Wonkbook: The market's 'Wile E. Coyote moment' — and what to do about it
There's been a tremendous amount of confident speculation about why the markets plunged yesterday. Much of it focused on Standard & Poor's downgrade of America's credit rating (more on that here, if you still feel like reading about it). I don't buy it. Or, at the least, I wouldn’t be too confident about it.
Remember that the market has been falling almost continuously for two weeks. To take the Dow as our example, the sharpest and most psychologically devastating drops were on Monday and Thursday, but the more steady deterioration between July 22 and Aug. 4, when the Dow fell from 12,700 to 11,400, actually destroyed more wealth. Monday's drop was the continuation, and perhaps acceleration, of a trend. It shouldn't be viewed as an isolated incident.
Why is this happening now? I tend to agree with Paul Krugman, who says that the market is having "a Wile E. Coyote moment, with investors suddenly noticing just how weak the fundamentals are. Also, the mess in Europe." But more even than that, I agree with Brad DeLong, who warns, "you can go insane trying to overinterpret short-term market movements."
But if you need special powers — or at least a special arrogance — to confidently interpret the market's movements, no such extraordinary abilities are required for mounting a response. Ultimately, markets want economic growth. In this country, that's held back in the short term by the jobs/demand/household debt crisis, and in the long term it’s threatened by the hangover from the jobs/demand/household debt crisis and pressure from the mounting public debt. Our political system has been tepid and uncertain in its response to both problems. But it doesn't need to be. Something like the program Peter Orszag outlines in this Bloomberg View column would go a long way toward showing the U.S. government can act swiftly, boldly and effectively to solve our economic problems. And I don't think there's any doubt that the markets would be comforted by that.
Five in the morning
1) Yesterday was the worst day in the markets since the financial crisis, report Zachary Goldfarb and Brady Dennis: "World markets plunged Monday in the worst trading day since the financial crisis, eradicating hundreds of billions of dollars of wealth in a setback to the struggling U.S. economic recovery. Despite efforts by world leaders to reassure markets, investors remained alarmed over the mounting economic woes in the United States and a spreading debt crisis in Europe. The Dow Jones Industrial Average fell 635 points, or 5.55 percent, to 10,810. But in the first trading day since the United States was downgraded Friday by Standard & Poor’s, which said U.S. Treasury bonds have become a riskier bet because of the government’s failure to tackle its debt burden, investors actually poured money into U.S. bonds."
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2) The administration needs to be much bolder on both jobs and deficits, writes Peter Orszag: "The most straightforward way to raise the needed revenue is to allow all of the 2001/2003 tax cuts, not only those for high-earners, to expire at the end of next year. ...To avoid overly hasty fiscal contraction and to promote job growth, we should triple the current payroll-tax holiday of 2 percentage points. A 6 percent payroll-tax holiday would amount to about 2 percent of gross domestic product (and $3,000 for a family earning $50,000 a year), which could aid a stalling economy. Rather than simply expand and extend the payroll-tax holiday, though, we should tie it to the unemployment rate. This would cause the break to automatically disappear as the labor market recovers and to reappear if the economy weakens again. By both canceling the tax cuts and revising the payroll-tax holiday, we would ... substantially improve the 10-year deficit outlook."
3) Obama will present his own ideas to the “supercommittee,” reports Carol Lee: "President Barack Obama, speaking Monday as stocks were plunging after the first-ever downgrade of the U.S. government's credit rating, tried to rally confidence that Washington will be able to address growing concerns about the federal debt. Mr. Obama said he would place ideas for tax revisions and Medicare 'adjustments' before a new congressional committee charged with cutting the deficit. His remarks lacked the sharp criticism that other administration officials had offered over the weekend of the Standard & Poor's decision to strip the U.S. of its triple-A credit rating. Rather, he used S&P's criticism of the U.S. political process to argue for 'common sense and compromise' on deficit reduction. Mr. Obama has long called for pairing tax increases with spending cuts to reduce the deficit. Some traders said his comments contributed to the steep market decline."
4) The White House prefers further Medicare cuts to further defense cuts, reports Brian Beutler: "Last week, Congressional Democrats were blindsided by newly-confirmed Defense Secretary Leon Panetta, who basically nixed any further cuts to military spending, and demanded that lawmakers trim from programs like Medicare and raise taxes to reduce future deficits. ... Rep. Barney Frank (D-Mass.) called on President Obama to repudiate Panetta. Obama did precisely the opposite in his White House speech Monday. 'Our challenge is the need to tackle our deficits over the long term last week we ... reached an agreement that will make historic cuts to defense and domestic spending,' Obama said. 'But there's not much further that we can cut in either of those categories. What we need to do now is combine those spending cuts with two additional steps: tax reform ... and modest adjustments to health care programs like Medicare.'"
5) Supercommittee members will be picked by Aug. 16; here are the frontrunners, reports Paul Kane: "House Republicans ... Reps. Paul Ryan (Wis.), David Camp (Mich.), Jeb Hensarling (Tex.) and Peter Roskam (Ill.). This handful of lawmakers come from three critical panels that are in the legislative sweet spot of which issues the supercommittee will have to deal with: Budget, which Ryan chairs; Ways and Means, the tax and entitlement panel which Camp chairs; and Financial Services ... Senate Democrats ... Sens. Patty Murray (Wash.), Jack Reed (R.I.), Max Baucus (Mont.) and Kent Conrad (N.D.) ... Senate Republicans ... Sens. Jon Kyl (Ariz.), Rob Portman (Ohio) and Jeff Sessions (Ala.) ... House Democrats ... Reps. Chris Van Hollen (Md.), Allyson Schwartz (Pa.), Xavier Becerra (Calif.) and Norm Dicks (Wash.)."
Sampler meets sampled interlude: Rye Rye and Robyn play "Never Will Be Mine" on “The Tonight Show.”
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Still to come: The dollar is falling; congressional Democrats are challenging the White House on Medicaid; Verizon's strike is turning into a big-deal labor fight; environmentalists want swifter action on ozone rules; and a robot that can learn new skills.
The dollar is falling, reports Neil Irwin: "Global investors are becoming antsy about the dollar’s role as the currency at the core of the world financial system, and concerned about the U.S. government’s dysfunction, and a weakening economic outlook. But they haven’t found anything better to replace it — and, if anything, view Europe’s financial problems as potentially deeper. So the pattern on global currency markets is a strange one. The U.S. dollar is not, as a whole, rising in value the way it normally does when financial panic rages. Instead, it is losing value against a handful of currencies viewed as even safer havens, particularly the Japanese yen and Swiss franc, while remaining roughly flat in recent weeks against the euro and British pound."
Mortgage rates are now ultra-low, reports Ylan Mui: "The stock market sell-off over the past week has created a surprising — albeit likely short-term — silver lining for consumers: ultra-low interest rates. The weekly average rate for a 30-year fixed mortgage has dropped to 4.39 percent, according to mortgage giant Freddie Mac, the lowest level this year. Mortgage brokers say that is fueling a boom in refinancing and piquing the interest of new home buyers who had been waiting on the sidelines. ... Cohen said he has been pulling 14-hour days and received more than 300 e-mails before noon Monday requesting information about locking in the new rates. He estimates he has secured $14 million in loans over the past week. ... Mortgage rates had been trending downward since hitting a high in February of more than 5 percent for a 30-year fixed loan."
Austerity may not work in Europe, reports Landon Thomas: "ONCE again Europe’s leadership has been forced to put up billions in cash to halt the spread of contagion to the Continent’s weaker economies, this time in the form of a potentially vast purchase of Italian and Spanish government bonds by the European Central Bank. And once again the condition for rescue is more austerity. But this time there is a difference. Unlike Greece, Portugal and Ireland — the patients previously forced into the austerity cure — Italy and Spain have already made their own substantial strides toward cutting their deficits. Some economists warn that forcing further cuts could push their teetering economies over the edge. And unlike Greece or Portugal, they are so big that any default might shatter the euro union for good."
Our fight is really about who bears the costs of deleveraging, write Menzie Chinn and Jeffry Frieden: "Countries borrow for many purposes: Canals and railroads in the 19th century, factories and highways in the 20th, and in the last decade, a housing and financial boom in Europe and America. When the projects don’t pan out and the debtor country falls into crisis, what happens to the accumulated debts? Who pays? Creditors or debtors? Workers or investors? ... Perhaps, some Americans believe, we can shunt the adjustment costs onto foreigners. Indeed, our creditors worry that the United States will reduce its debt burden the old-fashioned way, by inflating it away. A few years of moderate inflation, and a weaker dollar, would significantly lessen the real cost of servicing the country’s debts — at our creditors’ expense. But adjusting to the reality of America’s accumulated debts will inevitably require sacrifices at home."
Obama's jobs agenda needs to get more ambitious, writes Joe Nocera: "What is particularly frustrating is that the president seems to have so little to say on the subject of job creation, which should be his most pressing concern. On Monday, Obama mentioned a payroll tax holiday and the extension of unemployment benefits. Both moves would help people in need; neither will do much to create new jobs. I know that there are limits to what any government can do to create jobs. But what one yearns for is a little imagination from this White House. Someone suggested to me recently that the government could create a $50 billion fund for small business, and use it to pay, say, 20 percent of the wages of new hires for two years — first come, first served. Why doesn’t Obama suggest something like that?"
Conservatives need to embrace a more activist monetary policy, writes Ramesh Ponnuru: "In warning about inflation, conservatives are crying “fire” in, if not Noah’s flood, at least a torrential rain. It may be that they are stuck not so much in the 1930s as in the 1970s — the time when conservatism forged much of its current outlook on economics, and a time when monetary restraint was badly needed. Conservatives also tend to think that loosening monetary policy is a kind of intervention in free markets, and therefore to be suspicious of it. But this is an error. Professor Hendrickson points out that in a system of free banking, with competitive note issue rather than a central bank, the desire for profit and the need for solvency would lead to the supply of banknotes roughly equaling the demand. In a fiat-money regime such as the one under which we, for better or worse, live, a central bank’s withholding of a sufficient supply of money is just as much of an intervention in the economy as its overproduction of it. “Rise of Skynet” interlude: A robot that can teach itself to perform new tasks.
Congressional Democrats are challenging Obama on Medicaid before the Supreme Court, reports Robert Pear: "In an unusual break with the White House, the Democratic leaders of Congress told the Supreme Court on Monday that President Obama was pursuing a misguided interpretation of federal Medicaid law that made it more difficult for low-income people to obtain health care. The Democratic leaders said Medicaid beneficiaries must be allowed to file suit to enforce their right to care — and to challenge Medicaid cuts being made by states around the country. ... The brief was filed by seven influential Democrats, including Representative Henry A. Waxman of California, an architect of Medicaid; Representative Nancy Pelosi of California, the House minority leader; Senator Harry Reid of Nevada, the Senate majority leader; and Senator Max Baucus of Montana, the chairman of the Finance Committee."
Every health cut option the supercommittee has is problematic, reports David Nather: "OPTION: Crack down on Medicare fraud and abuse. What it does: As proposed by Obama’s fiscal commission, the idea is to give CMS more authority and more funding to track down fraud in Medicare payments. What it saves: $9 billion over 10 years, according to the fiscal commission. What the Democratic members will say: 'That’s great. Can we go now?' What the Republican members will say: 'Sit down.' ... OPTION: Cut hospital payments for bad debts What it does: Gradually gets rid of the Medicare payments that reimburse hospitals for unpaid co-payments and deductibles that they haven’t been able to collect from patients. What it saves: $14 billion to $26 billion over 10 years, according to the Biden group What the Republican members will say: 'Not bad — and the hospitals supported “Obamacare” anyway.' What the Democratic members will say: ... 'We’re not ready to have a bunch of angry, betrayed hospital lobbyists in our offices.' ”
An affordable care organization-style experiment showed good results, reports Sam Baker: "The Medicare agency heralded a test program Monday that it says will serve as a model for healthcare reform's accountable care organizations (ACOs). The agency said it has seen strong results from a five-year demonstration project with goals that are similar to ACOs' — lowering costs by improving quality and shifting away from paying doctors to perform more procedures. The demonstration program involved 10 large, integrated healthcare systems. Seven of the 10 met all 32 of the program's quality benchmarks, the Medicare agency said in a release. And all 10 agreed to participate in a two-year supplement to the initial demonstration project."
Verizon's strike is shaping into a major labor fight, report Greg Bensinger and Spencer Ante: "The strike at Verizon Communications Inc. descended into a tense standoff Monday, as workers and management dug in for what is shaping up to be a bitter battle over the future of the telecommunications giant's work force. Verizon said it has found evidence of vandalized equipment and said picketing laborers prevented replacement workers from entering or exiting some job sites. The Communications Workers of America, meanwhile, said Verizon's nonunion employees tried to run into strikers with their vehicles. 'This is a strike, there's going to be some conflict,' said Bob Master, a legislative and political director for the Communications Workers of America, which represents 35,000 striking Verizon workers. He said the union had instructed members to act legally and professionally on the picket lines."
Darrell Issa is subpoenaing the National Labor Relations Board, reports Felicia Sonmez: "House Oversight and Government Reform Committee Chairman Darrell Issa (R-Calif.) has subpoenaed the National Labor Relations Board for documents related to the agency’s case against Boeing, a move that further intensifies an already heated battle over whether the aerospace giant unlawfully retaliated against union members for past strikes by transferring a production facility from Washington to the right-to-work state of South Carolina. The move comes more than two months after Issa sent a letter to the NLRB’s acting general counsel, Lafe Solomon, requesting documents related to the agency’s lawsuit against Boeing. Congressional Republicans have rallied against the NLRB since the agency issued its complaint against Boeing in April, arguing that the lawsuit represents an overreach of the NLRB’s authority."
The Justice Department is suing a for-profit college company, reports Tamar Lewin: "The Department of Justice and four states on Monday filed a multibillion-dollar fraud suit against the Education Management Corporation, the nation’s second-largest for-profit college company, charging that it was not eligible for the $11 billion in state and federal financial aid it had received from July 2003 through June 2011. While the civil lawsuit is one of many raising similar charges against the expanding for-profit college industry, the case is the first in which the government intervened to back whistle-blowers’ claims that a company consistently violated federal law by paying recruiters based on how many students it enrolled. The suit said that each year, Education Management falsely certified that it was complying with the law, making it eligible to receive student financial aid."
'50s TV interlude: The last living witness to the Lincoln assassination appears on “I've Got A Secret” in 1956.
Environmentalists want the EPA to move faster on ozone regulations, reports Ryan Tracy: "Environmental and public-health groups, frustrated by the Environmental Protection Agency's delay of standards governing ozone pollution, joined together Monday to ask a federal court to set a deadline for the agency to act. The standards were delayed in late July for the fourth time in a year. That decision was 'utterly inexcusable,' the groups said in a filing with the U.S. Court of Appeals here. ... The new standards on ozone, a primary constituent in smog, are expected to be expensive for smokestack industries, though the agency says health benefits will outweigh their cost. EPA has said it will finalize them 'shortly,' but remained coy about a precise time frame. That has led environmental groups to worry that a lobbying blitz from industry groups is making headway."
House Democrats want to crack down on "fracking," reports Ben Geman: "Top House Energy and Commerce Committee Democrats want to limit the 'Halliburton loophole' that exempts the natural-gas drilling method known as hydraulic fracturing from Safe Drinking Water Act rules. Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.) wrote to Environmental Protection Agency Administrator Lisa Jackson Monday as the agency weighs how to handle permitting for 'fracking' operations that inject diesel fuels underground. A 2005 energy law exempts fracking from the drinking water law’s underground injection rules unless diesel fuels are used — a provision critics refer to as the Halliburton loophole after the oil services company once headed by former Vice President Cheney. ... The lawmakers are pressing the agency to ensure the definition of 'diesel fuel' is written broadly."
Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.