Euro-zone action is inching forward. “The euro zone is inching towards a new plan to tackle its debt crisis in a three-dimensional game of chicken among all the main players. The European Central Bank’s heavily qualified offer last week to step in and buy bonds to bring down the borrowing costs of Spain and Italy was the latest gambit in this game. Each of the main protagonists – the central bank, the countries under pressure, EU paymaster Germany, and governments already under a bailout program – is angling for others to make the first move and carry the brunt of the cost…The ECB, the only federal institution capable of rapid and massive intervention, is willing to act only if Spain first requests assistance and accepts strict policy conditions and surveillance, and if euro zone governments commit their own money by activating their rescue funds.” Paul Taylor in Reuters.
Spain’s leader hinted for the first time that he may ask for a bailout. “Spanish Prime Minister Mariano Rajoy opened the door–slightly–to requesting support from the euro-zone bailout fund to help ease Spain’s deepening financial crisis…The prime minister’s remarks represent a shift of stance for Spain’s conservative leader. Because of the conditions and political stigma that come with such aid, he had previously rejected the possibility of asking for support, in the hopes of unilateral action from the ECB. In recent days, however, Spanish officials had begun to concede in private that in the absence of a more active ECB, the government could be forced to ask for aid from the bailout fund…At the Spanish prime minister’s traditional midyear news conference, Mr. Rajoy said he could consider making a request for support from the European Financial Stability Facility, the euro zone’s temporary rescue fund, after getting more information on the ECB’s plans to ease financial market tensions.” Jonathan House in The Wall Street Journal.
Wall Street is increasingly trying to protect against a possible euro exit. “Wall Street banks are increasingly telling counterparties and borrowers to restructure contracts or find another bank as they prepare for the potential exit of a country from the eurozone. Using hedges, such as credit default swaps, US banks have reduced their net exposure to troubled eurozone countries. But they are also engaged in more work behind the scenes to ensure that if a country leaves the eurozone they will not have to receive payments in a devalued drachma or peseta. The eurozone continues to be the predominant concern of US bank executives, ahead of the faltering US recovery. Last summer the worsening of the eurozone crisis produced wild swings in US banks' stock prices and led the Securities and Exchange Commission to demand they provide more disclosure of assets in Spain, Greece, Italy, Ireland and Portugal.” Tom Braithwaite, Dan McCrum, and Patrick Jenkins in The Financial Times.
Creditors will do another review before releasing aid to Greece. “Envoys representing Greece's international creditors on Sunday wrapped up an inspection of the country's progress in meeting the terms of its second bailout and said they would return next month for a final review to determine whether further loans are released and a default is averted. In separate statements, inspectors and Greek government officials said that significant headway had been achieved in the talks, which focused on EUR3 billion, or $3.7 billion, for 2012 in budget cuts the government has yet to implement, and another EUR11.5 billion in budget cuts demanded for 2013 and 2014. The cutbacks — chiefly reductions to state spending, pensions and social benefits — must be implemented in exchange for the release of further installments of rescue funding.” Niki Kitsantonis in The New York Times.
European consumers are tightening their belts. “Austerity isn’t just for governments anymore. As countries across Europe slash their budgets to tackle the sovereign-debt crisis, individual Europeans are reining in spending, too. They are trading down to cheaper groceries, buying fewer big-ticket items, and searching more for bargains online…Dour indicators are piling up. French consumers spent 0.2% less in the second quarter than the first, on fewer manufactured goods, the government statistics agency said late last month. In July, consumer confidence across the 17-nation currency bloc fell to its lowest level since 2009, the European Commission said. Consumer spending on goods and services in Western Europe is expected to slip 0.9% in inflation- and exchange-rate-adjusted terms in 2012, compared to a 1.9% increase forecast for the U.S., according to market-research firm Euromonitor International.” Sam Schechner in The Wall Street Journal.
GARDNER: Rajoy is hardly the leader Spain needs amid its crisis. “Among the middle classes of Madrid, Barcelona and Bilbao, there is a pervasive sense of a government losing control…One distressed insider says of Mr Rajoy: ‘He is the wrong man, in the wrong place at the wrong time.’…Indeed, an increasingly alarming feature of the Rajoy government is its inability to grasp that the world is listening to what it says as well as watching what it does…Yet it is his failure to even try to rally the country trapped in a downward spiral of debt and deflation that is really damaging…He seems deaf to growing calls for a national pact to confront the economic emergency.” David Gardner in The Financial Times.
JOHNSON: The European Central Bank can’t save the euro singlehandedly. “Optimists hope that Draghi is trying to put an end to the policy uncertainty that has characterized the euro crisis…Now, the logic goes, if Draghi could just restore the promise of unconditional and unlimited ‘support,’ he would put the genie back in the bottle. A better analogy would be that it is easier to make fish soup from fish than to do the reverse. Once you have understood that the ECB does not necessarily stand behind euro-area government debt, it is hard to disabuse yourself of the notion…A broader question is what, if anything, Draghi might achieve with a looser monetary policy. The euro area has many problems…Which of these could be resolved by reducing interest rates across the board? ” Simon Johnson in Bloomberg.
Top op-eds
1) HANSEN: Climate change doesn’t just make extreme weather more likely. It’s causing it right now. “In a new analysis of the past six decades of global temperatures, which will be published Monday, my colleagues and I have revealed a stunning increase in the frequency of extremely hot summers, with deeply troubling ramifications for not only our future but also for our present. This is not a climate model or a prediction but actual observations of weather events and temperatures that have happened. Our analysis shows that it is no longer enough to say that global warming will increase the likelihood of extreme weather and to repeat the caveat that no individual weather event can be directly linked to climate change. To the contrary, our analysis shows that, for the extreme hot weather of the recent past, there is virtually no explanation other than climate change…Once the data are gathered in a few weeks' time, it's likely that the same will be true for the extremely hot summer the United States is suffering through right now.” James Hansen in The Washington Post.
2) FRANK: Luck plays an extremely important role in success. “Recent experiments suggest that chance events may influence market outcomes far more heavily than previously thought. The sociologists Duncan J. Watts, Matthew Sagalnik and Peter Dodds carried out some of these experiments, which Mr. Watts described in his superb 2011 book, ‘Everything Is Obvious* (*Once You Know the Answer).’ Their work focuses on online markets, but it has much broader implications. It suggests that although market success does depend on the quality of a product, the link is extremely variable and uncertain. Even the best contestant in a product category may fail, and even the worst one sometimes wins. And for an overwhelming majority of contestants in the intermediate-quality range, they found success to be largely a matter of chance.” Robert Frank in The New York Times.
@DaviaTemin: “Chance elements in the information flows that promote success are sometimes the most important random factors of all”
3) PEARLSTEIN: Even unionized companies can operate as if they don’t have a union. “The reason Caterpillar has no intention of negotiating with its workers is pretty simple: It doesn't have to. In the three months since the strike began, the company says its Joliet plant has produced all the hydraulic parts it needs. The work is done by supervisors, newly hired employees and employees contracted from temporary help agencies, along with 80 and 100 union members who have crossed the daily picket lines and returned to work. If things really got tight, the company could always import the same parts from other Caterpillar plants around the world.” Steven Pearlstein in The Washington Post.
4) WESSEL: The numbers inside the tax reform debate. “The U.S. is no closer to a consensus on ‘fair share’ than when the income tax was born 100 years ago….Facts can inform the debate. The top 5%, top 1% and top 0.1% of Americans have been getting a bigger slice of all the income and paying a growing share of federal taxes…Average tax rates have come down for everyone…On average, the tax bite on the rich is bigger except for those whose income mainly comes from capital gains and dividends…The share of taxes paid by the bottom 40% of the population has been shrinking along with their share of income…The tax system narrows the gap between economic winners and losers, but not enough to stop the gap from widening.” David Wessel in The Wall Street Journal.
5) SAMUELSON: The young are unlikely to live better than their parents. “Gains in productivity — from new technologies or better skills — that would normally flow into paychecks will be siphoned off to pay for retiree benefits, underfunded state and local government pensions and infrastructure repair. Taxes will rise; if not, public services will fall. Or both. Population change can't be repealed. The ratio of workers to retirees, 5-to-1 in 1960 and 3-to-1 in 2010, is projected at nearly 2-to-1 by 2025. It's often said that today's young will ultimately benefit from this lopsided tax-and-transfer system. Old themselves, they will be similarly subsidized by their young. Doubtful. Sooner or later, the system's oppressive costs will become so obvious that future benefits will be curbed. Chances are the young will still pay for today's elderly without themselves receiving comparable support.” Robert Samuelson in The Washington Post.
Top long reads
Atul Gawande on the Cheesecake Factory model for healthcare:“I asked one of the Cheesecake Factory line cooks how much of the food was premade. He told me that everything's pretty much made from scratch–except the cheesecake, which actually is from a cheesecake factory, in Calabasas, California. I'd come from the hospital that day. In medicine, too, we are trying to deliver a range of services to millions of people at a reasonable cost and with a consistent level of quality. Unlike the Cheesecake Factory, we haven't figured out how. Our costs are soaring, the service is typically mediocre, and the quality is unreliable. Every clinician has his or her own way of doing things, and the rates of failure and complication (not to mention the costs) for a given service routinely vary by a factor of two or three, even within the same hospital.”
Bill Vlasic, Hiroko Tabuchi, and Charles Duhigg on the migration of Japanese auto manufacturing to the U.S.:“The migration of Japanese auto manufacturing to the United States over the last 30 years offers a case study in how the unlikeliest of transformations can unfold. Despite the decline of American car companies, the United States today remains one of the top auto manufacturers and employers in the world. Japanese and other foreign companies account for more than 40 percent of cars built in the United States, employing about 95,000 people directly and hundreds of thousands more among parts suppliers. The United States gained these jobs through a combination of public and Congressional pressure on Japan, ‘voluntary’ quotas on car exports from Japan and incentives like tax breaks that encouraged Japanese automakers to build factories in America.”
Peter Maass and Megha Rajagopalan on the true costs of cybercrime:“Crediting Symantec, he said the theft of intellectual property costs American companies $250 billion a year. He also mentioned a McAfee estimate that the global cost of cybercrime is $1 trillion. ‘That's our future disappearing in front of us,’ he said, urging Congress to enact legislation to improve America's cyberdefenses.These estimates have been cited on many occasions by government officials, who portray them as evidence of the threat against America. They are hardly the only cyberstatistics used by officials, but they are recurring ones that get a lot of attention…A handful of media stories, blog posts and academic studies have previously expressed skepticism about these attention-getting estimates, but this has not stopped an array of government officials and politicians from continuing to publicly cite them as authoritative. Now, an examination of their origins by ProPublica has found new grounds to question the data and methods used to generate these numbers.”
Alt-country interlude: Tift Merritt plays “Engine to Turn” live on Lightning 100.
Got tips, additions, or comments? E-mail me.
Still to come:Small banks really don’t like Basel III; the feds will run about half the exchanges; Obama weighs cybersecurity action; gas prices surge; and a walrus does vocalizations.
Economy
A rising number of manufacturers are cutting spending due to the fiscal cliff. “A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions in tax increases and budget cuts in January, undermining economic growth in the coming months. Executives at companies making everything from electrical components and power systems to automotive parts say the fiscal stalemate is prompting them to pull back now, rather than wait for a possible resolution to the deadlock on Capitol Hill…More diversified companies like Hubbell Inc. in Shelton, Conn., have begun to hunker down as well.” Nelson Schwartz in The New York Times.
The federal government is pushing back on sequestration panic. “The government last week pushed back against contractors on how they should brace for a nearly $1 trillion cut in federal spending, arguing that mass layoff notices are unnecessary and that warnings of contract terminations are overblown. The frenzy over what's known as sequestration — an across-the-board cut set to go into effect in January — grew more intense as contractors staged a rally last week featuring industry chief executives and local politicians while Obama administration officials appeared on Capitol Hill. Under sequestration, the cuts would be split between defense spending and all non-defense accounts. In a guidance letter issued July 30, the Labor Department said the Worker Adjustment and Retraining Notification Act — better known as the WARN Act — does not require contractors facing sequestration to send notices to their workers that they could be let go.” Marjorie Censer in The Washington Post.
Banks are turning on one another over Libor. “Major banks, which often band together when facing government scrutiny, are now turning on one another as an international investigation into the manipulation of interest rates gains momentum. With billions of dollars and their reputations on the line, financial institutions have been spreading the blame in recent meetings with authorities, according to government and bank officials with knowledge of the matter. While acknowledging their own wrongdoing, institutions are pointing out actions at other banks that they believe are worse — and in some cases, extend to top executives. One official involved in the case said that banks are emphasizing that ‘we're not as bad as the next guy.’” Azam Ahmed and Ben Protess in The New York Times.
Small banks are unhappy about Basel III. “It isn’t unusual for bankers and regulators to have trouble getting along. But the 45-minute sparring match was a sign of the extreme anxiety and agitation over forthcoming rules by the OCC, Federal Reserve and Federal Deposit Insurance Corp. to implement an international agreement known as Basel III. Executives at many small banks complain that the rules could force them to cut back on loans to small businesses or homeowners…Many are particularly upset about the complex system of determining how much capital a bank must hold against mortgage loans they make. The new rules seek to calibrate capital requirements to more accurately reflect the risk of particular assets on a bank’s books: The riskier the loan, the more capital a bank must have to cover potential losses. The rules dictate what characteristics determine how risky a particular mortgage loan is.” Victoria McGrane in The Wall Street Journal.
Literary history interlude: Thomas Edison films Mark Twain walking around and playing cards.
Health Care
The Obama administration is getting ready to run exchanges in about half of the states. “Obama administration officials are getting ready to set up and operate new health insurance markets in about half the states, where local officials appear unwilling or unable to do so. The markets, known as exchanges, are a centerpiece of President Obama's health care law, and running them will be a herculean task that federal officials never expected to perform…Governors of 13 states with nearly one-third of the United States population have sent letters to the Obama administration saying they intend to set up exchanges. Complete applications are due on Nov. 16, just 10 days after the presidential election. Federal and state officials and health policy experts expect that the federal government will run the exchanges in about half of the 50 states — a huge undertaking, given the diversity of local insurance markets.” Robert Pear in The New York Times.
Domestic Policy
NASA’s Curiosity rover touched down on Mars. “NASA's rover Curiosity touched down deep in a Martian crater early Monday after a picture-perfect descent and landing, beginning what promises to be the most ambitious planetary mission in history. Jubilant NASA engineers and scientists let out a loud and prolonged whoop when the data came in indicating that the one-ton rover had touched down. It remains unknown exactly what shape the $2.5 billion rover is in, but the fact that it survived its ‘Seven Minutes of Terror’ descent was cheered like the grandest Olympic triumph…Described by top NASA officials as their ‘mission of the decade,’ the just-delivered rover will search for the makings of extraterrestrial life as well as investigate how and why Mars turned from a once wet and warm planet into the dry and cold place it is now. The complex, precision landing and sophisticated instruments could hasten the day when humans fly to Mars as well.” Marc Kaufman in The Washington Post.
@MarsCuriosity: I’m safely on the surface of Mars. GALE CRATER I AM IN YOU!!! #MSL
@lizzieohreally: SCIENCE.
Obama is weighing executive action on cybersecurity. “Senate Republicans recently blocked cybersecurity legislation, but the issue might not be dead after all. The White House hasn’t ruled out issuing an executive order to strengthen the nation’s defenses against cyber attacks if Congress refuses to act…Jim Lewis, a senior fellow at the Center for Strategic and International Studies, explained that Obama could enact many of the core provisions of the Cybersecurity Act through executive order. Many companies managing vital computer systems are already heavily regulated. Lewis said the president could order agencies to require the industries they regulate to meet cybersecurity standards.” Brendan Sasso in The Hill.
Some schools are extending the school year. “A typical public school calendar is 180 days, but the Balsz district, where 90 percent of the students qualify for free or reduced lunch, is in session for 200 days, adding about a month to the academic year. According to the National Center on Time and Learning, a nonprofit research group in Boston, about 170 schools — more than 140 of them charter schools — across the country have extended their calendars in recent years to 190 days or longer…Several recent efforts to lengthen the school calendar have foundered. The Woodland Hills Academy in Pittsburgh extended its school year to 195 days in 2009, but this year it will return to the traditional 180-day calendar because of state budget cuts. Similarly, Parkside Elementary in Coral Springs, Fla., tried a 200-day calendar for one year before abandoning it because of insufficient financing.” Motoko Rich in The New York Times.
The Obama administration will begin to process applications to defer deportation. “Obama administration officials said Friday that they would begin on Aug. 15 to process applications from hundreds of thousands of young illegal immigrants expected to seek two-year deferrals of deportation. Applicants will be charged $465 for each request. Alejandro Mayorkas, the director of Citizenship and Immigration Services, the agency that will handle the antcipated avalanche of paperwork, provided the first logistical details since President Obama announced on June 15 that he would halt deportations of illegal immigrants who came to the United States when they were children. Applications, which will also include requests for work permits, will be considered individually, Mr. Mayorkas said, with each immigrant undergoing a criminal and national security background check…Homeland Security officials gave assurances that information from the applications would not be used for immigration enforcement, which is handled by a separate agency.” Julia Preston in The New York Times.
@davidfrum: Back in 1986 v controversial act Congress provided amnesty to 3 million. W stroke of pen, Obama 1/3 of way there
Musical animals interlude: A walrus practices his vocalizations.
Energy
Gas prices are surging again. “Gas prices have surged in recent weeks and analysts predict they'll keep rising, creating fresh openings for GOP attacks against President Obama that had waned when prices dropped sharply. The nationwide average for regular gasoline is $3.60-per-gallon, a 24-cent rise over the past four weeks, according to AAA. Prices are well below the peak of nearly $4 in early April…But several analysts told The Hill that costs at the pump are likely to continue their recent rise through August. Friday brought fresh evidence that pump prices are likely primed for more increases in coming weeks. U.S. oil futures prices, buoyed in part by the Labor Department report of 163,000 jobs created in July, jumped by over $4-per-barrel to settle at $91.40 in New York trading. Prices for European Brent crude, which some U.S. refiners use, also rose sharply Friday.” Ben Geman in The Hill.
The recess may boost the farm bill’s prospects. “House Republican leaders are counting on the August heat to help them pass a farm bill when Congress returns from recess in September — and not just the kind causing the record drought parching 80 percent of the country. They are hoping that Members headed home for the district work period, particularly in drought-affected states, will hear from angry constituents all month, demanding that Congress do its job…At a Christian Science Monitor breakfast last week, McCarthy conceded that large bills are difficult to move in this Congress. But he said giving the farm bill a chance to sit will allow Members time to become better acquainted with its policies. He said his goal is still to pass it before the current authorization expires on Sept. 30.” Daniel Newhauser in Roll Call.
Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.
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