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Thursday, May 17, 2012

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e21 Event Next Week

Monday, May 21, 9 AM to 11 AM – Medicare Numbers Examined: Blahous and Bernstein Discuss the Fiscal Consequences of the Health Care Law

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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
Several on FOMC Said Easing May Be Needed on Faltering (Bloomberg)

Washington Update
Senate Games: Every Budget Goes Down (Politico)
Fed Nominees to Get Senate Floor Votes Thursday (CQ)
Obama Warns Republicans Against Debt-ceiling Fight (The Washington Post)
Paradigm Lost? (National Journal)

Market Talk
Are Taxes and Entitlements Perfectly Symmetrical? (National Review)
Housing Starts Add To Recovery Signs (Reuters)
Wall Street Goes Bearish on US Stocks (Financial Times)

Editorials & Opinions
Banks Need More Capital, Not More Rules (Allan Meltzer in The Wall Street Journal)
Mr. Boehner’s Lamentable Desire To Repeat Bad History (The Washington Post Editorial)
Pledge Week at the Fed (The Wall Street Journal Editorial)

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Story of the Day

Several on FOMC Said Easing May Be Needed on Faltering (Bloomberg)

Several Federal Reserve policy makers said a loss of momentum in growth or increased risks to their economic outlook could warrant additional action to keep the recovery going, minutes of their last meeting showed. The members of the rate-setting Federal Open Market Committee “indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough,” according to minutes of the panel’s April 24-25 meeting released today in Washington. Central bankers saw Europe’s debt crisis and a fiscal tightening caused by a failure of U.S. lawmakers to agree on a budget as risks to the recovery, the minutes showed. A discussion of such risks may give central bankers greater scope to ease policy than a focus on indicators such as growth or inflation, said Roberto Perli, a former member of the Fed’s Division of Monetary Affairs staff.


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Washington Update

Senate Games: Every Budget Goes Down (Politico)

The Senate became a political staging ground for meaningless budget votes on Wednesday, as five different budget plans spanning a range of fiscal ideologies failed, the latest chapter in Washington’s dysfunctional spending wars. First up was the House Republican budget, authored by Rep. Paul Ryan (R-Wisc.), which failed on a 41-58 roll call with five Republicans joining all Democrats in voting no. It was a replay of last year, when the Senate defeated Ryan’s budget 40-57. The most obvious political vote of the session was a 0-99 roll call on President Barack Obama’s budget blueprint — which was offered by Republicans. While that tally is sure to become fodder for campaign ads, Democrats dismissed it as a political stunt since there was no real policy language attached to the Obama budget. Three other budget blueprints, offered by tea-party Sens. Pat Toomey, Mike Lee and Rand Paul, also were rejected in lopsided votes.

Fed Nominees to Get Senate Floor Votes Thursday (CQ)

President Obama’s stalled nominees to serve on the Federal Reserve Board are expected to be confirmed by the Senate on Thursday, after Senate leaders reached an agreement to avoid procedural hurdles. A day after filing cloture on the two nominees, Senate Majority Leader Harry Reid, D-Nev., announced Wednesday the Senate would instead vote on confirmation of the nominations of Jerome H. Powell and Jeremy C. Stein to become Fed governors. If confirmed, as is likely, the Fed board would be full for the first time since April 2006. Despite the bipartisan support for the nominees, they had languished for weeks because of objections by Louisiana Republican David Vitter. Obama has struggled to fill positions in the nation’s financial regulatory agencies,including the powerful Fed slots.

Obama Warns Republicans Against Debt-ceiling Fight (The Washington Post)

President Obama warned congressional leaders on Wednesday that he would not tolerate a replay of the bitter debt-ceiling fight of last summer that nearly put the United States in default and led to the nation’s first credit-rating downgrade. During lunch at the White House with top leaders of the House and Senate, Obama called the political deadlock last year “not acceptable” and emphasized that he expects a “serious bipartisan approach” to tackling the budget and the federal deficit this year, White House press secretary Jay Carney said. Obama stressed the need to “avoid fighting old political fights,” Carney told reporters after the meeting. “It’s simply not acceptable to hold the American and global economy hostage to one party’s political ideology. It’s the responsibility of Congress to ensure that the United States of America pays its bills, maintains its creditworthiness.” The president’s warning came a day after House Speaker John A. Boehner (R-Ohio) threatened again to block an increase in the federal debt ceiling by early next year — when the debt is expected to reach its $16.4 trillion limit — without significant new cuts in spending. Boehner’s office said Wednesday that the speaker told Obama that he would not allow “a debt-ceiling increase without doing something serious about the debt.”

Paradigm Lost? (National Journal)

Whether you love or hate the Affordable Care Act, or love or hate House Budget Committee Chairman Paul Ryan’s plan for Medicare, those two otherwise very different approaches have one important thing in common: Both are aimed at slowing the nation’s health care spending. But what if that’s the wrong prescription for what ails the U.S. health care system? There’s a growing body of evidence that while the health-spending monster has not been slain, it is napping. Health spending grew just 3.9 percent in 2010, which was actually slower than the 4.2 percent gross domestic product growth rate. The year before, health care spending grew by 3.8 percent. That’s way down from 2007’s 7.6 percent and the double-digit increases of the 1980s and 1990s. In fact, spending increases for health care in both 2009 and 2010 were the slowest since the government started keeping track a half-century ago. Yet what appears to be the more serious problem is not growing spending on health care, but the rising inability of Americans to gain access to that care. In other words, it’s affordability.


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Market Talk

Are Taxes and Entitlements Perfectly Symmetrical? (National Review)

Suzy Khimm, reporting from a Peterson Foundation summit, suggests that while Democrats appear eager to talk about entitlement reform, Republicans are reluctant to discuss tax increases. My sense is that the apparent lack of symmetry isn’t quite what it seems. “Democrats say they took these criticisms to heart during the super committee negotiations, initially proposing $400 billion in savings from Medicare — half through benefit cuts and half through provider cuts. Democrats point to such proposals as evidence of their party’s willingness to compromise and incorporate a diversity of views, blaming Republican intransigence for the deficit-reduction talks’ ultimate failure. “We have a lot of people in our party who will not be drummed out if they depart from the conventional wisdom,” Clinton explained. For all that the Democrats tried to show they were willing to talk entitlements, you didn’t hear any Republicans at Peterson’s fiscal summit saying that they should be willing to compromise more by considering tax increases.” From the conservative perspective, the entitlement measures advanced by congressional Democrats are not best understood as meaningful structural reforms.

Housing Starts Add To Recovery Signs (Reuters)

A rebound in groundbreaking for homes in April suggested the housing market recovery was gaining some traction, even though permits for future building fell. The Commerce Department said housing starts increased 2.6 percent to a seasonally adjusted annual rate of 717,000 units. March's starts were revised up to a 699,000-unit pace from a previously reported 654,000 unit rate. Economists polled by Reuters had forecast housing starts rising to 680,000-unit rate. Compared to April last year, residential construction was up 29.9 percent. The housing market is showing some signs of life after collapsing six years ago, but remains hobbled by a glut of unsold homes. However, rising demand for rentals, which has seen builders breaking more ground on apartment projects, is helping to stabilize the market.

Wall Street Goes Bearish on US Stocks (Financial Times)

Wall Street strategists are expressing their most bearish views on US equities in nearly three years as investor worries mount over the threat of a eurozone break-up and the outlook for the global economy. The bearish outlook comes even as stocks enjoyed their best first quarter since 1997. However, since stocks peaked in March, the S&P 500 has shed more than half its prior gains for the year. Big Wall Street companies have cut their asset allocation to equities to its lowest level since May 2009, according to a Bloomberg index that measures average allocation for stocks. Asset allocation to equities has declined to 52 per cent from 62 per cent in January. Others stated that such a degree of bearishness at big Wall Street groups actually provided a contrarian sign.


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Editorials & Opinions

Banks Need More Capital, Not More Rules (Allan Meltzer in The Wall Street Journal)

The J.P. Morgan mistakes that resulted in a loss of $2 billion or more have awakened some senators to the fact that the Dodd-Frank financial-regulation legislation of 2010 did not prevent errors of judgment and investment losses. But the politicians have drawn the wrong conclusion. They claim that more regulation will protect the public. That's wrong for three reasons. First, J.P. Morgan has more than enough equity capital to cover its losses several times over. Banks' equity capital protects the general public from financial losses much more effectively than regulation. Increasing equity capital means that a bank's stockholders are the ones who absorb the losses that taxpayers were forced to accept in 2008. You won't find that improvement in Dodd-Frank. In 2008-2009, I advised Sen. David Vitter, the Republican from Louisiana on the Senate Banking Committee, that protecting the public meant we must end the notion that some banks and companies are "too big to fail" and must be bailed out by the taxpayers. Mr. Vitter proposed legislation that required all banks to hold more capital, and large banks to hold proportionally more capital per dollar of assets than smaller banks. Congress quickly dismissed his proposal.

Mr. Boehner’s Lamentable Desire To Repeat Bad History (The Washington Post Editorial)

It’s not often that a senior political figure announces an intention to behave irresponsibly and risk inflicting great harm on the U.S. economy. It’s even rarer that the politician, having already behaved irresponsibly and inflicted harm on the U.S. economy, announces his intention to do so again. Yet that is the situation in which House Speaker John Boehner (R-Ohio) has placed himself. In a speech Tuesday to the Peter G. Peterson Foundation’s fiscal summit, he vowed to use the next debt-ceiling debate to extract additional spending cuts as the price of lifting the country’s borrowing limit. “Yes, allowing America to default would be irresponsible,” Mr. Boehner said. “But it would be more irresponsible to raise the debt ceiling without taking dramatic steps to reduce spending and reform the budget process.” Actually, no. It would be more irresponsible to risk — again — the United States’ credit rating. We share Mr. Boehner’s deep concern about the rising federal debt. We have called for Congress and the president to put the country on a sustainable fiscal path before a crisis ensues. We sympathize with the speaker’s notion that the government won’t act unless forced to do so. “We shouldn’t dread the debt limit,” Mr. Boehner said Tuesday. “We should welcome it. It’s an action-forcing event in a town that has become infamous for inaction.” There was a point, we confess, when we too hoped that debt-limit brinkmanship might encourage responsible behavior. Then came last summer’s debacle. The country moved closer to the edge of default than anyone had thought imaginable. The U.S. credit rating was downgraded for the first time in history, and the resulting uncertainty and lack of confidence dragged down the economy.

Pledge Week at the Fed (The Wall Street Journal Editorial)

The ire over a trading stumble at J.P. Morgan shows how little taxpayers enjoy standing behind too-big-to-fail institutions. Remarkably, the same Federal Reserve that didn't blow the whistle on J.P. Morgan's "whale" trades is planning to make more such institutions. The exercise is part of the regulators' new power to declare so-called systemically important firms. Big banks are automatically on the list, but the Fed is writing rules to determine who else to tap as members. Not that all the new pledges really want to join this fraternity of the financial elite. For starters, companies that aren't banks and don't accept federally insured deposits may not want to pay the costs of heavy bank-style regulation in return for an implied taxpayer safety net. Taxpayers also aren't eager to subsidize every firm that, in the imagination of the Fed and the Treasury, is essential to the U.S. economy. The regulators have to use their imaginations because four years after the financial crisis, two years after the enactment of Dodd-Frank, and a month after enacting a final rule setting out the criteria for determining which firms pose a "systemic risk," they still can't define what that means. As they have said since the beginning, it apparently has a lot to do with "interconnectedness"—the relationships among firms.


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