Wonkbook: Europe extends and pretends
Ezra Klein's Wonkbood
Europe is caught in a long bout of something that we're very used to seeing after financial crises: extend and pretend. The underlying reality of their dilemma is that there are hundreds of billions -- or maybe more -- in losses for someone to take. If Greece and Ireland and Portugal take them, that means default and likely exit from the Euro. If they default, that means defaulting, in large part, on loans owed to German and French banks, which could cause a banking crisis in those countries. For them not to default, however, means that taxpayers in other European countries have to take those losses.
The solutions to this crisis that are economically plausible are not politically plausible, and vice-versa. As economist Carmen Reinhart told me, "If the policymakers were to be proactive, they would restructure Greek debt alongside bank recapitalization and at the same time, restructure both Portugal and Ireland as well." That is to say, they would do it all at once. But the sticker shock to that strategy would be enormous.
What is proving politically plausible is to do just enough to survive the week, and do it in the nick of time. We've seen that over and over again in this crisis. But the irony of this strategy is that it's likely making a resolution harder. The longer Europe spends under this cloud, the harder it is for them to grow. The harder it is for them to grow, the worse these debts become. And the worse these debts become, the harder they are to pay off. The cost of denying the problem is to make the problem worse. But for Europe's leaders, that is, at least for now, an easier price to pay. Actually fixing the problem might ultimately be cheaper, but it requires a wealth of political capital and continental unity that they simply don't have.
Top Stories
1) Europe is approving a bigger bailout fund, but it may not be enough, reports Howard Schneider: "One by one, European parliaments are blessing a $600 billion bailout fund considered an important step in solving the region’s financial crisis. But there is an unspoken problem: The fund may not be big enough to do a job that involves backing such major countries as Italy and Spain and boosting capital levels in the region’s financial system. Germany’s parliament delivered an important vote of approval Thursday for the European Financial Stability Facility. But even if other governments follow suit, officials will need to pivot quickly into a contentious debate about how to boost the size of the fund to perhaps several trillion dollars. That’s what many analysts feel is needed for the 17-nation euro zone to prove its commitment to standing behind weakened euro-zone governments and the region’s financial system."
2) The GOP wants big cuts to education and health care, reports David Rogers: "House Republicans on Thursday released their draft 2012 budget for labor, health and education programs, a giant $153.4 billion measure that moves toward the Democrats in total dollars but still challenges President Barack Obama almost across the board on labor rules and his prized education and healthcare reforms...Public school Title 1 and special education assistance emerge with significant funding increases above 2011. The National Institutes of Health are promised a $1 billion increase in program activity and Head Start -- once a target for the GOP -- would get a $540 million increase, as requested by Obama. Yet to keep the maximum annual Pell Grant at $5,550, the bill would institute tighter eligibility standards that could disqualify thousands of low-income college students. Obama’s Race to the Top education initiative would be wiped out entirely."
3) Congress has approved the stopgap spending package, reports Robert Pear: " House on Thursday gave quick approval to a stopgap spending bill that will finance the government for the first four days of October, until lawmakers can return and vote on a more ambitious seven-week spending bill. The stopgap bill, passed Monday by the Senate, goes now to President Obama, who is expected to sign it. The House action came in a brief session attended by just a few lawmakers. Both houses of Congress are in recess, holding only pro forma sessions like the one on Thursday. A partisan fight over the stopgap spending bill had raised the possibility that the government might have to shut down many of its operations starting on Saturday, the first day of the new fiscal year...The measure approved Thursday will be the 157th stopgap spending bill enacted since 1977, according to the nonpartisan Congressional Research Service."
4) The Fed's "Operation Twist" is working surprisingly well, reports Matt Phillips: "As the Federal Reserve Bank of New York prepares to release on Friday new details about the central bank's rate-lowering program, some bond-market strategists have done their own back-of-the-envelope assessment already. Their conclusion: Operation Twist could in some ways do as much--or more--for the bond market than its predecessor, known as QE2. The program also could prove to be a boost for stocks...Even though Operation Twist hasn't begun being implemented, it already is having an impact on long-term interest rates. It also is affecting what bond investors are buying and selling, pushing many to buy somewhat more risky bonds like mortgage securities and corporate bonds. That's the outcome the Fed has suggested it wants to achieve. 'Operation Twist has greater punch than the QE2 program, or should,' said Ray Stone, an economist at Stone & McCarthy Research."
Top Op-eds
1) Europe needs to act to stop another Great Depression, writes George Soros: "Three bold steps are needed. First, the governments of the eurozone must agree in principle on a new treaty creating a common Treasury for the eurozone. In the meantime, the main banks must be put under European Central Bank direction in return for a temporary guarantee and permanent recapitalisation. The ECB would direct banks to maintain credit lines and outstanding loans, while closely monitoring risks taken for their own accounts. Third, the ECB would enable countries such as Italy and Spain to temporarily refinance themselves within limits at a very low cost. These steps would calm markets and give Europe time to develop a growth strategy, without which the debt problem cannot be solved."
2) Europe could learn something from American history, writes Michael Gerson: "The European Union’s long-term problem is a structural flaw. It shares a common currency but not a system to ensure that its individual members are fiscally responsible. The United States faced a similar challenge in 1790, when Treasury Secretary Alexander Hamilton engineered the federal assumption of state debts incurred during the Revolution -- a remarkable success, which caused the price of American bonds to soar. 'He touched the dead corpse of public credit,' said Daniel Webster of Hamilton, 'and it sprung upon its feet.' Only Germany has the strength and standing to play a similar role in Europe. But Germans are reluctant Hamiltonians. They naturally resist paying the bills for their profligate European cousins. And other nations have plenty of historical reasons to fear German dominance in Europe. Still, Germany is being led, step by shuffling step, into this role."
3) Blaming the slow recovery on Obama is silly, writes Paul Krugman: "Listen to just about any speech by a Republican presidential hopeful, and you’ll hear assertions that the Obama administration is responsible for weak job growth. How so? The answer, repeated again and again, is that businesses are afraid to expand and create jobs because they fear costly regulations and higher taxes...The first thing you need to know, then, is that there’s no evidence supporting this claim and a lot of evidence showing that it’s false. The starting point for many claims that antibusiness policies are hurting the economy is the assertion that the sluggishness of the economy’s recovery from recession is unprecedented. But, as a new paper by Lawrence Mishel of the Economic Policy Institute documents at length, this is just not true. Extended periods of 'jobless recovery' after recessions have been the rule for the past two decades."
4) Deficit-financed stimulus is a free lunch, writes Brad DeLong: "The US government can currently borrow for 30 years at a real (inflation-adjusted) interest rate of 1% per year. Suppose that the US government were to borrow an extra $500 billion over the next two years and spend it on infrastructure - even unproductively, on projects for which the social rate of return is a measly 25% per year. Suppose that - as seems to be the case - the simple Keynesian government-expenditure multiplier on this spending is only two. In that case, the $500 billion of extra federal infrastructure spending over the next two years would produce $1 trillion of extra output of goods and services, generate approximately seven million person-years of extra employment, and push down the unemployment rate by two percentage points in each of those years...So what is not to like? Nothing."
Live interlude: The Dismemberment Plan play "What Do You Want Me To Say" live.
Got tips, additions, or comments? E-mail me.
Still to come: It's the beginning of the end for low-cost banking; the GOP wants a fight over health reform as part of the next spending bill debate; the Justice Department might sue more states over immigration; Energy Secretary Steven Chu is taking the fall for the Solyndra scandal; and the best moments of "60 Minutes"'s Andy Rooney.
Economy
Low-cost banking is coming to an end, reports Ylan Mui: "Bank of America will become the first major bank to charge customers across the country a monthly fee to shop with their debit cards, part of a wave of changes that are eroding the low-cost model of banking that consumers have long enjoyed. The $5 fee will debut next year for the bank’s basic checking accounts. It will apply only to debit card purchases and not to ATM withdrawals, online bill pay or mobile phone transfers...Banks are now spreading their costs more evenly among their customers. For some banks, that has meant eliminating free checking or ending rewards programs. Credit card holders have found their spending limits slashed and their interest rates increased. And with a new rule taking effect Saturday that limits banks’ ability to make money from merchants, it also means paying for the privilege of swiping your debit card."
The SEC will start filing more and milder suits, reports Jean Eaglesham: "Securities and Exchange Commission officials are trying to make it easier on themselves to hold more individuals responsible for wrongdoing during the financial crisis. In a major shift from the agency's traditional enforcement strategy, the SEC could file more civil cases in which defendants are accused of negligence only, rather than harder-to-prove charges of intentional wrongdoing or recklessness, according to SEC officials. In the past, the SEC sometimes persuaded individuals to agree to narrow negligence charges in order to settle the case, rather than fight the agency in court over more-serious allegations, according to defense lawyers. The SEC generally wasn't willing to risk a courtroom defeat if the only allegation was negligence. The penalties for negligence typically are much less harsh than for intentional fraud."
Wall Street isn't keen on Rick Perry, report Brody Mullins and Steve Eder: "The red meat Rick Perry is serving up to Republican primary voters is causing him problems with deep-pocketed Wall Street donors. Some bankers say they would prefer a more moderate candidate, and worry the Texas governor's style and stances on social issues could sink him in the general election. Their unease, along with rules against governors accepting money from certain financial executives, could crimp Mr. Perry's ability to tap into his party's single biggest source of cash...Last week, Mr. Perry went to New York for three fund-raising events, including a dinner hosted by former American International Group Inc. chief Hank Greenberg. That was a first step toward winning over financial-services executives, many of whom mix conservative views on economics and taxes with more-liberal positions on social issues such as gun control, same-sex marriage and abortion rights."
Dodd-Frank's to blame for higher bank fees, writes Todd Zywicki: "This Saturday, government price controls on debit card interchange fees (which card issuers charge to merchants) go into effect. The controls are the result of the Durbin amendment to last year's Dodd-Frank financial reform legislation. They were enacted at the behest of big-box retailers such as Wal-Mart and Walgreen's, which stand to gain a multimillion-dollar windfall...Faced with a dramatic cut in revenues...banks have already imposed new monthly maintenance fees--usually from $36 to $60 per year--on standard checking and debit-card accounts, as well as new or higher fees on particular bank services. While wealthier consumers have avoided many of these new fees...a Bankrate survey released this week reported that only 45% of traditional checking accounts are free, down from 75% in two years."
Senate action against China is long overdue, writes Harold Meyerson: "On Monday, the Senate will take up legislation that would impose tariffs on Chinese goods so long as China depresses the value of its currency. Despite the partisan polarization that grinds lawmaking to a halt these days, the bill’s support is thoroughly bipartisan, with sponsors ranging from such conservative Republicans as South Carolina’s Lindsey Graham to liberal Ohio Democrat Sherrod Brown. The legislation is expected to clear the Senate’s 60-vote hurdle for a floor vote and move on to the House. For students of America’s deranged romance with free trade, the fact that the Senate is willing to take on China is little short of amazing...But the consequences can no longer be denied. Between 2001 and 2010, the U.S. trade deficit with China cost Americans 2.8 million jobs, according to a report by economist Robert Scott, issued last week by the liberal Economic Policy Institute."
Space interlude: SpaceX's reusable rocket (currently under development).
Health Care
The GOP's spending bill includes a rider defunding health reform, reports Sam Baker: "House Republicans released a draft spending bill Thursday that would cut off funding for many parts of the healthcare reform law, though the bill remains deadlocked in the Appropriations Committee. The draft legislation would attempt to derail implementation of the law. It would specifically block any money from going to the Center for Consumer Information and Insurance Oversight -- the office handling the bulk of the implementation effort -- as well as the recently disbanded office in charge of setting up the controversial CLASS program. All told, the bill would rescind $6.8 billion, according to the Appropriations Committee. It would block funding for the Affordable Care Act until legal challenges over the law’s individual coverage mandate have been settled. But the bill isn’t likely to see a markup any time soon."
Domestic Policy
The Justice Department may sue yet more states for their anti-immigration laws, reports Jerry Markon: "The Obama administration is escalating its crackdown on tough immigration laws, with lawyers reviewing four new state statutes to determine whether the federal government will take the extraordinary step of challenging the measures in court. Justice Department lawyers have sued Arizona and Alabama, where a federal judge on Wednesday allowed key parts of that state’s immigration law to take effect but blocked other provisions. Federal lawyers are talking to Utah officials about a third possible lawsuit and are considering legal challenges in Georgia, Indiana and South Carolina, according to court documents and government officials. The level of federal intervention is highly unusual, legal experts said, especially because civil rights groups already have sued most of those states. Typically, the government files briefs or seeks to intervene in other lawsuits filed against state statutes."
Disability benefit approvals are slowing in an attempt to juke the stats, reports Damian Paletta: "Managers in the Social Security Administration, struggling to handle a skyrocketing number of disability cases, had an unusual request for their workers this week: slow down. Social Security judges and employees in Florida, Alabama, Colorado, Georgia, Tennessee, Ohio and Arizona were among those instructed to set aside disability cases this week, with the slowdown allowing managers to boost their performance numbers for the coming fiscal year, which starts Monday. Top officials, in a bid to meet goals to win promotions or thousands of dollars in bonuses, directed many employees to refrain from issuing decisions on cases until next week, according to judges and union officials. This likely would delay benefits paid to thousands of Americans with pending applications, many of whom are financially needy and have waited for a government decision for more than a year."
State and local revenues are rebounding, reports Michael Fletcher: "State and local pension funds continued to recover this spring from the depths of the Great Recession as their gains from investments and from higher annual taxpayer contributions lifted their holdings to their highest levels in three years, the Census Bureau reported Thursday. The assets for the nation’s 100-largest public-employee pensions systems rose more than 1 percent during the second quarter, to $2.8 trillion, the Census Bureau said. The increase contributed to a nearly 18 percent gain in holdings over the previous year. The recent retirement fund growth resulted from overall investment gains as well as pension reforms enacted in more than 40 states and many local governments since 2009. The reforms have required state and local governments and workers to pay more into the pension funds while trimming promised benefits to employees and, in a few cases, current retirees."
Supercut interlude: The best of Andy Rooney.
Energy
Energy Secretary Steven Chu is taking the blame for Solyndra, report Carol Leonnig and Joe Stephens: "Energy Secretary Steven Chu acknowledged Thursday making the final decision to allow a struggling solar company to continue receiving taxpayer money after it had technically defaulted on a $535 million federal loan guaranteed by his agency. Chu spokesman Damien LaVera said in a statement that the secretary approved the restructuring agreement for Solyndra because it gave the company 'the best possible chance to succeed in a very competitive marketplace and put the company in a better position to repay the loan.' Also Thursday, a law enforcement official confirmed that the criminal probe of Solyndra is focused on whether the company and its officers misrepresented the firm’s finances to the government in seeking the loan or engaged in accounting fraud."
Rick Perry's grievances with the EPA go back years, report John Broder and Kate Galbraith: "Gov. Rick Perry of Texas has built a political career running against Washington, and no agency more symbolizes what he considers the meddlesome and economy-choking evils of the federal government than the Environmental Protection Agency...He brags that he has significantly reduced air pollution over his decade-plus tenure by working with businesses and that he does not need new overbearing mandates from environmental nannies in Washington. But E.P.A. officials and independent analysts outside government said that Mr. Perry was claiming credit for improvements in air quality brought in large measure by the very federal laws he has resisted and railed against, and that air pollution in Texas remains worse than in nearly every other state."
Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.
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Sept. 30, 2011