The Daily Dish: 1.8.13

The Wall Street Journal reports that "this week, the Consumer Financial Protection Bureau will define standards that all mortgage lenders are likely to follow when originating home loans. The new rules -- the most significant policy implemented by the CFPB since its inception 18 months ago -- will be contentious because they will determine the types of loans the banks will offer, as well as to whom, and on what terms." 

Previous AAF research calculated the impact new housing regulations are already having on lending, sales, and starts as well as the greater economy. We found that Dodd-Frank regulations and Basel III capital standards would not only hinder qualified borrowers from access to loans, but also result in 20 percent fewer loans that otherwise would be made. We found that these new regulations could lead to a million fewer hosting starts over the next three years, 3.9 million fewer jobs and a loss of 1.1 percentage points of GDP growth. Certainly not something to overlook when we are growing at a rate of less than 3 percent. 

Doug's Daily Economic Outlook

Fresh off Notre Dame playing Alabama for the BCS championship we can move quickly to absurd idea #2: minting a $1 trillion platinum coin in response to the need to raise the federal debt ceiling.  For those who have been focused on more productive ideas, the story is this: the Secretary of the Treasury has the power to mint platinum coins in any denomination, presumably for commemorative purposes .  But as we enter the silly season better known as lame-duck-redux, the notion has been floated that the Treasury could mint the magic $1trillion coin (presumably with Secretary Geithner's picture on it), and use the proceeds to free up room under the debt ceiling in the absence of congressional authorization to raise it further.  

What should one make of this?  First, despite the notion being absurd on its face (or perhaps because the notion is absurd on its face) there is now a bill to bar this potential course of action.  Second, New York Times uber-whiner Paul Krugman has essentially embraced the idea, calling it "silly but benign."  

That might be true of his writing, but not the platinum coin.  Think about it.  One way to deal with the debt ceiling would be for the Treasury to print up a new $1 trillion bond and sell it to the public (or to the Fed.  When the Fed buys Treasuries it creates money, so this route has the doubly-absurd advantage of doing more aggressive monetary policy) and use the cash to either reduce existing debt outstanding -- putting the Federal government under the existing debt ceiling -- or simply to run the government.  One problem: there is a debt ceiling that prohibits the Treasury from actually issuing the new $1 trillion bond.

Instead, substitute the magic coin for the $1 trillion bond and you have the same result: either cash from the public or platinum QE, using disguised Treasury borrowing.  Financial markets viewing this clumsy subterfuge would quickly come to the correct conclusion: a country so unable to manage its finances that it resorts to issuing the magic Geithner is essentially the same as a country so unable to manage its finances that it breaches the debt ceiling.  

Confidence in the U.S. would plummet, leading to a spike in interest rates and unthinkable economic pain.  And, oh by the way, that $1 trillion would never materialize.  After all, you only give the Treasury $1 trillion if you expect to get at least that much back.  If the U.S. resorted to the Geithner no one would believe that their money was safe, the coin would generate far less than $1 trillion (the mirror image of higher interest rates are falling bond, …uh coin, prices), and the scheme would backfire.

So, give up on the coin.  The federal debt ceiling must go up, and traditionally that means companion legislation that addresses the real problem: the debt itself.  There is no fight about raising the debt ceiling, only those living in a budgetary fantasyland fight the fact that the debt problem is spending driven, and thus the only real debate is over how to best control the economic threat posed by federal entitlement programs.  

What We're Reading

U.S. Set for Biggest State-Local Jobs Boost Since 2007 -- State and local governments are in their best financial shape since the recession, giving them leeway to cushion the U.S. economy from federal budget cuts with spending and hiring of their own. After slashing their workforces by about half a million in the past five years, state and local authorities will add employees in 2013, said Mark Zandi, chief economist at Moody's Analytics Inc. in West Chester, Pennsylvania. Their payrolls in the fourth quarter will be 220,000 larger than in the same period for 2012, he projects. (Bloomberg) 

Plan to curb volatility in US stock markets likely to be delayed -- A pilot program to limit volatility in the U.S. stock markets scheduled to be implemented next month is not likely to be rolled out until April as exchanges and financial industry groups take more time to prepare. The so-called "limit up-limit down" initiative, approved by the U.S. Securities and Exchange Commission in June, would pause trading of individual U.S.-listed stocks if they moved outside a price dance based on where they had recent traded. (Reuters) 

DOT wants electric cars to make more noise -- The Department of Transportation is proposing new regulations that would require hybrid and electric cars to make more noise when their engines are running. The rules are designed to make it easier for pedestrians to hear the quiet automobiles when they are approaching. (The Hill) (Complete 2013 regulatory calendar here) 

Growth of Health Spending Stays Low -- National health spending climbed to $2.7 trillion in 2011, or an average of $8,700 for every person in the country, but as a share of the economy, it remained stable for the third consecutive year, the Obama administration said Monday. The rate of increase in health spending, 3.9 percent in 2011, was the same in 2009 and 2010 -- the lowest annual rates recored in the 52 years the government has been collecting such data. (NY Times) 

Also From the Forum

The Fallacy of the "Clean" Debt Limit Increase -- In the last 20 years, the United States has enacted 17 increases in the debt limit. Of those 17 incases, 3 were stop-gap measures: a temporary increases with a scheduled fall-back in the absence of superseding increase, and two increases that allowed for uninterrupted operations of the Social Security program. Of the remaining 14 "permanent" increases, all but 3 were either passed as part of other legislation or pursuant to a now repealed rule that precluded a vote in the House of Representatives, the so-called "Gephardt Rule." (History here) 

Regulatory Calendar: Administration Releases 2013 Regulatory Plan -- According to initial projections, the administration's "Unified Agenda" contains $123.2 billion in possible regulatory costs for 2013 and at least 13 million paperwork burden hours. (Full breakdown here)