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Wednesday, May 16, 2012

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Economic Events of the Week

Wednesday Housing Starts, Industrial Production, FOMC Minutes
Thursday Jobless Claims, Philadelphia Fed Survey

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Story of the Day
Ex-Im Bank Deal Clears Congress (Politico)

Washington Update
Boehner Insists That Debt Limit Increase Must Be Offset by Spending Cuts (CQ)
GOP Expects Budget Votes This Week (National Journal)
Senate Democrats to Bring Fed Nominees to Floor for Votes (The Wall Street Journal)
Taxmageddon Sparks Rising Anxiety (The Washington Post)

Market Talk
The Housing Market and the Case for Higher Inflation Targets in the US and the Eurozone (VoxEU)
JPMorgan Loss Exposes Derivatives Dangers (Financial Times)
Yields Show U.S. Is Facing Lost Decade, Krugman Says (Bloomberg)

Editorials & Opinions
It’s Time to Break Up the Big Banks (Katrina vanden Heuvel in The Washington Post)
U.S. Doesn't Need Industrial Policy (Dan Ikenson in USA Today)
The Big Danger With Big Banks (Tom Frost in The Wall Street Journal)

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Story of the Day

Ex-Im Bank Deal Clears Congress (Politico)

The Export-Import Bank won a new lease on life from Congress on Tuesday, as the Senate approved a House-passed bill extending the bank’s charter through September 2014 and raising its loan exposure cap to $140 billion — a 40 percent increase. The 78-20 vote ends months of haggling over the future of the low-profile agency that has more than doubled its annual loan activity since the 2008 financial collapse but also become an easy target for Republican tea party forces at war with the GOP’s older corporate establishment. Facing a tough primary challenge next month, Sen. Orrin Hatch (R-Utah) quietly fell in line behind his young tea party colleague, Sen. Mike Lee (R-Utah), even to the point of joining in a doomed amendment to wipe out the bank entirely in the space of one year. But South Carolina’s GOP delegation was the true ground zero, and in vote after vote Tuesday afternoon, Sens. Jim DeMint and Lindsey Graham butted heads without apology.


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Washington Update

Boehner Insists That Debt Limit Increase Must Be Offset by Spending Cuts (CQ)

House Speaker John A. Boehner is drawing another line in the sand over the debt ceiling, but his demand that Congress match any debt ceiling increase with at least an equal amount of spending cuts also could help jump-start negotiations between party leaders, and help to avoid the so-called fiscal cliff before the end of the year. “Everybody knows what the menu is,” Boehner, R-Ohio, said in an interview at a fiscal affairs conference, referring to the many spending and revenue proposals crafted during bipartisan negotiations over the past year. “It’s just a matter of having the guts to choose things on the menu.” Republicans are preparing their own offensive in the Senate, where on Wednesday they will seek votes on several budget proposals, including a House-passed, fiscal 2013 GOP budget resolution authored by House Budget Chairman Paul D. Ryan (R-Wis.), and an outline of President Obama’s proposed budget. The plans have no chance of passing, but the GOP hopes to highlight Senate leaders’ decision not to allow a vote on a Senate Democratic budget resolution for the third year in a row.

GOP Expects Budget Votes This Week (National Journal)

Republicans expect this week to force Senate floor votes on up to five proposed fiscal 2013 budgets in a bid to embarrass Democrats who have declined to offer their own budget resolution on the Senate floor. The GOP is expecting to win Democrats’ agreement to votes on Wednesday or Thursday on the fiscal 2013 proposal from House Budget Committee Chairman Paul Ryan, R-Wis., and separate budget proposals from Sens. Pat Toomey, R-Pa., Rand Paul, R-Ky., and Mike Lee, R-Utah. Republicans also expect to force a vote on President Obama’s fiscal 2013 budget, and they hope that, like last year, it fails unanimously. Democrats appear unlikely to block the votes. They may lack power to do so. Budget rules allow any member to offer a budget resolution if, as is the case this year, the Budget Committee fails to report one to the floor. The votes will come as part of GOP attacks on Senate Democrats for declining to seek a Senate floor vote on a budget resolution in the past few years. Democrats note that last year’s Budget Control Act already sets an overall discretionary spending level for fiscal 2013.

Senate Democrats to Bring Fed Nominees to Floor for Votes (The Wall Street Journal)

Senate Democrats, confident they have the 60 votes needed to confirm President Barack Obama’s two nominees for the Federal Reserve Board, plan to bring them to a vote soon, a top Senate aide said. Senate leaders believe they have at least the minimum of 60 votes needed to confirm both nominees. Several Republican senators on Tuesday declined to commit their support, but Senate Minority Leader Mitch McConnell (R., Ky.) said that “my impression is that there is bipartisan support” for the nominations. The process could take several days, depending on whether Republicans insist on the maximum debate time that Senate rules allow. Mr. Obama nominated the two men — Jerome Powell, a former private-equity executive, and Jeremy Stein, a Harvard University economics professor — to fill two empty seats on the seven-member Fed board late last year. But their confirmation has been held up by Sen. David Vitter (R., La.), a Republican member of the Senate Banking Committee. The White House had hoped that by pairing Mr. Powell, a Republican, with Mr. Stein, a Democrat, it could more easily win Senate approval. But Mr. Vitter has argued that the two men’s views hew too closely to those of Fed Chairman Ben Bernanke and could lead to further interventions in the economy by the Fed, which he opposes. Senate practices allow any one senator to object to a nomination, sometimes forcing long delays before a vote.

Taxmageddon Sparks Rising Anxiety (The Washington Post)

Defense contractors have slowed hiring. Tax advisers are warning firms not to count on favorite breaks. And hospitals are scouring their books for ways to cut costs. Across the U.S. economy, anxiety is rising about the potential for widespread disruptions after the November election, when a lame-duck Congress will have barely two months to resolve a grinding standoff over taxes and spending. The halls of the U.S. Capitol are already teeming with people warning of disaster if lawmakers fail to defuse a New Year’s budget bomb scheduled to raise taxes for every American taxpayer and slash spending at the Pentagon and most other federal agencies. Last week, hospital executives came to complain about big scheduled cuts in Medicare payments. Next month, university presidents plan to raise the alarm about big scheduled cuts in federal research grants. And the chief executives of Lockheed Martin and other aerospace giants last Wednesday passed out digital countdown clocks ticking off the seconds until “over 1 million American jobs” will be lost to big scheduled cuts in defense. “How do you plan for chaos?” Marion Blakey, president of the Aerospace Industries Association, sighed during a break between meetings with lawmakers, who could provide little assurance that the spending cuts would be averted. “It’s almost a unique moment in government because there’s so much at stake. And there’s nothing that inspires confidence that this will get done.”


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Market Talk

The Housing Market and the Case for Higher Inflation Targets in the US and the Eurozone (VoxEU)

Might more inflation be good for the US and Europe? This column looks at the housing market in the US and argues that, with houses dropping in price, buyers are playing a waiting game. And as buyers keep delaying, the price drops further. Given the importance of property in many economies, the knock-on effects are severe. Yet one way to break this vicious cycle is with inflation. The eloquent advocacy for moderate inflation at times of peril goes back to Irving Fisher’s seminal paper on the debt deflation: “In summary, we find that: (1) economic changes include steady trends and unsteady occasional disturbances which act as starters for cyclical oscillations of innumerable kinds; (2) among the many occasional disturbances, are new opportunities to invest, especially because of new inventions; (3) these, with other causes, sometimes conspire to lead to a great volume of over-indebtedness; (4) this, in turn, leads to attempts to liquidate; (5) these, in turn, lead (unless counteracted by reflation) to falling prices or a swelling dollar; (6) the dollar may swell faster than the number of dollars owed shrinks; (7) in that case, liquidation does not really liquidate but actually aggravates the debts, and the depression grows worse instead of better, as indicated by all nine factors; (8) the ways out are either via laissez faire (bankruptcy) or scientific medication (reflation), and reflation might just as well have been applied in the first place.”  Fisher (1933) This visionary paragraph remains fresh today, particularly at times when the global crisis showed the perils of debt deflation in the US from 2008, and in Europe from 2010. The residential housing market in the US is a prime example of the acidic power of housing deflation.

JPMorgan Loss Exposes Derivatives Dangers (Financial Times)

Credit derivatives were the brainchild of savvy bankers at JPMorgan in the 1990s. Now the bank and one of Wall Street’s most controversial products are under intense scrutiny in what will be a crucial period for the market. As JPMorgan reels from a complicated hedging strategy, one that misfired to the tune of at least $2.3bn in losses, derivatives-market participants worried about new rules on trading fear it will be harder to argue for more lenient treatment. The loss is also a reminder of the dangers of seeking bigger profits by minimising the cost of hedging. While credit derivatives were created to allow lenders to offset the threat of a default by a borrower, the product has been associated with a number of blow-ups in recent years. These include the effect on many Wall Street trading books in 2005 when US carmakers lost their investment-grade rating. Then came AIG’s huge losses from writing credit insurance on mortgage bonds to major banks in 2008, which precipitated a bailout from the Federal Reserve. Also at that time, Deutsche Bank lost more than $1bn from credit derivative trading as the financial crisis intensified.

Yields Show U.S. Is Facing Lost Decade, Krugman Says (Bloomberg)

Yields on debt of nations including the U.S. and U.K. are at almost the lowest ever because policy makers have been unable to boost economic growth, according to economist Paul Krugman. German bunds due in 10 years yielded 1.46 percent after falling to 1.43 percent yesterday, the lowest since at least 1989, as Greece failed to agree to a government, threatening to deepen Europe’s debt crisis. Treasuries of the same maturity yield 1.78 percent, compared with a record low 1.67 percent in September. Gilts touched 1.89 percent yesterday, also the lowest since at least 1989. “I don’t actually buy the flight-to-quality story, or at least it’s way overstated,” Krugman, a Nobel laureate economist and professor at Princeton University, said today in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “We’re all looking like we’re heading for lost decades, which means that policy interest-rates are going to stay close to zero for a really long time.” Japan’s so-called lost decade during the 1990s saw the economy slip in and out of recession and grow at an average rate of about 1 percent a year after the collapse of a real-estate bubble.


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Editorials & Opinions

It’s Time to Break Up the Big Banks (Katrina vanden Heuvel in The Washington Post)

Consider $2 billion lost on a bad bet, plus billions more as investors dumped the stock, a providential warning. When Jamie Dimon, the imperious head of JPMorgan Chase, revealed that the bank had lost so muchon a derivatives trade gone bad, it was clear warning that, four years after blowing up the economy, the big banks are still playing with bombs. This was no rogue trader. Dimon admitted to “many errors, sloppiness, bad judgment” in “poorly executed” derivative trades. Heads may role, but these were authorized trades by the bank’s leading — and notorious — trader, Bruno Iksil, the “London whale.” Dimon, of course, has been Wall Street’s most vociferous critic of banking reforms, deploying an army of lawyers and lobbyists — at the cost of an estimated $7.4 million in 2010 — to try to delay, dilute and disembowel the Dodd-Frank legislation. The unrelenting legal and lobbying campaign has clearly intimidated the regulators, forcing delays beyond the dates mandated by the statute. Most recently, the bank lobby seemed on the verge of defenestrating the Volcker rule that would limit commercial banks from gambling with depositors’ money. That rule, itself a pale shadow of the Glass-Steagall Act repealed during the Clinton years, might have constrained the kind of opaque, risky bets that led to the losses.

U.S. Doesn't Need Industrial Policy (Dan Ikenson in USA Today)

For a nation whose consumers spend twice as much on services than on goods, and where 90% of the workforce is employed outside the manufacturing sector, the obsession with manufacturing is misplaced. This romanticized notion about manufacturing's value to the U.S. economy often fosters policies with pernicious long-term economic effects: tax breaks, subsidies, trade barriers and other coddling market distortions. Even Christina Romer, an architect of President Obama's "stimulus" plan and one who is obviously not averse to government tinkering with the economy, concludes: "American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada. A persuasive case for a manufacturing policy remains to be made." Manufacturing apologists erroneously point to China's near-double-digit growth during the sluggish U.S. economic recovery as further evidence that top-down economic policies can ensure economic health. But China's evolution from subsistence to midlevel manufacturing is not instructive for an economy at the technological fore. Industrial policy is anathema to value-driven innovation, and thus doesn't play to America's strengths.

The Big Danger With Big Banks (Tom Frost in The Wall Street Journal)

In the early 1950s, when I was a young college graduate and a new employee of the Frost Bank, my great-Uncle Joe Frost, then CEO, told me that the very first goal we had was to return the deposits we received from customers. Our obligation was to take care of the community's liquid assets and manage them safely so others could use them (via loans) to grow. Frost Bank was not big enough to be saved by the government, Uncle Joe told me at the time, so we would always need to maintain strong liquidity, safe assets and adequate capital. I was impressed that making money was not high on his list of priorities, but he implied that profits would come if we observed sound banking principles. When we look at banking in the United States today, Uncle Joe's values seem so long ago and far away. The industry is now dominated by a few large banks.


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