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Thursday, June 7, 2012

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Economic Events of the Week

Thursday – Jobless Claims, Ben Bernanke Testimony Before the Joint Economic Committee
Friday – International Trade

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e21 Reaction & Commentary
e21 Commentary: The 'Government Sector of the Economy' Canard

Washington Update
Sessions Says Democratic Plan May Break Budget Pact (CQ)
Panel Backs GOP Spending Bill Undercutting Health Care, Dodd-Frank Laws (CQ)
Obama Will Not Extend Tax Cuts, W.H. Says (Politico)
House GOP Leaders to Obama: Cancel Student Loan Rally, Work With Us (The Hill)

Market Talk
Summary of Commentary on Current Economic Conditions by Federal Reserve District (Federal Reserve)
Fed's Yellen: "Scope Remains for Further Policy Accommodation" (Calculated Risk Blog)
Federal Reserve Set to Unveil Capital Proposals (Financial Times)
Finnish Leader Says U.S. Worried About Europe Banks (Bloomberg)

Editorials & Opinions
Have the Fed's Efforts Helped? (The Wall Street Journal)
What a Romney Recovery Might Look Like (Phil Gramm and Glenn Hubbard in The Wall Street Journal)
If You Walk Backward, You Run Into Things (The Economist Editorial)
Save Us, Ben Bernanke, You're Our Only Hope (Matthew O'Brien in The Atlantic)

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e21 Reaction & Commentary

e21 Commentary: The 'Government Sector of the Economy' Canard

The difference between government spending and the government contribution to GDP is largely attributable to transfer payments, entitlements, and subsidies. In recent years, transfer payments have exploded upwards. As of March 2012, transfer payments were running at a $2.3 trillion annualized rate, or 15.2% of GDP. Over the past four years, transfer payments have grown at a compound annualized rate of 9.1%, or about 3.5-times faster than the economy. Since passage of the Obama Administration stimulus, transfer payments have accounted for more than 18% of household income. As the composition of government spending has shifted away from capital investments and towards transfers, the “government sector” of the economy has fallen even as government spending has reached record highs.


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Washington Update

Sessions Says Democratic Plan May Break Budget Pact (CQ)

Sen. Jeff Sessions said Wednesday that a spending outline written by Senate Democrats may break the debt limit agreement the parties struck last year, turning up the heat in a dispute that’s simmered even as the parties have moved toward funding federal programs for the next year. The Alabama Republican, the ranking member on the Budget Committee, charged that Chairman Kent Conrad filed inflated spending levels, and he warned in a letter to Conrad that if the limits are not revised he would “consider other options to attempt their correction.” Republicans say the higher outlay limits allow for $14 billion more in spending next year than agreed to by the parties. “If the Senate purposefully elevates the spending level in the [Budget Control Act] $14 billion above the baseline, it would represent, in my view, an abrogation of the commitment made to the American people less than a year ago as a condition for raising the debt ceiling,” Sessions wrote.

Panel Backs GOP Spending Bill Undercutting Health Care, Dodd-Frank Laws (CQ)

A House Appropriations panel on Wednesday advanced GOP-backed legislation that would significantly undercut the Obama administration’s efforts to implement the 2010 health care and financial regulatory overhaul laws, two of the president’s signature legislative achievements. Overall, the draft fiscal 2013 measure would provide $21.2 billion in discretionary spending for the Treasury Department and various regulatory agencies, including the Securities and Exchange Commission (SEC), Small Business Administration (SBA), General Services Administration (GSA), as well as the judiciary and the District of Columbia. The total represents a $376 million cut from the fiscal 2012 enacted level and is $2 billion less than both President Obama’s request and the amount Senate appropriators allocated for their draft measure, which the Senate subcommittee will take up next week. The House Financial Services and General Government Subcommittee endorsed the bill by voice vote Wednesday as Democrats signaled that they will fight to preserve two of their top priorities as the legislation moves forward.

Obama Will Not Extend Tax Cuts, W.H. Says (Politico)

The White House is sticking by its opposition to an extension of the Bush tax cuts for wealthy Americans despite the increasing number of Democrats voicing support for it, including former President Bill Clinton. Press Secretary Jay Carney told reporters aboard Air Force One on Wednesday that President Obama will not sign an extension. "He will not. Could I be more clear?" Carney said. "He will not support an extension of the upper-income Bush tax cuts. He could not be more clear."

House GOP Leaders to Obama: Cancel Student Loan Rally, Work With Us (The Hill)

The top two Republicans in the House are urging President Obama to cancel a scheduled event in Las Vegas on Thursday and instead work with Congress to prevent an increase in student loan rates. Speaker John Boehner (R-Ohio) and Majority Leader Eric Cantor (R-Va.) released a letter to President Obama on Wednesday taking him to task for ignoring their offer on a student loan bill. Obama has hammered congressional Republicans for blocking a bill to keep in place student loan interest rates that are set to double on July 1. House Republicans passed their own version of a student loan bill last month over a presidential veto threat. In a bid to break the impasse, GOP leaders sent Obama a letter last week presenting two options in his own budget to offset the cost of the program.


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Market Talk

Summary of Commentary on Current Economic Conditions by Federal Reserve District (Federal Reserve)

Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded at a moderate pace during the reporting period from early April to late May. Activity in the New York, Cleveland, Atlanta, Chicago, Kansas City, Dallas, and San Francisco Districts was characterized as growing at a moderate pace, while the Richmond, St. Louis, and Minneapolis Districts noted modest growth. Boston reported steady growth, and the Philadelphia District indicated that the pace of expansion had slowed slightly since the previous Beige Book. Manufacturing continued to expand in most Districts. Consumer spending was unchanged or up modestly. New vehicle sales remained strong and inventories of some popular models were tight. Sales of used automobiles held steady. Travel and tourism expanded, boosted by both the business and leisure segments. Demand for nonfinancial services was generally stable to slightly higher since the last report, and several Districts noted strong growth in information technology services. Conditions in residential and commercial real estate improved. Construction picked up in many areas of the country. Lenders in most Districts noted an improvement in loan demand and credit conditions. Agricultural conditions generally improved, and spring planting was well ahead of its normal pace in most reporting Districts. Energy production and exploration continued to expand, except for coal producers who noted a slight slowing in activity.

Fed's Yellen: "Scope Remains for Further Policy Accommodation" (Calculated Risk Blog)

From Vice Chair Janet Yellen: Perspectives on Monetary Policy. Excerpt: “Recent labor market reports and financial developments serve as a reminder that the economy remains vulnerable to setbacks. Indeed, the simulations I described above did not take into account this new information. In our policy deliberations at the upcoming FOMC meeting we will assess the effects of these developments on the economic forecast. If the Committee were to judge that the recovery is unlikely to proceed at a satisfactory pace (for example, that the forecast entails little or no improvement in the labor market over the next few years), or that the downside risks to the outlook had become sufficiently great, or that inflation appeared to be in danger of declining notably below its 2 percent objective, I am convinced that scope remains for the FOMC to provide further policy accommodation either through its forward guidance or through additional balance-sheet actions.” Clearly Yellen is considering QE3.

Federal Reserve Set to Unveil Capital Proposals (Financial Times)

The US Federal Reserve is set to propose new capital rules on Thursday, including a provision that will reverse a policy that has helped shield US bank capital levels from volatility, people familiar with the matter said. US banking industry groups and lenders, including Citigroup and Wells Fargo, have been trying to persuade lawmakers that the measure, which is among a batch of proposals to implement the Basel III accords, will hurt them relative to overseas competitors. They also say that they may have to curtail purchases of long-term US Treasuries and municipal debt. They argue that the net effect of the change will force them to hold more capital over and above the stated requirements and that because of different accounting treatments, their foreign peers will have their capital levels protected from changes in the market value of some securities holdings.

Finnish Leader Says U.S. Worried About Europe Banks (Bloomberg)

U.S. Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke are concerned about the European banking industry, Finnish Prime Minister Jyrki Katainen said after meeting the two U.S. officials. “They were very worried about what was going on,” Katainen said in a Bloomberg News telephone interview yesterday. Katainen said he discussed with Geithner and Bernanke the options for recapitalizing banks in trouble. European Union leaders, including European Central Bank President Mario Draghi and European Commission President Jose Barroso, have called for a banking union with more coordination of regulation, as lawmakers seek to bolster confidence damaged by debt turmoil. EU President Herman Van Rompuy plans to report on proposed “building blocks” for deeper integration in the 17-nation euro area at the next summit of EU leaders on June 28- 29 in Brussels. “One of the issues which we talked most was how to deal with the banking sector in Spain or in some other European countries because we should avoid a new banking crisis,” Katainen said. “This is an issue which we are considering right now.”


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Editorials & Opinions

Have the Fed's Efforts Helped? (The Wall Street Journal)

After pushing short-term interest rates near zero in late 2008, the Federal Reserve decided it could do more. Unable to cut short rates further, it turned to buying huge amounts of long-term Treasury debt and mortgages to push down long-term rates. More than $2 trillion later, the U.S. economy is stuck with 8.2% unemployment and a still shaky recovery. So what has been learned about the efficacy of this experiment? The answer matters not only for judging the past, but for whether the Fed can and should do more now. The Fed's first "quantitative easing," initiated in November 2008 and later expanded, bought $1.7 trillion in U.S. Treasurys and mortgage securities. The second, QE2, launched years later, bought $600 billion more in Treasurys. The third move, begun in September 2011 and set to end this month, was to buy $400 billion in long-term government debt while selling the same amount of short-term debt. The game plan was  to (1) signal that the Fed would keep short-term rates low for a long time, (2) drive long-term consumer and business borrowing rates lower than they would otherwise be, encouraging spending, (3) chase investors from lower-yield, safe securities into equities and other risky assets, boosting stock prices and making households richer and firms more willing to invest and (4) push the dollar lower, giving exports a lift.

What a Romney Recovery Might Look Like (Phil Gramm and Glenn Hubbard in The Wall Street Journal)

Given last week's grim jobs report, it's now clearer than ever that the November election will be a referendum on the economy. Has the president's program worked? Does Mitt Romney have a better program to promote job creation and prosperity? Fortunately, Americans have evidence that will allow them not only to judge President Obama's economic performance, but also to compare that performance with Mr. Romney's proposed alternative. Twice in postwar America, deep recessions have driven the unemployment rate to 10%. In the 1981-82 recession, the unemployment rate soared to 10.8%. In the 2007-09 recession, it peaked at 10%. Both downturns were rooted in financial convulsions. The 1981-82 recession was induced by restrictive monetary policy aimed at breaking the back of double-digit inflation and interest rates, which generated a housing and savings-and-loan crisis. The more recent recession resulted from excessive government intervention to increase homeownership by expanding subprime housing loans, on which substantial leverage was built. The resulting wave of defaults damaged the base of the banking system.

If You Walk Backward, You Run Into Things (The Economist Editorial)

Tim Duy quotes St Louis Fed President James Bullard, who says: “The global problems are clearly being driven by continued turmoil in Europe...A change in U.S. monetary policy at this juncture will not alter the situation in Europe.” I don't know about that; there are some unconventional things the Fed could do (but won't) that might make a meaningful difference. Setting that aside, I'm with Mr Duy (caps in the original):

“This is one of those things that makes you shake your head in the wonder of it all. The point of further easing would not be to alter the situation in Europe - THE POINT IS TO PREVENT THE SITUATION IN EUROPE FROM WASHING UP ON US SHORES.”

Save Us, Ben Bernanke, You're Our Only Hope (Matthew O'Brien in The Atlantic)

This may not be our darkest hour, but the disappointing May jobs report showed the U.S. economy once again slowing towards stall speed. It's not just the anemic 69,000 jobs the economy added last month. More disconcerting were the sharp downward revisions to previous months. It looks like we could be in for an unwelcome rerun of the summer doldrums we have gotten to know all too well in 2010 and 2011. Markets have a bad feeling about this. It isn't just about the deteriorating U.S. outlook. Europe and China are turning to the dark side of growth too. The euro is continuing its game of Schrödinger's currency: At any moment it is both saved and doomed. Right now, it's looking more and more doomed. Then there's the slowdown in China -- along with India and Brazil. These economies powered global growth during the dark days of 2008 and 2009, but seem certifiably wobbly now. The Fed is our last hope -- and there isn't another. Republicans in Congress continue to block further fiscal stimulus, despite historically low borrowing costs and a clear need for better infrastructure. So that leaves Ben Bernanke & Co. as the last and only line of defense. But with short-term interest rates at zero, how much more can the Fed do? What would more quantitative easing accomplish -- and what does that even mean?


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