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RCP Obama approval47.3%; 7-day change: +0.4%.

Top story: Talking about policy transmissions

ECB head Mario Draghi said he would do 'whatever it takes' for the euro. "Europe’s most powerful banker made an extraordinary pledge Thursday to do 'whatever it takes' to defend the troubled euro currency, sparking a rally in world stock markets on the prospect of help from the almost unlimited resources of the European Central Bank. In a speech in London, ECB chief Mario Draghi said the words that many worried European officials had longed to hear: 'Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. . . . Believe me, it will be enough,' he said...Draghi has been reluctant to commit to sweeping action, telling European leaders in recent months that they could not rely on the bank to intervene in bond markets to push down borrowing costs. But the combination of progress toward a banking union at a June summit and rapidly rising rates on Spanish and Italian debt seem to have led Draghi to at least raise the possibility that the bank is prepared for further action." Michael Birnbaum and Brad Plumer in The Washington Post.

READ: Mario Draghi's remarks in London.

@ReformedBroker: Shorter Draghi: "We 'bout to print like Harper-Collins"

And it sounded like he may be willing to backstop Spain and Italy's debt. "The European Central Bank technically has an unlimited supply of euros at its disposal. Mario Draghi could say, 'Don’t worry, I’ll do whatever it takes to backstop Spain’s debts.' At that point, fewer people would question the Spanish government’s ability to repay what it owes. Investors could start lending to Spain again, and at reasonable rates. The cycle of doom would calm down. Spain and Italy would have time and space to address their budget woes...So far, though, Draghi and the ECB have been hesitant to go this route...Today, however, Draghi appears to be changing his tune. When he says, per Bloomberg, that 'yields are disrupting policy transmission,' he seems to be suggesting that the high borrowing costs for Spain and Italy are actually hindering the ECB’s ability to stabilize the continent’s economy. And if that’s the case, then maybe the central bank has the authority to do something about Spain and Italy’s high borrowing costs after all." Brad Plumer in The Washington Post.

The most important sentence today, explained in under two minutes: http://bit.ly/LTWC0b.

FT Alphaville has more: http://on.ft.com/OgvbTA.

Markets were quite pleased by his comments. "Investors are finishing the week in a generally bullish mood as the euro-supportive comments provided by European Central Bank president Mario Draghi continue to boost confidence. The FTSE Eurofirst 300, which jumped 2.4 per cent on Thursday, has opened with a further gain of 0.3 per cent. Commodities are firmer as risk appetite builds. US stock futures point to Wall Street adding 0.3 per cent, while the dollar index, which tends to fall when optimism improves, is dipping 0.1 per cent. A weaker buck is helping gold add $4 to $1,620 an ounce...Strong gains on Thursday for the euro, and Spanish and Italian bonds, which pushed yields, sharply lower, are being maintained at the start of the new session. The single currency is up 0.2 per cent to $1.2299, while Madrid’s 10-year borrowing costs are down 11 basis points to 6.82 per cent and Rome’s are off 10bp to 5.95 per cent." Jamie Chisholm in The Financial Times.

Tim Duy is skeptical: http://bit.ly/OoUYaF

@RichardBarley1: Two days ago Spain 2-yr was hitting 7.1%; now it is 5.1%. Central bankers' words still carry a lot of weight...

Another ECB official suggested they may act to lower yields. "European Central Bank policy maker Christian Noyer said the ECB is 'active' and 'vigilant' to ensure its lowered interest rates feed through the troubled euro-zone economies, becoming the second central bank official to suggest Thursday that the ECB was ready to help drive down sovereign-bond yields. 'It is very clear that we will do everything so that the transmission of our monetary policy takes place in the best possible conditions for our economies,' Mr. Noyer, who is also Bank of France governor, told The Wall Street Journal. 'We have done it in the past and we are continuing to work at it.'" William Horobin in The Wall Street Journal.

Draghi’s remarks sounded familiar. "'We have to ensure whatever it takes that we don’t have a recession coming from the funding pressure,' Draghi said last December, hoping to prevent a recession generated by a credit crunch as banks cut lending. Banks are facing a capital shortage because 'the situation has changed profoundly,' he said at the time. This January, after warning of a 'very grave state of affairs,' Mr. Draghi again pledged to do 'whatever it takes to ensure financial stability' as long as its actions fit with its mandate of price stability. 'Whatever it takes' appears to have been the phrase of choice across Europe around prior bouts of market turmoil. European Council President Herman Van Rompuy, German Chancellor Angela Merkel and Mr. Draghi himself -- along with numerous other euro-zone officials -- have repeatedly pledged to do 'whatever it takes' during a debt crisis that’s now well into its third year." Sudeep Reddy in The Wall Street Journal.

The ECB may be preparing to try a negative deposit rate. "Is the European Central Bank preparing to go where no major central bank has gone before? The ECB cut its deposit rate to zero this month, hoping to spur banks to withdraw their money and lend instead but two council members have recently hinted that the central bank may go further and experiment with a negative deposit rate - in effect charging banks to keep their money safe. This is pretty unconventional thinking. The only central banks to have attempted negative deposit rates before are the Swedish Riksbank, briefly in 2009, and the Danish central bank earlier this month - but it is fighting to stem capital inflows and maintain its peg to the euro." Robin Wigglesworth in The Financial Times.

@tylercowen: How long does Draghi have now to actually do something?

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Top op-eds

1) KRUGMAN: Markets want us to run larger deficits. "A funny thing happened on the way to the predicted fiscal crisis: instead of soaring, U.S. borrowing costs have fallen to their lowest level in the nation’s history. And it’s not just America. At this point, every advanced country that borrows in its own currency is able to borrow very cheaply...So what is going on? The main answer is that this is what happens when you have a 'deleveraging shock,' in which everyone is trying to pay down debt at the same time. Household borrowing has plunged; businesses are sitting on cash because there’s no reason to expand capacity when the sales aren’t there; and the result is that investors are all dressed up with nowhere to go, or rather no place to put their money. So they’re buying government debt, even at very low returns, for lack of alternatives. Moreover, by making money available so cheaply, they are in effect begging governments to issue more debt. And governments should be granting their wish, not obsessing over short-term deficits." Paul Krugman in The New York Times.

2) LAWRENCE: Cutting healthcare costs could free up trillions for other priorities. "If total U.S. health-care spending could be reduced over the next 20 years to Swiss levels -- based on 2007 data, that would mean going from 15.7 percent of GDP to 10.8 percent -- annual health-care cost growth over those 20 years would be 2 percent slower. The GAO did not calculate the impact of slower growth, but simple deduction suggests that tens of trillions of dollars would be freed up to spend on schools, or roads or lower taxes...Rather than trying to control costs by reducing fees for each service, which Congress has tried but overridden with its doc-fixes since 1997, we need a mechanism to choose which services to perform. Every other developed country has such a mechanism -- and provides universal health care at lower cost. " Bryan Lawrence in The Washington Post.

3) SCHOENHOLTZ AND WHITE: The next Libor should rely on actual transactions, not surveys. "The recent revelations by Barclays Plc (BARC) probably spell doom for the London interbank offered rate, at least in its present form...How to ensure that a damaging scandal won’t happen again? The answer seems straightforward: Wherever feasible, benchmarks for financial contracts should derive from actual transactions, not surveys, as is the case with Libor...How could the BBA’s 'survey Libor' be replaced with a transactions measure? One approach would be a clearinghouse to broker interbank loans. It would make the interbank market more efficient, and need only exist electronically, allowing banks to post fund bids and offers to counterparty banks of their choosing. It also would make it possible for willing banks to transact and settle in real time." Kim Schoenholtz and Lawrence White in Bloomberg.

4) POPE: The ethanol mandate should be relaxed. "One of the hardest-hit commodities, corn, plays a critical role in our food chain. This year's crop yield could be the worst in 15 years, and corn prices have already hit record high levels. But aggravating the problem and adding to the crisis is the U.S. government's Renewable Fuel Standard (RFS), which requires that a certain volume of ethanol (15.2 billion gallons in 2012, mainly derived from corn) be blended into gasoline. This is an arbitrary figure, set irrespective of market supplies, demands or price...In the short term, the Environmental Protection Agency should grant a nationwide waiver to the RFS. That will have an immediate positive impact on the corn market by removing the demand created by the mandate. Furthermore, there is a legislative proposal backed by a bipartisan group of members of the House of Representatives that would tie the RFS percentage to free-market supply and demand. Congress should pass that immediately." C. Larry Pope in The Wall Street Journal.

5) SILVERMAN: The healthcare system fails risk takers. "It is also predictable that a person in Mr Medley’s position would need this kind of help from their friends. He is part of a class of people who take enormous personal risks to pursue their dreams...Society reveres these people in many ways...But if accidents happen, as they do, their friends have to pass round the hat. The reason goes back to our so-called healthcare system...People who live in the manner of a Mr Medley have a tendency to fall through the cracks - either because their employers don’t offer insurance or because they can’t put away enough money to buy insurance policies on their own. Full implementation of the Affordable Care Act of 2010 - or Obamacare, as it is often called - should help bring coverage to tens of millions of people who lack insurance. But many of the key provisions of the law won’t go into effect until 2014 and the price of delay is on display in Colorado." Gary Silverman in The Financial Times.

Minnesota alt-country interlude: Haley Bonar plays "Green Eyed Boy" at 89.3 The Current.

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

Still to come: Congress nears a deal on a stopgap spending bill; a court decision that could lower health costs; cybersecurity advances; a one year farm bill gains; and a small child explains how to skateboard.


Congress is nearing a deal on a six-month stopgap spending bill. "There’s already movement to avoid the fiscal cliff. House and Senate leadership Thursday approached a deal to fund the government for six months -- a move that would avert a Sept. 30 shutdown, and keep the federal government operating through March. The deal would keep the government funded at the same levels of last year’s debt limit law, a spending level Republicans have consistently dismissed as too high. But it would also avert a messy pre-election showdown over shutting down the government, something neither party wants...The bipartisan funding bill will be rolled out early next week, aides said. When Congress would vote on it is still unclear, but both chambers would need to approve the deal by Sept. 30." Jake Sherman and John Bresnahan in Politico.

The Treasury Department released new details of a plan to fight offshore tax dodging. "The Treasury Department released new details Thursday of a plan to ferret out Americans' global tax dodging, though some lawmakers and banks remain concerned about the initiative's scope and regulatory costs. Treasury officials said they hope to finalize the system's basic rules by the fall and expressed confidence it would be on track for implementation by 2014 as scheduled. Congressional experts said the new system would recover $8.7 billion in tax revenues over 10 years...Treasury officials announced Thursday a new model agreement-- developed with the U.K., Germany and other Western European nations - for the U.S. to enter with cooperating foreign governments." John McKinnon in The Wall Street Journal.

Housing got bad news. "Contracts to purchase previously owned homes unexpectedly dropped in June for the second time in the last three months, a sign of limited momentum in housing. The index of pending home resales decreased 1.4 percent to 99.3 after a revised 5.4 percent gain in May that was less than initially reported, figures from the National Association of Realtors showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 0.3 percent June increase." Michelle Jamrisko in Bloomberg.

@NickTimiraos: Pending home sales in June: worse than March and May, but better than any month in 2011, and all but two months in 2010

Kids telling stories interlude: Two adults act out a short story written by an eight year-old.

Health Care

A court struck down 'pay for delay' drug settlements. "It would seem a business executive’s dream: legally pay a competitor to keep its product off the market for years. Congress has failed to stop it, and for more than a decade generic drug makers and big-name pharmaceutical companies have been winning court rulings that allowed it. Until this month. On July 16, a federal appeals court in Philadelphia issued a decision that the arrangement is anticompetitive on its face. It potentially sets up a confrontation before the United States Supreme Court. If it were to accept the case, the outcome could profoundly affect drug prices and health care costs." Edward Wyatt in The New York Times.

@BCAppelbaum: A court ruling that could actually reduce health care costs

Hospitals are worried about a cut in a fund for the uninsured. "President Obama’s health care law is putting new strains on some of the nation’s most hard-pressed hospitals, by cutting aid they use to pay for emergency care for illegal immigrants, which they have long been required to provide. The federal government has been spending $20 billion annually to reimburse these hospitals -- most in poor urban and rural areas -- for treating more than their share of the uninsured, including illegal immigrants. The health care law will eventually cut that money in half, based on the premise that fewer people will lack insurance after the law takes effect. But the estimated 11 million people now living illegally in the United States are not covered by the health care law. Its sponsors, seeking to sidestep the contentious debate over immigration, excluded them from the law’s benefits. As a result, so-called safety-net hospitals said the cuts would deal a severe blow to their finances." Nina Bernstein in The New York Times.

Domestic Policy

Tens of thousands could be dropped from Head Start. "Tens of thousands of young children from low-income families could be dropped from Head Start programs if Congress cannot find a way to prevent automatic cuts to the federal budget in 2013. Supporters of Head Start fear the cuts would put more children at a disadvantage even before they reach kindergarten. Critics, including Congressional Republicans who tried to slash the Head Start budget in 2011, say the cuts would help rein in an overpriced program whose benefits have not been proven. The Congressional Budget Office estimated last year that the automatic cuts would slice $590 million from federal spending on Head Start, which will be more than $7.9 billion in 2012. The National Education Association said the cuts would eliminate 80,000 of the 962,000 slots for children and more than 30,000 jobs of teachers, aides and administrators in the program." Adeshina Emmanuel in The New York Times.

States with NCLB waivers have offered varied goals. "In excusing more than half of the states from meeting crucial requirements of the No Child Left Behind education law, the Obama administration sought to require states to develop more realistic tools to improve and measure the progress of schools and teachers. A report being issued on Friday by the liberal Center for American Progress shows that while some states have proposed reforms aimed at spurring schools and teachers to improve student performance, others may be introducing weaker measures of accountability...The waivers allow states to select from a menu of new goals. According to the center’s report, eight states have chosen to cut in half the percentage of students not testing at grade level in reading or math within six years, while one state, Arizona, said it would make all its students proficient by 2020. The majority of states chose to set their own goals." Motoko Rich in The New York Times.

The Senate overwhelmingly voted to move forward on cybersecurity. "The Senate agreed on Thursday to move forward with Sen. Joe Lieberman's (I-Conn.) cybersecurity bill after months of contentious negotiations. The motion to proceed to the Cybersecurity Act was approved 84-11 after Senate Majority Leader Harry Reid (D-Nev.) agreed to an open amendment process...Although the bill cleared this test vote, it faces an uphill battle to reach the finish line. While senators are meeting to try and reach a final agreement, disagreements remain...In a bid to win GOP support, Lieberman introduced a revised version of the bill last week that scaled back provisions mandating critical operators meet a set of security standards developed, in part, by the Homeland Security Department." Jennifer Martinez and Ramsey Cox in The Hill.

How to interlude: A three year-old on how to ride a skateboard.


Momentum is growing in the House for a one-year farm bill. "The top Democrat on the House Agriculture Committee signaled Thursday that he would support a Republican-backed one-year extension of the current farm law if it could be used as a vehicle to negotiate a larger comprehensive deal with the Senate. 'That seems to be gaining some ground on the Republican side right now,' Rep. Collin Peterson (D-Minn.) told POLITICO. 'That I would drop my opposition as long as this got us into conference on the big bill.'...Under the scenario mapped out by Peterson, the House could next week pass a one-year extension together with drought relief for livestock producers -- giving Republicans some protection for their members before going home for the August recess. The Senate would substitute its five-year farm bill, adopted in June, and ask for a conference." David Rogers in Politico.

Strong storms are threatening the ozone layer over the U.S.. "Strong summer thunderstorms that pump water high into the upper atmosphere pose a threat to the protective ozone layer over the United States, researchers said on Thursday, drawing one of the first links between climate change and ozone loss over populated areas. In a study published online by the journal Science, Harvard University scientists reported that some storms send water vapor miles into the stratosphere -- which is normally drier than a desert -- and showed how such events could rapidly set off ozone-destroying reactions with chemicals that remain in the atmosphere from CFCs, refrigerant gases that are now banned. The risk of ozone damage, scientists said, could increase if global warming leads to more such storms." Henry Fountain in The New York Times.

Ethanol producers aren't having a good summer. "Record corn prices and sluggish gasoline demand are squeezing profits for U.S. ethanol companies, prompting some producers to idle plants or slow production. Valero Energy Corp., Abengoa Bioenergy US Holding Inc. and Nedak Ethanol LLC have idled plants since mid-June, citing poor market conditions for the corn-based fuel additive. And Archer Daniels Midland Co., the biggest U.S. ethanol producer by capacity, said that its ethanol margins had eroded to a loss of well over 20 cents a gallon...Ethanol production in the week through July 20 dropped to 796,000 barrels a day, down 0.7% from the preceding week and 9.9% from a month earlier, hitting a record low for the second straight week." Owen Fletcher in The Wall Street Journal.

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