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Wednesday, May 23, 2012

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Economic Events of the Week

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 Commentary: Revisiting ObamaCare’s Numbers (James C. Capretta)

Washington Update
Bill Targets Fed Conflicts (Politico)
CBO: Taxmageddon Would Throw U.S. Back Into Recession (The Washington Post)
Reid: Tax Deal Unlikely Before Elections (CQ)

Market Talk
Existing Home Sales in April: 4.62 Million SAAR, 6.6 Months of Supply (Calculated Risk Blog)
US Looks At Cutting Settle Lag on Trades (Financial Times)
Fed Regional Bank Directors Saw Improvement In Economy (Bloomberg)

Editorials & Opinions
Modest Proposals for Financial Reform: Abolish Mortgage-Backed Securities (Dr. Manhattan in The Atlantic)
Why We Need Principles-Based Regulation (Arnold Kling in The American)
Reinstating an Old Rule Is Not a Cure for Crisis (Andrew Sorkin in The New York Times)

 

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e21 Reaction & Commentary

e21 Commentary: Revisiting ObamaCare’s Numbers (James C. Capretta)

On Monday, e21 sponsored a discussion, moderated by National Journal’s Major Garrett, between Charles Blahous and Jared Bernstein. The topic was Blahous’ recent paper entitled “The Fiscal Consequences of the Affordable Care Act” (published by the Mercatus Center of George Mason University). The full event can be viewed here. Not surprisingly, the back and forth between Blahous and Bernstein was spirited and covered mainly familiar ground. Blahous repeated the main arguments from his paper, which is that ObamaCare will add hundreds of billions of dollars to the federal deficit over the next decade, contrary to official estimates. Bernstein then picked up many of the criticisms of paper that have appeared in blog posts and opinion columns from defenders of ObamaCare.


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Washington Update

Bill Targets Fed Conflicts (Politico)

On the heels of JPMorgan’s stunning trading losses, two senators on Tuesday unveiled a bill that would ban financial executives from regulating themselves by taking positions at the Federal Reserve. The measure is aimed at barring what Sens. Bernie Sanders (I-Vt.) and Barbara Boxer (D-Calif.) call a conflict-of-interest issue that includes JP Morgan Chase CEO Jamie Dimon, who sits on the board of the New York Federal Reserve. “How do you sit on a board, which approves $390 billion of low-interest loans to yourself?” Sanders said at a news conference rolling out the bill. “Who in America thinks that makes sense?” Under the bill sponsored by Boxer and Sanders, two of the most liberal members of the Senate, people who work for or invest in companies that can receive financial aid from the Federal Reserve would be banned from sitting on any of the Fed’s 12 boards of directors. Federal Reserve workers and board members would also be barred from owning stock in firms that the Fed oversees. The bill is also co-sponsored by Sen. Mark Begich (D-Alaska).

CBO: Taxmageddon Would Throw U.S. Back Into Recession (The Washington Post)

Tax hikes and spending cuts set to take effect in January would suck $607 billion out of the economy next year, plunging the nation at least briefly back into recession, the nonpartisan Congressional Budget Office said Tuesday. Unless lawmakers act, the economy is likely to contract in the first half of 2013 at an annualized rate of 1.3 percent, the CBO said, before returning to 2.3 percent growth later in the year. Canceling those tax and spending policies would protect the recovery in the short run and encourage more vibrant growth, around 4.4 percent, in 2013, the CBO said. However, unless lawmakers adopt policies that would reduce budget deficits by a comparable amount down the road, the CBO said, the national debt would continue to climb, imperiling future economic growth.

Reid: Tax Deal Unlikely Before Elections (CQ)

Senate Majority Leader Harry Reid indicated this week that he does not see a way to reach bipartisan agreement on deficit reduction or taxes before the November elections. The Nevada Democrat wrote a terse letter dated May 21 in response to a letter signed by 41 Senate Republicans demanding immediate action on extending Bush-era tax cuts that expire at the end of this year. In his letter, Reid suggested that the GOP senators’ concerns were not legitimate unless they agreed to compromise on a deficit reduction package that includes tax increases on the wealthy and corporations. “Unfortunately, it appears that Republicans’ blind adherence to Tea Party extremism is making it impossible to reach this sort of balanced agreement before the election,” Reid wrote.


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Market Talk

Existing Home Sales in April: 4.62 Million SAAR, 6.6 Months of Supply (Calculated Risk Blog)

The NAR reports: April Existing-Home Sales Up, Prices Rise Again Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 3.4 percent to a seasonally adjusted annual rate of 4.62 million in April from a downwardly revised 4.47 million in March, and are 10.0 percent higher than the 4.20 million-unit level in April 2011.  Total housing inventory at the end of April rose 9.5 percent to 2.54 million existing homes available for sale, a seasonal increase which represents a 6.6-month supply at the current sales pace, up from a 6.2-month supply in March. Listed inventory is 20.6 percent below a year ago when there was a 9.1-month supply; the record for unsold inventory was 4.04 million in July 2007.

US Looks At Cutting Settle Lag on Trades (Financial Times)

The US financial industry is examining whether the time it takes trades of stocks and bonds to settle should be cut, in an effort to reduce risk and costs. At the moment, trades of equities and bonds usually settle within three days, in a market convention known as “T+3.” That means money and securities actually exchange hands three days after a trade is agreed, though sometimes trades can “fail” to settle, further extending settlement time. Indeed, some commentators have criticised lags behind between trading and settlement for extending operational risk into the financial system and making it difficult to track the way money and securities are flowing between big trading parties. The Depository Trust and Clearing Corporation, the US post-trade body, has hired the Boston Consulting Group to examine the impact of shortening settlement for trades of equities, corporate bonds, municipal debt and certain exchange-traded mutual fund “units”, it said on Tuesday.

Fed Regional Bank Directors Saw Improvement In Economy (Bloomberg)

Directors at the Federal Reserve’s regional banks saw a pickup in the pace of economic growth last month as housing, motor vehicle sales and consumer spending gained strength. “Directors noted further improvement in economic activity, and they anticipated growth would continue at a moderate pace,” according to minutes released today in Washington summarizing discussions of meetings in April. Board members of the 12 banks “saw the incoming data on consumer spending as a bit more robust than they had expected but cautioned that these gains might be attributable to unseasonably warm winter weather,” the minutes said. The minutes covered meetings on April 2 and April 23 by the Fed’s Board of Governors to discuss the discount rate, which the central bank charges on emergency loans to banks. The Fed kept the rate unchanged at 0.75 percent. A different Fed panel, the Federal Open Market Committee, met April 24-25 and affirmed a plan to hold interest rates near zero at least through late 2014 to spur growth and reduce unemployment.


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Editorials & Opinions

Modest Proposals for Financial Reform: Abolish Mortgage-Backed Securities (The Atlantic)

If given the opportunity to pick one financial regulatory reform, I'd pick one which allowed us to pay regulators lots and lots of money, competitive with the worst excesses of the private sector if need be -- up to and including signing them up for the Porsche-of-the-Month Club. (Another way of saying the foregoing is that, notwithstanding all the attention paid to income inequality, we need much, much more if it in the public sector.) However, other people have made the same argument and it doesn't seem to have helped much. So maybe it's time to start thinking of some other exceedingly modest proposals which haven't gotten as much play: Some impractical ideas which nonetheless might point us towards actions which -- with apologies to Lena Dunham -- may not be "the solution to the problem, but a solution to a problem."

Why We Need Principles-Based Regulation (Arnold Kling in The American)

Recently, large trading losses at JP Morgan have revived the question of how to regulate financial institutions. I believe that this would best be done using a very different approach than what regulators traditionally employ. When we think of regulation, we think of specific rules that spell out the boundaries between what is approved and what is forbidden. For example, requiring credit card issuers to give 45 days notice prior to a rate increase. I call this bright-line regulation (BLR). What I want to propose is an alternative approach, called principles-based regulation (PBR). With PBR, legislation would lay out broad but well-defined principles that businesses are expected to follow. Administrative agencies would audit businesses to identify strengths and weaknesses in their systems for applying those principles, and they would punish weaknesses by imposing fines. Finally, the Department of Justice would prosecute corporate leaders who flagrantly violate principles or who are negligent in ensuring compliance with those principles.

Reinstating an Old Rule Is Not a Cure for Crisis (Andrew Sorkin in The New York Times)

Call it the Glass-Steagall myth. Since JPMorgan Chase announced its surprise $2 billion, and growing, trading loss there have been renewed calls from economists, pundits and politicians to reinstate the Glass-Steagall Act, a Depression-era law that prevented commercial banks from participating in investment banking activities. Elizabeth Warren, the Democratic candidate for Senate in Massachusetts, sent an e-mail to thousands of her constituents, pressing to bring back the law, which she said, “stopped investment banks from gambling away people’s life savings for decades — until Wall Street successfully lobbied to have it repealed in 1999.” A meme around Glass-Steagall has been created, repeated so often that it has almost become conventional wisdom: the repeal of Glass-Steagall led to the financial crisis of 2008. And, the thinking goes, has become almost religious for some people, that if the law were reinstated, we would avoid the next crisis. The facts — basic facts — just aren’t that convenient. While the repeal of Glass-Steagall has seemingly become the sine qua non of the financial crisis, it is pure historical revisionism.


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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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