•The Political Economy of CFPB Funding

The incomes of American households at the low end of the distribution aren’t especially high, and haven’t increased much, when compared to those of their counterparts in other rich nations. But perhaps this is an unfair comparison. After all, hasn’t the United States absorbed a much larger flow of immigrants than any other affluent country. Actually, as the following chart shows, we’re not exceptional in this regard. Does the U.S. have more of the type of immigrants most likely to struggle in the labor market — those with limited education? Again no. As this next chart indicates, here too we’re in the middle of the pack.

TARP expected to cost U.S. only $25 billion, CBO says – The Troubled Asset Relief Program, which was widely reviled as a $700 billion bailout for Wall Street titans, is now expected to cost the federal government a mere $25 billion – the equivalent of less than six months of emergency jobless benefits.  A new report released Monday by the nonpartisan Congressional Budget Office found that the cost of the program, known as TARP, has plummeted since its passage in October 2008, when policymakers thought that the world stood on the brink of an economic meltdown.

The Political Economy of CFPB Funding Federal Reserve Bank of St. Louis President James Bullard is kvetching about the CFPB’s funding mechanism.  It seems that he doesn’t like the CFPB having a claim on 12% of the Fed’s budget.  That money might get used for effective consumer financial protection or something crazy like that, instead of for bailing out parts of the financial system.  CFPB funding isn’t a poorly thought-through piece of legislation; a lot of thought went into this particular issue.  The concern that Congress and CFPB advocates had was that if CFPB were subject to the regular appropriations process, it would be too easy for CFPB to be strangled in the appropriations process, which is one of the least transparent parts of Congressional activity, and therefore the ideal place to ice an agency.  The whole point of giving the CFPB a percentage of the Fed’s overall budget was to ensure that the CFPB will always have the financial wherewithall to be effective–consumer financial protection shouldn’t be a politically dependent matter.  Congress acted deliberately and intentionally to bind its own hands in the future when political winds change.  

The Irish Banking Crisis: A Parable – Once upon a time, there was a country where bankers disappeared. The bankers, fed up with regulation, dissatisfaction, and downright hostility, decided to unleash the planet-destroying superweapon in their arsenal: they went on strike, not once, but three times. This is no fairy tale, so we don’t have to imagine what happened next. And what did come next was something really, really interesting — and just a little bit awesome. Instead of Ragnarok ripping prosperity to shreds, the economy continued to grow. Though the money supply did contract sharply, neither trade, commerce, nor industry came to a grinding halt. How? People created their own currencies, to substitute for the collapsing money supply. They kept using checks to pay one another, but then, people’s checks began trading within communities. Here’s how Antoin Murphy, one of the few scholars to have studied these strikes, which took place in the 1970s, describes it: "a highly personalized credit system without any definite time horizon for the eventual clearance of debits and credits substituted for the existing institutionalized banking system." The country in question was Ireland — today, in deep crisis because of profligate banks.

National Fiscal Hypocrisy Week – Robert Reich – Likelihood of this happening over Republican and DINO objections is zero.

Bankers Gone Wild in Ireland AND Germany

Ireland bailout: full Irish government statement

 Ireland’s Banks Get $46 Billion as Senior Bondholders Escape Bailout Costs –– Irish banks soared in Dublin trading as the government said it will make junior bondholders pay some of the cost of the 35 billion-euro ($46 billion) rescue package.  “The risk of immediate shareholder-dilutive wipe-out has been averted,” Ciaran Callaghan, an analyst at Dublin-based NCB Stockbrokers, wrote in a note to clients today.  Bank of Ireland Plc, the country’s largest lender, soared 16 percent to 30.7 euro cents at the 5:10 p.m. close of trading, while Allied Irish Banks Plc, the second-largest, gained 3.8 percent to 35.5 cents and Irish Life & Permanent Plc surged 59 percent to 81.9 cents. The five-member ISEQ Financial Index is still down about 98 percent from its peak in February 2007.  Finance Minister Brian Lenihan told state broadcaster RTE the government needs to impose “big haircuts” on banks’ junior bondholders after the rescue. Ireland met its two-year-old pledge that senior bondholders, typically the last investors to lose out when a bank or company founders, wouldn’t lose money.

In a Disappointing Europe, Sweden Stands Out – Sweden’s economy contracted 5.3% last year but has rebounded smartly this year.  Q3 GDP was reportedly earlier today and at 2.1% quarter-over-quarter was nearly twice as strong as the consensus forecast and Q2 figures were revised up a touch.  From a year ago, the Swedish economy is 6.9% larger.  Adding to the positive news stream was the Oct retail sales report.  The 0.8% rise was twice the consensus.   The point is that not only is Sweden reporting robust data, it is surprising the market to the upside. This is serving to shift expectations decidedly in favor of a rate hike by the Riksbank at the next meeting (Dec 15) and likely followed by another rate hike in the middle of Q1.  The Riksbank expects the repo rate to average 1.3% in Q1 11.  Currently it is at 1%.  It expects the repo rate to average 2% in Q4 11.   At this juncture, the main risk to a Riksbank hike next month is if there is a complete meltdown in the euro and the international variables might steady the Riksbank’s hand.

  • PIMCO | Mohamed A. El-Erian – Ireland Rescue Is Not a Game Changer – Europe tried to strike a delicate balance this weekend. It granted emergency loans to boost liquidity, an approach that has visibly lost traction in containing the dislocations in the continent’s periphery. But it also moved toward a more durable approach to tackling solvency problems, although one that involves greater risk of collateral damage. The new liquidity package does little to deal with Ireland’s debt overhang, or to reduce the embedded cost of its debt. Instead it aims to introduce stability into market conditions, which in turn should allow the Irish government to implement its recently announced austerity package.  Ireland will get €67.5 billion to recapitalize its banks, and fund the state’s balance sheet. The financing carries an average interest charge of 5.8% – not cheap but considerably better than market terms.  The package, therefore, is not a “game changer.” It will reduce the risk of contagion to other peripheral countries, until a regional resolution framework is put in place. But it will not significantly improve Ireland’s medium-term growth and employment prospects.
  • Another Lesson In How Not To Go About Things From The EU Commission – The present generation of European leaders will doubtless be remembered for many things, but somewhere high up there on the list will be the appalling sense of bad-timing they seem to have when making critical announcements. The confusion caused by certain ill-considered remarks from Angela Merkel about how private sectors bondholders would need to participate in future EU bailout processes is evidently one good example. Another, without doubt is going to be the decision by EU Commissioner Olli Rehn to appear before the world’s press today (yes, today of all days, one day after the sensitive announcement of the Irish Bank Bail-out plan and the decision to create the European Financial Mechanism), and inform the assembled throngs that, as far as the EU Commission could see, Spain will not be sticking to its 6% of GDP fiscal deficit commitment next year, simply because according to EU calculations the deficit is going to be 6.4% – unless, of course – there is another round of fiscal reduction measures. I think Spanish has a suitable word for this kind of persistent bad timing: "gafé". But the thing is, if Europe’s leaders insist on continually showing the markets just how "gafé" they all are, then we are never going to find our way out of this hole we have all dug for ourselves.

    EU to Ireland: Do you want your pensions or your banks? –  In assessing the effectiveness of the EU/IMF emergency lending package to Ireland, it’s important to distinguish the financial market impact from the political impact.  In terms of market impact, the package is surely a success.  All talk of restructuring, for sovereign debt let alone senior debt in banks, is off the table.  Through IMF and bilateral involvement, the call on EU lending has been kept in the low range: note the heavy use of the EU-budget backed stability mechanism relative to the use of the financial stability fund — the EFSF’s powder has been kept dry in case it’s needed elsewhere.  Furthermore, the lender of last resort checklist is looking good: if not quite lending freely at high rates against good collateral, all the EU money comes in at a large headline amount, with a fairly high rate (above IMF and Greece program), and the collateral coming from conditions to which the Irish government had already agreed.  This money will get paid back. In terms of domestic politics — and therefore with broader implications for the EU as political project — the package is much more problematic.

  • The financialisation of commodities – In recent years, hundreds of billions of dollars of investment has flowed into commodities markets. According to a CFTC staff report (2008) and Masters (2008), the total value of various commodity index-related instruments purchased by institutional investors has increased from an estimated $15 billion in 2003 to at least $200 billion in mid-2008. A recent report by the US Senate Permanent Subcommittee on Investigations (2009) argues that the dramatic index investment flow had distorted prices of some commodities such as wheat. This column describes why and how commodities markets have grown so rapidly and discusses some policy implications.

    Hope and Change – The moral: If you want a lasting impact, don’t cut budgets. Cut agencies; my point is that these guys never made a permanent debt in the small stuff, let alone the big stuff. This time around, maybe — just maybe — things will be different, especially if the Tea Party continues to hold some feet to the fire. With that in mind, here are a few bits of advice for the freshman class: Like I said, cut agencies. And cut them in bunches, to dilute opposition. As I’ve said before on this blog, the department of commerce steals from workers and farmers to subsidize businesses; the department of agriculture steals from workers and businesses to subsidize farmers, and the department of labor steals from businesses and farmers to subsidize workers. Eliminate them all at once and every American will lose one friend and two enemies."

    Brad DeLong – Uncertainty and aggregate demand – The future is always uncertain–and how uncertain it is fluctuates. When the future is more than unusually uncertain, economic players want the security of extra financial asset holdings before they are willing to spend to put people to work. It is, then, the business of the government to make sure that they have the amount and the kinds of financial assets they need to sleep easily. That was one of the insights of John Maynard Keynes. That was one of the insights of Milton Friedman. Uncertainty about the future cannot be eliminated. But its harmful macroeconomic consequences can be neutralized.

     

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