Mid-Day News Roundup

by CC September 9, 2011 10:28 am • Commentary


ECB Executive Board Member Juergen Stark will step down from his post by the end of the year, the European Central Bank said on Friday.
Earlier Reuters, citing two sources, had reported Stark would leave because of a conflict over the central bank’s controversial bond-buying program.

European stocks sunk further into negative territory following the news.

On Europe’s debt crisis, Stark has said indebted countries should not expect any direct help from the ECB and must cut
their deficits fast. Stark has always been considered one of the most “hawkish” ECB members and takes a strict line on inflation.

“So it looks like the last hawk is leaving the sinking ship. The direct impact will be very small and shouldn’t change policy. But the loss of Stark, also the ECB’s chief economist, could lead to policy changes down the line,” ING Economist Carsten Brzeski said.


Greek default chatter may not really amount to much, and shouldn’t shock anybody, really, given that Greek debt has been priced for default for a long time now, but it is adding to the pile of grief weighing on US stocks today.

The Dow is down about 200 points in early trading, and the 10-year Treasury note is yielding 1.95%. The euro is down to $1.372. Oddly, gold prices are flat, for some reason.

Along with Greek default worries, you have Juergen Stark resigning from the ECB board, in what appears to be a dispute over sovereign-debt bond purchases. Not a good development for the euro.

European stock markets are in even worse shape, with the German DAX now down 3.1%, France’s CAC off 3.1%, and Italy’s FTSE down 3.5%.

Greek CDS spreads are another 400 basis points wider — hard to believe, given that they were at an astronomical 3000 basis points yesterday.

More disturbingly, reports Howard Packowitz, German CDS spreads are wider than the UK’s, as investors fret about the impact of a Greek default on the primary funding source for European bailouts.

European banks with Greek debt exposure are selling off, too — they haven’t gotten rid of that stuff yet? Yikes.

Goldman Sachs estimates BNP has 8.1 billion euro in Greek sovereign exposure, Soc Gen has 3.8 billion euro worth, and Credit Agricole has 1.7 billion euro worth, Howard reports.

BNP shares are down 6.5% in Paris, while Soc Gen is down 9.2%.


“Pass this jobs bill,” said President Obama. Then he said it again. Then he said it again. And again. All in all, he asked Congress to “pass this jobs bill,” or some variant thereof, 12 times during Thursday’s jobs speech.

That got to the essential truth behind the speech: all the president can do is ask Congress to pass his bill. The only direct leverage he has is his ability to make the ideas popular and their refusal unpopular. He can’t make them pass the bill. He can’t pass it himself. He can’t use an executive order. He can propose ideas and use the bully pulpit to force them onto the agenda. After that, it’s up to Congress.

The proposal itself is called “The American Jobs Act” and amounts to about $450 billion worth of ideas that have, at other times, commanded a bipartisan consensus.

– It cuts the payroll tax for workers in half, which amounts to a $175 billion tax break, and cuts it in half for businesses until they reach the $5 million mark on their payrolls, at a cost of $65 billion. The idea there is to target the tax cut to struggling small businesses, rather than the cash-rich large businesses. It also extends the credit allowing businesses to expense 100 percent of their investments through 2012, which the White House predicts will cost $5 billion.

– It offers $35 billion in aid to states and cities to prevent teacher layoffs, and earmarks $25 billion for investments in school infrastructure.

– It sets aside $50 billion for investments in transportation infrastructure, $15 billion for investments in vacant or foreclosed properties, and $10 billion for an infrastructure bank. It also makes mention of a program to “deploy high-speed wireless services to at least 98 percent of Americans,” but it doesn’t offer many details on that program.

– It provides $49 billion to extend expanded unemployment insurance benefits. $8 billion for a new tax credit to encourage businesses to hire the long-term unemployed, and $5 billion for a new program aimed at supporting part-time and summer jobs for youth and job training for the unemployed.

– It also encourages the Federal Housing Finance Authority to make it easier for underwater homeowners to refinance their mortgages.

If all of that could be spent out in 2012 — a big if, but given the reliance on tax cuts and state and local aid, much of it could certainly hit before the year’s end — it would be bigger, in annual terms, than the Recovery Act. The White House also promises the entire proposal will be paid for, and the specific offsets will be released next week.

The plan, taken as a whole, attempts to include every single theory of how to address the jobs crisis. If you believe we need more direct spending, you’ve got the infrastructure component. More tax cuts? The plan has $250 billion in tax cuts. More help for the unemployed? Yep. More deficit reduction? Next week, the White House will release a package that offsets this plan and reduces the deficit by more than $1.5 trillion on top of that.

Of course, in much the same way that everyone can find something to like in this plan, everyone can find something to dislike. If you believe tax cuts are ineffective during a demand-driven crisis, the plan spends a lot of money on tax cuts. If you don’t believe in infrastructure spending, there’s plenty of it in here to offend you. If government spending goes against your moral code, well, the government is going to spend money. And next week, when the Obama administration releases its deficit-reduction ideas, liberals are going to be a lot less enthusiastic than they are tonight.

So the question for members of Congress ends up being simple: do you want to focus on the things you do like and compromise on the things you don’t like in order to get some action on jobs and deficit reduction? Or do you want to focus on the things you don’t like and abandon the things you do like in order to kill the legislation? All Obama can do is ask. Now it’s up to Congress to answer.


President Obama’s newly proposed $450 billion job creation bill is equivalent to nearly 3% of GDP, so if it was passed by Congress as it stands it would certainly have a significant impact on GDP growth in 2012, which we currently expect to be only 2%. The big question, however, is whether an otherwise hopelessly split Congress can agree to pass any of the multitude of different measures the bill includes? –Paul Ashworth, Capital Economics

The total cost of the plan has risen from the previously reported $300 billion (2% of GDP) to $447 billion (3% of GDP). At first glance it appears that, if enacted, around 75% (or roughly $335 billion) of the fiscal effects of the proposal would show up in calendar 2012. We estimate that fiscal restraint under current law would total $270 billion, or $160 billion net of the extension of the payroll tax cut (to 4.2%) we already assume in our forecast. Thus, if enacted in its entirety, this proposal could shift the fiscal impulse in 2012 from -1.1% of GDP to +0.4% of GDP. However, it is not yet clear how congressional Republicans will respond to the proposal, and we are not changing any of our estimates at this time. –Goldman Sachs

[The Obama plan] calls for about $200 billion in new spending — much of it on things we need in any case, like school repair, transportation networks, and avoiding teacher layoffs — and $240 billion in tax cuts. That may sound like a lot, but it actually isn’t. The lingering effects of the housing bust and the overhang of household debt from the bubble years are creating a roughly $1 trillion per year hole in the U.S. economy, and this plan — which wouldn’t deliver all its benefits in the first year — would fill only part of that hole. And it’s unclear, in particular, how effective the tax cuts would be at boosting spending. Still, the plan would be a lot better than nothing, and some of its measures, which are specifically aimed at providing incentives for hiring, might produce relatively a large employment bang for the buck. –Paul Krugman, Princeton University

The devil is in the details, and this bill’s devils are likely to be larger than usual, in order to get through a Congress that has so recently faced a massive budgetary and fiscal challenge to meet obligations already on the books. At the same time, the President is proposing to cut payroll taxes and Entitlement funding. Entitlements remain the biggest long-term threat to U.S. fiscal solvency, and further reducing Entitlement funding could result in further negative ratings agency actions regarding the U.S. credit rating. Despite Mr. Obama’s frequent use of the phrase/plea/command “pass this,” the American Jobs Act will be a very tough bill to pass. –Jason Schenker, Prestige Economics

The President’s proposal will probably not have an enormous impact on GDP (in principle, it should have been larger, but I bow to political realities), although the estimates vary since the details are still coming out. Macroeconomic Advisers guessed about a percentage point acceleration, more than a week before the speech (they are to have a more specific estimate soon). Mark Zandi from Moody’s, with more details at hand, estimated 2 percentage points acceleration relative to baseline, according to Bloomberg. What perhaps is of key importance is that these measures prevent the economy from falling below stall speed. –Menzie Chinn, University of Wisconsin, Madison

The payroll tax cut for employers sounds remarkably inefficient to me. It’s a 50% reduction in the employer’s portion of the Social Security payroll tax up to $5 million per employer. While most employers probably pay their employees less than $5 million, I’d guess that a large share of employment is at large firms that have payrolls much bigger than that. For those employers, there is no incentive to hire more. Just a nice windfall of $155,000 (3.1% of $5 million) that they can pile on top of their already large stashes of cash. This is a waste of money. The payroll tax subsidy for small firms that increase payroll is better, but it will only work for firms that have tax liability. –Len Burman, Syracuse University


Some Republican presidential candidates have turned the 2012 campaign into open season on Federal Reserve Chairman Ben Bernanke.

Mitt Romney and Newt Gingrich both took swipes at the Fed chief at Wednesday night’s GOP debate, piling onto earlier criticism by Texas Governor Rick Perry, Minnesota Rep. Michele Bachmann and Texas Rep. Ron Paul.

Mr. Bernanke is facing animosity in part due to criticism of the Fed’s easy-money policies intended to spur hiring and economic growth, and in part because the central bank is unpopular with the GOP’s tea-party wing, which is involved in the presidential nomination process.


n the CBO working paper, the economists invented a refinancing plan. For one year, borrowers of any income, even those who are underwater, who are current on their loans and who have mortgages already guaranteed by Fannie, Freddie or FHA would be offered a shot at refinancing with a 30-year, fixed-rate mortgage at today’s low interest rates. Principal would NOT be reduced. A fee would be charged equal to the one charged initially on the existing mortgage. (One obstacle to refinancing today are the fees that Fannie and Freddie are levying, particularly on borrowers whose income or loan-to-value rations make them riskier credits.)

They estimate such a refi scheme would prompt the refinancing of 2.9 million mortgages totaling $428 billion, saving homeowners about $7.4 billion in the first year in lower monthly payments and averting 111,000 defaults that would otherwise occur. Those averted defaults would save Fannie Mae, Freddie Mac and the Federal Housing Administration — which already guarantee the loans — about $3.9 billion.

Offsetting those savings, though, various arms of the federal government that hold mortgage-backed securities would take a $4.5 billion hit because the high-interest mortgages they hold would be paid back early. Net cost to the federal taxpayers, therefore, is a relatively modest $600 million.

But there would be some big losers. About 65% of the higher-interest mortgages that would be refinanced a government-backed program into lower-interest loans are held by private investors. These investors would take a $13 billion to $15 billion hit, the economists estimate. “Most of that wealth,” they say, “would be transferred to borrowers.”