Fireworks? Ron Paul Gets Gavel for Fed Panel

Fireworks? Ron Paul Gets Gavel for Fed Panel – Rep. Ron Paul, the Texas Republican who has passionately called for dismantling the Federal Reserve, will be running the panel that oversees the central bank when Republicans take the House majority next year. Mr. Paul has introduced legislation to abolish the Fed, wrote the book, “End the Fed,” and rallied support for eliminating it. Rep. Spencer Bachus (R., Ala.), who will take over the House Financial Services Committee from Rep. Barney Frank (D., Mass.), announced today that Mr. Paul, a libertarian who won a fervent following when he ran for president in 2008, will head the Domestic Monetary Policy Subcommittee.
 
France Joins Germany to Nix Junker’s Junk Bond Proposal to Save the Euro – Jean-Claude Juncker, President of the Euro Group and Prime Minister of Luxembourg (not to be confused with Jean-Claude Trichet, President of the ECB) hatched a plan to combine the bonds of all the Eurozone countries into one entity, saying E-bonds would end the crisis Europe must formulate a strong and systemic response to the crisis, to send a clear message to global markets and European citizens of our political commitment to economic and monetary union, and the irreversibility of the euro. This can be achieved by launching E-bonds, or European sovereign bonds, issued by a European Debt Agency (EDA) as successor to the current European Financial Stability Facility. Junker’s plan is much like the idea of taking subprime loans bundling them together with AA and A loans, putting the mess into one package and stamping the whole thing AAA on the misguided notion (lie) that bundling would make everything safe.
 
  • A December to Remember Compromise Boosts  Growth Prospects for 2011 – In our just published economic forecast we had already assumed many of the elements of this compromise would be enacted. However, there are three major components that we had not assumed, and that would, in fact, together significantly impact the economic outlook over the next few years. First is the extension of emergency unemployment compensation through December 2011. In total this would add roughly $56 billion to personal disposable income through early 2012. Second is the one-year, two-percentage-point payroll tax reduction for employees that would add approximately $120 billion to disposable income in 2011. It should be noted, however, that the administration dropped its proposal that the Making Work Pay refundable tax credit be extended permanently, something we had also assumed in our forecast. Therefore, the net effect on disposable income in 2011 is only roughly $60 billion, relative to our forecast. Third is the new expensing and bonus depreciation through 2012 that would reduce corporate taxes by roughly $170 billion through 2012, with roughly $140 billion of that subsequently recaptured by the federal government because of smaller depreciation deductions in later years.
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    House Democrats defy Obama on tax cut bill – Defying President Obama, House Democrats voted Thursday not to bring up the tax package that he negotiated with Republicans in its current form. "This message today is very simple: That in the form that it was negotiated, it is not acceptable to the House Democratic caucus. It’s as simple as that," said Democratic Congressman Chris Van Hollen. "We will continue to try and work with the White House and our Republican colleagues to try and make sure we do something right for the economy and right for jobs, and a balanced package as we go forward," he said. The vote comes a day after Vice President Biden made clear to House Democrats behind closed doors that the deal would unravel if any changes were made. "Wow did the [White House] mishandle this," a senior House Democratic Source told CNN. "Breathtaking. Rep. Peter DeFazio of Oregon said: "They said take it or leave it. We left it."

    Nigeria isn’t just participating in the usual bribes, according to one Wikileaks document. Instead, Shell is playing CIA, inserting employees into every recess of Nigeria’s corrupt government. From the UK Guardian: The oil giant Shell claimed it had inserted staff into all the main ministries of the Nigerian government, giving it access to politicians’ every move in the oil-rich Niger Delta, according to a leaked US diplomatic cable. The company’s top executive in Nigeria told US diplomats that Shell had seconded employees to every relevant department and so knew “everything that was being done in those ministries”. She boasted that the Nigerian government had “forgotten” about the extent of Shell’s infiltration and was unaware of how much the company knew about its deliberations. The cache of secret dispatches from Washington’s embassies in Africa also revealed that the Anglo-Dutch oil firm swapped intelligence with the US, in one case providing US diplomats with the names of Nigerian politicians it suspected of supporting militant activity, and requesting information from the US on whether the militants had acquired anti-aircraft missiles.

     
    Monetary and fiscal policy, working together -BUTTONWOOD continues to be sceptical of the Fed’s new security purchases. And, you won’t be surprised to hear, I continue to think his fears are somewhat misplaced. Reduced bond yields are not the Fed’s goal. The Fed’s goal is to facilitate recovery, so as to move inflation and unemployment closer to the central bank’s target levels. Beginning in late August, the Fed signalled its intent to do more to achieve its goal through additional purchases of Treasury securities. And indeed, the Fed’s messaging was successful; Treasury yields were lower in early October than they were in late August. But lower yields were the means, not the end. The promise of more Fed action boosted markets and expectations, and before long actual economic data was following suit. But of course, we’d expect an improving outlook for the American economy to lift American government bond yields. Yields were low, aside from Fed activity, because investors were uninterested in putting their money in private projects. That’s no longer the case; with rising growth expectations comes rising interest in private investment, which makes for falling bond prices and rising yields. Yields are rising because QE2 has been successful.

     QE2 and Rising Yields – More folks are now considering the possibility that the rise in long-term interest rates may be a sign of economic recovery.  For example, see Ryan Avent, Paul Krugman, Cardiff Garcia, and David Andolfotto.  This is a welcome reprieve from the those observers who point to the rising yields as a sign that QE2 is failing.  Recall that the recovery view begins with notion that a successful QE2 will first raise inflation expectations.    The increase in  inflation expectations, however, also implies higher expected nominal spending (i.e. higher future nominal spending means higher future inflation).  Higher expected nominal spending in an economy with sticky prices and excess capacity should in turn lead to increases in expected real economic growth.  Finally, this higher expected real economic growth should increase current real long-term yields.  Though it too soon to know for sure,  the data seem to support the recovery interpretation of the rising nominal yields.  Below is a figure showing the 10-year expected inflation rate and the 10-year real interest rate from the TIPs market.  This figure shows that inflation expectations pick up first and eventually the real interest rate does too: (Click on figure to enlarge.)

    Debt Panel Chairmen Press Obama, Congress to Act Before Debt-Ceiling Vote – The co-chairmen of the White House’s debt-reduction panel, Democrat Erskine Bowles and Republican Alan Simpson, said the White House and congressional leaders should try to broker a bipartisan agreement to shrink the federal debt before Congress confronts a vote on raising the debt ceiling next year. Lawmakers and the White House are bracing for a collision next year over the debt ceiling issue. Administration officials have said Congress must raise the borrowing cap so the government doesn’t default on its debts. But some congressional Republicans say they won’t vote to raise the debt ceiling above the current $14.3 trillion level because it would encourage more government spending. Reaching an accord on deficit reduction could prove difficult before a vote on the debt limit expected sometime this spring. Members of both parties remain at odds over how to cut spending.
    Q3 Flow of Funds: Household Real Estate assets declined $650 Billion in Q3 2010 – The Federal Reserve released the Q3 2010 Flow of Funds report this morning: Flow of Funds. According to the Fed, household net worth is now off $11 Trillion from the peak in 2007, but up $5.8 trillion from the trough in Q1 2009.  The Fed estimated that the value of household real estate fell $684 billion to $16.55 trillion in Q3 2010, from $17.2 trillion in Q2 2010.This is the Households and Nonprofit net worth as a percent of GDP. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations. Note that this ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles. This graph shows homeowner percent equity since 1952.  Household percent equity (as measured by the Fed) collapsed when house prices collapsed in 2007 and 2008.  In Q3 2010, household percent equity (of household real estate) declined to 38.8% as the value of real estate assets fell by almost $650 billion. The third graph shows household real estate assets and mortgage debt as a percent of GDP.

    Support the Tax Deal – Given a Democratic President, this is the best possible deal that could be reasonably expected. For the next two years, through the remainder of President Obama’s first/only term, tax rates won’t go up on anyone except dead people. (OK, actually their heirs.) That is a total and complete policy win. With almost no political effort and very little public discussion, capital tax rates aren’t going up. I had expected Congressional Republicans to get two years on all the individual rates but was nervous about the capital tax rates. That is a slightly surprising and complete policy win. The estate & gift tax deal ends up at the Kyl/Lincoln compromise levels, as most anyone could have guessed for a while. While this isn’t a complete victory, it’s darn good. The stupid Making Work Pay credit, which the President mislabeled as a tax cut, is now a true payroll tax cut. That’s a marginal improvement.
     
    Day Trading in China a Growing Business – Before the opening bell sounded on the New York Stock Exchange on a recent Tuesday, a group of fresh college graduates clocked in at a small trading firm on the outskirts of this capital city.  They were hired to engage in rapid-fire stock trading with some of the world’s most powerful investment houses in New York, London and Tokyo, and they were instructed to be alert.  “The market could be volatile today,” King Chan, the general manager at the firm, Lazer Trade, shouted to the group during a pep talk. “Be careful at the open. And don’t take dumb risks!”  Mr. Chan’s day trading shop is one of many that have sprung up in and around China’s major cities in recent years. Trading firms based in the United States and Canada are recruiting inexpensive workers in China and teaching them to engage in speculative trading — which means repeatedly buying and selling shares listed on the New York Stock Exchange and Nasdaq, hoping for quick profits.  By some industry estimates, as many as 10,000 people in China are doing speculative day trading of American stocks — mostly aggressive young men working the wee hours here, from 9:30 p.m. to 4 a.m., often trading tens of thousands of shares a day.

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