Author: WSJ.com: Real Time Economics

President Barack Obama took another swipe at lobbyists for the financial sector today in a speech to the Business Roundtable, when he urged business leaders to support his effort to rework financial regulations. Here’s an excerpt from his remarks:

“We cannot repeat the mistakes of the past. We cannot allow another AIG or another Lehman to happen again. We can’t allow financial institutions, including those that take your deposits, to make gambles that threaten the whole economy. We must ensure consolidated supervision of all institutions that could pose a risk to the system. We must close loopholes that allow financial firms to evade oversight and circumvent rules of the road. And we need robust consumer and investor protections.

I ask the members of the Business Roundtable to support these efforts. The lobbyists up on the Hill right now are trying to kill reform by claiming that it would undermine businesses outside the financial sector. That couldn’t be further from the truth. This is about putting in place rules that encourage drive and innovation instead of short-cuts and abuse. And those are rules that will benefit everyone.”

U.S. Federal Reserve Chairman Ben Bernanke said that by simply holding mortgage-backed securities on its books, the Fed will continue to support the housing sector and the wider economy.

Federal Reserve Chairman Ben Bernanke. (Bloomberg)

He added, however, there were lots of different views on how ending the purchases could impact long-term rates. “There may not be a significant reaction,” Bernanke told lawmakers.

In a key testimony at the House Financial Services Committee, Bernanke said the Fed would stick to plans to end buying $1.25 trillion in mortgage-backed securities by the end of March. Some economists worry that the end of the purchases could lead to higher mortgage rates.

Fed officials believe that holding the mortgage bonds is “going to keep rates down,” Bernanke said.

Bernanke indicated that merely keeping the securities on the Fed’s balance sheet would be enough to support the market. Some Fed officials have called for selling the mortgage holdings later this year, but Bernanke has said that no sales are foreseen in the near term.

Rep. Ron Paul (R., Texas), the chief critic of the Federal Reserve on Capitol Hill, used his five minutes at a House Financial Services Committee hearing this morning to explore the central bank’s role in Saddam Hussein’s reign and Watergate.

Rep. Ron Paul (R., Texas). (Getty Images)

That’s right — Watergate and Saddam Hussein. Rep. Paul was airing allegations that the Federal Reserve has been used to funnel money for various nefarious causes. That’s why the Fed needs wider audits by Congress, Mr. Paul said. His bill to audit the central bank’s monetary policy — a measure the Fed opposes — would include a lag of six months. Today, he sought to win a commitment to audit the Fed after 10 or 15 years. “Why couldn’t we open the books up 10 years back and find out the truth of these matters?” Mr. Paul asked.

Mr. Bernanke, in response, called the allegations about Watergate and Saddam Hussein “absolutely bizarre.” He noted that the central bank releases transcripts of its Federal Open Market Committee meetings after five years. And he seemed to agree with Mr. Paul’s request to review every loan made to foreign governments.

Next, Mr. Paul wanted to know if the Fed has “talked with any international groups about us participating in a bailout of Greece.”

“I have not,” Mr. Bernanke said. “We have no plans whatsoever to be involved in any foreign bailouts or anything of that sort.”

Krishna Guha, who has been the chief Fed-watcher at the Financial Times, is expected to become the new head of the communications group at the Federal Reserve Bank of New York.

Guha has been at the FT since 1994. In his latest role as the FT’s U.S. economics editor and deputy Washington bureau chief, he covered economic policy in the Bush and Obama administrations along with the U.S. central bank, the International Monetary Fund and the World Bank. He was previously an editorial writer for the FT, political correspondent in the U.K., Lex columnist and Bombay correspondent. He has degrees from Cambridge and Harvard’s Kennedy School of Government.

Guha will take the position overseeing the New York Fed’s communications previously held by Calvin Mitchell, who left the bank in November to become global head of corporate affairs at Thomson Reuters.

There’s been a lot of talk on Capitol Hill about who should be given the power to oversee the country’s largest financial companies. Based on Federal Reserve Chairman Ben Bernanke’s testimony to the House Financial Services Committee on Wednesday, it sounds like Fed officials aren’t waiting around for Congress to act.

Here are some quick takeaways from Mr. Bernanke’s testimony, directly related to bank supervision.

1) The Fed is conducting “an intensive self-examination of our regulatory and supervisory responsibilities” and is “actively implementing improvements.”

2) The Fed is “overhauling supervisory framework and procedures to improve coordination within our own supervisory staff” and with other agencies.

3) The Fed is developing an “enhanced quantitative surveillance program for large bank holding companies.” Mr. Bernanke said supervisory information will be “combined with firm-level, market-based indicators and aggregate economic data to provide a more complete picture of the risks facing these institutions and the broader financial system.”

4) Mr. Bernanke argues in favor of retaining key supervisory powers at the Fed. “The recent crisis has also underscored the extent to which direct involvement in the oversight of banks and bank holding companies contributes to the Federal Reserve’s effectiveness in carrying out its responsibilities as a central bank, including the making of monetary policy and the management of the discount window. Most important, as the crisis has once again demonstrated, the Federal Reserve’s ability to identify and address diverse and hard-to-predict threats to financial stability depends critically on the information, expertise, and powers that it has by virtue of being both a bank supervisor and a central bank.”

South Korea doesn’t host the world’s leaders for the G-20 economic summit until November, but organizers here already have one big fear: that nothing will get done at the meeting and interest in the primacy of 20-nation forum will fade as a result.

Finance ministers from the 20 countries in the group have met since the Asian financial crisis of the late 1990s. When the global financial crisis hit in 2008, presidents and prime ministers started meeting as a group. At their meeting in Pittsburgh last September, they decided the G-20 should take over from the G-7 as the main forum for hammering out global economic problems.

In South Korea, which will be the first non-member of the G-7 to host a summit of the G-20 leaders, organizers feel a special burden to demonstrate that the bigger group can make progress on the big issues.

But the risk is high that some of the problems the countries are facing — such as so-called “rebalancing,” or changing the perceived imbalance of trade and capital between Asian and Western countries — are too intractable to be resolved at either the year’s first G-20 summit in Canada in June or the second one here.

“We feel great responsibility of making the November G-20 summit a success for the sake of the credibility of the G-20 process itself,” Sakong Il, chairman of South Korea’s presidential committee on the G-20, told reporters Wednesday. “We have to produce more deliverables, implementable policy measures, rather than just to make the G-20 summit another feast of rhetoric. We have to make it function.”

Even so, Mr. Sakong wasn’t ready to be pinned down on the direction that some solutions might take.

For instance, leaders in the U.S. and U.K. in recent weeks have proposed a tax or levy on banks to recover some of the bailout costs during the financial crisis, a step that may also deter some of the excessive investment and capital flows that hurt countries like South Korea. Mr. Sakong said he wouldn’t “pre-determine which is the best idea” and noted both the International Monetary Fund and Financial Stability Board are studying the feasibility of various taxes.

“I just hope that the leaders can agree on some of these issues in Seoul,” he says.

The Obama idea has gained some traction in parts of the South Korean government, however, because of the perception that it might prevent the big swings in capital the country has seen by virtue of having open equity and currency markets.

South Korean banks and companies were isolated from the root causes of the 2008 financial crisis because they weren’t heavily invested in instruments backed by U.S. mortgages. But the country saw so much foreign capital flee in 2008 that its export-dependent companies were pinched for access to U.S. dollars and other currencies.

“What the Obama tax does is to target that path that is likely to be associated with excessive fluctuations in the financial sector,” says Shin Hyun-song, a Princeton economist who is spending a year in Seoul as senior adviser on international economics to South Korean President Lee Myung-bak.

“This hasn’t received much emphasis in the U.S. or the economies that suffered the brunt of the crisis,” Mr. Shin says. “The imperative is to get the money back for the taxpayers, but if you think about this as a long-run shield or preventative tool, it has some very nice properties.”

Some other South Korean officials have also spoken favorably about the bank-tax idea but the Lee government hasn’t formed an official position. Mr. Shin says, “The view is we are watching very closely what is happening internationally and we stand ready to engage in international discussions whenever that becomes close to fruition.”

He added that he thinks the G-20 is a natural forum to discuss a financial-industry levy because it will be difficult for any country to act on its own without running into enforcement difficulties and conflicts with the industry.

“It is best done with international coordination,” Mr. Shin says. “If we have the big picture behind us, I think it’s something we can agree on, perhaps with different motivations.”

A roundup of economic news from around the Web.

• Stimulus Effects: The nonpartisan Congressional Budget Office estimates the effects of the stimulus (the American Recovery and Reinvestment Act). “CBO estimates that in the fourth quarter of calendar year 2009, ARRA added between 1.0 million and 2.1 million to the number of workers employed in the United States, and it increased the number of full-time-equivalent (FTE) jobs by between 1.4 million and 3.0 million. Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers. CBO also estimates that real (inflation-adjusted) gross domestic product (GDP) was 1.5 percent to 3.5 percent higher in the fourth quarter than would have been the case in the absence of ARRA.”
• Way Out?: Writing for the Financial Times, Martin Wolf is gloomy about the global economic outlook. “I do not agree that monetary policy mistakes were responsible for all of this. But they played a role. In any case, all this had to end. Now, after the implosion, we witness the extraordinary rescue efforts. So what happens next? We can identify two alternatives: success and failure. By “success”, I mean reignition of the credit engine in high-income deficit countries. So private sector spending surges anew, fiscal deficits shrink and the economy appears to being going back to normal, at last. By “failure” I mean that the deleveraging continues, private spending fails to pick up with any real vigour and fiscal deficits remain far bigger, for far longer, than almost anybody now dares to imagine. This would be post-bubble Japan on a far wider scale. Unhappily, the result of what I call success would probably be a still bigger financial crisis in future, while the results of what I call failure would be that the fiscal rope would run out, even though reaching the end might take longer than worrywarts fear. Yet the big point is that either outcome ultimately leads us to a sovereign debt crisis. This, in turn, would surely result in defaults, probably via inflation. In essence, stretched balance sheets threaten mass private sector bankruptcy and a depression, or sovereign bankruptcy and inflation, or some combination of the two.”
• Price Tag Taste: On Psychology Today, Daniel R. Hawes looks at how our brains trick us into equating price with quality. “To get at this relation between price and taste experience, the researchers first made sure the experiment participants were always given information of a wine’s supposed price. They did this by presenting the wines for the experiment in bottles that were clearly identified by their supposed retail prices of ($5 to $90). What they also did, was refill the wines in such a way that each participant would have to taste the same wine twice; once from a bottle that was supposedly expensive (e.g. $90) and once from a bottle that had a much lower price tag (e.g.$10). Every participant was therefore led to believe that he or she was tasting five different wines, when indeed he or she was only tasting three different wines; two of them twice. The first set of results is striking, albeit possibly what you would expect: The expert wine tasters remained oblivious to the researcher’s manipulations and were not able to tell that they were tasting only three, instead of five, wines. Also, when tasting the same wine, the participating wine tasters systematically reported superior taste for the wine that came out of the $90 bottle, in contrast to the wine that came from the $10 bottle.”

Compiled by Phil Izzo

The number of people let go in mass layoffs rose in January after four straight months of declines.

Employers laid-off 182,261 workers, seasonally adjusted, in 1,761 mass layoff events last month, the Labor Department said Tuesday. A mass layoff is when a single employer terminates at least 50 people.

Manufacturing employers laid off 104,846 workers in mass layoffs in January, not adjusted for seasonal variations, and construction companies terminated 24,148 workers.

The upside is that the mass layoffs picture still looks better than it did a year ago. The number of mass layoff events was nearly 23% lower than the same month a year ago. And the number of people fired as part of those layoffs was down nearly 28%.

The improvement in the past year has been widespread. Sixteen of the 19 private industry sectors the Labor Department tracks experienced a decline in the number of people terminated in mass layoffs.

The Treasury announced this afternoon that it is going to revive a program in which it borrows $200 billion by issuing short-term bills and leaves the cash on deposit with the Federal Reserve. Why? And why now?

The Treasury initiated this program — called the Supplemental Finance Program — at the peak of the financial crisis. It was a way to get the Fed cash it needed to fund a myriad of new programs to get credit into the financial system. The Treasury reduced the program last year as its borrowing authority approached legal limits. But since Congress earlier this month approved an increase in the debt limit, it is able to revive it.

“The intention always was to resume SFP issuance when the debt ceiling was increased on a permanent basis, which finally happened earlier this month,” said Lou Crandall, a money market analyst at Wrightson ICAP LLC. “The Treasury kept $5 billion of SFP bills outstanding throughout all the debt limit negotiations as a placeholder to indicate that it wanted to go back to the status quo ante.”

The practical effect of this move is that the Fed will be able to finish $1.25 trillion of purchases of mortgage backed securities by the end of March without printing more money. Instead, it will have the cash on hand from the Treasury deposits to fund the purchases. As of February 17, the Fed’s portfolio of mortgage backed securities had reached $1.025 trillion, roughly $200 billion short of the objective.

The supplemental finance program move is part of a complex dance that the Fed has to undertake to manage its large and growing balance sheet. Cash deposits from the Treasury were used to fund some of the Fed’s early interventions into the financial system in 2008. But as the interventions grew, and the economic outlook worsened, the Fed took another approach. It began printing the money itself, in effect crediting the accounts of banks with cash when it made loans or bought securities.

Printing money made sense to rescue a wobbling financial system, but it could cause problems down the road. At some point, the Fed will need to drain this money — known in central banking parlance as “excess reserves” — to prevent an onset of inflation. It has been experimenting with and debating different ways of doing that. The Fed could sell some mortgage backed securities, taking cash from the buyers which reduces the supply of money in the system. It would soak up money itself by taking longer-term deposits from banks or doing trades with financial institutions that pull money away from them.

Excess reserves were $1.1 trillion on Feb. 10. Having the Treasury renew its supplemental finance program makes it easier for the Fed to contain the growth of this number and officials see it as a helpful supplement to its tools. But taking Treasury deposits aren’t seen inside the Fed as a step toward tightening credit broadly in the economy.

When that time comes, and it will, the Fed is likely to increase the interest rate it pays banks on these reserves so they put money at the Fed instead of lending it out. That step is still likely at least several months away, something Fed Chairman Ben Bernanke is likely to reiterate in testimony to Congress Wednesday on the outlook for the economy and monetary policy.

Three out of five Americans who are unemployed or underemployed don’t expect to find work in the next month, according to a new Gallup poll.

Gallup surveyed more than 4,000 adults throughout January. Some of the other findings:

• Among the underemployed — people working part-time but want full-time work — who say their companies are hiring, only 42% are hopeful about getting full-time hours.
• Almost two-thirds of people with a college degree or postgraduate education aren’t hopeful about finding work — making them the least likely to be hopeful among educational groups.
• Almost three out of four underemployed Americans ages 50 to 65 aren’t hopeful about finding a job within a month, making them the demographic group with the lowest likelihood of being hopeful. Gallup found that 46% of blacks and the same share of people ages 18 to 29 are likely to be hopeful, making them the demographic groups most likely to be hopeful.
• One area where hope made little difference: having enough money. Among both groups (hopeful and not hopeful), more than one in three said they did not have enough money to pay for food in the past year. More than one out of three said the same about health care. One in five said they did not have enough money for shelter in the past 12 months.

In another set of data released Tuesday, Gallup found that the underemployed reported spending 36% less than those employed — $48 per day vs. $75.

Sens. Judd Gregg (R., N.H.) and Ron Wyden (D., Ore.) on Tuesday introduced a proposal to vastly simplify the nation’s tax code by cutting the number of income tax brackets in half and flattening the corporate tax rate.

The Gregg and Wyden plan would lower the number of marginal income tax rates to three: 15%, 25% and 35%. It also would eliminate the alternative minimum tax, which lawmakers scramble to “patch” each year in order to minimize its impact on middle-income taxpayers.

The plan would create a single corporate income tax rate of 24%, but allow small businesses with receipts of up to $1 million to expense all of its equipment and inventory costs.

The plan would target “direct payments and indirect subsidies to businesses each year,” but would leave it to the nonpartisan Congressional Budget Office to identify “the least productive” of those subsidies. Politically, that would be a tough task, as lawmakers fiercely guard subsidies that benefit their states and districts.

President Barack Obama has also called for tax simplification, and last year he tapped former Federal Reserve Chairman Paul Volcker to head a task force on the issue. That task force has not issued any recommendations, however.

In a statement, Gregg and Wyden said they were aiming to alleviate the headache the tax code causes individuals and businesses trying to sort through its minutiae.

“For far too long, our tax system has been overly complicated, burdensome and unfair to taxpayers and to small businesses that are the economic engines of our nation,” Gregg said in a statement.

Gregg and Wyden assert that the average individual or family earning less than $200,000 would do “as well or better” under their plan than current tax law, in large part because the plan would nearly triple the standard deduction.

“Many taxpayers who currently itemize will find it more advantageous to switch to the standard deduction which will both reduce their tax bills and eliminate the burden of maintaining records and receipts needed to document itemized deductions,” the plan states. Most taxpayers would be able to use a one-page form to submit their taxes, according to Wyden and Gregg.

The capital gains tax also would see broad changes under the plan. The legislation would exempt the first 35% of capital gains income from the tax. Also, the first $500,000 of investment would be held for at least six months to be considered long-term capital gains income, and the next $500,000 would have to be held for a year to be considered long-term.

The S&P/Case-Shiller 20-city home-price index, a closely watched gauge of U.S. home prices, was mostly flat in December from a month earlier.

The index declined 3.1% from a year earlier. On a month-to-month basis prices fell 0.2% in December from November, but adjusted for seasonal factors the 20-city index was 0.3% higher.

On a seasonally adjusted basis, just five cities posted month-to-month declines. Unadjusted, 15 regions experienced home-price drops. The housing market is particularly sensitive to seasonal factors, especially in December as the holidays depress activity.

Los Angeles posted the largest jump in prices, while Chicago posted the biggest drop.

Four times a year, S&P/Case-Shiller publishes a broader national index. On an unadjusted basis, home prices nationwide fell 1.1% in the fourth quarter from the third and dropped 2.5% from a year earlier. While all the indexes are recording annual declines, the pace has slowed, indicating more stabilization in the market.

“These data do show that home prices are far more stable than they were during the depths of the financial crisis in the fourth quarter 2008,” said Dana Saporta of Stone & McCarthy Research. “But it is too soon to call recent home price data a clear signal of a sustained, broad-based recovery.”

• See the full S&P/Case-Shiller report.
• Read the full story.

Below, see data from the 20 metro areas Case-Shiller tracks, sortable by name, level, monthly change and year-over-year change — just click the column headers to re-sort.

(About the numbers: The Case Shiller indices have a base value of 100 in January 2000. So a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the metro market.)

Home Prices, by Metro Area

Source: Standard & Poor’s and FiservData

A roundup of economic news from around the Web.

• Who Pays for Recession?: On Economist’s View, Mark Thoma looks at who pays the cost of recession. “The recession is taking away opportunity for the young to gain employment experience, and many who are employed are working below their abilities in jobs they are likely to get stuck in for many years, if not forever. The recession is wiping out the accumulated assets of the unemployed as they try to bridge the gap until jobs return, and since many of these are older workers, this will have a large detrimental effect that lasts throughout their retirement years. Recessions cause skills to depreciate, there are psychological costs, there are costs to family members, the loss of a job generally means loss of health care, the costs to working class households go on and on. And there are other ways in which the costs have been distributed unequally, and in many cases these have not been thoroughly examined. For example, there is evidence that minority groups were given higher cost and highly profitable mortgages when lower cost but less profitable loans were available. This also served to wipe out accumulated assets of minority borrowers in addition to all the other problems that come when a high cost mortgage cannot be paid.”
• Doomsday Cycle: On voxeu, Peter Boone and Simon Johnson suggest the economic system is in a doomsday cycle. ” Over the last 30 years, the US financial system has grown to proportions threatening the global economic order. This column suggests a ‘doomsday cycle’ has infiltrated the economic system and could lead to disaster after the next financial crisis. It says the best route to creating a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise.”
• Commercial Real Estate: Mike Shedlock looks at a Congressional Oversight Panel report on commercial real estate. “The report noted that ‘Treasury officials believe that the commercial real estate problem is one that the economy can manage through, and analysts believe that the current condition of commercial real estate, in isolation, does not pose a systemic risk to the banking system.’ The key words in that paragraph are ‘in isolation’. What about credit card defaults? What about another wave down in housing? What about the cumulative effect of banks being so undercapitalized they could not lend if they wanted to? What if more businesses decide to walk away for properties? What happens to mortgage rates and rates for commercial loans when the Fed stops buying mortgage backed securities? A quick look at the above questions shows risk is overwhelmingly to the downside… Perhaps the economic miracle fairy waves her wand and cures all of these systemic risks, but I would not bet on it.”

Compiled by Phil Izzo

Gary Gorton, a finance professor at the Yale School of Management, takes a stab at explaining one key aspect of the recent crisis — the rise of the shadow banking system and the role that securitization plays — in testimony he’ll deliver later this week to the Financial Crisis Inquiry Commission.

The story isn’t as simple as the black hats vs. white hats version that politicians, the press and the public favor. In question-and-answer format, he offers a step-by-step explanation.

It’s wrong to blame this crisis on subprime mortgage lending, he says. Rather, this crisis is best seen as the latest of a series of banking crises throughout history. Banks borrow (or take deposits) short-term, promising to give money to their customers if they want it. They invest that money long-term, lending to businesses and consumers. This “intermediation” process is vital to the smooth functioning of the economy. But if depositors or others from whom banks have borrowed short-term demand their money back — a demand often sparked by panic — banks can’t instantly respond, and bad things ensue. In the old days, these runs were prompted by anxious depositors. Deposit insurance helped solve that problem. In our time, banks were reliant on short-term borrowing known as repurchase agreements — and the folks who held those panicked.

Gorton writes: “Repo is money… But, like other privately created bank money, it is vulnerable to a shock, which may cause depositors to rationally withdraw en masse, an event which the banking system — in this case the shadow banking system — cannot withstand alone. Forced by the withdrawals to sell assets, bond prices plummeted and firms failed or were bailed out with government money. In a bank panic, banks are forced to sell assets, which causes prices to go down, reflecting the large amounts being dumped on the market. Fire sales cause losses. The fundamentals of subprime [mortgages] were not bad enough by themselves to have created trillions in losses globally. The mechanism of the panic triggers the fire sales. As a matter of policy, such firm failures should not be caused by fire sales.”

“The crisis was not a one-time, unique, event. The problem is structural. The explanation for the crisis lies in the structure of private transaction securities that are created by banks. This structure, while very important for the economy, is subject to periodic panics if there are shocks that cause concerns about counterparty default. There have been banking panics throughout U.S. history, with private bank notes, with demand deposits, and now with repo. The economy needs banks and banking. But bank liabilities have a vulnerability.”

Gorton also argues that securitization — the business of making loans and then selling them off as securities — was prompted by a simple fact of banking business life. “Holding loans on the balance sheets of banks is not profitable. This is a fundamental point. This is why the parallel or shadow banking system developed,” he says. “As traditional banking became unprofitable in the 1980s, due to competition from, most importantly, money market mutual funds and junk bonds, securitization developed. Bank funding became much more expensive. Banks could no longer afford to hold passive cash flows on their balance sheets. Securitization is an efficient, cheaper, way to fund the traditional banking system.”

In addition to being a scholarly analyst of finance, Gorton had a ringside seat during this crisis. He helped craft models that AIG used to assess the risk of its credit default swaps.

A lot of action is expected this week in the Senate – and in the Obama administration – over the White House’s push for new financial rules. Senate Banking Committee Chairman Christopher Dodd (D., Conn.) told reporters Monday he hopes to bring a bill to his committee in a matter of “days.”

Here’s an update of news on the financial overhaul:

1) Treasury Secretary Timothy Geithner on Thursday has called a meeting with some of the country’s top business and financial trade groups – including the U.S. Chamber of Commerce, the American Bankers Association, the Independent Community Bankers of America, the Financial Services Roundtable, and the Securities Industry and Financial Markets Association. The meeting is supposed to focus a lot on the financial overhaul plan.

2) Senate lawmakers are back after the President’s Day recess. Here’s some outtakes from a few caught in the hallway Monday.

• a. Mr. Dodd: “I feel will have a good chance to produce a bipartisan bill soon, and I know you all want to know dates and times exactly, and obviously I don’t know that…We’re not running out of time. Eventually you have to put something together and go forward. I want people to be comfortable with the product to the extent they can be, but I’m very optimistic we can get a bill. A good bill…We’re talking about everything in the bill, of course we are…I think if we can come out of committee with a bipartisan bill, the chances on the floor increase dramatically, and I believe we have a very good chance of doing that.”
• b. Sen. Richard Shelby (R., Ala.): “Conceptually, we’re probably very close together on all the main issues…The big difference is an independent free standing consumer financial (agency). I’ve always said it should be with the prudential regulator because safety and soundness is so important, otherwise you are going to have cross-purposes there…Our staffs have been talking and we’ll see later this week if we’re moving closer together or we’re moving further apart. I hope we are moving closer together…We will produce at a markup an alternative to whatever is there, unless we work out something.”
• c. Sen. Judd Gregg (R., N.H.): “I’ve been focused pretty much entirely on the issue of derivatives, and Jack Reed and I continue to work in a very constructive way on that issue. I can’t speak for the other issues as a whole.” When asked about progress on the derivatives piece, he responded, “I don’t want to characterize it, but we’re making constructive and I think positive progress.”
• d. Sen. Jim Bunning (R., Ky.) was asked his thoughts about Sen. Bob Corker (R., Tenn.) breaking ranks with Republicans and working with Mr. Dodd on a potential bipartisan compromise. His response: “I don’t have a thought about Bob Corker. Not one thought.”

The Knowledge is Power Program, or KIPP, is a get-tough approach to education that’s been adopted by charter schools across the country. KIPP schools, which feature long days, limited vacation time and heavy homework loads, are touted as giving disadvantaged children a leg up on education. But figuring out what sort of results KIPP schools get has been less than clear cut, because while KIPP students often perform better than students at nearby schools, they may have an edge to start with.

Now a group of researchers has uncovered evidence that suggests KIPP really works.

A glowing profile of the KIPP program in Malcolm Gladwell’s book, “Outliers,” offers hints at how hard it is to measure KIPP’s success. Gladwell tells the story of Marita, a student in the Bronx. She balked at how hard KIPP sounded when her mother took her to sign up, she says, “but then my mom was right there, so I signed it.” She talks about counseling a friend who showed an interest in KIPP “but then she would say that KIPP is too hard and she didn’t want to do it.”

Marita has a mother who’s keenly interested in her getting an education. And Marita, unlike her friend, is willing to take on the hard work. That’s a potent combination for getting a good education. Indeed, a 2005 report by the Economic Policy Institute found that KIPP students had more motivated parents and better test scores from the get go. Without a controlled study, it’s impossible to tell what advantage, if any, KIPP gives.

In an attempt to clear the air, economists Joshua Angrist, Parag Pathak and Christopher Walters, working alongside education professors Susan Dynarski and Thomas Kane, examined the KIPP school in Lynn, Mass.

Massachusetts law requires that when enrollment to a charter school is oversubscribed, a lottery be held for admittance. That allows the researchers to run a quasi-randomized trial, comparing students who won the lottery and got into KIPP Lynn with those who didn’t. And they find that attending KIPP leads to significantly better reading and math scores.

Of course, Lynn is just one of 80 KIPP schools now operating or slated to open soon. But because the KIPP program is standardized, say the researchers, “we might therefore expect similar gains and interactions to emerge from a larger sample of KIPP schools.”

Here is some good news on the jobs picture, courtesy of economists at Deutsche Bank.

After collapsing last year, individual income-tax withholding seems to be turning a corner. Tax withholding is a good jobs indicator, because you have to have a job to get your taxes withheld.

Withholding sank with the recession’s onset and collapsed after the collapse of Lehman Brothers in 2008. But it seems to be turning a corner.

 Here’s Joseph LaVorgna’s take: “The tax data, which are reported daily by the US Treasury, are particularly valuable to us because they are not subject to revision. Over the past 3-4 months, the plunge in tax receipts has reversed sharply. While still down in year-on-year terms (-2.5%), the lengthening recovery in tax receipts strongly supports our view that net positive hiring is very near—probably not in the February figures (due to weather), but increasingly likely when the March jobs data are reported on April 2.”

U.S. regulators need to “redouble” their efforts to deal with the still shaky commercial real estate market, a top U.S. Senate Democrat said Monday.

Sen. Christopher Dodd (D., Conn.), who chairs the Senate Banking Committee, said in a letter released by his office that he was concerned about the potential effects of commercial real estate woes on the broader economy.

“I believe that the weakness in the CRE market requires prompt and robust responses from the regulators to guard against harmful effects on financial institutions and the economy,” Dodd said in the letter to Federal Reserve Chairman Ben Bernanke.

Similar letters were sent to the Federal Deposit Insurance Corp. and Office of Thrift Supervision, among others.

U.S. regulators have been warning about problems in the commercial real estate market for months. FDIC Chairman Sheila Bair, speaking at a conference in Washington last month, said that regulators expect banks to report higher delinquencies and charge-off rates for commercial real estate properties in the first three months of 2010. Even income-producing properties have seen a decline in credit performance, Bair said.

The Federal Reserve will rely most heavily on its power to pay interest on reserves, rather than assets sales, when the time arrives to tighten monetary policy, although those actions are unlikely for quite a while, a top Federal Reserve official said Monday.

Yellen

With a still weak economy and scant inflationary pressures, “this is not the time to be removing monetary stimulus,” Federal Reserve Bank of San Francisco President Janet Yellen said. “When the day comes to start raising rates again, we have tools at the ready. But, for the time being, the economy still needs the support of extraordinarily low rates,” she said.

When it becomes time for the Fed to change gears, Yellen said the Fed’s ability to pay interest on reserves banks hold at the Fed will “play a lead” role in the policy response. This power, according to central bankers, mutes the inflationary power of the Fed’s swollen balance sheet by creating powerful incentives for banks to stash excess cash at the Fed, which keeps that money out of the economy.

The policy maker said outright sales of assets the Fed has bought to help lower borrowing costs and support the housing market would be a bad idea for the foreseeable future. “Massive sales of mortgage-related and Treasury securities could be disruptive to markets and cause mortgage interest rates and other long-term rates to shoot up when we are still in the early stages of the recovery and the financial system, although improving, is still not at full health,” Yellen said.

“Eventually, after economic conditions have improved and a policy tightening has begun, we may then start a gradual process of selling securities in order to help return the Fed’s balance sheet to its pre-crisis levels,” the official said.

Yellen isn’t currently a voting member of the interest rate setting Federal Open Market Committee. Her comments came from the text of a speech that was to be delivered before an event at the University of San Diego, in San Diego, California.

She spoke in the wake of last week’s decision by the Fed to lift a rate charged to banks when they take emergency loans from the Fed. While the Fed said the action represented a normalization of its emergency lending tools, it came in a climate where many believe a recovering economy will soon drive the Fed to tighten monetary policy, and it rattled investors. Market participants are mulling when the Fed will raise short-term rates, and when it will start to shrink its balance sheet, which is over $2 trillion.

Fed officials appear split over what will happen with asset sales. The Fed will soon complete a program to buy $1.25 trillion in mortgage securities, and some officials would like to see those purchases moved off the Fed’s books in short order. Others believe the Fed has more time, especially since it can control the balance sheet via the interest-on-reserves power.

Yellen’s view on the economy was mixed, and she noted it will take a long time for the recession’s impact to wane. The economy will be “gradually picking up steam over the remainder of this year as households and businesses regain confidence, financial conditions improve, and banks increase the supply of credit,” Yellen said. She expects 3% growth for the current quarter, and growth of 3.5% for 2010, rising to 4.5% next year.

Still, “the economy will continue to operate well below its potential throughout this year and next,” Yellen said. While there’s been a “glimmer” of hope for hiring, “I expect unemployment to remain painfully high for years,” she said. The official reckons the 9.7% unemployment rate should ease to 9.25% by year’s end, and 8% by end of 2011, levels she declared “a far cry from full employment.”

With hiring weak, inflation isn’t much of a threat. “With slack likely to persist for years and wages barely rising, it seems quite possible that core inflation will move even lower this year and next,” Yellen said. “The more worrisome challenge for price stability over the next few years stems primarily from the sizable amount of slack in the economy,” she said.

Yellen also said “the housing sector appears to have stabilized, but here too I don’t see any signs of a sharp turnaround.” But she warned more difficulty could be coming, saying “as support from Federal Reserve and other government programs phases out, there is a risk that the housing market could weaken again.”

Yellen also said “credit is becoming more available, but terms such as collateral requirements can be onerous.” She added, “losses on mortgages, commercial real estate credits, and other loans continue to mount, and the full weight of foreclosures and bank failures on the economy has yet to be felt.”

The economy is back to its usual cruising speed, according to the Chicago Fed’s national activity index.

The index rose to 0.2 in January from a negative 0.58 in December. Anything above zero means that the pace of overall economic activity faster than usual. A composite of 85 economic indicators, the index includes data on employment and income and so is meant to be a broader measure of the economy than gross domestic product.

But after the deepest recession since the 1930s, for economic activity to be merely back to normal isn’t enough. There remains a large gap between where the economy is and where it needs to be for it to be healthy. For that gap to be closed, the activity index will need to push farther above zero, and stay there for some time.