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Tuesday, June 26, 2012

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Economic Events of the Week

Tuesday Consumer Confidence
Wednesday Durable Goods Orders
Thursday GDP, Jobless Claims
FridayPersonal Income and Outlays

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e21 Reaction & Commentary
e21 Reaction: Key Variables in Coming Weeks (David Malpass)

Washington Update
Congress Said To Delay Automatic Budget Cuts Until March (Bloomberg)

Market Talk
When will the Case-Shiller house price index turn positive Year-over-year? (Calculated Risk)
Banks Preparing for the End (The Wall Street Journal)
Chart: Today's Big Housing News Looks Really Pathetic in Context (The Atlantic)

Editorials & Opinions
John Taylor on the BIS Critique of Current Monetary Policy (Scott Sumner's The Money Illusion)
Krugman & Today's Policies: This Is Nothing Like 1937 (Sean Trende in Real Clear Politics)
Eurozone Crisis: What Is The Solution? (Arnold Kling in EconLog)
Shareholders Can Cure Too Big to Fail (Phil Purcell in The Wall Street Journal)

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e21 Reaction & Commentary

e21 Reaction: Key Variables in Coming Weeks (David Malpass)

Late this week Europe is again faced with an EU-wide 27-country summit with no clear direction. The more positive tone of early June -- when Europe focused briefly on constructive ways to use the new ESM to add capital to Spain's banks – has faded. The euro-zone isn't making progress on creating a mechanism to share some of the periphery's huge legacy debt built up during euro-wide violations of the Maastricht deficit guidelines, and the periphery isn't taking the much-needed steps to downsize governments and government controls to allow private sector growth.


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Washington Update

Congress Said To Delay Automatic Budget Cuts Until March (Bloomberg)

The $1.2 trillion in automatic spending cuts over a decade, half of which would affect the Defense Department, are scheduled to begin in January 2013. At the same time, lawmakers must decide what to do about income tax cuts and other tax breaks scheduled to expire at the end of the year. Leaders in both chambers are discussing whether to propose a catch-all bill that would delay the automatic cuts, fund the government through March or later and temporarily extend the George W. Bush-era tax cuts and other tax laws, said the House aide and industry officials, who asked to speak on condition of anonymity.


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Market Talk

When will the Case-Shiller house price index turn positive Year-over-year? (Calculated Risk)

On Friday I posted Zillow's forecasts for the April Case-Shiller indexes to be released tomorrow. The year-over-year (YoY) decline in Case-Shiller prices has been getting smaller all year, and the Zillow forecast suggests the YoY decline will be smaller still in April - and be the smallest YoY decline since the expiration of the housing tax credit. This raises the question: When will the Case-Shiller indexes turn positive year-over-year? I looked at the recent improvement in prices (comparing the month-to-month changes for the NSA index to last year). At the current pace of improvement, it looks like the YoY change will turn positive in either the August or September reports.

Banks Preparing for the End (The Wall Street Journal)

Some of the biggest banks are being asked to submit by July 1 road maps for how they can be quickly and cleanly liquidated, but a top regulator said he doesn't back using the so-called living-will process to break them up. Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., also doesn't think that the new regulatory process will end "too big to fail"—the expectation that the government will bail out faltering financial firms rather than risk the damage their failure would inflict on the system.

Chart: Today's Big Housing News Looks Really Pathetic in Context (The Atlantic)

The big non-Supreme Court news this morning comes from another hard-to-read, highly-watched, and slow-moving American institution: the housing market. Sales of single-family homes -- which non-economists often call a "house" -- surged 7.6 percent to the highest point since April 2010. Home building is expected to contribute to the economy for the first time in seven years, Reuters reports. But here's the chaser: Seven years ago, in 2005, new home sales were four times higher than they are today. A combination of foreclosures, underemployment, market uncertainty, and tighter credit has created a oversupply of previously-owned homes. And as this graph from Calculated Risk makes clear, we are still a long, long way from normal -- not to mention the abnormal highs from the mid-2000s.


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Editorials & Opinions

John Taylor on the BIS Critique of Current Monetary Policy (Scott Sumner's The Money Illusion)

If you simply replaced the word “accommodative” with “contractionary” I would be in complete agreement with Taylor.  And that’s actually pretty mind-boggling, when you think about it.  It’s not that strange that we might differ on whether current monetary policy is contractionary or accommodative (although non-economists must be appalled that economists can’t even agree on something as basic as that.)  What’s really shocking is that we even agree on the four effects from that monetary policy, even though logically one would think that accommodative policies would produce the exact opposite effect from contractionary policies.

Krugman & Today's Policies: This Is Nothing Like 1937 (Sean Trende in Real Clear Politics)

On Monday, Krugman doubled down, claiming that policymakers had progressed past 1937, and that we were risking a repeat of 1931. That was the year things really fell apart, when policymakers failed to contain a banking crisis in Austria, which eventually resulted in the spread of a global contagion, bringing down governments worldwide -- and bringing the Great Depression to its crushing denouement. The European debt crisis is certainly something to be concerned about, but let’s step back a moment and be clear about something: at least in terms of policy, this is nothing like 1937, much less 1931. And if anything, 1937 tells us more about of the dangers of real-world Keynesian experimentation than anything else.

Eurozone Crisis: What Is The Solution? (Arnold Kling in EconLog)

Friends sometimes ask me this question. My answer is rather harsh. The problem is that some governments and some banks are insolvent. When a financial institution is insolvent, its liabilities must be taken over by a solvent institution. The solvent institution gets to set the price, which typically is a discount. So, if your solution is for Germany to "step up," the question has to be, at what price? Should the German government take over the liabilities of the Spanish banks and/or the Spanish government at 100 cents on the euro? That would not be terribly rational on the Germans' part.

Shareholders Can Cure Too Big to Fail (Phil Purcell in The Wall Street Journal)

There are many reasons people give for breaking up financial institutions that are "too big to fail." It would reduce their complexity, making it less likely they would fail in first place. And ending the government's implicit subsidies to these behemoths means they would no longer enjoy a lower cost of borrowing funds—a competitive advantage that now leads them to grow bigger. But there is one benefit of breakups that hasn't gotten much publicity: Shareholders would get greater value from their investments.


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