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Wednesday, June 13, 2012

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Economic Events of the Week

Wednesday – Senate Banking Committee Hearing - "A Breakdown in Risk Management: What Went Wrong at JPMorgan Chase?" JPMorgan Chase’s Jamie Dimon Testifies, Producer Price Index, Retail Sales, EIA Petroleum Status Report
Thursday – Jobless Claims, Consumer Price Index
Friday – Industrial Production

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e21 Reaction & Commentary
e21 Commentary: Supreme Suspense: Getting Ready for the Big ObamaCare Decision (James Capretta)

Washington Update
Romney Outlines Plan to Make Health-Care System Like ‘Consumer Market’ (Washington Post)
Steep Rise in Health Costs Projected (Wall Street Journal)

Market Talk
Economists Say Inflation Won’t Stand in Way of Fed Aid (Real Time Economics)
The Fed is Beginning to Figure Out Where It Went Wrong in 2008 (The Money Illusion)
The US "Budget Surplus" Miracle Is Over: $125 Billion Deficit In May (Zero Hedge)

Editorials & Opinions
President Obama Made Two Strategic Mistakes Last Friday (KeithHennessey.com)
The Looming Showdown (Peter Orszag in Democracy Journal)
Large Banks Need Living Wills (Lacker and Stern in Wall Street Journal)
Why the Economy Can’t Get Out of First Gear (RobertReich.org)

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e21 Reaction & Commentary

e21 Commentary: Supreme Suspense: Getting Ready for the Big ObamaCare Decision (James Capretta)

Very soon, the Supreme Court will be rendering judgment on the constitutionality of ObamaCare. It is one of the most highly anticipated decisions in decades, and for good reason. Whatever the outcome, it’s going to be a political earthquake. The only question is the degree to which it will shake up the political and policy landscape. Of course, at this point, only a handful of people have any idea how the court will rule, and they aren’t talking. So there’s no real way to predict what the Court will decide. Still, it’s possible to boil down the various scenarios to a handful that capture the most likely outcomes, and to examine the implications of those scenarios through both a policy and a political lens. Indeed, for those who have spent the past three years opposing ObamaCare, it’s critically important to be prepared for all eventualities because what the key players in this drama say and do in the days after the Court issues its decision could be just as important as the decision itself to the future of ObamaCare and American health care. Scenario 1: The Court Upholds ObamaCare; Scenario 2: Only the Individual Mandate Falls; Scenario 3: The Court Strikes Down the Mandate and Other Provisions Too; Scenario 4: The Court Strikes Down the Entire Law.


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Washington Update

Romney Outlines Plan to Make Health-Care System Like ‘Consumer Market’ (Washington Post)

As the Supreme Court prepares to rule on the constitutionality of President Obama’s health-care overhaul, Mitt Romney laid out an alternative on Tuesday that would make the health insurance system more like a “consumer market.” Addressing supporters in Orlando, Romney fleshed out a plan that he proposed earlier, one that would apply free-enterprise principles to the nation’s health-care system rather than operate it like a “government-managed utility,” letting competition drive down prices and increase quality. He also vowed to divert federal Medicaid money and other federal funding to state governments, making them responsible for covering the uninsured. And he promised that his plan would help cover people with preexisting conditions, one of the more popular components of Obama’s law.

Steep Rise in Health Costs Projected (Wall Street Journal)

Economists have been puzzling over whether a three-year slowdown in the growth of health-care spending, prompted by the economy, portends a permanent change. Federal projections indicate that isn't the case. A forecast released Tuesday said the growth rate for U.S. health spending of all types would stay historically low the next two years. But it would increase if most of the federal health-care overhaul takes effect in 2014. After that, the rate would drop, but spending still would grow at a higher rate than that of the past few years, according to the Centers for Medicare and Medicaid Services. The figures, published in the trade journal Health Affairs, suggest the current soft spending is a short-term trend.


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Market Talk

Economists Say Inflation Won’t Stand in Way of Fed Aid (Real Time Economics)

The looming Federal Reserve meeting has economists locked in a full scale debate over whether weak economic data will force officials to provide more stimulus to the economy. The back and forth is unlikely to get much in the way of an official resolution ahead of the Federal Open Market Committee meeting scheduled for June 19 and 20. Based on the current calendar and the blackout period that precedes an FOMC meeting, Tuesday’s address by Fed governor Daniel Tarullo was the last shot policymakers had to weigh in on its outcome. As the Fed considers the range of options before it, it can at least do so knowing it has room to act, as measured by current inflation dynamics, a number of economists say. Maneuvering space doesn’t guarantee Fed action, to be sure, but it at least alters the cost/benefit ratio to action some central bankers have said is key to their thinking.

The Fed is Beginning to Figure Out Where It Went Wrong in 2008 (The Money Illusion)

Market monetarists have often pointed to the Fed’s pathetically weak response to the financial crisis of 2008.  For instance, the Fed met two days after Lehman failed in mid-September, and refused to cut their fed funds target (which was 2% at the time), citing an equal risk of recession and inflation.  In fact, the day of the meeting the 5 year TIPS spread was only 1.23%, which is roughly the actual inflation rate since that time. Why did the Fed adopt such a tight money policy in 2008?  Because they were operating a backward-looking policy regime and inflation had been relatively high over the previous 12 months.  It’s like trying to drive a car by looking in the review mirror, and making adjustments when you are edging off the road.  In contrast, market monetarists want the Fed to look down the road, and steer to a point on the horizon.  We want the Fed to use market forecasts.

The US "Budget Surplus" Miracle Is Over: $125 Billion Deficit In May (Zero Hedge)

One month ago we were pleasantly surprised to note that following 42 straight months of budget deficits, among them record ones, such as the ($231.7) billion recorded in February, the US finally managed to record its first budget surplus since September 2008. The number was a modest but positive $58 billion, although there was once again more than meets the eye. On May 7 we said that "without various temporal adjustments, the April surplus of $58 billion would have been completely netted out by the cumulative $57 billion in deficit time shifts." More importantly, we said, "In other words, enjoy the surplus while you can: for another 30 or so days." Sure enough, 30 days later, the number is out, and it is back to normality: the US recorded a deficit of $125 billion in May, on outlays of $305 billion and revenues of $181 billion. And so the "surplus" miracle is over.


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Editorials & Opinions

President Obama Made Two Strategic Mistakes Last Friday (KeithHennessey.com)

President Obama made not one but two strategic mistakes last Friday. Everyone paying attention picked up on his first mistake. The President said “The private sector is doing fine,” a quote that Republicans will use to great effect during the remainder of this election cycle. The President’s second mistake is as important but less obvious. President Obama spoke a second time Friday afternoon. He did not, as reported by some, correct his earlier statement. He instead reinforced it. The President’s second mistake was his decision to stick with an economic argument that is unsupportable by facts, easy to disprove, and politically damaging to him. President Obama will never again say “The private sector is doing fine,” but it appears he will continue to make an economic argument that Republicans can easily rebut. In addition to the specific deadly quote, this second Presidential mistake presents a significant election opportunity for Governor Romney and other in-cycle Republicans, but only if they treat the President’s argument as serious and seek to debate him, not just to hurl invective. The President is sticking to his guns about what ails the economy and how to fix it. Republicans should relish the opportunity to debate this question extensively.

The Looming Showdown (Peter Orszag in Democracy Journal)

It’s January 2013. The treasury secretary has warned that we’ve run out of maneuvering room to avoid hitting the debt limit again, bringing back memories of August 2011. This time, though, the debt-limit drama is happening at exactly the same time as contentious debates over the massive spending cuts triggered by the 2011 debt-limit deal and over the 2001 and 2003 tax cuts, which were allowed to expire at the end of 2012 due to political stalemate but are likely to be replaced or resurrected in some form. This trifecta—debt limit, sequestration on spending, tax cuts—is occurring right at the beginning of a new presidential term, the brief but auspicious honeymoon period for legislative action. Furthermore, even if the rest of 2012 turns out relatively well for economic growth, the labor market will remain weaker than normal in early 2013—which should further motivate legislators to avoid the substantial and immediate fiscal contraction that would occur if the tax cuts and spending cuts were to be implemented in full. If ever there were a time for a big legislative package, early 2013 would be it. And yet there’s reason to question whether meaningful legislation will emerge from this maelstrom, especially if the President is not from the same political party as the majority in the House and the Senate.

Large Banks Need Living Wills (Lacker and Stern in Wall Street Journal)

J.P. Morgan Chase's $2 billion in hedging-related losses has been in the news of late. Overlooked in much of the commentary, however, is that a sizeable loss at a large bank holding company would not be a public-policy concern were it not for the belief that the creditors of such firms will benefit from taxpayer support in the event of failure. This highlights the question of whether the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act eliminated "too-big-to-fail"—that is, the expectation of government rescue of large financial institutions. The short and honest answer at this point is that we simply don't know. Numerous provisions of Dodd-Frank are aimed at addressing the problem. But the fate of too-big-to-fail depends on what policy makers, regulators and supervisors actually do, and not on what they assert.

Why the Economy Can’t Get Out of First Gear (RobertReich.org)

Rarely in history has the cause of a major economic problem been so clear yet have so few been willing to see it. The major reason this recovery has been so anemic is not Europe’s debt crisis. It’s not Japan’s tsumami. It’s not Wall Street’s continuing excesses. It’s not, as right-wing economists tell us, because taxes are too high on corporations and the rich, and safety nets are too generous to the needy. It’s not even, as some liberals contend, because the Obama administration hasn’t spent enough on a temporary Keynesian stimulus. The answer is in front of our faces. It’s because American consumers, whose spending is 70 percent of economic activity, don’t have the dough to buy enough to boost the economy – and they can no longer borrow like they could before the crash of 2008.


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