CBO’s case against “Obama’s middle-class tax cuts”


 Florida’s foreclosures nightmare – We should all be very concerned about the foreclosure situation in Florida. If you are a homeowner or potential homeowner, you should find it offensive that people’s property rights are being violated in such a flagrant way. If you are an investor, either as “bond vigilante” or someone with a generic 401(k), you should be worried that servicers have gone rogue and the incentive structure to maximize value instead of fees associated with foreclosures has broken down.  The short problem is that banks are foreclosing without showing clear ownership of the property. In addition, “foreclosure mills” are processing 100,000s of foreclosures a month without doing any of the actual due diligence or legal legwork required for the state to justify the taking of property and putting people on the street. Even worse, many are faking documentation and committing other fraud in the process. The government is allowing this to happen both by not having courts block it from going forward, but also through purchasing the services of these mills. As Barney Frank noted: “Why is Fannie Mae using lawyers that are accused of regularly engaging in fraud to kick people out of their homes?” And the worst part is the lack of conversation about this. Thanks to Yves Smith at naked capitalism for following this story from the get-go; her blog has become the place for anyone interested in this topic (that link is a catch-up post). The rest of the media is starting to catch up to where she was weeks ago.  Here’s the Washington Post with the story of an individual caught in one of these nets.

Confidence slips to lowest since February (Reuters) – U.S. consumer confidence fell to its lowest level in seven months in September, underscoring lingering worries about the strength of the economic recovery. But in a sign of stabilization in the housing market, U.S. home prices hovered above multi-year lows without the help of the homebuyer tax credit that ended in April. The day’s data is the latest to give a mixed signal on the economy, with a 9.6 percent unemployment rate and still-tight access to credit among factors hurting consumers and keeping concerns about a double-dip recession alive. "With unemployment at a 26-year high, confidence among consumers remains weak. This decline in sentiment will give the Fed a stronger reason to increase stimulus in November,"

 CBO’s case against "Obama’s middle-class tax cuts" Alert readers will have noticed something odd in the CBO’s graph of the harm that different tax cut policies will do to the economy. On the one hand, the harm comes from increasing the amount that we borrow. On the other hand, the extension of all tax cuts — as opposed to those just for income under $250,000 — actually does less damage to the economy, at least under one scenario. People can — and will — take issue with the CBO’s model here. For instance, it holds demand-side effects constant, so the fact that lower-income folks spend while higher-income folks save isn’t included. CBO says those effects tend to disappear over time. But the bottom line is that both the full and partial indefinite extension of the Bush tax cuts are bad ideas that hurt the economy (the table atop this post shows the CBO’s various estimates in detail). And though the Obama administration’s proposal to extend the tax cuts for income under $250,000 seemed slightly less irresponsible than the Republicans’ proposal to extend all the cuts, it’s also worse at generating growth. The takeaway? Both plans are fundamentally irresponsible. The tax cuts need to be canceled. If not now, due to the temporary weakness in the economy, then three years from now. Josh Barro has some further thoughts worth reading.

 Evaluating states’ credit with bond yields – States continue to struggle through their worst budget crises in recent memory. Most states have seen red ink for the last three years, with total state budget gaps estimated at $96 billion for Fiscal Year 2011 (which started in July) and $72 billion for Fiscal Year 2012. With no end in sight to state budget woes, some bond investors are reasonably starting to worry about default. How likely is it that states will default on their bond obligations? And which states should be of greatest concern? Information from the municipal-bond markets shows that while some states are still able to borrow at low rates, spreads for California and Illinois indicate that they are considered to be at far greater risk of default. Just as credit card companies offer the lowest rates to individuals with the best credit histories, investors in the bond market offer the most favorable financing terms to states that are the most creditworthy. We can use the interest rates that investors demand as a way to determine which states are most likely to keep paying the interest on their bonds and ultimately repay the principal. Below is a table of yields on long-term, general-obligation Build America Bonds (“BABs”) issued by fourteen mostly large states.

BBC News – EU austerity drive country by country – A new austerity drive has been sweeping across Europe, as governments struggle to trim huge budget deficits and the 16-nation eurozone races to reassure sceptical markets.  Some of the biggest protests have been seen in France but industrial action is making headlines elsewhere too. With all EU governments aiming for maximum budget deficits of 3% of GDP by 2013, what belt-tightening measures are they taking?

Retaliation is Likely – For the next several years I expect the global economy will suffer from anemic consumption growth. Currency intervention is just one of many policy tools that can be used to acquire a greater share of global demand, now the world’s most valuable economic resource, along with manipulating after-tax wages, suppressing interest rates (in bank-dominated economies), raising trade tariffs, imposing import quotas, and subsidising production directly. Countries that have excess demand and very large trade deficits may or may not be justified in trying to weaken their currencies or otherwise altering the trade balance, but when countries with deficient demand do so, they almost certainly invite retaliation.And we know how that game ends. In 1930, following France’s very successful 1928 devaluation and Britain’s tightening of trade conditions within the Commonwealth, the world’s leading trade-surplus nation passed the Smoot-Hawley tariffs in a transparent attempt to gain a greater share of dwindling global demand. This would have been a great strategy for the US had no one noticed or retaliated, but of course the rest of world certainly noticed, and all Smoot-Hawley did was accelerate a collapse in global trade which, not surprisingly, hurt trade surplus countries like the US most.

Global debt comparison watch Economist interactive

 Riksbank’s Svensson Warns Against Interest-Rate Rises  (Bloomberg) — The Swedish Riksbank’s most outspoken board member on the risks of deflation said central banks shouldn’t raise rates to curb asset-price growth when inflation is low — a path his own bank is pursuing.  “The policy rate is an ineffective instrument for influencing financial stability,” Riksbank Deputy Governor Lars E. O. Svensson said in a speech delivered in Tokyo and published on the bank’s website yesterday. “The use of the policy rate to prevent an unsustainable boom in house prices and credit growth poses major problems for the timely identification of such an unsustainable development.”  Sweden’s central bank on Sept. 2 raised its benchmark repo rate a second time in as many months in part, it said, to cool the housing market. Inflation, which has lagged behind the bank’s 2 percent target since December 2008, slipped 0.2 point to 0.9 percent last month.

St. Louis Fed’s Financial Stress Index – One excellent index which attempts to capture a broad range of components of financial stress is the St. Louis Fed’s Financial Stress Index, henceforth to be known here as the STLFSI. The index constituents are highlighted below and include an interest rate group, a yield spread group and an third uncategorized group of additional indicators in which the VIX is one of five components.

Our Acute Case of Fiscal Madness – Krugman – Future historians will marvel at the austerity madness that gripped policy elites in the spring of 2010. In a flurry of blind panic and irrational exuberance, organizations from the European Central Bank to the Organization for Economic Cooperation and Development suddenly abandoned everything we had learned, at a bitter cost, about economics during recessions and decided that fiscal austerity was the way to go while the world was in the depths of a slump — indeed, many claimed that spending cuts would actually be expansionary. Not only was there an illogical push for austerity, but there also emerged a widespread demand for central banks to raise interest rates in the face of falling inflation and high unemployment. This madness was exemplified by the O.E.C.D.’s economic outlook report in May, which supported these ideas. But the O.E.C.D. has suddenly changed its tune. “In the short term, the weakness can be dealt with [through] the prolongation of some of the monetary accommodation in some countries,” the O.E.C.D.’s secretary general, Angel Gurria, told Reuters on Sept. 17. This is as close as such organizations ever get to admitting that they were wrong. And speaking of the rewards of austerity, I think it’s worth checking to see whether there have been any.

The politics of Chinese adjustment – I am often asked, especially by my Peking University students, to list what I think is the sequence of steps China will take to address its economic imbalances.  Remember that rebalancing, in the Chinese context, has a very specific definition.  It means raising the consumption share of GDP.  This is just a way of saying that consumption growth must outpace GDP growth, and over the next few years it inevitably will, if the rest of the world is unable to absorb a rising Chinese trade surplus. But there are many ways this can happen.  The good way is by a surge in consumption growth that allows GDP growth to remain strong.  The bad way is for consumption growth to slow, and for GDP growth to slow much more rapidly.So how will China rebalance?  Unfortunately there is no obvious answer.  I always tell my students that even if I were smart enough to know the optimal sequence, it would nonetheless be very difficult to make any reasonable prediction since the sequence is not likely to be subject to economic analysis.  This is as much or more a political issue as it is economic, for at least two reasons

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