Wonkbook: ‘The U.S. banking system is safe’
It's not clear that Rick Santorum's wins in Mississippi and Alabama will mean much when we look back on 2012. Mitt Romney still looks to be marching towards the nomination. His delegate count is almost twice that of Santorum's, and if you look at last night's results closely, endorsements from the state's two superdelegates mean Romney actually picked up more delegates in Mississippi than Santorum did.
So what will matter? On Tuesday, the Federal Reserve released the results of its latest round of financial "stress tests." In these simulations, the Fed looked at the condition of 19 major financial institutions if the global economy entered another recession that sent unemployment up to 13 percent and housing prices down another 20 percent. Eighteen of the 19 tested institutions passed the tests. The results mean most of the institutions will be permitted to increase dividends and stock buybacks.
The FT summarized the Fed's message succinctly: "The US banking system is safe." That's important for businesses who want to make sure that if they begin borrowing and investing again, they're not suddenly going to get cut off in things go south in Europe. It matters for the banks, as most of them are getting the go-ahead to wriggle out of the Fed's tight, post-crisis rules and take more risks. That could mean more lending. It matters for the markets, which closed at pre-crisis highs yesterday.
And it matters because it's a little bit more fuel for the recovery. After years of false starts and illusory dawns, it's wise to be very cautious about predicting sustained growth for this economy. Just ask Ben Bernanke, whose interview invoking "green shoots" aired three years ago this week. But it's nevertheless true that recoveries are partly driven by expectations about whether they will continue or not. If a business thinks consumer demand will be higher next year than it is today, they need to make investments to meet that demand. And every time we get another piece of news like this, it gives them that much more reason to make those investments.
1) SANTORUMENTUM! DENEWTIFICATION! OMITTED! "Rick Santorum has won Republican primaries in Mississippi and Alabama, a surprising Deep South sweep that signals Santorum is consolidating support among the party’s conservatives. Both of the wins were narrow: just a few points separated Santorum from rivals Mitt Romney and Newt Gingrich in both states. The larger lesson of the night was that this long-running primary--far from leading the party to unite behind a favorite--has left Republicans divided stubbornly into thirds...Santorum has only a slim chance of actually becoming the GOP nominee. But the results in Alabama will help Santorum with the only hope he has left--that Gingrich can be convinced to drop out of the race, and that conservatives will unify behind a single challenger to Romney, making the rest of the primaries a two-man race." David Fahrenthold in The Washington Post.
@davidaxelrod: @MittRomney You know what they say: as America Samoa goes, so goes the nation!
UP NEXT: Illinois. "The Republican presidential candidates spent the past week honing their Southern accents and talking awkwardly about their love of grits. With their Southern swing behind them, they will return to the industrial heartland for a potentially pivotal primary Tuesday in Illinois. Illinois is the biggest of the three contests that will be held over the next week, after Saturday’s Missouri’s caucuses and Sunday’s Puerto Rico primary. Given Rick Santorum’s strong performance in the South, Illinois becomes the latest state where pressure will be on Mitt Romney to regain momentum. It also offers the former Massachusetts governor the opportunity to extend his winning streak in Midwestern primaries. Romney struggled mightily to beat Santorum in primaries in the two other big Midwestern states, Michigan and Ohio. A Romney victory in Illinois would puncture Santorum’s hopes of winning and give the former governor a decisive hold on the GOP nomination." Dan Balz in The Washington Post.
@pourmecoffee: Very, extremely dramatic night tonight in politics as more stuff happens along the way to Mitt Romney being the nominee.
2) FED: Most banks pretty good at dealing with stress. "Most of the biggest U.S. banks passed the latest round of 'stress tests' administered by federal regulators--a milestone in the recovery from the financial crisis that clears the way for investors to receive tens of billions of dollars in increased bank dividends and share buybacks. But in a major setback to Citigroup Inc.'s efforts to restore investor confidence, the Federal Reserve rejected the bank's request to raise its dividend and expand its buyback. Citigroup, the third-largest U.S. bank by assets, passed the stress test, but the Fed indicated it would fall short of some capital requirements if it boosted the payouts...The Fed's stress tests were designed to see whether banks would have enough capital on hand to keep lending even if another deep economic slump or financial crisis were to strike. It's the third round of stress tests: The first took place in 2009, in the immediate aftermath of the financial crisis. At that time, banks fared much more poorly." Dan Fitzpatrick and Victoria McGrane in The Wall Street Journal.
@BCAppelbaum: Weakest performers in new Fed stress test: Ally, Morgan Stanley, MetLife and SunTrust.
Wall Street closed at pre-crisis highs. "Stocks rose to new heights on Tuesday, in part on stronger retail sales data, pushing the broad market to levels last seen in June 2008 and the Nasdaq composite index to close above 3,000 for the first time since 2000...The Standard & Poor’s 500-stock index has risen 11 percent so far this year, ending Tuesday up 24.86 points, or 1.81 percent, at 1,395.95. The Dow Jones industrial average is almost 8 percent higher for the year, closing on Tuesday up 217.97 points, or 1.68 percent, at 13,177.68. Both of those indexes this year have already returned to the levels where they were trading not long before the collapse of Lehman Brothers in September 2008 set off a global financial crisis." Christine Hauser in The New York Times.
@conorsen: I'm feeling pretty irrationally exuberant.
3) Millions of Americans are threatened by rising sea levels. "About 3.7 million Americans live within a few feet of high tide and risk being hit by more frequent coastal flooding in coming decades because of the sea level rise caused by global warming, according to new research. If the pace of the rise accelerates as much as expected, researchers found, coastal flooding at levels that were once exceedingly rare could become an every-few-years occurrence by the middle of this century. By far the most vulnerable state is Florida, the new analysis found, with roughly half of the nation’s at-risk population living near the coast on the porous, low-lying limestone shelf that constitutes much of that state. But Louisiana, California, New York and New Jersey are also particularly vulnerable, researchers found, and virtually the entire American coastline is at some degree of risk." Justin Gillis in The New York Times.
4) Health reform will cost less but cover fewer people than expected according to the CBO. "The revised estimate of the law's coverage provisions shows about 2 million fewer people gaining coverage by 2016, reducing the number of uninsured Americans by 30 million instead of the 32 million projected a year ago. That would leave about 27 million people uninsured in 2016, two years after the law's insurance exchanges go online. Four million Americans can expect to lose their employer-provided healthcare by 2016, according to the revised figures, far more than the 1 million people estimated last year...The revised figures are more positive when it comes to the federal deficit. The law's coverage provisions are now expected to cost $1.083 trillion over the next 10 years, $50 billion less than the $1.131 trillion projected last year." Julian Pecquet in The Hill.
1) SMITH: Why I am leaving Goldman Sachs. "Today is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it. To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money."
"[...]What are three quick ways to become a leader? a) Execute on the firm’s 'axes,' which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) 'Hunt Elephants.' In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym." Greg Smith in the New York Times .
2) PORTER: The tax code isn't as progressive as you may think. "At first glance the budget does seem heavily tilted to take from the rich and redistribute to the rest...But this is too narrow a view of taxing and spending. There is an alternate, more comprehensive way to measure how the government moves resources across the economy. It includes amounts that are not reported either as revenue or spending in the budget, but recorded as tax expenditures; that is, money that the government does not collect because of tax breaks...If we eliminated them all and replaced them with regular spending on the same set of objectives, the budget would look very different. It would become apparent that initiatives are much more costly than we think -- about $1.1 trillion more costly, according to the Tax Policy Center. Moreover, including this money creates an entirely different landscape of winners and losers of the government’s largess: of the extra $1 trillion, almost $7 goes to the top fifth of taxpayers. Only $1 out of $10 goes to the bottom 40 percent." Eduardo Porter in The New York Times.
3) CROOK: Private saving should be part of the retirement security solution. "The idea that retirees 'own' their Social Security benefits -- as illusory in fiscal terms as that notion might be -- accounts for the country’s devotion to the system, and this devotion is telling. People want and should be granted ownership of the assets they will need to support them in retirement...I’d recommend, as a start, that an additional 5 percent be deducted from wages and invested in a choice of pooled accounts holding a mixture of domestic and foreign assets. Pooling and central administration would keep fees very low. Balances would accumulate tax-free until retirement; distributions would then be taxed. I’d also advocate that taxpayers provide a subsidy to those on low incomes, sufficient to cover the whole deduction for those earning the minimum wage, so that everybody could afford to save through their retirement account. To help meet the cost of this taxpayer subsidy, narrow the existing tax preferences for saving, which flow to those on higher incomes who least need the help." Clive Crook in Bloomberg.
4) WOLF: Deleveraging has a long way to go. "'Deleveraging' is an ugly word for a nasty journey: that towards lowering excessive debt after a credit bubble. What makes the effort particularly difficult now is that it affects the US and other large economies. This is a global, not just a local, event...It is going to take quite a long time to escape the aftermath of the biggest financial crisis since the 1930s. The good news is that a depression was prevented. Further good news is that private sector deleveraging is progressing, especially in the US. As asset prices stabilise and the economies adjust, it should be possible to withdraw the exceptional monetary and fiscal support. The bad news is that this is likely to take longer than many expect. Premature withdrawal of monetary and fiscal support could push afflicted economies back into recession, with devastating effects on confidence. In the long run, moreover, big shifts in the external accounts will be necessary if a new round of irresponsible private borrowing or a continuation of huge fiscal deficits is to be avoided." Martin Wolf in The Financial Times.
5) HASSETT AND HUBBARD: Corporate tax reform must remember the lessons of modern economics. "The one thing on which our political leaders seem to agree is the need for corporate tax reform. Barack Obama and Mitt Romney unveiled new proposals on the same day last month, with President Obama cutting the top corporate tax rate to 28% and Mr. Romney reducing it to 25%. Rick Santorum would cut the rate to 17.5%, and to zero for manufacturing...This flurry of proposals is a result of increased awareness of how out of step America is with the rest of the world. The U.S. is currently an outlier within the 34-member Organization for Economic Cooperation and Development, with a combined state and local corporate tax rate that is about 15 percentage points higher than the average of our trading partners. But amid all of the promising rhetoric there is significant cause for concern. Many proposals, particularly those of Messrs. Obama and Santorum, seem to have unlearned many of the lessons of modern economics." Kevin Hassett and Glenn Hubbard in The Wall Street Journal.
6) ORSZAG: To boost productivity, first tackle polarization. "Last week, Harvard Business School hosted a conference in New York to talk about how the U.S. could continue to support 'high and rising living standards for Americans' in the face of global competition. It was a lively discussion, leading to many good, if familiar, economic-policy ideas for increasing productivity in the U.S. Unfortunately, this conversation largely ignored the key constraint to many of the policy recommendations: the rise of hyperpolarization in Congress. If business leaders want better economic policy, they need to first help elect more moderates to Congress...What specifically could business leaders do to reduce the problem? The evidence suggests that although the public has become more polarized in recent decades, it remains more centrist than the Congress itself. That difference creates an opportunity for efforts to reduce the polarization in Congress to the level we see in the population." Peter Orszag in Bloomberg.
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Still to come: Foreclosure fraud was encouraged by managers; health reform costs less than expected; hacking is generating a new interest in cybersecurity legislation; solar doubles; and a couple of pigs and a dog hang out.
An optimistic Fed declined to take new policy action. "Federal Reserve officials offered a guarded though moderately upbeat assessment of the economy Tuesday, and held off on taking any new actions designed to bolster the recovery. The Fed's post-meeting statement said unemployment had declined 'notably' in recent months and household and business spending 'continued to advance.' It projected 'moderate' economic growth with slow declines in unemployment. The central bank also acknowledged an increase in gasoline prices but said it expected the related inflation spurt to be temporary...At the conclusion of the Fed's one-day policy meeting Tuesday, what the central bank didn't do or say also was notable. There was no change to its assurance that short-term interest rates will stay near zero into late 2014 and no indication it is near launching another controversial bond-buying program." Jon Hilsenrath in The Wall Street Journal.
@ryanavent: I'm mildly encouraged by this FOMC statement, as are markets. Wld prefer more, but Fed could easily have taken a step backward.
Mortgage misconduct came from the top. "Employees at major banks who churned out fraudulent foreclosure documents, forged signatures, made up fake job titles and falsely notarized paperwork often did so at the behest of their superiors, according to a federal investigation released Tuesday. It’s well documented that the nation’s biggest banks routinely 'robo-signed' legal papers to keep up with the wave of foreclosures brought on by the housing bust. But the new report from the inspector general of the Department of Housing and Urban Development reveals that those shoddy practices often came at the direction of managers at the banks, and that employees in some cases were judged by how fast they could get new foreclosure filings out the door...HUD investigators launched their inquiries soon after news of the banks’ practices caused a national uproar in late 2010, and government officials used their findings as they negotiated a recent landmark $25 billion settlement with the banks." Brady Dennis in The Washington Post.
Unemployment rates are declining in swing states. "Joblessness remains high but has fallen in a handful of states expected to be closely contested in November, a turnaround from a year ago that has shifted the political debate in the presidential election. U.S. unemployment declined to 8.3% in January from 9.1% a year earlier, and the drop was more pronounced in a group of states that could tilt the election, Labor Department data released Tuesday show. The biggest job gains have come in the industrial Midwest--places such as Ohio and Michigan--where manufacturers have stepped up hiring in response to a surge in auto sales and other exports. The unemployment rate in Michigan fell more sharply than in any other state, to 9% in January, down nearly two percentage points from a year ago. The jobless rates in Colorado and Ohio fell by at least a percentage point each to 7.8% and 7.7%, respectively. In all, six of 10 states expected to be closely contested have a jobless rate below the national average." Josh Mitchell in The Wall Street Journal.
The next World Bank head is going to be another American. "Once again, the next head of the World Bank will be an American. The White House has not yet announced its nominee to lead the 67-year-old development institution, whose president, Robert B. Zoellick, will step down when his term is over at the end of June. But administration officials said this week that they would pick an American by the March 23 deadline for nominees. That stance has discouraged increasingly powerful emerging-market countries, like Brazil and China, from proposing a strong alternative, observers said. Since Europe will almost certainly support whomever Washington picks -- as the United States backed the candidacy of the former French finance minister Christine Lagarde to head the International Monetary Fund last year -- the result is that the American is a lock, they said." Annie Lowrey in The New York Times.
Compilation interlude: Grandparents discovering Photo Booth.
Debate over the Affordable Care Act is heating up again. "Democrats and Republicans are reviving their competing campaigns over the health-overhaul law in advance of the Supreme Court's review of the measure this month. After largely avoiding the issue in the 2010 midterm elections, a handful of Democrats are extolling the law on the campaign trail and their websites. Later this week, top Obama administration officials will start traveling to events across the country to celebrate the law in conjunction with its two-year anniversary on March 23. Republicans will use the anniversary to cash in on polls that generally suggest more Americans dislike the law than support it, though some polls have shown wider margins than others and public opinion has varied over time. The law's requirement to buy insurance or pay a fee--the crux of the case before the Supreme Court--is one of its most unpopular elements." Louise Radnofsky in The Wall Street Journal.
The CBO's IPAB repeal score is raising eyebrows. "The Congressional Budget Office’s estimate that repealing IPAB would cost $3.1 billion has people on the Hill scratching their heads even more than they usually do on a CBO health spending score. On one hand, CBO is looking at Medicare spending trends and seeing signs that growth is truly slowing. Not a recession-linked short-term blip, but a trend. And that means the Independent Payment Advisory Board -- which was designed as a backstop to curb spending if needed -- probably won’t have to recommend payment changes until at least 2022. Yet at the same time CBO is saying IPAB won’t really have anything to do for a decade, it’s also saying that repealing IPAB would cost $3.1 billion. Deciphered, it means CBO is saying Medicare spending would be $3.1 billion above the level it would need to be to avert triggering IPAB recommendations to bring it down." Matt Dobias in Politico.
A spike in hacking has sparked new interest in cybersecurity legislation. "During the five-month period between October and February, there were 86 reported attacks on computer systems in the United States that control critical infrastructure, factories and databases, according to the Department of Homeland Security, compared with 11 over the same period a year ago. None of the attacks caused significant damage, but they were part of a spike in hacking attacks on networks and computers of all kinds over the same period. The department recorded more than 50,000 incidents since October, about 10,000 more than in the same period a year earlier, with an incident defined as any intrusion or attempted intrusion on a computer network. The increase has prompted a new interest in cybersecurity on Capitol Hill, where lawmakers are being prodded by the Obama administration to advance legislation that could require new standards at facilities where a breach could cause significant casualties or economic damage." Michael Schmidt in The New York Times.
The Senate rejected an extension of the federal pay freeze. "The Senate rejected a measure Tuesday that would have extended a pay freeze for federal employees for another year. By a vote of 51 to 47, the chamber turned down an amendment to a highway funding bill introduced by Sen. Pat Roberts (R-Kan.) that would have extended the freeze through January 2014 to fund energy projects, an adoption tax credit, and tax deductions for college expenses and for state and local property taxes. The vote came during debate on the federal highway funding measure. The White House has said it will oppose any effort to extend the pay freeze for another year to pay for federal programs or to pay down the federal deficit...The House voted in February to approve a one-year extension of the freeze as part of a separate bill. The White House, however, has recommended a 0.5 percent pay increase for civilian federal employees that would start next January." Ed O'Keefe and Eric Yoder in The Washington Post.
Adorable animals being adorable together interlude: Two pigs and a dog have a cute off.
Lower prices are causing a drop in natural gas drilling. "The price of natural gas has plunged to a 10-year low, prompting a flight of energy companies from gas fields across the country...In recent years, energy companies have extracted record amounts of natural gas by combining new technologies to unlock gas trapped in shale. The surge in supply has far outpaced demand for gas, which has dropped during an unseasonably warm winter. The resulting low gas prices are good for consumers and other users of gas here and across the country, and help cut the U.S.'s reliance on foreign energy supplies. Nationally, the number of rigs drilling for gas has fallen by more than 200 from a year ago to 670, while those targeting oil has risen by nearly 500, according to Baker Hughes. Major gas producers such as Chesapeake Energy Corp. are dialing back their natural-gas output." Daniel Gilbert in The Wall Street Journal.
Solar installations doubled last year. "The number of megawatts of solar power installed in the U.S. in 2011 more than doubled from the previous year, driven by growth in solar plants built for utilities, according to an industry study being released Wednesday. However, U.S. production of solar panels slipped amid a world-wide glut of capacity and falling prices, said the study by the Solar Energy Industries Association, a trade group, and GTM Research. The low prices as well as federal and state subsidies drove investment in solar power by large energy companies, including NRG Energy Inc., NextEra Energy Inc., Exelon Corp. and the MidAmerican Energy Holdings Co. unit of Warren Buffett's Berkshire Hathaway Inc. Solar-power plants built for utilities in the U.S. almost quadrupled in 2011 to nearly 760 megawatts, according to the report. Overall, new solar installations reached 1,855 megawatts in 2011, up from 887 megawatts in 2010, the report said." Cassandra Sweet in The Wall Street Journal.
Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.