Wonkbook: The week of central bank inaction continues

Karl Singer is writing Wonkbook this week while Ezra is on vacation.

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Top story: The week of central bank inaction continues

The European Central Bank took no immediate action. "Financial markets recoiled on Thursday after Mario Draghi demanded eurozone governments turn to existing rescue funds before any intervention by the European Central Bank in bond markets to shore up Europe’s monetary union. But a determined Mr Draghi also said the ECB would devise a plan to buy bonds to combat 'exceptionally high' risk premiums for some eurozone countries, while easing private investors’ fears about the ECB putting itself at the back of the queue for absorbing any losses on investments...Mr Draghi said the ECB 'may consider' again buying short-term government debt, but would expect 'strict and effective conditionality' to be imposed by the EFSF...The ECB president also ruled out giving the rescue funds a banking licence, which would vastly increase their firepower but which is firmly opposed by Germany and other core eurozone members." Claire Jones, Miles Johnson, and Mary Watkins in The Financial Times.

READ: Mario Draghi's statement to the press.

@mattyglesias: ECB will do whatever it takes to save the euro. Also: No change in policy. Epic fail.

@tylercowen: Draghi, Lucy, Charlie Brown, football, etc.

The markets were not exactly thrilled. "Investor reaction to Mr. Draghi's comments was swift. The euro tumbled against the dollar, and stocks fell from Madrid to New York. Italian and Spanish borrowing rates, which dipped after Mr. Draghi's comments last week, surged. Interest rates on German bonds, which are regarded as a relative safe haven, retreated to near record lows...Spanish 10-year yields rose nearly a half a percentage point to above 7.2%. Italian 10-year yields also rose sharply, to 6.34%, according to Tradeweb. In late-afternoon London trading, the euro was at $1.2141, off about a penny against the dollar. The common currency was wildly volatile: It rose to nearly $1.24 midday, after the ECB announced it would hold interest rates steady. Then it plummeted during Mr. Draghi's press conference. The Spanish stock market ended down 5.16%. The Italian bourse dropped 4.64%. The Dow Jones Industrial Average fell 92.18 to 12878.88." Brian Blackstone and Charles Forelle in The Wall Street Journal.

The head of Germany's Bundesbank voted against ECB plans to re-enter the bond markets. "When Mario Draghi took the helm of the European Central Bank nine months ago, he took care not to alienate Bundesbank President Jens Weidmann. Now the gloves are coming off. Draghi yesterday announced the ECB is working on a plan to re-enter bond markets and took the unusual step of naming Weidmann as the only policy maker to object to the proposal. While the move would ratchet up the ECB’s response to Europe’s debt crisis, it risks isolating the German central bank, potentially undermining the effectiveness of the new measures." Jana Randow and Gabi Thesing in Bloomberg.

@dsquareddigest: In the long term, we will look back on the most significant thing at this press conf as the news that Weidmann objected but was outvoted

The Bank of England also voted to leave policy unchanged. "The Bank of England’s rate-setting body voted on Thursday to make no changes to its key interest rate or to its existing programme of gilts purchases, known as quantitative easing. The BoE’s Monetary Policy Committee had been widely expected to leave policy unchanged in August, despite indications that Britain’s economy is in even worse shape than many had believed, because of pre-emptively announced measures in July. The BoE has said it will purchase a further £50bn of gilts over the next four months, taking the programme up to November, when it will have a chance to review its inflation and growth forecasts ahead of its quarterly inflation report. But since that programme was announced, official preliminary estimates of second-quarter gross domestic product have been released showing that output contracted 0.7 per cent in the three months to June, far more than expected." Norma Cohen in The Financial Times.

Expectations are high for action soon from the ECB and Fed. "Ben Bernanke and Mario Draghi, with words but not yet actions, demonstrated this week that they are on red alert about the global economy. Expectations are now high that Mr. Bernanke's Federal Reserve and Mr. Draghi's European Central Bank will act soon to address those worries. But both face immense tactical and political challenges and neither has a handbook to follow...Both appear to be on a path toward expanding their balance sheets with large-scale purchases of debt from private investors. They are also exploring innovative monetary tools now that they have driven short-term interest rates, once their primary lever, nearly as low as they can go." Jon Hilsenrath in The Wall Street Journal.

@goldfarb: Why do people keep on expecting central bankers to be saviors? No evidence since '08 they are so inclined.

DUY: The ECB failed. "An epic policy failure by the ECB. Not only is the ECB willing to let the Eurocrisis simmer for another month, but their communication strategy is abysmal. Draghi very desperately needs to be more aware of the impact of his comments. As for the ECB statement, I think it says that the ECB is a second line of defense, and they will act reluctantly only after the EFSF/ESM fund is activated. This seems to imply a formal bailout request as a precondition to ECB action. We really need to see more clarification in the weeks ahead about what the ECB sees as the ordering of policy actions in the Eurozone. The order implied in this statement seems to me like a commitment to continued economic stagnation." Tim Duy in Fed Watch.

COTTERILL: Maybe the ECB's statement wasn't a disaster. "We are burying the lede here -- the central bank has also sent an enormously important signal on the seniority of its debt holdings above private holders. That it would even officially talk about its seniority in the first place is a big change. ECB seniority has been veiled in the prerogatives of monetary policy, and the famous prohibition of monetary financing in Article 123 of the EU Treaty. Article 123 issues remain live: it’s why Mr Draghi once again batted away the sideshow of a banking license for the ESM, in this press conference. 'Addressing' seniority might have to mean some kind of legal machinery OK with Article 123. Not easy. But the ECB’s creditor status is one reason why its bond-buying made things worse and helped finance investors’ escape from Spanish and Italian bond markets. Removing or curing it could have a big impact on the real money’s asset allocations to the eurozone." Joseph Cotterill in The Financial Times.

@mattyglesias: The central bankers' motto -- if at first you don't succeed, keep doing the same thing.

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Top op-eds

1) KLEIN: Mitt Romney's tax plan is mathematically impossible. "I can describe Mitt Romney’s tax policy promises in two words: mathematically impossible. Those aren’t my words. They’re the words of the nonpartisan Tax Policy Center, which has conducted the most comprehensive analysis to date of Romney’s tax plan and which bent over backward to make his promises add up. They’re perhaps the two most important words that have been written during this U.S. presidential election...The analysts assumed that any cuts to deductions or loopholes would begin with top earners, and that no one earning less than $200,000 would have their deductions reduced until all those earning more than $200,000 had lost all of their deductions and tax preferences first...They even ran a simulation in which they used a model developed, in part, by Greg Mankiw, one of Romney’s economic advisers, that posits 'implausibly large growth effects' from tax cuts. The numbers never worked out." Ezra Klein in Bloomberg.

2) KRUGMAN: DeMarco is an illustration of what has crippled economic policy. "The overriding story of the past few years is not Mr. Obama’s mistakes but the scorched-earth opposition of Republicans, who have done everything they can to get in his way -- and who now, having blocked the president’s policies, hope to win the White House by claiming that his policies have failed. And this week’s shocking refusal to implement debt relief by the acting director of the Federal Housing Finance Agency -- a Bush-era holdover the president hasn’t been able to replace -- illustrates perfectly what’s going on...DeMarco seems to misunderstand his job. He’s supposed to run his agency and secure its finances -- not make national economic policy. If the Treasury secretary, acting for the president, seeks to subsidize debt relief in a way that actually strengthens the finance agency, the agency’s chief has no business blocking that policy. Doing so should be a firing offense." Paul Krugman in The New York Times.

3) CONRAD: High marginal tax rates don't cause growth. "With the prospects for a postrecession economic rebound fading, it has grown increasingly obvious that the United States must eventually raise taxes or cut spending. President Obama claims we can raise taxes on those earning over $250,000, to avoid spending cuts with little, if any, effect on growth because growth was faster in the 1990s and in the 1950s and '60s when marginal income-tax rates were higher. The evidence doesn't support Mr. Obama's conclusion. President Clinton raised taxes in the 1990s and the economy grew. So does that mean it would grow today if we did the same thing? Commercialization of the Internet lifted the Nasdaq from 800 in 1995 to 4,500 in 2000, the largest five-year gain of any major index in American history. Put bluntly, increased payoffs for successful investment and rising equity values simply dwarfed offsetting increases in marginal tax rates. The taxes themselves didn't increase growth." Edward Conrad in The Wall Street Journal.

4) POZEN: The transportation bill was funded in part by a gimmick. "The transportation bill that Congress passed this summer is financed, in part, with a budget gimmick: Lawmakers changed the funding rules for corporate pension plans. These changes help the federal budget in the short term by reducing the tax deductions that corporations take for contributing to these plans -- thereby reportedly increasing their taxable income. These changes, however, encourage companies to contribute less to pensions, which raises the long-term risk that a governmental insurer will need to step in to pay benefits. Under the new funding rules, the required pension contributions for public U.S. companies could drop in one year from $58 billion to approximately $33 billion, says accounting expert Chris Senyek." Robert Pozen in The Washington Post.

5) DOCTOROFF: A new Libor should be grounded in data and transparency. "But one key problem with the current approach is the decline in actual interbank short-term lending and borrowing. With limited activity, banks--especially European institutions--have fewer anecdotal transactions upon which to base their Libor submissions to the British Bankers' Association. One potential solution to this problem is to combine two types of inputs to compensate for the diminished volume in loans available for bank reference. The first input would follow the current Libor approach. The interbank borrowing rate--the numbers they submit--will be transparent. That is, if bank X says it borrowed at rate Y, that submission to Bloomberg would be public." Daniel Doctoroff in The Wall Street Journal.

Singer-songwriter interlude: Neko Case plays "'People Got a Lotta Nerve" on Q TV.

Got tips, additions, or comments? E-mail me.

Still to come:Jobs day; another attempt at a healthcare repeal vote bites the dust; a filibuster kills cybersecurity legislation; drought aid clears the House; and a 24/7 corgi cam exists.

Economy

Expectations are low for today's jobs report. "With the government’s monthly unemployment report due Friday, many economists believe that the unemployment rate of 8.2 percent is unlikely to change much. After three straight months of disappointing job growth, many analysts are expecting payrolls in the United States to have jumped by roughly 100,000 in July. If so, that’s a faster rate of growth than was recorded in April, May or June. Since the labor force is growing about the same rate as payrolls, however, little change in the rate of unemployment is expected." Peter Whoriskey in The Washington Post.

Jobless claims rose last week. "The number of U.S. workers filing applications for jobless benefits rose last week, continuing an uneven pattern that suggests job creation was likely modest in July...Initial jobless claims, an indication of layoffs, increased by 8,000 to a seasonally adjusted 365,000 in the week ended July 28, the Labor Department said Thursday. Economists surveyed by Dow Jones Newswires had forecast 370,000 new applications for jobless benefits last week. Claims for the July 21 week were revised up to 357,000 from an initially reported 353,000. Still the four-week moving average of claims, which covers nearly all of July, fell by 2,750 to 365,500, the lowest level since March. The moving average is considered a more-reliable measure because it smoothes out weekly data." Eric Morath and Sarah Portlock in The Wall Street Journal.

@grossdm: 1st time unemployment claims sort of meh. Wouldn't be surprised to see jobs number tomorrow in same vein

The opening round of tax reform left many tax loopholes in place. "It was supposed to be a first step toward tax reform. But as lawmakers tackled a list of 75 special-interest tax breaks, the special interests repeatedly won. An accelerated write-off for owners of NASCAR tracks: That has to stay. An economic development credit for a StarKist tuna cannery in American Samoa: That stays, too. A rum-tax rebate for Puerto Rico and the U.S. Virgin Islands worth millions of dollars a year to one of the world’s largest distillers: Check...When the dust settled Thursday, members of the Senate Finance Committee congratulated themselves for agreeing to jettison 20 of the perks, including a $5,000 credit for first-time home buyers in the District and a cash-incentive program for wind-energy projects that has been derided as benefiting foreign companies. But their failure to weed out dozens more pet provisions clouded prospects for a far-reaching simplification of the nation’s tax laws." Lori Montgomery in The Washington Post.

Retail sales beat expectations. "In July, higher-than-expected sales at low- and midpriced stores helped push sales past analysts’ estimates. Sales at stores open at least a year rose 4.3 percent in July at the 20 stores tracked by Thomson Reuters, well above expectations of a 1.5 percent gain. That is a good sign as retailers head into the important back-to-school months of August and September, said Chris Donnelly, global industry managing director for retail at the consulting firm Accenture." Stephanie Clifford in The New York Times.

Europe's crisis is hitting U.S. businesses. "In the latest series of earnings announcements from U.S. corporations, top American brands such as Whirlpool, Ford, General Motors, Starbucks and Apple have reported disappointing revenue because of Europe’s troubles. These results, over the past two weeks, have heightened concerns on Wall Street about the health of U.S. business. The ripple effects of the European financial crisis, like its roots, are complex, but the impact on European consumers may be one of the easiest things to understand. As unemployment rates have soared -- to a high of 11.2 percent in the euro zone as of Tuesday -- consumer spending has plummeted." Ariana Eunjung Cha in The Washington Post.

Corgis are excellent interlude: YouTube now has a 24/7 corgi livestream.

Health Care

Medicaid providers with tax debts still got paid. "Thousands of Medicaid health-care service providers were still paid by the government even though they owed hundreds of millions of dollars in federal taxes, congressional investigators say. A legal technicality is making it harder for the IRS to collect. In a report released Thursday, the Government Accountability Office said Medicaid payments to doctors, hospitals and other providers aren’t technically considered federal funds because they’re funneled through state health-care programs. Because of that glitch, the IRS can’t just shut off the payment spigot to collect tax debts. Investigators only looked at three states, so the full extent of the losses is even greater." Ricardo Alonso-Zaldivar in The Washington Post.

Reid blocked another GOP attempt to vote on healthcare repeal. "Senate Majority Leader Harry Reid (D-Nev.) once again blocked a Republican attempt to hold a vote on repealing the healthcare law Thursday evening. McConnell proposed that shortly after the Senate returns in September that a vote be held to repeal the Affordable Care Act. Reid objected...Reid pointed out that the Senate rejected a Republican amendment on that very thing when the transportation bill passed in March...Earlier this week McConnell requested another amendment vote on a repeal of the healthcare law as part of the Cybersecurity Act." Ramsey Cox in The Hill.

Domestic Policy

A GOP filibuster blocked the cybersecurity bill. "A bill that would establish security standards to prevent large-scale cyberattacks on the nation’s critical infrastructure -- including water supplies and the electrical grid -- failed in the Senate on Thursday despite strong endorsements from top military and national security officials. Senators voted 52 to 46 in favor of the bill, coming up short of the two-thirds majority necessary to advance it to a final vote. The GOP filibuster further stalls years of bipartisan efforts to establish stricter security standards and, some experts say, could leave the nation vulnerable to widespread hacking or a serious cyberattack." Ed O'Keefe and Ellen Nakashima in The Washington Post.

Congress leaves a pile of unfinished bills behind as it leaves for recess. "An effort to provide emergency aid for American ranchers and farmers reeling from a year of drought, frost and other calamities collapsed on Thursday as members of Congress departed for their five-week August recess, leaving behind a pile of unfinished legislation as they go home to campaign for re-election...Despite the multiple impasses, Congress has made progress in some areas. Both chambers quickly agreed this week to tighten sanctions against Iran. House and Senate leaders reached a tentative agreement that would keep the government operating after the end of the fiscal year on Sept. 30, without the partisan drama that has almost caused a government shutdown in the past. But that measure must still pass the House and Senate next month." Jennifer Steinhauer in The New York Times.

@BCAppelbaum: In solidarity with the millions of unemployed Americans, Congress does not plan to meet during the rest of the month of August.

Restless sleep interlude: A seven day old hedgehog takes a nap.

Energy

The House narrowly passed a disaster aid package. "With its five-year farm bill relegated to the back pasture, the House headed home for August after narrowly approving a stopgap $383 million disaster aid package to help tide over cattle and sheep operations impacted by this summer’s severe drought. The hastily assembled livestock bill -- adopted 223-197 -- promises some political cover for Republican candidates in farm states. But it quickly stalled Thursday night in the Senate where the Agriculture Committee leadership is demanding that the House first deal with the larger farm bill. " David Rogers in Politico.

Extension of a tax credit for wind power moved forward. "On Thursday, the wind industry convinced a key Senate committee that green can be good politics in red states as well as blue ones. The Senate Finance Committee voted to renew a tax credit for wind power that is set to expire at the end of this year, with several Republicans joining Democrats to support extending the credit for one more year at a cost of $3.3 billion. The provision, which will apply to projects under construction by the end of 2013, was included in a $200 billion package of popular tax breaks that the committee passed on a bipartisan 19-5 vote. The bill is expected to go to the Senate floor when Congress returns from summer recess, although it is unclear if the House will take up similar legislation." Diane Cardwell in The New York Times.

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

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Dylan Matthews · August 2, 2012