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Monday, May 14, 2012

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Economic Events of the Week

Tuesday Consumer Price Index, Retail Sales
Wednesday Housing Starts, Industrial Production, FOMC Minutes
Thursday Jobless Claims, Philadelphia Fed Survey

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Story of the Day
NY Fed Releases Latest View on Economy (The Wall Street Journal)

Washington Update
Ryan Budget Still An Issue in Congressional Races (The Washington Post)
Senators Seek Tougher Bank Rules (CQ)
Republican State Officials Stall on Setting Up Health Insurance Marketplaces (The Washington Post)

Market Talk
Labor force nonparticipants: So what are they doing? (Atlanta Fed)
Unemployment Insurance is Vanishing, Even As Jobs Are Scarce (The Washington Post)
Lawler: Fannie SF REO Inventory: Total vs. “Listed/Available for Sale” (Calculated Risk Blog)

Editorials & Opinions
More Evidence on What Is Holding the Economy Back (John Taylor in Economics One Blog)
JP Morgan and Systemic Risk (James Hamilton in Econbrowser Blog)
'Taxmaggedon' Is a Real Threat (John Snow in The Wall Street Journal)

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e21 Reaction & Commentary

NY Fed Releases Latest View on Economy (The Wall Street Journal)

The latest update of the official New York Fed staff economic forecasts predicts trend-like growth, largely stable inflation and a slow grind lower in the unemployment rate. The Federal Reserve Bank of New York released its May forecasts Friday to its Economic Advisory Panel. In a release that laid out the data, bank economists said the predictions help prepare William Dudley, the New York Fed leader, to participate in monetary policy setting Federal Open Market Committee meetings. Bank economists see “moderate” growth of around 2.5% this year, with activity picking up to 3% next year. The forecasters allowed that activity at the end of last year and the start of this year may have been goosed up by warm winter weather and auto inventory adjustments, but they nonetheless reckon “some of the headwinds that have hampered growth in recent years” will subside “gradually.” They said that will allow “improved fundamentals to become more apparent in the second half of the year.”


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Washington Update

Ryan Budget Still An Issue in Congressional Races (The Washington Post)

Rep. Ann Marie Buerkle (R-N.Y.) is exasperated as she concludes her opening remarks and reaches for a piece of paper on the podium. “I don’t know who was handing out this literature,” she says, “but I think we’ve got to talk about this a little bit.” The issue in question is the budget proposal issued by House Budget Committee Chairman Paul Ryan (R-Wis.), and what it does to Medicare in particular. More than a year after the proposal’s initial release, Republican candidates continue to find themselves on the defensive about what the plan will actually do, and Democrats continue to make claims about the dire consequences if it were to become law. In its drive to tame entitlement spending and reduce the federal debt, the Ryan plan has been embraced by the GOP establishment as an article of faith, and it is likely to be a key issue in this fall’s congressional elections.

Senators Seek Tougher Bank Rules (CQ)

The announcement that J.P. Morgan Chase & Co. incurred $2 billion in trading losses is bringing new scrutiny from lawmakers to the stability of the financial system and the implementation of the Dodd-Frank regulatory overhaul law. To Democrats, the bank’s losses underscore the rationale for the overhaul they wrote in 2010. And they are using J.P. Morgan’s troubles to increase pressure on regulators for strict enforcement of the law’s Volcker rule, which seeks to ban proprietary trading by banks. To some Republicans, who do not want to be caught flat-footed on a politically explosive issue, the losses justify additional oversight, even as GOP lawmakers oppose government intervention in the industry. “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today,” said Rep. Barney Frank of Massachusetts, top Democrat on the Financial Services Committee and co-author of the overhaul law.

Republican State Officials Stall on Setting Up Health Insurance Marketplaces (The Washington Post)

In about two dozen states across the country, the insurance marketplaces at the heart of the 2010 health-care law remain in limbo, with Republican governors or lawmakers who oppose the statute refusing to act until the Supreme Court decides its constitutionality. New Jersey’s Republican governor, Chris Christie, joined the ranks Thursday, vetoing a bill from the majority Democratic legislature that would have set up the Garden State’s version of the “exchanges,” through which individuals and small businesses could shop for insurance. In states with Democratic governors, such as New Hampshire and Minnesota, it is often Republican-dominated legislatures that are causing the hold-up. And in six states where Republicans hold both branches of government, including Kansas and South Dakota, state assemblies haven’t even considered laws to establish the marketplaces. Though the battles primarily break along partisan lines, there have been at least a half-dozen exceptions. Last spring, the Republican governor of Nevada chose not to stand in the way of an exchange bill adopted by the majority Democratic assembly. And the Republican insurance commissioner of Mississippi is using existing authority to set up an exchange with the blessing of the Republican governor.


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Market Talk

Labor force nonparticipants: So what are they doing? (Atlanta Fed)

The Current Population Survey (CPS), administered by the U.S. Bureau of Labor Statistics (BLS), asks labor force nonparticipants about their reason for absence (details of the CPS questionnaire are available from the NBER). The reason given by nonparticipants that gets most of the attention is "discouraged over job prospects." In April 2012, these people accounted for only 1.1 percent of all nonparticipants (41 percent of the marginally attached—those who want a job, are available to work, and searched in the previous year). The vast majority of nonparticipants are absent because of retirement, disability, going to school, caring for household members, or other reasons. Using the latest survey data we have available (November 2011), we find that most nonparticipants are retired (48 percent); the share who are in school, disabled, or taking care of household members are 18 percent, 16 percent, and 15 percent, respectively; and the share in the category termed "Other" comes in at about 2 percent.

Unemployment Insurance is Vanishing, Even As Jobs Are Scarce (The Washington Post)

The job market in the United States is still in rough shape, yet states are already starting to pare back unemployment insurance. On Saturday, eight states — including California and Florida — will cut benefits for more than 200,000 workers. Here’s the backstory: Since the recession began, many states have been using federal aid to offer up to 99 weeks of unemployment insurance. In February, Congress agreed to reauthorize this program for one more year, but with less aid. States have since been cutting back the number of weeks they provide benefits. The National Law Employment Project has been tracking all the state cutbacks in this chart. All told, some 409,000 workers have lost benefits in 2012 — and most of them have been unemployed for longer than 70 weeks. These days, fewer and fewer jobless workers are receiving government aid. According to NELP, two-thirds of all jobless workers qualified for state or federal unemployment insurance in 2010. Last year, that number shrunk to 54 percent. This year, it will go below 50 percent. If Congress lets all of its extended-unemployment programs lapse at the end of this year, says NELP, then “only a quarter of jobless Americans will be receiving unemployment insurance.”

Lawler: Fannie SF REO Inventory: Total vs. “Listed/Available for Sale” (Calculated Risk Blog)

From economist Tom Lawler: In its latest 10-Q filing Fannie Mae showed the distribution of the “status” of its SF REO inventory, including the % it was unable to “market” for various reasons. (Fannie’s SF REO inventory as of 3/31/2012 totaled 114,157 properties, down 25.5% from last March). Of Fannie’s 114,157 SF REO properties, almost half – 54,795 – were characterized as being “unable to market” (meaning can’t be listed for sale). Another 11,416 were not yet “listed” or “available” for sale because the properties were still being appraised (so that a list price can be determined). That left just 47,946 properties that were available for sale (listed), of which 22,831 already had a purchase offer accepted but which had not yet closed escrow.


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Editorials & Opinions

More Evidence on What Is Holding the Economy Back (John Taylor in Economics One Blog)

Milton Friedman’s “plucking model” should be back in fashion now because it reminds us of the historical fact that throughout American history—until now—the deeper the recession, the faster the recovery. I like to bring a guitar to talks and lectures to illustrate this: Like a guitar string, when the economy is “plucked” down or pulled down, the “string” or the economy always springs back up. The more the economy is “plucked” down, the faster it springs back up. This has been true throughout recorded American history, and it holds whether or not there has been a financial crisis. Of course something is now interfering with the usual economic response, because our current recovery is certainly not springing back to normal. I have argued that economic policy is holding the economy back, and I think recent research by Ellen McGrattan and Ed Prescott (on increased regulations) and by Scott Baker, Nick Bloom, and Steve Davis (on policy uncertainty) supports this view. 

JP Morgan and Systemic Risk (James Hamilton in Econbrowser Blog)

For some time, financial observers have been discussing the large positions in bond-index derivatives amassed by a trader known as the London Whale, now revealed to be Bruno Iksil working for JP Morgan Chase. On Thursday we learned that JP Morgan has lost over $2 billion in the space of two weeks as a result of the trades. On Friday the stock price fell by 9.3%, wiping out $14.4 billion of the company's value. How do you lose so much money so quickly? The short answer is, leverage. Although details are not known, one likely scenario involves derivatives constructed from the riskier components of some European corporate bonds. Using derivatives, you can buy or sell securities or pieces of securities that you do not yourself own, involving a potential promise to deliver more money than you even have. If the market moves against you, you'll have to deliver substantial real cash to unload your commitment, and this process appears to be what produced the sudden losses. The Whale's notional exposure in one index was speculated to have been $100 billion in April. The total notional exposure of all of JP Morgan's trades has been estimated to be $79 trillion. That's "trillion", with a "T", from a company with an equity value of $140 billion, and falling quickly.

'Taxmaggedon' Is a Real Threat (John Snow in The Wall Street Journal)

Nine years ago this month Congress passed President George W. Bush's Jobs and Growth Tax Relief Reconciliation Act. That bill's lower rates on capital, as well as the continuity in tax policy it established, have helped make our economy far more resilient. The legislation's centerpiece was a reduction in the taxation of dividends and capital gains to 15%. Unfortunately, the 2003 tax rates, including those on capital income, are due to expire at the end of the year. Capital warrants special tax treatment because of the central role it plays in generating economic growth and jobs. Capital is the very lifeblood of the market economy, the mainstay of innovation, and the foundation for future prosperity. As more of it is put to work today, labor output and wages will rise tomorrow. An appreciation of that critical relationship should guide how the tax system treats earnings from capital. The double taxation of dividends—with corporate earnings first taxed 35% at the corporate level and then, when paid out to shareholders, taxed again—has been a long-standing and well-recognized distortion in the tax code. It favors debt financing over equity capital formation, because interest is deducted as a cost of doing business and lowers taxable income, while dividends are taxed twice.


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