We All Need Something To Write About In August

James Pethokoukis:

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie.

Daniel Indiviglio at The Atlantic:

First, this could really happen. The Treasury has unlimited discretion to plow as much money as it pleases into Fannie and Freddie. So adding several hundred billion dollars to the $150 billion already provided through their bailout would be as easy as the stroke of a pen. Moreover, the government’s other foreclosure efforts, particularly the HAMP program, have had lackluster success. This would provide the principal reductions that many progressives have been calling for to make for more effective modifications — but even for those who aren’t in danger of foreclosure.

Consequently, it would act as a stimulus. Let’s say your mortgage was based on original principal of $250,000. At 6% fixed interest, that would make your payment around $1500. But let’s say the housing bubble dropped your property value by 30%, so the home is only worth $175,000. Now, let’s say that you had paid off $25,000. That leaves $50,000 in principal that the GSEs could potentially write down. Suddenly, your payment would drop to as low as $1,050. What would you do with that extra $450 per month? The Obama administration would hope that you spend it!

This would effectively transfer wealth from all taxpayers to middle class homeowners, since it would only benefit those who have mortgages with the GSEs. The upper class generally has either very large (“jumbo) mortgages that don’t qualify for Fannie and Freddie’s backing or they own their home outright. Poorer Americans, however, don’t have mortgages at all — they rent. So they wouldn’t benefit either.

Whether or not this proposal would successfully stimulate the economy depends on the psychology of those lucky homeowners. We have seen recently that saving has been quite high. So it’s certainly conceivable that much or most of that mortgage payment reduction would be saved or used to pay down other debt. If the recipients spent it, however, then it would stimulate the economy.

Ryan Avent at Free Exchange at The Economist:

Such a move would raise some significant questions concerning issues of governance and the use of previously-private firms to support administration ends. Republicans would be furious. At the same time, it could be a nice shot in the arm for the economy (and, it goes without saying, the White House). But there are few good details to go on, and even less in the way of official substantiation. Who knows what the policy would actually look like or whether it’s truly on the table. But it’s August! Gotta write about something.

Annie Lowrey at The Washington Independent:

The question is whether this really is a good move politically if housing has stabilized. It will be expensive, very, very expensive. And my guess is that Republicans would love to campaign on this, easily and rightly characterized as a mass taxpayer bailout of underwater homeowners. For that reason, I would be surprised to see the administration do it. Forcing the banks to enact cramdown or changing bankruptcy laws would be one thing. But doing this through Treasury, politically, would be quite another.

Moe Lane:

You know, I happen to have an underwater mortgage: we bought our house at exactly the wrong moment in time. Do you know what we’re doing about it? WE’RE MAKING OUR MORTGAGE PAYMENTS, that’s what we’re doing about it. Because we sat down and worked out how much we could afford to spend beforehand, then we stuck to that number like glue.  In other words, I don’t need a handout to pay my bills, and I really don’t need to spend another insanely large sum of money (Hot Air thinks that it could reach 100 billion, which is a large sum of money, even today) that my kids are just going to have to repay later, after the President retires to the global cocktail circuit.  And I know that people are going to argue that the majority of Americans can be short-termed bribed in this fashion, but you know something?  I don’t think it’ll work.  Particularly when it comes to people who have kids.

At some point the Democrats are going to have to accept the fact that you cannot finesse your way out of some situations, and that this is one of those times.  Yes, it is going to be incredibly painful for long-term, still-serving federal politicians who can be linked to the crisis.  Yes, thanks to 2006 and 2008 that’s going to disproportionately hurt Democrats.  Yes, Republican and conservative operatives like myself will (deservedly) mock their pain for it.

Andrew Samwick:

If it happens, it will be just another example of why the government should not be involved in running business enterprises that could be done, even if imperfectly, in the private sector.  It will also be another example of how we have moved a bit further away from democracy in allowing such a move solely by the executive branch of government.

Calculated Risk:

The blog post includes the poorly considered proposal from Morgan Stanley (that Tom Lawler responded to last week), and an excerpt from a July 16th Goldman Sachs research note that suggested “while there are ways in which the GSEs could provide support through policy, the effects on the broader economy would ultimately be fairly modest.”

Not exactly foretelling a “gigantic bailout”.

This nonsense is part of the silly season. Sure, some small changes could be made to Fannie and Freddie, but nothing like this post would suggest.

Not. Gonna. Happen.

Alert Drudge and the tinfoil hat sites – they will run with this story. It is a political post … I’m already sorry I mentioned it.

The Two Propositions Of The Day: Proposition 8

Andrew Sullivan with the ruling

Marc Ambinder:

Here’s what you need to know about Judge Vaughn Walker’s decision invalidating California’s Proposition 8, a referendum, passed by voters, that banned same-sex marriage. The decision itself will be appealed, and Walker’s reasoning could serve as the basis for argument at the appellate level — or, the appeals court could decide to argue the case a completely different way.

What matters are the facts that Walker finds. Why? As Chris Geidner notes, “[the] judge or jury who makes the findings of fact, however, is given deference because factual determinations are aided by the direct benefit of the judge or jury at trial. On appeal, Judge Walker’s findings of fact will only be disturbed if the appellate court finds any to be clearly erroneous.”

Walker, in his decision, writes that “Proposition 8 fails to advance any rational basis in singling out gays and lesbians for denial of a marriage license.”  He evaluates as credible witnesses the panel of experts who testified against Proposition 8, and finds fault with the credentials of several witnesses who testified against same-sex marriage, including David Blankenhorn, President of the Institute for American Values.

“Blankenhorn’s testimony constitutes inadmissible opinion testimony that should be given essentially no weight,” Walker writes. “Blankenhorn gave absolutely no explanation why
manifestations of the deinstitutionalization of marriage would be exacerbated (and not, for example, ameliorated) by the presence of marriage for same-sex couples. His opinion lacks reliability, as there is simply too great an analytical gap between the data and the opinion Blankenhorn proffered.”

Jacob Sullum at Reason:

The arguments for banning gay marriage are so weak, Walker said, that they fail even the highly deferential “rational basis” test, which applies in equal protection cases that do not involve a “suspect classification” such as race. “Moral disapproval alone is an improper basis on which to deny rights to gay men and lesbians,” he wrote. “The evidence shows conclusively that Proposition 8 enacts, without reason, a private moral view that same-sex couples are inferior to opposite sex couples.”

The decision is bound to be appealed and may ultimately reach the Supreme Court. The text of Walker’s opinion is available here. The Los Angeles Times has excerpts here. I discussed the equal protection argument for federal recognition of state-approved gay marriages here and here. More to come.

Rachel Slajda at Talking Points Memo:

In his findings of fact, Walker pointed out that California “has never required that individuals entering a marriage be willing or able to procreate.”

He also notes that slaves were unable to marry.

“The states have always required the parties to give their free consent to a marriage. Because slaves were considered property of others at the time, they lacked the legal capacity to consent and were thus unable to marry. After emancipation, former slaves viewed their ability to marry as one of the most important new rights they had gained,” he wrote.

Walker also noted that past marriage inequalities have included the prohibition of interracial marriage and coverture, in which a woman’s identity is subsumed by her husband’s.

Chris Rovzar at New York Magazine

The Brad Blog:

Great news for real conservatives who believe in the U.S. Constitution and its guarantee of equal protection under the law! A U.S. District Court Judge, first nominated by Ronald Reagan and then appointed under George H.W. Bush, has struck down CA’s Prop 8 which added an amendment to the state constitution banning same-sex marriage equality. The state’s majority Republican-appointed Supreme Court had previously found no basis for banning same-sex marriage in the CA constitution. That finding was, in effect, overturned at the ballot box in November 2008 by Prop 8 which ended same-sex marriage in the state and left thousands of marriages in limbo until today’s finding.

Jim Newell at Gawker:

CNN is going to gay bars in San Francisco on TV right now, for reactions. (Update: No one was in the gay bars so they stopped. Lame empty gay bars!)

You can read the full decision here. The judge found it unconstitutional under both the due process and equal protection clauses. The ruling is expected to be appealed and could end up at the Supreme Court.

Steve Benen:

The full ruling from Judge Walker, an appointee of President H.W. Bush, is online here.

Note, the case will now go to the 9th Circuit Court of Appeals, which tends to be pretty progressive. Many legal experts I’ve spoken to expect the Supreme Court to eventually hear the case.

In the meantime, the decision is heartening. The arc of history is long, but it continues to bend towards justice.

Jesse Zwick at The Washington Independent:

Looking ahead, it will be interesting to see what kind of role the issue of same-sex marriage, so incendiary in California in 2008, will play in the midterm elections in the state this November. The Courage Campaign, a progressive online organizing network based in California and formed partly in response to the passage of Prop 8, has been busy pointing out the role of the National Organization of Marriage (NOM), the main nonprofit behind the passage of Prop 8, in backing California candidates like GOP senate hopeful Carly Fiorina.

“In NOM, Carly Fiorina has aligned herself with a fringe group that relies on lies and fear to advocate discrimination and second-class citizenship for millions of loving American families,” Courage Campaign Chairman and Founder Rick Jacobs said in a press release. “Bigotry is not a family value and it has no place in the United States Senate.”

The National Organization of Marriage, already under fire for failing to disclose its donors to state election officials in Iowa and Maine, has now joined up with the Latino Partnership for Conservative Principles, an initiative of American Principles in Action, and the Susan B. Anthony List, a pro-life women’s network, to back Fiorina through the “Tus Valories” (Your Values) Campaign, an independent expenditure on the part of American Principles in Action.

bmaz at Firedoglake:

The common wisdom is that the prospects for upholding Judge Walker’s decision in the 9th Circuit are good. I agree. However, the common fear is that the ever more conservative and dogmatic Roberts Court will reverse and ingrain the discrimination, inequality and hatred of Proposition 8 and its supporters deep into American law and lore. I am much more optimistic this is not the case.

As the inestimable Linda Greenhouse noted recently, although the Roberts Court is increasingly dogmatically conservative, and Kagan will move it further in that direction, the overarching influence of Justice Anthony Kennedy is changing and, in some ways, declining. However, there is one irreducible characteristic of Justice Kennedy that still seems to hold true; she wrote of Kennedy:

…he embraces whichever side he is on with full rhetorical force. Much more than Justice O’Connor, whose position at the center of the court fell to him when she left, Justice Kennedy tends to think in broad categories. It has always seemed to me that he divides the world, at least the world of government action — which is what situates a case in a constitutional framework — between the fair and the not-fair.

The money quotes of the future consideration of the certain appeal and certiorari to come on Judge Walker’s decision today in Perry v. Schwarzenegger are:

Laws designed to bar gay men and lesbians from achieving their goals through the political process are not fair (he wrote the majority opinion striking down such a measure in a 1996 case, Romer v. Evans) because “central both to the idea of the rule of law and to our own Constitution’s guarantee of equal protection is the principle that government and each of its parts remain open on impartial terms to all who seek its assistance.”
……
In a book titled “Justice Kennedy’s Jurisprudence,” a political scientist, Frank J. Colucci, wrote last year that Justice Kennedy is animated by an “ideal of liberty“ that “independently considers whether government actions have the effect of preventing an individual from developing his or her distinctive personality or acting according to conscience, demean a person’s standing in the community, or violate essential elements of human dignity.” That is, I think, a more academically elegant way of saying fair versus not-fair.

So the challenge for anyone arguing to Justice Kennedy in the courtroom, or with him as a colleague in the conference room, would seem to be to persuade him to see your case on the fair (or not-fair, depending) side of the line.

I believe that Linda is spot on the money with her analysis of what drives Anthony Kennedy in his jurisprudence. And this is exactly what his longtime friend, and Supreme Court advocate extraordinaire, Ted Olson will play on and argue when the day arrives. It is exactly what Vaughn Walker has ingrained in to and framed his extraordinary decision today on.

Today is one of those rare seminal days where something important and something good has occurred. Fantastic. The beauty and joy of equality, due process and equal protection under the Constitution of the United States of America.

UPDATE: Dahlia Lithwick at Slate

Orin Kerr

Ilya Shapiro at Cato

Tom Maguire

William Duncan at NRO

Eugene Volokh

UPDATE #2: James Taranto at WSJ

Scott Lemieux

Dan McLaughlin at Redstate

Jim Antle in The American Spectator

UPDATE #3: David Frum at CNN

Steve Chapman at Reason

UPDATE #4: Legal Insurrection

Allah Pundit

Jackson Pollack And Groucho Marx Comparisons Abound, Part II

Eric Lipton at NYT:

A House investigative panel has found “substantial reason to believe” that Representative Charles B. Rangel violated a range of ethics rules, dealing a serious blow to Mr. Rangel, a Harlem Democrat, in the twilight of his political career.

The finding means that the 80-year-old congressman must face a public trial before the House ethics committee, the first member to be forced to do so since 2002, when former Representative James A. Traficant Jr. was expelled from Congress after taking bribes.

The investigative panel did not disclose any details about the nature of the violations.

But two Democrats with knowledge of the investigation said the committee found evidence to support accusations that Mr. Rangel wrongly accepted four rent-stabilized apartments in Manhattan and misused his office to preserve a tax loophole worth half a billion dollars for an oil executive who pledged a donation for an educational center being built in Mr. Rangel’s honor.

The committee also found evidence to support a charge that Mr. Rangel failed to report or pay taxes on rental income from his beachfront Dominican villa.

Jay Newton-Small at Swampland at Time:

The last time such an open process was used was for former Rep. James Traficant, an Ohio Democrat who was expelled from the House in 2002 for taking bribes, racketeering, filing false tax returns and forcing aides to perform household chores on his Ohio farm and DC houseboat (which was, coincidentally, parked not far from Duke Cunningham’s houseboat). Traficant served seven years in prison and is now a radio host in Ohio. He recently filed papers to make an independent run for his old seat.

Former Majority Leader Tom DeLay skipped such a step when his ethics investigation went right from the exploratory phase to admonishment — a first in ethics committee history.

Rangel first asked the committee two years ago to look into newspaper allegations that he’d failed to report income from a Caribbean rental, that he used Congressional letterhead to solicit donations for a charity in his name and that he broke New York rent subsidy laws. The alleged tax lapses were particularly worrisome as the chairman of the Ways & Means Committee is Congress’s top tax writer. Politico reported that Rangel was seen arguing with ethics committee chair Zoe Lofgren shortly before today’s announcement was made. Zofgren had, reportedly, been encouraging Rangel to follow a DeLay route and skip the adjudicatory process. As of August 2009, Rangel had spent more than $1 million in legal fees defending his actions to the committee. If he’s found in violation of House rules the committee’s evidence could be turned over to prosecutors to pursue a criminal case

James Richardson at Redstate:

In the same way that Republican ethics violations loomed large in the 2006 midterm elections that saw the House of Representatives change hands, Rangel’s ethics misdeeds threaten to undermine Speaker Nancy Pelosi’s pledge to run the “most honest, most open and most ethical Congress in History.”

But for now, the specific nature of charges against Rangel remain unknown — and will likely remain as such until next Thursday when he makes his case to the ethics panel. In the meantime, a list–that is, unfortunately, in no way comprehensive–of the 80-year-old lawmaker’s ethics lapses:

• Violating New York state and city zoning laws, Rep. Rangel rented in 2008 several rent-stabilized Harlem apartments and used one for a base of operations for his reelection effort.
• Days later it was revealed Rangel had used congressional letterhead to solicit funds for his personal foundation, the Charles B. Rangel Center for Public Service.
• The following month, in August of 2008, the New York Post reported that Rangel had failed to disclose income from renting his beachfront villa on a Dominican Republic resort. In total, Rangel failed to disclose $75,000 in rental income since 1988. Rangel secured a seven-year fixed rate loan at 10.5 % for the property, but two years later the interest on the loan, which was awarded by a company for which the congressman was an early investor, was waived. Rangel paid $10,800 in back-taxes for his 2004, 2005 and 2006 tax returns for the unreported rental income.
• Rangel violated House rules and failed to report income to the IRS when he left his 1972 Mercedes in a House parking lot for several years without registering the car. The car, without license plates and covered by a tarp, occupied a space for several years valued a $290 per month.
• In November 2008, the Post’s muckrakers discovered that Rangel had improperly received a “homestead” tax exemption on a property he owned in Washington, D.C., while occupying his four rent-stabilized apartments in New York City.
• Rangel secured tax benefits for a company whose chief executive he was courting as a donor for his private foundation.
• And most recently, a House panel admonished the scandal-plagued congressman for wrongly accepting reimbursements for two Caribbean trips in 2007 and 2008.

Mary Katherine Ham at The Weekly Standard:

Rangel’s lawyer tried to settle but was rebuffed. The man who writes the tax law you must follow

Gateway Pundit

Allah Pundit:

This is five months in the making, starting with his admonishment back in February over staff members having accepted free trips to the Caribbean and culminating a week later in his removal from Ways and Means — albeit supposedly only on a temporary basis. Anyone think he’ll be returning to the committee after this, even if he beats the rap?

The next step is a trial by subcommittee. Given that the most ethical Congress ever had a decidedly lackluster reputation on ethics until now, I wonder how much pressure for and against charging Rangel there is on the Democratic side. On the one hand, this is going to push ethics back on the campaign menu. On the other, if they beat up on Rangel, it makes them look forthright. Stand by for updates.

Jim Newell at Gawker:

While nothing short of a mobilized Allied army seems capable of forcing Rep. Charlie Rangel out of Congress, the House ethics committee will charge him with official ethics violations, essentially setting up a trial — the first in eight years.The violations have not been officially filed yet, so the specific violations they’re pursuing out of his career’s 10 billion worth aren’t fully clear. Probably related to this stuff, though, which people who’ve followed Rangel’s investigation are quite familiar with:

The committee had been investigating claims that Mr. Rangel improperly rented four rent-stabilized apartments in Harlem at a price well below market value, despite rules forbidding House members from accepting gifts worth more than $50.

It also had been investigating allegations that he improperly used his office to provide legislative favors for an oil-drilling company that pledged a $1 million donation for an academic center named for Mr. Rangel and improperly failed to report taxable income received from a villa he owns in the Dominican Republic.

Maybe we’ll get something else, though? Something a little more blog-friendly? Sex, maybe?

UPDATE: Michelle Malkin

Ed Morrissey

Nicole Allan at The Atlantic

Jesse Zwick at The Washington Independent

UPDATE #3: Steve Krakauer at Mediaite

Ed Morrissey

They’ve Got No Energy For It

David Herszenhorn at NYT:

After a meeting of Senate Democrats, party leaders on Thursday said they had abandoned hope of passing a comprehensive energy bill this summer and would pursue a more limited measure focused on responding to the gulf oil spill and tightening  energy efficiency standards.

Senator John Kerry of Massachusetts, a champion of comprehensive climate change legislation, called the new goal “admittedly narrow.”

At a news conference, the majority leader, Harry Reid of Nevada, blamed Republicans for refusing to cooperate. “We don’t have a single Republican to work with us,” Mr. Reid said.

Democrats said they would continue to pursue broader climate change legislation.

“This is not the only energy legislation we are going to do,” Mr. Reid said. “This is what we can do now.”

Allah Pundit:

Supposedly it’s merely a scheduling move, aimed at pushing the C&T debate into the fall when the Senate calendar is less crowded.

Really, though? Democrats, who are already terrified of losing Congress, are going to surf into the midterms with an eleventh-hour push for a hugely expensive new bill related to … global warming? With the GOP already armed with ad-ready video of Obama talking about how it’ll make energy prices “skyrocket”? Radical prediction: Reid’s going to end up deciding in September that the schedule’s still a little too “crowded” to take this up.

Ronald Bailey at Reason:

Instead, according to Politico, the Democratic leadership will attempt to pass a more limited energy bill in the fall that will have:

…low-hanging-fruit provisions dealing with the oil spill, Home Star energy efficiency upgrades, incentives for the conversion of trucking fleet to natural gas and the Land and Water Conservation Fund.

The death of the expensive and pork-laden carbon rationing scheme is good news for now. However, it is widely expected that the Democrats will lose control of the House of Representatives and reduce their membership in the Senate in the upcoming mid-term elections. Some commentators fear that defeated Democrats who are no longer beholden to their constituents will use the lame duck session in December to ram through carbon rationing (and much else).

Jennifer Rubin at Commentary:

That hasn’t and won’t stop Reid and the White House from blaming Republican lawmakers. But this is one accusation to which Republicans should be glad to plead guilty. If Reid wants to accuse them of stopping another job-killing, tax-hiking, mammoth piece of legislation, I don’t think Republicans will mind.

Andrew Restuccia at The Washington Independent:

Just got a readout of what’s likely to be included in Senate Majority Leader Harry Reid’s (D-Nev.) scaled-down energy bill. According to an environmentalist source with close ties to the discussions, the bill will likely include:

– An oil spill response title based on the bill passed by the Senate Energy & Natural Resources Committee and the bill lifting the liability cap for economic damages in the event of a spill passed by the Senate Environment & Public Works Committee, both passed out of committee last month.

– A title on energy efficiency that will be based on the Home Star Energy Retrofit Act, which gives homeowners incentives to make their homes more efficient.

Significantly, the source says the bill might not include a renewable energy standard, which environmentalists and other groups have been pushing aggressively.

A spokesperson for Reid, Regan Lachapelle, declined to comment on the bill, saying more information will be available after a caucus lunch being held today on the issue.

More to come…

Steve Benen:

The “admittedly narrow” legislation won’t be completely useless; it just won’t do what we need it to do. The plan is to have this bill include new oil company regulations, cover spill liability issues, reinvest in the Land and Water Conservation Fund, put some money into manufacturing of natural gas vehicles, and create some jobs through Home Star (the program formally known as Cash for Caulkers).

The list of key provisions that aren’t in this bill isn’t short — any kind of cap-and-trade, renewable energy standards, etc. — but the leadership is convinced it just doesn’t have a choice. “We know where we are,” Reid told reporters. “We don’t have the votes.”

So, is that it? Is the congressional effort to combat global warming dead? Probably.

Brad Plumer at The New Republic:

This would be a no-brainer energy bill that should easily get 60 votes. The oil-spill response provisions largely entail reforming the Interior Department and tightening regulations for rigs. The only controversial section is the bit about lifting the cap on liabilities for oil spills. (At the moment, oil companies have to pay to clean up their messes, but they’re only on the hook for the first $75 million in indirect damages.) Even Home Star, which I wrote about recently, picked up a number of Republican votes in the House.

Trouble is, this bill won’t do much to address climate change. It doesn’t have a renewable standard for electric utilities. There’s no cap on carbon emissions. There isn’t a broader suite of efficiency measures that could really start chipping away at all the energy bloat and waste in the economy. Democratic staffers say that most of those measures will have to be brought up in a separate bill, after the August recess. Although then we get into the question of whether there will even be time to consider the climate provisions. Possibly not.

And there’s another question: Is it a smart strategy to separate the oil-spill provisions from everything else? The thing about the spill-response legislation was that it was popular. Moderate Republicans were relatively nervous about opposing it—who wants to be seen as protecting BP? Including rig regulations in a broader energy/climate bill might have improved the chances of passing the whole thing. But what happens if the two are split apart? The odds of a climate bill plummet.

Well, If Andrew Breitbart Had Film Of Bernanke Speaking, We Would Have All Paid Attention

The Fed:

Chairman Ben S. Bernanke

Semiannual Monetary Policy Report to the Congress

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

July 21, 2010

Chairman Dodd, Senator Shelby, and members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress.

Economic and Financial Developments
The economic expansion that began in the middle of last year is proceeding at a moderate pace, supported by stimulative monetary and fiscal policies. Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth. In particular, real consumer spending appears to have expanded at about a 2-1/2 percent annual rate in the first half of this year, with purchases of durable goods increasing especially rapidly. However, the housing market remains weak, with the overhang of vacant or foreclosed houses weighing on home prices and construction.

An important drag on household spending is the slow recovery in the labor market and the attendant uncertainty about job prospects. After two years of job losses, private payrolls expanded at an average of about 100,000 per month during the first half of this year, a pace insufficient to reduce the unemployment rate materially. In all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009. Moreover, nearly half of the unemployed have been out of work for longer than six months. Long-term unemployment not only imposes exceptional near-term hardships on workers and their families, it also erodes skills and may have long-lasting effects on workers’ employment and earnings prospects.

In the business sector, investment in equipment and software appears to have increased rapidly in the first half of the year, in part reflecting capital outlays that had been deferred during the downturn and the need of many businesses to replace aging equipment. In contrast, spending on nonresidential structures–weighed down by high vacancy rates and tight credit–has continued to contract, though some indicators suggest that the rate of decline may be slowing. Both U.S. exports and U.S. imports have been expanding, reflecting growth in the global economy and the recovery of world trade. Stronger exports have in turn helped foster growth in the U.S. manufacturing sector.

Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of less than 1 percent in the first half of the year. Although overall inflation has fluctuated, partly reflecting changes in energy prices, by a number of measures underlying inflation has trended down over the past two years. The slack in labor and product markets has damped wage and price pressures, and rapid increases in productivity have further reduced producers’ unit labor costs.

My colleagues on the Federal Open Market Committee (FOMC) and I expect continued moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years. In conjunction with the June FOMC meeting, Board members and Reserve Bank presidents prepared forecasts of economic growth, unemployment, and inflation for the years 2010 through 2012 and over the longer run. The forecasts are qualitatively similar to those we released in February and May, although progress in reducing unemployment is now expected to be somewhat slower than we previously projected, and near-term inflation now looks likely to be a little lower. Most FOMC participants expect real GDP growth of 3 to 3-1/2 percent in 2010, and roughly 3-1/2 to 4-1/2 percent in 2011 and 2012. The unemployment rate is expected to decline to between 7 and 7-1/2 percent by the end of 2012. Most participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw the risks to growth as weighted to the downside. Most participants projected that inflation will average only about 1 percent in 2010 and that it will remain low during 2011 and 2012, with the risks to the inflation outlook roughly balanced.

Colin Barr at Fortune:

Asked if he feared being out of bullets should the downturn intensify, Bernanke answered no, then rattled off the Fed’s three options for adding liquidity. He added that the Fed “needs to continue to evaluate those options.”

Bernanke’s choice of words suggests he isn’t eager to look dovish in front of a Congress that under pressure to take action on the massive U.S. budget deficit – even though the yield on the 10-year Treasury note has tumbled by more than a percentage point since April, easing fears of an investor flight.

Bernanke’s stance seems to preclude the oft-rumored cut in reserve interest rates — unless the bottom absolutely falls out of the recovery.

“To our minds, it would require a considerable further deterioration in the incoming data before the FOMC would realistically consider adding more stimulus to the mix,” Capital Economics analyst Paul Ashworth wrote in a note to clients Wednesday.

Even in that instance, Ashworth believes, the Fed’s first step would be to return to the policy it wound up this spring of purchasing long-dated U.S. government and agency bonds.

Annie Lowrey at The Washington Independent

Mike Shedlock at Favstocks:

Be prepared for Quantitative Easing Round 2 (QE2) and/or other misguided Fed policy decisions because Bernanke Says Fed Ready to Take Action.

Larry Kudlow at NRO:

Ben Bernanke threw a curveball today in his midterm report to Congress. The Fed view of the economy has been downgraded since its last report in February. This is not totally new news, since the June FOMC minutes reported this downgrade. However, “the majority saw the risks to growth as weighted to the downside.”

But here’s the disconnect. With no inflation and weaker growth, including stubbornly high unemployment, Bernanke mostly talked about an exit strategy that would shrink the Fed’s balance sheet by removing liquidity. This was the Fed’s bias last winter when the recovery looked stronger. Now that the recovery looks weaker, the stock market was hoping to hear Bernanke hint of an easier policy that would increase liquidity if necessary. Didn’t happen.

At one point today stocks were down 165 points, though they finished better, falling only 109 points. Gold fell $7 to $1,184, and the greenback rallied a bit. Bond rates continued to slide lower.

But I have a different view of this story. The Fed has injected $1.4 trillion of new money into the economy, of which about $1 trillion of excess reserves are unused and on deposit at the central bank. So, in other words, the economy has more liquidity than it knows what to do with. What’s the problem? All that excess money is not being used. This, I believe, is a fiscal problem, not a Fed problem.

Ryan Avent at Free Exchange at The Economist:

YESTERDAY evening, the Washington Post‘s Neil Irwin discussed the market’s reaction to expectations about Ben Bernanke’s Congressional testimony (taking place today and tomorrow):

For those of us who follow the Federal Reserve closely, it is sometimes shocking how poorly Wall Street seems to understand the central bank. The rumor Tuesday was that Ben Bernanke would, at his monetary policy testimony Wednesday, announce that the Fed is cutting its interest rate on excess bank reserves, now at a quarter percentage point, to zero.

This speculation, apparently, drove the stock market up in late trading. Yet it’s completely blinkered.

As Mr Irwin goes on to point out, Fed officials never announce policy moves in testimony, are extremely reluctant to shift policy between meetings, and have generally laid out conditions that might lead to a policy move—conditions that haven’t yet been met. And sure enough, Mr Bernanke’s prepared testimony for the Senate Banking Committee did little more than recycle the points he had previously made following the June FOMC meeting, including this bland guidance:

Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.

Naturally, markets flipped out, falling over 1% in the hour after the testimony was released. Beyond that, there is little to report. The Fed remains ready to act when things are worse, as things are currently not quite bad enough.

Daniel Indiviglio at The Atlantic:

Headlines are proclaiming that the stock market is down today due to Federal Reserve Chairman Ben Bernanke’s sobering Congressional testimony on the sluggish recovery. Even though headlines claiming that the stocks are down for ‘x’ reason are usually oversimplified and always annoying, Bernanke’s words likely had something to do with the market’s downward move this afternoon. Yet, anyone who follows the Fed and watched his testimony might find the market’s reaction surprising. Bernanke didn’t actually say anything that the Fed hadn’t expressed before. Had the market been ignoring Bernanke recently?

FinReg Soon To Be More Than Just A Wonky Blogger’s Twitter Tag

The round-up with Max Fisher at The Atlantic

Adam Sorensen at Swampland at Time:

By a 60-39 vote Thursday, the Senate passed legislation that re-calibrates the flow of capital through the American financial sector and provides new powers to the regulatory regime that oversees it. The final bill is the culmination of a near two-year effort launched after 2008’s Wall Street crisis thrust the nation into recession and marks the most comprehensive changes to government’s oversight of banks since the Great Depression. When Obama signs it into law next week, financial reform will join health care and the stimulus in the ranks of major Democratic initiatives enacted by the 111th Congress and boldface bullet-points on the president’s resume.

Peter Suderman at Reason:

In a victory for the hordes of Washington politicians who have been deeply committed to doing something about Wall Street (regardless of whether that something was likely to be effective), the Senate voted 60 to 38 to move forward with a significant overhaul of the nation’s financial regulations. Three of those votes came from moderate Republicans, including Cosmo-pinup Scott Brown, who, after demanding that Democrats remove a tax on banks (and replace the revenue with TARP revenue that was intended to be used to reduce the deficit), gave the bill his blessing. As predicted, once Brown came around, fellow GOP squishes centrists Olympia Snowe and Susan Collins followed. No longer just a guy with a truck, he’s now a guy with a truck who decides whether or not to massively increase the power of federal regulators over the nation’s banking system.

Annie Lowrey at The Washington Independent:

The final bill, more than 2,300 pages in length, directs regulators to create 533 rules, according to the Chamber of Commerce. The bill contains three central provisions. First, it provides the government with new powers to identify risky banking institutions and to shutter them before they harm the broader financial system, via a new systemic regulator. Henry Paulson, the Treasury Secretary under President Bush when the financial crisis first hit, lauded the provision this week. “We would have loved to have something like this for Lehman Brothers. There’s no doubt about it,” he told The New York Times, referring to the investment bank that collapsed, destabilizing the country’s financial system and contributing to the credit crunch. Democrats say this provision ends “too big to fail,” by providing the government with a way of shutting down failing banks, reassuring counterparties and containing any sense of panic.

Second, the Dodd-Frank bill makes banks less dangerous, forcing them to keep more capital on hand, banning them from making risky trades on their own behalf and keeping them from investing heavily in vehicles like hedge funds. “[The bill] places some limits on the size of banks and the kinds of risks that banking institutions can take,” President Obama told an audience of Wall Street workers this spring, speaking at Cooper Union in Manhattan. “This will not only safeguard our system against crises, this will also make our system stronger and more competitive by instilling confidence here at home and across the globe. Markets depend on that confidence. By enacting these reforms, we’ll help ensure that our financial system — and our economy — continues to be the envy of the world.”

Finally, it creates a new consumer financial protection bureau, which will have the power to create and enforce new rules regarding financial products like home-equity loans and credit cards. “Consumers finally will have a cop on the beat … that will monitor the market and write and enforce the rules,” said Susan Weinstock, the financial reform campaign director for the Consumer Federation of America. “The Wild West for financial products and services is coming to an end. Consumers will now have a bureau that will clear out the tricks and traps in financial products and services that have harmed so many Americans.”

Nicole Gelinas at The Corner:

A couple of hours before the Senate narrowly passed the Dodd-Frank fin-reg bill today, Sen. Chris Dodd, one of the bill’s two namesakes, spoke some common sense on the Senate floor:

We can’t legislate wisdom or passion. We can’t legislate competency.

Dodd did not allow this point of truth to inform the bill that he helped write, though.

The financial system’s failures made themselves obvious starting in 2007 in part because legislators and regulators thought that they could conjure up on command not only wisdom and competence but omniscience.

In the years leading up to the financial crisis, regulators allowed financial firms such as AIG to create derivatives that evaded the old-fashioned limits on borrowing and trading. The people in charge figured that the financial guys had figured out every angle and made these things perfectly safe.

Regulators, too, allowed banks to borrow far more than old-fashioned rules would have allowed on mortgage-related securities and other instruments rated AAA — because competent people had determined that such securities could never fail.

Finally, regulators allowed people to buy houses with no money down — even though we learned in the 1920s that it’s not a good idea to let people borrow limitlessly to speculate that the price of something will continue to rise.

The lesson to be learned here is that we need borrowing and trading rules that apply to everyone and everything for those times when bankers, regulators, and tens of millions of ordinary Americans aren’t right.

The bill offers no evidence that anyone in Congress has learned this lesson.

Simon Johnson:

Just over a hundred years ago, the United States led the world in terms of rethinking how big business worked – and when the power of such firms should be constrained. In retrospect, the breakthrough legislation – not just for the US, but also internationally – was the Sherman Antitrust Act of 1890.

The Dodd-Frank Financial Reform Bill, which is about to pass the US Senate, does something similar – and long overdue – for banking.

Prior to 1890, big business was widely regarded as more efficient and generally more modern than small business. Most people saw the consolidation of smaller firms into fewer, large firms as a stabilizing development that rewarded success and allowed for further productive investment. The creation of America as a major economic power, after all, was made possible by giant steel mills, integrated railway systems, and the mobilization of enormous energy reserves through such ventures as Standard Oil.

But ever-bigger business also had a profound social impact, and here the ledger entries were not all in the positive column. The people who ran big business were often unscrupulous, and in some cases used their dominant market position to drive out their competitors – enabling the surviving firms subsequently to restrict supply and raise prices.

There was dominance, to be sure, in the local and regional markets of mid-nineteenth-century America, but nothing like what developed in the 50 years that followed. Big business brought major productivity improvements, but it also increased the power of private companies to act in ways that were injurious to the broader marketplace – and to society.

The Sherman Act itself did not change this situation overnight, but, once President Theodore Roosevelt decided to take up the cause, it became a powerful tool that could be used to break up industrial and transportation monopolies. By doing so, Roosevelt and those who followed in his footsteps shifted the consensus.

[…]

Why are these antitrust tools not used against today’s megabanks, which have become so powerful that they can sway legislation and regulation massively in their favor, while also receiving generous taxpayer-financed bailouts as needed?

The answer is that the kind of power that big banks wield today is very different from what was imagined by the Sherman Act’s drafters – or by the people who shaped its application in the early years of the twentieth century. The banks do not have monopoly pricing power in the traditional sense, and their market share – at the national level – is lower than what would trigger an antitrust investigation in the non-financial sectors.

Effective size caps on banks were imposed by the banking reforms of the 1930’s, and there was an effort to maintain such restrictions in the Riegle-Neal Act of 1994. But all of these limitations fell by the wayside during the wholesale deregulation of the past 15 years.

Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill. Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability.

This is not a theoretical possibility – such risks manifested themselves quite clearly in late 2008 and into early 2009. It remains uncertain, of course, whether the regulators would actually take such steps. But, as Representative Paul Kanjorski, the main force behind the provision, recently put it, “The key lesson of the last decade is that financial regulators must use their powers, rather than coddle industry interests.”

And Kanjorski probably is right that not much would be required. “If just one regulator uses these extraordinary powers [to break up too-big-to-fail banks] just once,” he says, “it will send a powerful message,” one that would “significantly reform how all financial services firms behave forever more.”

Regulators can do a great deal, but they need political direction from the highest level in order to make genuine progress. Teddy Roosevelt, of course, preferred to “Speak softly and carry a big stick.” The Kanjorski Amendment is a very big stick. Who will pick it up?

Brian Beutler at Talking Points Memo:

They’re not campaigning on it in earnest — at least not yet — but Republican leaders say that, given the power, they would like to do away with Wall Street reform much like they have already discussed repealing health care reform.

“I think it ought to be repealed,” said House Minority Leader John Boehner, in response to a question from TPMDC, at his weekly press conference this morning.

One of his top lieutenants, Republican Conference Chair Mike Pence agrees. “We hope [the Senate vote] falters so we can start over,” Pence told TPMDC yesterday. “I think the reason you’re not hearing talk about efforts to repeal the permanent bailout authority is because the bill hasn’t passed yet.”

Your Daily FinReg Centerfold

Brian Beutler at Talking Points Memo:

With the Wall Street reform legislation agreed to by House and Senate negotiators now in serious doubt in the Senate, what happens if the final bill can’t muster the votes? At his weekly press availability this morning, House Majority Leader Steny Hoyer hinted that they may have to make some changes.

“We’re trying to work with the Senate to ensure that we both take up a version that does in fact have 60 votes,” Hoyer said.

But the conference report, passed late last week, can not be amended on the House or Senate floors. It’s an up-or-down, yes-or-no proposition. If they need a new ‘version’ that has 60 votes to overcome a filibuster, they’d have to reconvene the conference committee, strip the language that offends Sen. Scott Brown (R-MA) and Sen. Susan Collins (R-ME) and try again.

Kevin Drum:

In the wake of a historic economic collapse caused largely by a financial industry allowed to run rampant, Sen. Russ Feingold (D–Wisc.) has decided to vote in favor of doing nothing at all to address this:

As I have indicated for some time now, my test for the financial regulatory reform bill is whether it will prevent another crisis. The conference committee’s proposal fails that test and for that reason I will not vote to advance it. During debate on the bill, I supported several efforts to break up ‘too big to fail’ Wall Street banks and restore the proven safeguards established after the Great Depression separating Main Street banks from big Wall Street firms, among other issues. Unfortunately, these crucial reforms were rejected. While there are some positive provisions in the final measure, the lack of strong reforms is clear confirmation that Wall Street lobbyists and their allies in Washington continue to wield significant influence on the process.

Can I vent for a minute? I know Feingold is proud of his inconoclastic reputation. I know this bill doesn’t do as much as he (or I) would like. I know the financial industry, as he says, continues to have way too much clout on Capitol Hill.

But seriously: WTF? This is the final report of a conference committee. There’s no more negotiation. It’s an up-or-down vote and there isn’t going to be a second chance at this. You either vote for this bill, which has plenty of good provisions even if doesn’t break up all the big banks, or else you vote for the status quo. That’s it. That’s the choice. It’s not a game. It’s not a time for Feingold to worry about his reputation for independence. It’s a time to make a decision between actively supporting something good and actively supporting something bad. And Feingold has decided to actively support something bad.

Scott Brown, the junior Senator from Mass:

Dear Chairman Dodd and Chairman Frank,

I am writing you to express my strong opposition to the $19 billion bank tax that was included in the financial reform bill during the conference committee. This tax was not in the Senate version of the bill, which I supported. If the final version of this bill contains these higher taxes, I will not support it.

It is especially troubling that this provision was inserted in the conference report in the dead of night without hearings or economic analysis.  While some will try to argue this isn’t a tax, this new provision takes real money away from the economy, making it unavailable for lending on Main Street, and gives it to Washington. That sounds like a tax to me.

I have always strongly opposed a bank tax because, as the non-partisan CBO has said, costs would be passed onto the millions of American consumers and small businesses who rely on major U.S. financial institutions for their checking, ATM, loans or other services.  This tax will be paid by consumers who will have to pay higher fees and the small businesses that won’t get the funding they need to invest and create jobs.

Imposing this new tax is the wrong option. Our economy is still struggling. It is wrong to impose higher taxes and ignore the impact it will have on our economy without considering other ways we might offset the costs of the measure.  I am asking that the conference committee find a way to offset the cost of the bill by cutting unnecessary federal spending. There are hundreds of billions in unspent federal funds sitting around, some authorized years ago for long-dead initiatives. Congress needs to start to looking there first, and I stand ready to help.

Sincerely,

Senator Scott P. Brown

John Carney at CNBC:

Democrats on Tuesday planned to strip out a controversial tax from their landmark financial reform bill in order to win the swing votes needed to pass it through Congress.

With crucial Republican moderates threatening to withdraw their support, Democrats were weighing alternative ways to fund the most sweeping rewrite of the Wall Street rulebook since the 1930s.

Though a supposedly final version of the bill had been hammered out last week, Democrats in charge of the process called a fresh negotiating session, which got under way shortly after 5 p.m. EDT Tuesday.

Democratic lawmakers and aides said they planned to remove a $17.9 billion tax on large financial institutions. Instead, they would cover most of the bill’s costs by shutting down a $700 billion bank-bailout program.

“I haven’t talked to everybody, but I gather from a number of people they like this option,” said Democratic Senator Christopher Dodd, one of the lawmakers in charge of the bill.

The bill had been expected to pass both chambers of Congress this week in time for President  Obama to sign it into law by July 4. But supporters have been forced to scramble for votes in the Senate, putting that goal in jeopardy.

Analysts said while that timetable may slip, the bill was still likely to become law.

“We believe that this legislation will pass, timing and the bank tax remain the final question marks,” wrote FBR Capital Markets analyst Edward Mills in a research note.

Jay Newton-Small at Time:

Senate Banking Committee Chairman Chris Dodd stood an hour ago in the Senator’s Retiring Room off of the Senate floor in an intense conversation with Massachusetts Senator Scott Brown – one of surely many they will have today. Dodd is trying to get Brown, one of four Republicans who voted for the Senate version of financial regulatory reform, to pledge his support for final passage. House and Senate negotiators last week worked out a deal to combine the two measures only to find that Brown couldn’t support $18+ billion in new bank fees. To complicate matters, Democrats are now down a vote due to the untimely death of Senator Robert Byrd, a West Virginia Democrat.

Dodd, a Connecticut Democrat, and House Financial Service Chairman Barney Frank are planning on taking the unusual step of reopening the conference committee this afternoon. Lucky for them it wasn’t formally closed or reopening it would’ve taken votes from both chambers of Congress. They have been negotiating with the four Republicans – Brown, Maine Senators Olympia Snowe Susan Collins and Iowa’s Chuck Grassley — on new offsets for the $18+ billion. Dodd says that 90% of the $18+ billion would now be paid for by the immediate end of TARP, the unpopular bank bailout fund due to expire October 3. The additional offset would come from raising fees the banks pay to the Federal Deposit Insurance Corporation, exempting all small banks under $10 billion capitalization (Dodd says he’s spoke to Sheila Bair on this and she’s fine with it). Some Republicans still have reservations that such a move, though, wouldn’t prompt the banks to pass the cost on to consumers. “Repealing TARP definitely appeals to me,” says Snowe, who met with Dodd in her office last night and again this morning.  “At this point other issues are not related to the TARP part, we’re still looking at how you replace those fees. So things are still in motion here, there are a lot of conservations developing.”

Brown, emerging from his meeting with Dodd, says he’s waiting to see the final product and hasn’t made any decisions yet. Brown sent Dodd and Frank a letter this morning announcing his opposition to the $18+ billion in fees, prompting today’s dramatics. Collins told reporters she was pleased with her meetings with Dodd but that she also had made no final decision. Grassley was nowhere to be found. “I gather there were a number of people who were uneasy with the earlier pay-for who like this alternative and so the present plan is to probably reconvene the conference this afternoon,” Dodd said, heading into a meeting in Senate Majority Leader Harry Reid’s offices. If all four Republicans sign on, Dems should have enough votes to pass the Senate as they race to finish the legislation by the end of the week.

Annie Lowrey at The Washington Independent:

Rather than charging the hedge funds and big banks considered most responsible for the financial crisis a reasonable fee for implementation, the conference committee will settle for ending a government stability program and spreading the pain around to all federally insured banks — including small community-focused banks — to satisfy the demands of one Republican. So it goes in Washington.

Felix Salmon:

It would be a fiasco of tragic proportions if the banks managed to remove these taxes from the final bill, essentially absolving themselves from cleaning up after their own mess. The arguments against the taxes are weak indeed: either you simply oppose all taxes on principle (which seems to be the Scott Brown stance, and which is fiscally disastrous), or else you’re forced into John Carney’s corner.

Carney is worried that we don’t know exactly where the tax will be applied — but that’s a feature, not a bug. Setting up the tax in great deal ex ante is essentially just asking banks to spend millions of dollars on tax consultants who can help them skirt the new levies. And as the risks in the system evolve and change, so to should the way that they’re taxed. It’s right and proper that the newly created Council for Financial Stability will be charged with taxing systemic risk, rather than having a bunch of politicians try to do so at the beginning and then watch as the banks and other financial institutions nimbly sidestep the new taxes.

An increase in the FDIC premium would be a gift on a platter to banks like Goldman Sachs and Morgan Stanley which don’t have insured deposits — not to mention non-bank players like Citadel which are systemically very important. I’m unclear on what exactly this Republican “procedural hurdle” is — I thought that after reconciliation, you just needed a simple majority to pass a bill. But I’m getting very annoyed about it.

UPDATE: Russell Berman at The Hill

UPDATE #2: Eric Zimmermann at The Hill

Noam Scheiber at TNR

A Blog Post For Your Interest

The Fed:

Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.

Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Calculated Risk:

The comments on the economy were slightly more negative than last meeting. The Fed noted the financial issues in Europe, and also commented that “underlying inflation has trended lower”. Each statements was slightly less positive …

Annie Lowrey at The Washington Independent:

Except that this month, the FOMC says that the economy is improving “gradually,” rather than just improving. Last month, financial conditions remained supportive of growth; this month, less so. This month, the FOMC notes that underlying inflation is declining — for the past two months, there has technically been price deflation. All in all, not a particularly comforting message.

Sudeep Reddy at Wall Street Journal:

Four meetings, four dissents. Federal Reserve Bank of Kansas City President Thomas Hoenig kept his dissent streak going strong at today’s Federal Open Market Committee meeting. Given the rest of the FOMC’s stance — displaying more caution about the strength of the recovery — this probably won’t be Mr. Hoenig’s last dissent of the year.

Mr. Hoenig was the lone opposing vote in the FOMC’s 9-1 decision to keep the federal funds rate near zero with the guidance that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

The FOMC’s post-meeting statement repeated Mr. Hoenig’s rationale offered in the April statement: “continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.” Anyone looking closely for new language from Mr. Hoenig was met with only one slight alteration from the April statement: an added hyphen between “longer run” that was missing on April 28.

For months, Mr. Hoenig has warned about the potential for near-zero interest rates to create imbalances — that is, bubbles — and spur inflation in the longer run. In a  June 3 speech, he again called monetary policy “a blunt instrument that has a wide set of intended but also unintended consequences that can and have worsened economic outcomes including misallocation of precious resources, inflation and long-term unemployment.” He added, “That is why we want to return to a sustainable long-term equilibrium policy rate, starting soon.”

Daniel Indiviglio at The Atlantic:

By now, many people expected that we would have a more concrete blueprint of when the Fed’s exit strategy will begin. When might it begin raising rates? When will it begin selling the assets it accumulated during the financial crisis? We won’t know the answers to these questions as soon as we thought, because the problems in Europe have made the Fed wary about scaring the market with signs of tightening.

As for rates, the Fed continues to assure banks that they will remain “exceptionally low” for “an extended period.” Kansas City Federal Reserve President Thomas M. Hoenig remains the lone dissenter. He believes that this language should be weakened so the central bank can feel more flexibility to raise rates quickly if inflation suddenly manifests itself.

Of course, at this time, inflation is very low. It appears to be well under control, which makes it unsurprising that the Fed wouldn’t feel the need to provide greater certainty on when it might raise rates by changing its language. As the statement noted, energy prices are actually deflationary.

David Leonhardt at the New York Times:

Mr. Bernanke also believes that the economy is growing “not fast enough,” as he recently put it. He has predicted that unemployment will remain high for years and that “a lot of people are going to be under financial stress.”

Yet he has been unwilling to use his power to lift growth and reduce joblessness from near a 27-year high. Instead, Fed officials are expected to announce on Wednesday that they have left their policy unchanged, even if they acknowledge that the economy has recently weakened.

How can this be? How can Mr. Bernanke simultaneously think that growth is too slow and that it shouldn’t be sped up? There is an answer — whether or not you find it persuasive.

Above all, top Fed officials are worried that financial markets are fragile. They are not so much worried about inflation, the traditional source of Fed angst, as they are about upsetting the markets’ confidence in Washington. Yes, investors remain happy to lend the United States money at rock-bottom interest rates, despite our budget deficit and all of the emergency Fed programs that will eventually need to be unwound. But no one knows how long that confidence will last.

In effect, Mr. Bernanke and his colleagues have decided to accept an all-but-certain downside — high unemployment, for years to come — rather than risk an even worse situation — a market panic, a spike in long-term interest rates and yet higher unemployment. As the last few years have shown, market sentiment can change unexpectedly and sharply.

Still, you have to wonder if the Fed is paying enough attention to the risks of its own approach. They do exist. The recent data on jobless claims, consumer spending and home sales have been weak. On Tuesday, Britain announced a budget-cutting plan that will depress short-term growth there and spill over somewhat into the global economy. The necessary budget cuts in Greece and other parts of Europe won’t help global growth, either.

The main historical lesson of financial crises is that governments are usually too passive. They respond in dribs and drabs, as Japan did in the 1990s and Europe did in 2008. Or they remove support too quickly, as Franklin Roosevelt did in 1937, and then the economy struggles to escape its funk.

Matthew Yglesias:

In today’s Federal Reserve Open Market Committee release America’s monetary policymakers said that an already bad economic outlook now looks worse, as “[f]inancial conditions have become less supportive of economic growth on balance” and that “the pace of economic recovery is likely to be moderate for a time” and “[w]ith substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.” That ought to be a recipe for looser monetary policy, but instead the Fed chose to hold pat. Every time I mention the view that more expansionary monetary, some people chime in with the view that monetary policy can’t be made to work under the current conditions. That may be true, though I don’t personally believe it. But it’s important for people to understand that whatever you think about this question Ben Bernanke himself has never adhered to this view.

David Leonhardt has an excellent column today teeing off that point and making the case for looser policy. I might add that this is hardly the first excellent Leonhardt column of the recession years, and it strikes me as a shame for the NYT to be semi-hiding one of their best columnists in the business section. In a time of economic crisis at least, insightful economic policy writing is a huge part of general interest political commentary.

Like A Rolling Stone, Part II

Bruce Drake at Politics Daily:

PRESIDENT BARACK OBAMA DELIVERS REMARKS ON GENERAL STANLEY A. MCCHRYSTAL

JUNE 23, 2010

[*] OBAMA: Good afternoon.

Today I accepted General Stanley McChrystal’s resignation as commander of the International Security Assistance Force in Afghanistan. I did so with considerable regret, but also with certainty that it is the right thing for our mission in Afghanistan, for our military, and for our country.

I’m also pleased to nominate General David Petraeus to take command in Afghanistan, which will allow us to maintain the momentum and leadership that we need to succeed.

I don’t make this decision based on any difference in policy with General McChrystal, as we are in full agreement about our strategy. Nor do I make this decision out of any sense of personal insult. Stan McChrystal has always shown great courtesy and carried out my orders faithfully. I’ve got great admiration for him and for his long record of service in uniform.

Over the last nine years, with America fighting wars in Iraq and Afghanistan, he has earned a reputation as one of our nation’s finest soldiers. That reputation is founded upon his extraordinary dedication, his deep intelligence and his love of country.

I’ve relied on his service, particularly in helping to design and lead our new strategy in Afghanistan.

So all Americans should be grateful for General McChrystal’s remarkable career in uniform.

But war is bigger than any one man or woman, whether a private, a general or a president. And as difficult as it is to lose General McChrystal, I believe that it is the right decision for our national security.

Andrew Sullivan rounds-up reactions.

Ed Morrissey:

Obama appears to have split the baby rather adeptly here, softening the blow of losing McChrystal by arguably trading up for the legendary Petraeus.  That should dampen criticism over cashiering McChrystal, especially among Republicans on Capitol Hill.

Rich Lowry at The Corner:

I’m not sure how Obama could have handled this any better. He was genuinely graceful about McChrystal and his explanation of why he had to go made perfect sense. He called for unity within his adminstration in pursuing the war and sounded quite stalwart about both the war and about the strategy. More importantly, his choice of Petraeus as a replacement for McChrystal is a brilliant move: He gets a heavy-weight, an unassailable expert in this kind of warfare, and someone who presumably can step in pretty seamlessly. He also picked someone who has expressed (very diplomatic) misgivings about the July 2011 deadline and who will have the clout and credibility to tell the president that he can’t afford to go down in troops when July comes, should circumstances warrant. (It should also be noted that this is a step down for Petraeus and he can’t relish directly managing another war — that he will do so speaks to his selfless patriotism.) In short, Obama has made the most of a rotten situation.

Max Boot at Commentary:

If there is one general who can step quickly  into the top job in Afghanistan, it is Petraeus, who has been closely involved in formulating the campaign plan along with McChrystal. And if there is one general who knows how to handle the media and the political process (skills that McChrystal obviously lacked), it is Petraeus. That doesn’t mean that he is a “political general” — that dreaded epithet applied by combat soldiers to those who get ahead by playing office politics rather than by proving their worth on the battlefield. Petraeus has proven himself at every level of command, on the battlefield and off. His courage cannot be doubted. Neither can his skill. Already in Iraq, he has pulled off the greatest turnaround in American military history since Matthew Ridgway took over the 8th Army in 1950 during the dark days of the Korean War. Now he has to do it again in Afghanistan. Don’t bet against him.

As for General McChrystal, it is a tragedy that his sterling career has come to such an inglorious end. McChrystal is widely admired, especially in the Special Operations community, and for good reason. He turned the Joint Special Operations Command in Iraq into a well-honed killing machine. He also did much to improve the situation in Afghanistan, injecting fresh energy into the war effort and designing a campaign plan that can succeed. He deserves enormous credit, too, for declaring in his first major report to the president last summer that the war effort would fail without a fresh injection of troops. That prompted Obama to send more troops, which now gives the NATO command a shot at success. Unfortunately the Rolling Stone incident showed that he was not quite ready to operate at the highest strategic level, where discretion and judgment are prized, and where Special-Forces swagger can be a liability.

But President Obama should not fool himself into thinking that, by replacing McChrystal with Petraeus, he has magically solved all of the problems with the war effort. There is still that little matter of the looming deadline — July 2011 — for troop withdrawals. Vice President Biden is pulling for a rapid pullout, and Defense Secretary Gates is taking a go-slow approach. McChrystal has been firmly aligned with Gates, while the U.S. Ambassador in Kabul, Karl Eikenberry, has publicly backed the “light footprint” approach advocated by Biden. That tension will not disappear because of the change of command; Petraeus is a firm believer in the need for a prolonged counterinsurgency campaign, just as McChrystal was. So far, President Obama has been mum on what the deadline means and how many troops will actually come out. He should back his new commander with a firm pledge to make any withdrawal strictly contingent on conditions being met, and he should leave open the possibility of sending more troops if necessary.

Tom Ricks at Foreign Policy:

So, for the second time in three years, Gen. David Petraeus is bailing out a president.

Afghanistan 2010 may be an even tougher nut than Iraq 2007. Sure, Iraq looked like a mess back then, but the Americans hadn’t tried a lot of good ideas. In Afghanistan they have been trying them out and not finding them working very well. Counterinsurgency was a novel idea in Baghdad back then. It is not anything new in Kabul right now. Our biggest problem in Afghanistan is the government we are supporting there, and it isn’t clear to me what Petraeus can do about that.

Putting Petraeus in command in Afghanistan is only the first step. Now, what to do about Ambassador Eikenberry and special envoy Holbrooke?

My second big concern is what happens to Iraq now. As readers of this blog know, I am very worried about trends there. If Iraq begins to fall apart, and Petraeus is busy in Kabul, who is going to step on? At the very least, they should consider extending General Odierno’s time there.

I thought Obama’s talk was rhetorically perfect, hitting all the right notes in explaining why McChrystal had to go, while paying tribute to McChrystal’s service. The only big question he left hanging in just what happens to Central Command. Will Petraeus try to have both commands? Will someone else take over? With Pakistan, Iran and other Middle Eastern issues bubbling out there, this is a question that needs to be addressed ASAP.

Matthew Yglesias:

A bit oddly the only person I heard calling for this “fire McChrystal, replace him with Petraeus” move yesterday was Bill Kristol. I assumed he was just throwing something out there so outside the box that he could criticize Obama no matter what happens. Instead he got his way. I’ll be eager to see the reaction.

Adam Serwer at Tapped:

Conservatives recognized that McChrystal needed to be disciplined but wanted him to stay, largely because they were concerned his departure would mean a shift in strategy. Despite the tendency of the political press to describe military commanders in near-mythological terms, McChrystal is not irreplaceable, not even for those who want to see the current counterinsurgency strategy continue. With Gen. David Petraeus stepping in as his replacement, those on the right concerned with strategic continuity can breathe easy. Obama stressed that “we have a clear goal, we are going to break the Taliban’s momentum, we are going to build Afghan capacity, we are going to relentlessly apply pressure on al-Qaeda and its leadership, strengthening the ability of both Afghanistan and Pakistan to do the same,” essentially reaffirming his commitment to the strategy decided on last fall. Petraeus’ Senate confirmation is likely to go through without incident.

Liberals were hoping that McChrystal’s departure would offer an opportunity for the administration to rethink a strategy that some suspect was adopted largely due to political pressure to continue the mission.They point to the recent difficulties in Marjah as evidence the strategy isn’t working to dislodge or weaken the Taliban, and maintain that the structure and corruption of the Afghan government is an intractable problem. At the very least, they would have liked a serious re-evaluation of the viability of the current counterinsurgency strategy.

The appointment of Gen. Petraeus is likely to squelch any such discussion before it gets started. The near superhero status Petraeus enjoys isn’t simply due to his intelligence or capability as a leader — it’s also the result of media mythmaking about the Iraq War. Despite the ease with which the country has come to adopt the narrative that the 2007 troop escalation and the shift to a counterinsurgency strategy singlehandedly turned the Iraq War around, it remains untrue. As Michael Cohen helpfully continues to remind us, there were a number of factors involved, including ethnic cleansing in Baghdad, the Sunni tribes turning on al-Qaeda’s affiliate in Iraq and the Sadr ceasefire.

These things are complicated though, and it’s easier both for the press and for the general audience to shoehorn the complicated story of the turnaround in Iraq into a single epic narrative starring an indomitable warrior-hero, and the media won’t be able to resist the temptation to call this a sequel. The problem with flattening these things into facile narratives is that it dissuades Americans from thinking critically about the implications — both moral and practical — of important policy decisions. Which — aside from his admirable record — is surely part of why Petraeus was chosen.

EARLIER: Like A Rolling Stone

UPDATE: Marc Ambinder

Ed Morrissey

Luke Johnson at The Washington Independent

Pee In A Cup And The Government Pays You (Well, Not Really)

Mara Gay at Politics Daily:

Senator Orrin Hatch (R-Utah) has proposed an amendment to the jobs bill today that would require Americans seeking unemployment benefits and welfare to pass a drug test.

He said the current social safety net only feeds their addiction to both illegal substances and help from the federal government.

“Too many Americans are locked into a life of a dangerous dependency not only on drugs, but the federal assistance that serves to enable their addiction,” the senator said in a statement. “Drugs are a scourge on our society — hurting children, families and communities alike.”

The amendment comes as an attempt to pass the $140 billion jobs bill failed in the Senate. The bill would extend unemployment benefits for millions of Americans, but its price tag has elicited objections from both Republicans and Democrats.

Hatch said his amendment would help save taxpayer money and reduce the national deficit.

“This amendment is a way to help people get off of drugs to become productive and healthy members of society, while ensuring that valuable taxpayer dollars aren’t wasted,” the senator said today.

Joan McCarter at Daily Kos:

Being unemployed just isn’t denigrating enough for Orrin Hatch. You have to be punished it for, put under suspicion. That’s the Republican way. What’s next? Poor houses?

Ezra Klein:

A while back, Matt Yglesias wrote an insightful piece arguing that “ideas about freedom and small government are totally irrelevant to the actual political agenda [of the Republican Party].” I was reminded of it by the news that small-government advocate Orrin Hatch wants the state to perform mandatory drug tests on every one of the 15 million people receiving unemployment insurance or welfare benefits.

Meredith Jessup at Townhall:

I can hear the ACLU’s screams of injustice now.  Truth be told, this seems like such a basic, commonsense notion.  It’s definitely not a new idea, but props to Sen. Hatch for reintroducing it, especially at a time when the country can’t afford to waste a dime.

Annie Lowrey at Washington Independent:

Currently, about 4.4 million families receive assistance through the Temporary Assistance for Needy Families program. On top of that, 9.8 million people are receiving unemployment insurance in some form. Millions more get other kinds of aid. Granted, the federal government does plenty of drug testing already, but does it really want to process 15 million new urine samples? Plus pay for all the court cases the law would create? The Drug Policy Alliance notes that “a 2003 ruling by a federal appeals court that covers the states of Kentucky, Michigan, Ohio, and Tennessee ruled that states cannot drug test welfare recipients because it’s unconstitutional.”s.

Matt Welch at Reason:

This is, alas, nothing new. In addition to social-welfare recipients, lawmakers have identified several other sub-classes of people ripe for being forced by the state to urinate on command, including (but not limited to) student athletes, kids who dare take part in other extra-curricular activities, and even kids who do nothing all day but draw “I Heart Conor” in their Pee-Chees. (They still have those, right?)

Always missing from these flippant tramplings of our privacy rights are two classes of people: Lawmakers themselves, and recipients of corporate welfare. Wouldn’t you feel just a little safer if Patrick Kennedy got his fluids checked on regular basis? Ya think some of those juicy subsidies for film productions ever land in the hands of people who use drugs?

The moral of the story here is not new, but bears repeating: If you are at all dependent on the state, whether by choice or force, and you don’t have the good manners to be powerful, you will always stand the risk of being treated like a patient at a criminal asylum. It is as good a reason as any other to resist further encroachment of the government on our private lives.

Wonkette:

Famed Utah hazzan Senator Orrin Hatch proposed an amendment to the $140 billion jobs benefits extension bill today that would make make people seeking welfare benefits first pass a drug test. Welfare will now be a level playing field, as poor people will not be able to get away with taking steroids to make themselves super-poor. And also poor drug addicts will maybe starve and thus no longer be a problem, so that’s good.