How the government rebuilt household balance sheets

Medicaid Demands Push States Toward `Cliff’ Even as Governors Cut Benefits – Governors nationwide are taking a scalpel to Medicaid, the jointly run state and federal health-care program for 48 million poor Americans, half of whom are children. The single biggest expense for states, Medicaid consumes about 22 percent of their total $1.6 trillion in expenditures, more than what is allocated to elementary and secondary education, according to a National Governors Association report. With federal stimulus funds to help states pay higher Medicaid costs running out June 30, “we’re heading for a cliff in July,” said Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers in Washington. Medicaid enrollment has jumped 13.6 percent since the recession began in 2007, according to the Henry J. Kaiser Family Foundation based in Menlo Park, California. The 2009 federal stimulus bill and a supplemental appropriation this year allocated a total of $103 billion for Medicaid. With that funding ending, state health-care expenditures may climb as much as 25 percent in fiscal 2012, according to a Kaiser report.
 
Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market – CBO Director’s Blog – The cost to taxpayers of taking over Fannie Mae and Freddie Mac, and the structural weaknesses that contributed to the institutions’ financial problems, have prompted policymakers to consider various alternatives for the government’s future role in the secondary (resale) market for residential mortgages. To provide a context for those options, CBO has prepared a study entitled Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market. That study examines the rationales that are often cited for federal involvement in the secondary mortgage market, the problems with Fannie Mae and Freddie Mac that existed before the recent financial crisis, and alternative approaches for the future of the secondary mortgage market.
 

Fears grow of euro-style debt crisis in US states – No sooner has the last crisis ended, than warnings about the next one begin. In the dying days of the year, with the sub-prime mortgage debacle entering the rear-view mirror, economy-watchers are warning 2011 could see US states and municipalities plunge into a debt crisis of that type that has wrought chaos in Europe. Although the US economy is slowly getting to its feet after a brutal recession, state and local budgets are still prostrate.To the west, California faces a budget shortfall of over 25 billion dollars. To the east, New York faces a nine-billion-dollar deficit. The north, south and center of the country are not faring much better. Only four of the fifty US states are currently keeping their heads above water; Arkansas, Montana, North Dakota and — thanks to oil revenues — Alaska, according to the Center on Budget and Policy Priorities (CBPP). Across the country the shortfall is expected to be at least 130 billion this fiscal year.

Bloomberg Sues ECB to Force Disclosure of How Greece’s Swaps Hid Deficit – Bloomberg News filed a lawsuit against the European Central Bank, seeking the disclosure of documents showing how Greece used derivatives to hide its fiscal deficit and helped trigger the region’s sovereign debt crisis.  The lawsuit asks the European Union’s General Court in Luxembourg to overturn a decision by the ECB not to disclose two internal documents drafted for the central bank’s six-member executive board in Frankfurt this year. The notes show how Greece used swaps to hide its borrowings, according to a March 3 cover page attached to the papers obtained by Bloomberg News.  ECB President Jean-Claude Trichet withheld the documents after the EU and International Monetary Fund led a 110 billion- euro bailout ($144 billion) for Greece. The dossier should be disclosed to stop governments from employing the derivatives in a similar way again and to show how EU authorities acted on information they had on the swaps, according to the suit, filed by Bloomberg Finance LP, the parent of Bloomberg News.

Greeks go on strike before austerity budget vote (Reuters) – Greek unions called a general strike on Wednesday and Athens was paralyzed by a 24-hour public transport stoppage in protest against the government’s 2011 budget, set to pass later as part of an EU/IMF bailout. The budget, meant to help stem a debt crisis that has shaken the euro zone, includes further tax hikes and wage cuts in state-run enterprises, especially in public transport. Fitch said on Tuesday it may cut Greece‘s credit rating next month to junk as both other major rating agencies have done. "Even though this news was expected, it will go down badly with the markets, there is widespread fear about downgrades coming,"

 

Banks Best Basel as Global Regulators Dilute or Postpone New Capital Rules – More than 500 representatives from 27 nations, including top regulators and central bankers, met dozens of times this year to hammer out 440 pages of new rules to govern the world’s banks. What’s not in the documents published by the Basel Committee on Banking Supervision, and the escape hatches that are, may have more impact on how financial institutions will operate following a global credit crisis that led to $1.8 trillion in bank losses and writedowns. The committee’s most significant achievement, members say, an agreement to increase the amount of capital banks need to hold, won’t go into full effect for eight years. Other measures that regulators had hoped would prevent future crises — liquidity standards, a capital surcharge on the biggest lenders and a global resolution mechanism for failing firms — were postponed, allowing banks to escape the toughest rules that would force them to change the way they do business.

Trader Holds $3 Billion of Copper in London – As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world’s stockpiles is coming under scrutiny. The latest example is in the copper market, where a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world’s exchange-registered copper stockpile and worth about $3 billion. The report coincided with copper prices reaching record highs Tuesday. Commodities prices rallied along with stocks. The Dow Jones Industrial Average gained 55.03 points, or 0.5%, to 11533.16, its highest level since August 2008. Crude oil jumped to its highest level in more than two years and topped $90 a barrel in late electronic trading in New York. Corn and soybeans rose amid worries about hot weather in Argentina. Copper soared to a new record of $4.2705 per pound Tuesday in New York and is up more than 28% this year.

China ready to buy 4-5 bln euros of Portugal debt-paper (Reuters) – China is ready to buy 4-5 billion euros ($5.3-$6.6 billion) of Portuguese sovereign debt to help the country ward off pressure in debt markets, the Jornal de Negocios business daily reported on Wednesday. The paper said, without citing any sources, that a deal reached between the two governments will lead to China buying Portuguese debt in auctions or in the secondary markets during the first quarter of 2011. China’s central bank declined to comment on the report, while Portuguese government officials were not immediately available for comment. It is unclear whether China’s government would be prepared to take on so much fresh exposure to Portugal in such a short space of time, given that Beijing has faced domestic political pressure to invest the country’s foreign reserves more carefully.

How the government rebuilt household balance sheets – Mark Thoma makes a familiar complaint: that the government’s response to what he characterizes as a “balance sheet recession” has done wonders for the balance sheets of banks, but much less for the balance sheets of the population as a whole. What the government should have done, he says, is “use fiscal policy to help households make up for losses from the recession”: Mark doesn’t go into any detail on exactly how the government should have done “a better job of helping households”. But it seems to me that, quietly and largely invisibly, it’s actually done exactly that. Balance sheets have two sides, of course: assets and liabilities. And I suspect that what Mark might have in mind here is attacking the liability side of things, through pushing principal reduction on mortgages or allowing them to be reduced in bankruptcy. But there’s a problem with trying to reduce liabilities: when the markets lose faith in credit instruments, as we saw during the crisis, the repercussions can reverberate around all markets and all countries.
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