scarcely surprising, given the fall in unemployment, and the stickiness of inflation.But until very recently the hawks have not been in control of the committee. What is more surprising is that the powerful group of doves which includes Ben Bernanke, Bill Dudley and Janet Yellen, and which normally has disproportionate weight on the FOMC, has also taken QE off the agenda . So is that the end of QE? Not necessarily. The doves seem to have changed their policy conclusion without changing their basic view of the economy. In recent speeches, they have all repeated that the current unemployment rate of 8.2 per cent will remain two to three percentage points above the level consistent with the Fed’s mandate for some time. This judgment depends on their interpretation of the work of three distinguished economists: Arthur Okun (1928-80), William Beveridge (1879-1963) and John Taylor (who is still very much alive and kicking at Stanford University).

New Short Sale Timelines and HARP Updates (Calculated Risk Blog)

This might speed up the short sale approval process, from Freddie Mac: “The new requirements introduce specific response time frames for certain activities in the short sale process ... Effective for new evaluations conducted on or after June 15, 2012, Servicers must comply with the following minimum communication time frames for all short sales. If feasible, Servicers are encouraged to implement these changes prior to the effective date of June 15, 2012.” Here is a key section: “Within five days of an evaluation decision, but no later than 30 days following receipt of a complete BRP [Borrower Response Package], the Servicer must provide to the Borrower an evaluation decision and send the appropriate Borrower Evaluation Notice in accordance with Section 64.6(d)(5). There may be some situations in which a Servicer will be unable to provide a decision within 30 days following receipt of a complete BRP (e.g., extended negotiations with the MI). In such cases, the Servicer must notify the Borrower within the 30 day time limit that the BRP is still under review and each week thereafter provide the Borrower a status update indicating the reason(s) why a decision is pending. The weekly status updates may be communicated verbally or in writing. However, the Servicer must provide the Borrower with a decision and send the appropriate Borrower Evaluation Notice no later than 60 days after receipt of a complete BRP.” Fannie Mae is also implementing new timelines.


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Editorials & Opinions

It’s Not a Markup if You Don’t Vote (KeithHennessey.com)

The Congressional Budget Act requires the House and Senate to pass a budget resolution by April 15th. Under Democratic control the Senate has not done so since 2009. Last year Senate Budget Committee Chairman Kent Conrad (D-ND) committed to his ranking member, Senator Jeff Sessions (R-AL), that the committee would mark up a budget resolution this year.  By itself that’s only a first step but it’s a lot more than the Senate has done in the past three years. Senate Majority Leader Reid (D-NV) has repeatedly said that he will not bring a budget resolution to the floor this year.  If Leader Reid were to carry out such a threat he would be violating the Budget Act requirement, but until now the issue has been moot. As long as the committee has not reported, the responsibility to act and blame for legislative inaction falls on Chairman Conrad.  If the committee reports a budget resolution then the responsibility for action and blame for inaction shift to Leader Reid.

The ‘Buffett Rule’ Does Damage to A Good Cause (Robert J. Samuelson in The Washington Post)

Warren Buffett has become a political prop — and, perhaps, an object lesson in how business leaders, when they enter the political arena, are easily manipulated. Their efforts to “do good” are often twisted to suit the narrow interests of their political patrons. That’s the story of Buffett and President Obama. Unless you live on Mars, you know that Buffett is America’s second-richest man (net worth of $44 billion, says Forbes). You also know that, a while back, he noted that his tax rate — the share of income paid to the federal government — is lower than his secretary’s. From this emerged the “Buffett Rule”: Millionaires should pay at least 30 percent of their incomes in federal taxes. Let me state: I favor the Buffett Rule. Let me also state: The proposal has done more harm than good.

The Inequality Obsession (Holman Jenkins in The Wall Street Journal)

If it were learned that the car driven by the average American is 10 times more likely to burst into flames than the car driven by the richest 1%, what should the policy response be? Should it be to mandate that cars driven by the rich burst into flames more often? Income inequality is a strange obsession, at least to the extent the obsessives focus their policy responses on trying to adjust the condition of the top 1% rather than improving the opportunities of everyone else. Income inequality could be a sign of real pathology in authoritarian societies where entrenched groups use government-granted privileges to protect themselves from competition. By and large, that's not the case in the U.S., where most see the market actually increasing the competitive advantages of the educated, skilled, hardworking and talented. Though it's always good to be on guard against political favoritism, the U.S. exhibits mostly a giddy process of wealth creation by people from middle-class backgrounds who start companies or become Wall Street traders or CEOs or celebrity performers in entertainment and sports.


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