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Tuesday, May 22, 2012

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Economic Events of the Week

Tuesday – Existing Home Sales
Wednesday – New Home Sales, EIA Petroleum Status Report
Thursday – Durable Goods Orders, Jobless Claims
Friday – Consumer Sentiment

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e21 Reaction & Commentary
e21 Reaction: Squeezing Greece's Cash Flow (David Malpass)

Washington Update
CFTC Chief Opposes Bill to Loosen Derivatives Rule, Citing Risk to Financial System (CQ)
Obama’s Mortgage Fraud Task Force Under Fire (Politico)
Chamber Urges Congress to Delay Major Tax, Spending Decisions Until 2013 (CQ)

Market Talk
Fed More Bullish Than Wall Street Forecasting Growth (Bloomberg)
Chicago Fed: Economic Growth Near Historical Trend in April (Calculated Risk Blog)
Fed’s Lockhart: No Need to Extend Operation Twist (The Wall Street Journal)

Editorials & Opinions
Faulty Memories (Greg Mankiw Blog)
The Long and Short of Fiscal Policy (Alan Blinder in The Wall Street Journal)
Their Learnable Moment (The New York Times Editorial)

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e21 Reaction & Commentary

e21 Reaction: Squeezing Greece's Cash Flow (David Malpass)

Greece’s political impasse and the risk of contagion to euro deposits in Spain pushed markets down last week. We think those developments are serious but not necessarily fatal to the euro-zone. The downward pressure from the Facebook IPO and the disclosure of big, vulnerable JP Morgan long positions on corporate credit should fade, leaving U.S. and Chinese growth as key variables along with Greece and euro developments. We don’t think the June 30 wind down of the Fed’s operation twist (which was ineffective) or the fiscal cliff (open to compromise) are as important. We expect the Greek government’s cash to be squeezed hard in coming days. The question is how that plays politically in Greece. Running short before the June 17 election might be helpful to reformers. Greece’s government has been sustaining itself (meeting payroll) by hollowing out the Greek banking sector (as discussed in previous pieces), but the government is at the limit of this resource. The banks are nearly drained and the withdrawal of bank deposits hastens this endpoint (because it uses up any remaining assets). The ECB is reducing Greece’s access to the discount window. It could restrain currency transfers or stop the “emergency lending” that the Bank of Greece has been allowed to make even as its capitalization goes more deeply into the red.


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Washington Update

CFTC Chief Opposes Bill to Loosen Derivatives Rule, Citing Risk to Financial System (CQ)

A top financial regulator, citing huge trading losses at J.P. Morgan Chase & Co., announced his opposition Monday to a bipartisan measure aimed at loosening derivatives regulations, dealing a setback to the effort to roll back restrictions. Commodity Futures Trading Commission Chairman Gary Gensler said the bill (HR 3283) “would substantially reduce transparency and increase risk to our financial system and the economy.” It is the second blow to the legislation in as many weeks, after the House Agriculture Committee postponed consideration of the bill amid the outcry over the losses at J.P. Morgan, estimated to exceed $2 billion. It also signals that larger efforts to roll back the Dodd-Frank financial regulatory overhaul (PL 111-203) face an even steeper climb, with advocates of stricter regulation now emboldened to defend the 2010 law. The derivatives measure, sponsored by Rep. Jim Himes, D-Conn., would exempt overseas subsidiaries of U.S. banks from the law’s clearing and margin requirements for derivatives trades made overseas.

Obama’s Mortgage Fraud Task Force Under Fire (Politico)

President Barack Obama used his January State of the Union address to show he’s on top of the housing crisis, announcing a new “special unit” to investigate mortgage fraud. But the much-ballyhooed group is now under fire from housing advocates and liberal Democrats who say it lacks the muscle and White House backing to take on Wall Street defendants who drove the economy off a cliff. It’s the latest example of the administration’s fitful efforts to take command of a complex crisis involving Wall Street shenanigans and suffering homeowners. High-profile announcements haven’t always been followed by actions immediately obvious to voters, especially in battleground states with soaring foreclosure rates such as Nevada, Colorado, Florida, Ohio and Wisconsin. “People are very angry that the only person who’s been to prison is Martha Stewart,” said Democratic pollster Celinda Lake, referring to the insider trading charges against the home-improvement celebrity. A Public Policy Polling survey released last week by the Campaign for a Fair Settlement, a coalition of housing activists, showed a majority of likely voters had a negative view of Obama’s housing efforts in five swing states: Arizona, Florida, Nevada, North Carolina and Pennsylvania.

Chamber Urges Congress to Delay Major Tax, Spending Decisions Until 2013 (CQ)

The U.S. Chamber of Commerce is pushing lawmakers to consider a two-part strategy for coping with so-called fiscal cliff at the end of 2012 and backing House Speaker John A. Boehner’s approach to the coming debt ceiling debate. Pushing into 2013 some decisions on the major tax and spending issues that are crashing together would ensure that “we do it in an organized way,” Chamber President Thomas J. Donohue said at a breakfast meeting Monday. The meeting was sponsored by the Christian Science Monitor. The Bush-era tax cuts, as well as several other temporary tax breaks, are set to expire at the beginning of 2013, just as $98 billion in automatic budget cuts to the discretionary budget begin to kick in and as the Treasury Department again approaches its statutory borrowing limit. With lawmakers unwilling to cut a deal before the Nov. 6 elections, Donohue said he’s concerned a post-election frenzy could lead to a poor result and a major hit to economic growth.


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Market Talk

Fed More Bullish Than Wall Street Forecasting Growth (Bloomberg)

Stephen Stanley, chief economist at Pierpont Securities LLC, has derided the Federal Reserve for downplaying improvement in the U.S. economy. Yet his 2.6 percent forecast for growth this year is below the midpoint in the central bank’s projection of 2.4 percent to 2.9 percent. Stanley’s not alone: The median of 55 estimates compiled this month by Blue Chip Economic Indicators for 2012 is 2.3 percent. All but 16 of the predictions were below the bottom of the Fed’s so-called central tendency. JPMorgan Chase & Co.’s Michael Feroli, John Lonski of Moody’s Capital Markets Group and Wells Fargo Securities LLC’s John Silvia all are relatively more cautious on growth than the policy makers. The disconnect between the Fed’s optimistic forecast for expansion and its more bearish expectations for the labor market and inflation have made it difficult to predict the course of monetary policy, according to Stanley, who said he’s underestimated central bankers’ emphasis on their goal of full employment. The Fed last month reiterated its plan to keep borrowing costs “exceptionally low” through at least late 2014, in part to bring down “elevated” joblessness.

Chicago Fed: Economic Growth Near Historical Trend in April (Calculated Risk Blog)

The Chicago Fed released the national activity index (a composite index of other indicators) Index shows economic activity increased in April: “Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to +0.11 in April from –0.44 in March. The index’s three-month moving average, CFNAI-MA3, ticked down to –0.06 in April from +0.02 in March, falling below zero for the first time since November 2011. April’s CFNAI-MA3 suggests that growth in national economic activity was near its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.”

Fed’s Lockhart: No Need to Extend Operation Twist (The Wall Street Journal)

It isn’t necessary to extend the Federal Reserve‘s Operation Twist beyond its scheduled expiration in June and a severe drop-off in the U.S. economy would be needed for it to implement further quantitative easing, said the head of the Federal Reserve Bank of Atlanta Monday. “My own view is that it’s not necessary to extend it,” Atlanta Fed President Dennis Lockhart said when asked if Operation Twist should continue beyond its scheduled end next month. He was speaking to reporters after a Tokyo financial seminar. He said a “severe drop-off in economic performance” would be the prerequisite to justify a fresh round of easing, known as QE3, adding that one such indication would be rising unemployment as a result of real job loss.


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Editorials & Opinions

Faulty Memories (Greg Mankiw Blog)

In watching various news talk shows over the past few weeks, I have seen Democratic partisans make the following argument: “President Obama just wants to return top tax rates to where they where in the 1990s under President Clinton. And that was a great time for the U.S. economy. So one shouldn't be concerned about the impact of higher tax rates.” There are two things wrong with this.

The Long and Short of Fiscal Policy (Alan Blinder in The Wall Street Journal)

Can we talk about the federal budget deficit? Better yet, can we think about it? For there has been a lot more talking than thinking. One persistent point of confusion arises from the radically different macroeconomic effects of larger budget deficits in the short and long runs. In the short run—let's say within a year or so—a larger deficit, whether achieved by spending more or taxing less, boosts economic growth by increasing aggregate demand. It's pretty simple. If the government spends more money without raising anyone's taxes to pay the bills, that adds to total demand directly. That's true, by the way, whether you like the specific expenditures or hate them. Similarly, cutting somebody's taxes without also cutting spending raises spending indirectly—again, whether you like the tax cut or not.

Their Learnable Moment (The New York Times Editorial)

On Tuesday, the Senate Banking Committee is holding a hearing on reforming derivatives — not a topic one would expect to draw a lot of energy or attention. But in the wake of JPMorgan Chase’s stunning trading loss, now reportedly at $3 billion and counting, committee members need to push the regulators testifying — and each other — to explain why, four years after the financial meltdown, speculative trading in these risky instruments has not been reined in. The Dodd-Frank law was supposed to bring much-needed oversight to the multitrillion-dollar market for derivatives, including transparent trading, mandatory reporting and higher capital and collateral requirements. But banks, with help from lawmakers in both parties, have lobbied regulators to delay and weaken the rules. The committee’s ranking Republican, Senator Richard Shelby of Alabama, has vowed to repeal Dodd-Frank altogether. The panel’s chairman, Senator Tim Johnson of South Dakota, and Senator Charles Schumer, a Democrat of New York, have called for looser rules on banks’ international derivatives trades. After JPMorgan’s losses came to light, Mr. Johnson issued a statement saying that it shows “why opponents of Wall Street reform must not be allowed to gut important protections for the financial system and taxpayers.” He is right. Now and he other committee members, and the regulators, need to show what they have learned.


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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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