Inflation

Describes motivation process for creativity with emphasis on intrinsic motivation by Corey K Katir

I ENJOY reading the Atlanta Fed’s macroblog. Most of the time what draws me is the analysisaof labour markets, macro conditions generally, that sort of thing. Lately, however, it has become useful as a source of insight into the mindset of the inflation-averse central banker, thanks to a some recent writing by the Atlanta Fed’s executive vice president and research director, David Altig. Two weeks ago, Mark Thoma wrote a piecequestioning whether the Fed’s approach to its 2% inflation target is actually symmetric (such that downside misses generate as aggressive a response as upside misses). In recent years it has certainly seemed that while the Fed is interested in avoiding deflation, it is much more comfortable with an inflation rate just below 2% than one at or above 2%. Mr Altig took to his blog to defend the central bank, using this image:

IT’S been a long time coming, but America’s housing market finally seems to be normalising. Construction has been so low since the beginning of the bust that many markets are experiencing increasingly tight conditions. That’s supporting rent increases, and that, in turn, is putting a floor under home values and leading to an uptick in construction. The question is: how large an uptick?

Builder confidence has risen sharply in recent months and, as Calculated Risk points out, that typically presages a surge in construction:

SELFISHLY, my main worry about the ongoing euro-zone crisis is that it might derail America’s kinda-sorta strengthening recovery. Trade, once again, is not the main concern. Previously, financial contagion seemed a big problem, but the European Central Bank has helped insulate America against that, for now at least.

Instead, the problem appears to be that euro crisis is generating a passive tightening of monetary policy. This shows up most clearly in the form of falling inflation expectations and a rising dollar. We can also read something about growth expectations in the yields on long-term Treasury debt, which are touching 6-month lows. What we’re observing is rising money demand, and that is a contractionary force.

This shouldn’t matter; it’s well within the central bank’s power to offset this dynamic. But this is where the Fed’s apparent recovery strategy is so troublesome. There is complete confidence that the Fed will prevent deflationathe question is when. The Fed’s unwillingness to overshoot on inflation means that a preemptive intervention to buoy up demand is unacceptable; if the downside risk is less than currently perceived inflation could rise to (gasp) 2.5 or even 3%. The Fed will therefore stay its hand while disinflation occurs, until there is sufficient breathing room to step in and cut off the possibility of deflation without generating a meaningful probability of 3% wage and price growth. That sounds like an incredibly foolish way to make policy, I realise; I wouldn’t believe it was the Fed’s MO if I hadn’t watched this play out repeatedly since 2009.

The Federal Open Market Committee meets again in just over a month. If market conditions continue as they have, I would expect the Fed to either take additional easing steps or to strongly signal that such steps are likely in the immediate future if headwinds remain stiff. But the chilling effect on the economy is occurring right now. The time to build a buffer against the chill was the April meeting, if not well before.

Inflation expectations have been dropping steadily for two months. I would be surprised if this did not soon translate into deterioration in other macro variables: the blame for which falls squarely and solely on the Fed.

FOLLOW the bouncing recovery:

JUSTIN LAHART has written an interesting post today looking at government job losses over the course of the recession and recovery. He runs some numbers and determines that had American managed to hold government employment constant from December of 2008 then, all else equal, its unemployment rate would now be 7.1%, rather than the current 8.1%. Mr Lahart is careful to note that “ceteris is rarely paribus”. Rightly so; I am increasingly convinced that an effort to support government employment would not have led to a meaningful drop in unemployment. To conclude otherwise one would have to accept one of the following conjectures:

1. That a full percentage point drop in unemployment would not meaningfully change America’s inflation dynamics, or,
2. That the Fed would tolerate a rate of inflation persistently above its 2% target.

Are you sitting down? Because you’re not going to believe this. The Senate actually got something done yesterday. Something big! They confirmed both Jeremy Stein and Jerome Powell to the Federal Reserve’s Board of Governors. That means, for the first time since 2006, there are no vacancies on the Fed’s Board.

Stein, a Harvard economics professor, was confirmed 70-24. Powell, a banker who served in George H.W. Bush’s Treasury Department, was confirmed 74-21. Neither seems evidently more qualified than Nobel laureate Peter Diamond, who Republicans filibustered last year. But the Obama administration’s ‘Noah’s Ark’ strategy — nominate one Republican and one Democrat — worked. Furthermore, the predicted collapse of the confirmation process after Obama recess appointed Richard Cordray to the Consumer Financial Protection Bureau hasn’t happened. So that’s another piece of good news.

The next question is whether Stein and Powell will exert any influence on the Fed, and if so, in what direction. That remains to be seen. Right now, the Federal Reserve seems in the unusual position of admitting that it has missed terribly on its mandate to maintain full employment, swearing that there is more it can do if need be, and yet not doing anything more. Given events in Europe, though, they may not be able to resist escalating for very much longer.

Wonkbook dashboard:

According to Tim Geithner, we won’t hit the debt ceiling until a few months into 2013. By that time, either the Bush tax cuts will have already expired and the automatic spending cuts will have already begun or the parties will have come to some big fiscal deal and the debt ceiling will have been raised along the way.

I laid out some of the possible scenarios along these lines yesterday. But one thing I didn’t mention as clearly as I should have: In the no-deal scenario, our deficit problem is pretty much solved by the time we hit the debt ceiling.

According to the Committee for a Responsible Federal Budget, if there’s no deal on anything in the new year, the scheduled tax increases and spending cuts “would reduce ten-year deficits by over $6.8 trillion relative to realistic current policy projections a enough to put the debt on a sharp downward path but in an extremely disruptive and unwise manner.”

The Congressional Budget Office agrees. They’ve sketched the no-deal scenario out in their “current law” baseline. Public debt falls from 75.8 percent in 2013 to 61.3 percent in 2022. That’s as fast as Paul Ryan says it will fall under his budget.

For all sorts of reasons, simply doing nothing isn’t a desirable way to reduce deficits. It would probably throw us back into recession in the first half of next year, for instance. But it would be very odd for Republicans, in those circumstances, to refuse to raise the debt ceiling because America’s budgets are on an unsustainable path. The country would, at that very moment, be in the midst of the sharpest bout of deficit reduction in its history.

Wonkbook dashboard:

“We shouldnat dread the debt limit,” said Speaker John Boehner at the Peter G. Peterson Fiscal Summit. “We should welcome it. Itas an action-forcing event in a town that has become infamous for inaction.”

These comments have been the occasion for much wailing and gnashing of teeth, as if anyone, anywhere, believed that the Republicans’ 2011 debt-ceiling antics were some sort of one-off. But Boehner was clear on Tuesday. “I will again insist on my simple principle of cuts and reforms greater than the debt limit increase,” he said.

Of course he will. For one thing, it worked well for him in 2011. Republicans got more than $900 billion in immediate spending cuts, as well as $1.2 trillion in triggered spending cuts — though they don’t much like the $500 billion or so of those cuts scheduled to fall on the Pentagon. They also drove President Obama’s approval ratings beneath 40 percent. And while I’m not one who thinks Republicans intentionally tank the economy to undermine Obama, there’s little doubt that the effect of the debt-ceiling debacle was to set back the recovery, brightening Republican prospects and darkening Democratic ones. The fact is that it’s easier to be sanguine about economic showdowns when you’re not the ones in charge.

For another, it’s Boehner’s only option in 2012. The Democrats, for once, have nothing but fiscal leverage. They’ve got the expiration of the Bush tax cuts, which all Republicans would hate and many Democrats would welcome. They’ve got the aforementioned spending trigger, which Republicans really have begun to fear for its cuts to defense spending. They can do nothing — or, more likely, offer Republicans a deal they can’t accept — and the resulting paralysis will swing fiscal policy far, far, far to the left. Threatening to default on the national debt is Boehner’s only piece of counter-leverage.

So of course Boehner will try and use the debt ceiling as leverage again. And again. And again. It’s pretty clear that, at this point, there’s no going back to the time when debt-ceiling increases came smoothly. If I were the market, I’d take the fact that the leader of one of the two parties has publicly said that he “welcomes” debt-ceiling showdowns as evidence that the United States is almost certain to default on its debt — if only temporarily — within the next decade or so.

The question is what, aside from complain, Democrats and the business community will do to stop him. Somehow, the debt ceiling needs to be taken off the table once and for all, either because Republicans forced a default in a way that they were blamed for the consequences and scared into never doing it again or because the president successfully pulled off one of the more creative maneuvers suggested during last year’s showdown (Bill Clinton, for instance, argued that Obama should invoke the Fourteenth Amendment — which says “the validity of the public debt of the United States … shall not be questioned” — to raise the debt ceiling unilaterally).

Wonkbook dashboard

RCP Obama vs. Romney: Obama +1.8%; 7-day change: Obama +1.6%.

RCP Obama approval: 48.0%; 7-day change: +0.7%.

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Top stories

1) Boehner threatened another debt-mageddon “Washington braced Tuesday for a replay of last summeras tense battle over the burgeoning national debt as House Speaker John A. Boehner threatened again to block an increase in the federal debt ceiling without significant new cuts in spending. Treasury Secretary Timothy F. Geithner and other senior Democrats quickly blasted the Ohio Republican, arguing that his ultimatum could put the nationas credit rating — and the broader economy — at risk early next year, when the debt is expected to hit its $16.4 trillion limit.” Lori Montgomery in The Washington Post.

@damianpaletta: Boehner’s debt ceiling “line in the sand” is very similar to what he said last year; Definitely got the attention of White House and D’s

@ObsoleteDogma: Shorter Boehner: Regulatory uncertainty is bad. But default uncertainty is good.

INTERVIEW: Sen. Tom Coburn on defusing the debt bomb.

READ: Mitt Romneyas remarks on the debt.

@MichaelSLinden: As a fiscal policy analyst, I’d like to thank Mitt Romney for offering no specifics whatsoever so I can go home at a normal time tonight.

2) Greece failed to form a new government, triggering new elections. “The threat of a full economic collapse in Greece escalated Tuesday after warring political factions here failed to forge a new government, triggering fresh elections and heightening chances that this rudderless Mediterranean nation could be forced to abandon the euro…A nation in danger of running out of cash to operate the government, and where fearful residents in recent days have been rapidly withdrawing more of their savings from Greek banks, faces uncertain new elections next month. Opinion surveys have shown that Syriza, a party that wants to break the terms of Greeceas bailout deal and that came in a surprise second in the last vote, is polling in first place…European finance ministers — whose taxpayers have largely funded the bailout for Greece — were quick to push back Tuesday. Given the potential shock waves if Greece is forced to leave the euro zone, there have been suggestions in recent days that European officials might show more lenience with Athens.” Anthony Faiola in The Washington Post.

Surging bank withdrawals in Greece sparked fears of a bank run. “Greek depositors withdrew a!700 million ($898 million) from the country’s banks on Monday, fueling fears of a bank run amid the growing political disarray. With deposits falling, Greek banks become even more dependent on the European Central Bank to meet their funding needs, exposing the central bank to potentially huge losses if Greece leaves the euro area. Greek President Karolos Papoulias told the country’s political leaders that bank withdrawals plus buy orders received by Greek banks for German bunds totaled some a!800 million on Monday, a transcript of his comments said. A central bank official confirmed the figures…Monday’s deposit withdrawal far outpaced Greek banks’ steady decline in deposits since the start of the country’s debt crisis in 2009, as depositors withdraw cash and transfer funds overseas.” Brian Blackstone and David Enrich in The Wall Street Journal.

@grossdm: So, Greece is seeking to solves its economic problems through QE — quantitative electioneering

3) The Senate will vote on several GOP budget proposals today. “The Senate on Wednesday will hold six hours of debate and votes on four different Republican budget resolutions, in an apparent attempt to demonstrate that they will not be supported in the Democratic-led Senate. A fifth budget measure up for a vote, from Senate Budget Committee ranking member Jeff Sessions (R-Ala.), is based on President Obama’s budget and is seen as an attempt to embarrass the White House. But Senate Budget Committee Chairman Kent Conrad (D-N.D.) said Tuesday that debate and votes on the GOP proposals would show there is little appetite for these plans. He also said it would give the country a chance to understand that last year’s Budget Control Act already sets spending caps for Congress. Democrats have been under fire for failing to pass any budget resolution…One of the four GOP budget resolutions to be debated Wednesday is H.Con.Res. 112, the budget resolution approved by the House in March.” Pete Kasperowicz in The Hill.

4) The Justice Department started a criminal probe into JPMorgan Chase’s loss. “The Justice Department has initiated a criminal probe into the $2 billion trading loss at JPMorgan Chase, a law enforcement representative familiar with the situation said Tuesday. The inquiry is at a very early stage, said the person, who spoke on the condition of anonymity because the matter is private. Many details about the loss at JPMorgan are murky, so it is unclear what laws, if any, may have been violated. But the attention from federal officials indicates that regulatory pressure is rising on JPMorgan, and its chief executive Jamie Dimon, to explain what exactly led to the bankas multi-billion dollar misstep. That, in turn, has rekindled questions about whether government regulators are equipped to monitor banks making risky, complex trades…Dean Boyd, a Justice spokesman, declined to comment.” Jia Lynn Yang and Sari Horwitz in The Washington Post.

Too big to fail banks have gotten bigger. “JPMorgan Chaseas $2 billion blunder is throwing the spotlight on an awkward truth for President Barack Obamaas promise to end the era of big bank bailouts: The same institutions that were deemed ‘too big to fail’ before the financial collapse are even bigger now. Efforts to manage the size of such institutions were at the heart of the Dodd-Frank financial law passed in July 2010. But nearly two years later, many of the lawas regulations remain in limbo, as federal agencies muddle through long rule-making processes against stiff industry opposition…All the while, the countryas biggest financial institutions continue to grow. The five largest, which controlled $6.1 trillion in assets before the collapse, by the end of 2011 had assets worth $8.5 trillion — equal to more than half of U.S. economic output, according to Federal Reserve data.” Patrick Reis in Politico.

@BCAppelbaum: This whole JPM story underscores one reason we don’t have effective financial regulation: Our public officials don’t understand finance.

Top op-eds

1) PORTER: It’s time for the euro to come to an end. “Social upheaval across the euro area suggests that it may be time to call it quits and try to work out an orderly process to re-establish national currencies throughout the bloc. Europe would be in much better shape if the euro didnat exist and each member country had its own currency. Monetary union has shackled together nations with vastly different economies, depriving them of an independent monetary policy that can help them through rough times. The interest rate and exchange rate that serve Germany also have to serve Spain, though that country has more than four times Germanyas joblessness. The main problem is that while leaders eagerly embraced the monetary bond, they rejected its necessary complement: a central budget that would transfer money from successful regions to underperforming ones, as the United States government sends tax dollars collected in Massachusetts to pay for unemployment benefits in Nevada.” Eduardo Porter in The New York Times.

2) FROST: The FDIC shouldn’t protect investment banks. “I suggest that we divide the two functions into separately owned, managed and regulated entities. That’s the only way we can ensure that their riskier businesses don’t undermine the insured deposits that are the foundation of a stable and healthy economy. Taxpayer safety-net programs, such as the Federal Deposit Insurance Corporation (FDIC), should be available only to banks in business to provide insured deposits. Financial institutions that provide primarily investment, hedging and speculative services don’t deserve protection either by the FDIC’s explicit guarantees or by an implicit understanding that taxpayers will bail them out because there is no other alternative. Indeed, this kind of protection is a perversion of capitalism and can distort its good outcomes…We need a real and impregnable firewall that keeps one part of the banking system–and the economy–from being consumed when the other goes into flames.” Tom Frost in The Wall Street Journal.

3) ROSEN: Competitive bidding can hurt patients. “On the face of it, competitive bidding sounds like a very good idea. If one supplier can provide power wheelchairs or oxygen masks for 30 percent less than another, itas hard to argue for contracting with the more expensive supplier, especially at a time when everyone is looking for ways to save money. A one-year experiment with expanded competitive bidding that was recently conducted by Medicare yielded cost savings of 42 percent, without reducing the quality of care, and was hailed as a great success. But as a doctor working with patients on the ground, I have doubts about that quality-of-care measure, and I worry that those savings obscure a potentially serious problem…If competitive bidding is predicated on supplying equipment at the lowest possible price, something has to give. And more likely than not, that something will be patient care.” Dennis Rosen in The New York Times.

4) ORSZAG: Want good news on jobs? Look to big businesses. “Big business, we keep being told, has been so hampered by regulatory uncertainty over the past few years, it has been reluctant to hire workers. So it is surprising to read the results of a little-known survey from the Bureau of Labor Statistics: Very large businesses, it turns out, have been expanding their domestic workforces relatively rapidly. If, since January 2011, businesses of all sizes had hired at the same rate as those with 5,000 or more employees, we would have almost 4 million more jobs today…The JOLTS data highlight the importance of exploring how the continuing deleveraging process and resultant sluggish growth in demand is affecting smaller businesses in particular. With the percentage of working Americans stuck at a depressed level, we sure could use those extra 2 million to 4 million jobs.” Peter Orszag in Bloomberg.

5) ALEXANDER: Washington should take over Medicaid and let states handle education. “Staring down steep tuition hikes, students at the University of California have taken to carrying picket signs. As far as I can tell, though, none has demanded that President Barack Obama accept a Grand Swap that could protect their education while saving them money. Allow me to explain. When I was governor of Tennessee in the early 1980s, I traveled to meet with President Ronald Reagan in the Oval Office and offer that Grand Swap: Medicaid for K-12 education. The federal government would take over 100% of Medicaid, the federal health-care program mainly for low-income Americans, and states would assume all responsibility for the nation’s 100,000 public schools…If we had made that swap…states would have about $92 billion a year in extra funds, as they’d keep the $149 billion they’re now spending on Medicaid and give back to Washington the $57 billion that the federal government spends per year on schools.” Lamar Alexander in The Wall Street Journal.

Cover interlude: Screaming Females play Sheryl Crow’s “If It Makes You Happy” for the AV Club.

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

Still to come: Free trade with Colombia is in effect; Catholic bishops are close to suing over birth control; backlash against tests is growing; energy independence is within reach; and a puppies’-eye view of life.

Economy

The Senate will vote on two Fed nominees on Thursday. “Senate Majority Leader Harry Reid (D-Nev.) today set up a procedural vote for Thursday on two nominees to join the Federal Reserve whose nominations have stalled because of opposition from Sen. David Vitter (R-La.)…Vitter blocked attempts in March to quickly confirm Harvard University economics professor Jeremy Stein, a Democratic nominee, and former private-equity executive Jerome Powell, a Republican nominee…Asked whether he was confident that he would have the 60 votes to invoke cloture on the nominations, Reid said, ‘Well I sure hope so, weave been waiting months and months.’…Senate Minority Leader Mitch McConnell (R-Ky.) said he believes there is bipartisan support for the nominees…Without the two nominees in place, the Federal Reserve Board will remain short-handed as it attempts to support the economic recovery” Humberto Sanchez in Roll Call.

The dip in gas prices eased inflation. “The recent slide in gasoline prices in the U.S. has pushed the nation’s annual rate of inflation to its lowest level in more than a year, easing some economic strains on consumers. The consumer price index, which measures what Americans pay for everything from breakfast cereal to doctor visits, was unchanged from March to April, ending three months of increases, the Labor Department said Tuesday. A 2.6% drop in the gasoline-price index helped offset rising costs for many other items. Overall prices are now running 2.3% higher than a year ago, the smallest increase since February 2011…The inflation figures have mixed implications for the recovery. Lower gasoline and utility costs are keeping a lid on household expenses, effectively boosting Americans’ spending money. However, prices are climbing broadly, most notably for food, but also medical care, rents, autos and airfares.” Josh Mitchell in The Wall Street Journal.

States are using foreclosure prevention funds to plug budget gaps. “Hundreds of millions of dollars meant to provide a little relief to the nationas struggling homeowners is being diverted to plug state budget gaps. In a budget proposed this week, California joined more than a dozen states that want to help close gaping shortfalls using money paid by the nationas biggest banks and earmarked for foreclosure prevention, investigations of financial fraud and blunting the ill effects of the housing crisis. California was awarded more than $400 million from the banks, and Gov. Jerry Brown has proposed using the bulk of that sum to pay the stateas debts. The money was part of a national settlement valued at $25 billion and negotiated with five big banks over abuses in their mortgage and foreclosure processes…As part of the settlement, the banks agreed to pay the states $2.5 billion, money intended to help homeowners and mitigate the effects of the foreclosure surge.” Shaila Dewan in The New York Times.

House Republicans are planning a vote on a ‘fast track’ proposal for tax reform. “Speaker John Boehner said in a speech Tuesday that House Republicans would try to attach a timeline to fast-track a broad tax overhaul to a vote extending the George W. Bush-era tax rates before the November elections…’Our bill to stop the New Yearas Day tax increase will also establish an expedited process by which Congress would enact real tax reform in 2013,’ Boehner (R-Ohio) said in remarks to a fiscal summit in Washington. ‘This process would look something like how we handle Trade Promotion Authority, where you put in place a timeline for both houses to act.’…GOP aides said that, even though Boehner specifically discussed Trade Promotion Authority on Tuesday, House Republicans are looking at a variety of expedited processes that have been used in the past, and have yet to settle on just one.” Russell Berman and Bernie Becker in The Hill.

@grossdm: Memo to Boehner, the markets, etc.: the House passing legislation won’t be sufficient to avert tax increases. They’ll have to make a deal

The euro zone narrowly missed recession. “The euro-zone economy narrowly escaped recession in the latest quarter thanks to a surprising rebound in Germany, which offset deepening downturns in Spain and Italy. Although the region avoided two straight quarterly drops in gross domestic product, the common benchmark for recession, the figures nonetheless reflect a deepening divide between Germany and the rest of the euro zone that complicates the bloc’s efforts to stem its debt crisis…Euro-zone GDP was unchanged from the previous quarter, said Eurostat, the European Union’s statistics agency. In annualized terms, GDP rose 0.1% from the fourth quarter, according to calculations by J.P. Morgan Chase. Economists had expected an annualized contraction of around 1%. GDP fell at a 1.2% rate in the fourth quarter…European stock markets rose initially on the figures, which eased fears that the debt crisis may trigger an economic free fall.” Brian Blackstone in The Washington Post.

Export-Import Bank reauthorization cleared the Senate by a wide margin. “On a broad bipartisan vote of 78 to 20, the Senate voted Tuesday to extend the life of the U.S. Export-Import Bank and expand its authority to make loans to U.S. exporters. In the ‘Schoolhouse Rock’ version of how Capitol Hill works, this is what Congress does all the time — passes legislation. But it made for big news on this Capitol Hill, where protracted partisan warfare has meant that lately the story has more often been about votes forced by one party or the other to indignantly demonstrate the otheras opposition…Tuesdayas bill was the rarest of breeds: a lasting compromise on an issue of substance. It renewed the charter of what is commonly referred to as the Ex-Im bank for three years and will over that time raise the cap on the total financing the bank can guarantee from $100 billion to $140 billion.” Rosalind Helderman in The Washington Post.

The U.S.-Colombia free trade agreement took effect. “A free-trade agreement between the U.S. and Colombia took effect Tuesday after years of negotiations and despite strong opposition from U.S. labor organizations, which are worried about jobs being sent abroad and union-busting violence in Colombia. The first products shipped tariff-free were crates of Colombian roses and other flowers that landed Tuesday morning at Miami’s airport…President Barack Obama signed the free-trade agreement with Colombia in October, days after Congress gave its final approval following heated debates. The deal was originally negotiated by the Bush administration, but President Obama reworked the deal to satisfy Democrats. The U.S. exported $14 billion of goods to Colombia last year, everything from cars to consumer electronics to food, and exports are expected to rise by more than $1.1 billion as a direct result of the pact, according to the International Trade Commission.” Dan Molinski in The Wall Street Journal.

Adorable children singing interlude: Two girls cover Gotye’s “Somebody That I Used To Know” from the back seat of the car.

Health Care

Catholic bishops are threatening to sue over the birth control mandate. “The Catholic Church’s U.S. hierarchy warned Tuesday that without quick action by Congress, it will sue the Obama administration for mandating that insurance plans provide birth control to women without a co-pay. ‘[F]orcing individual and institutional stakeholders to sponsor and subsidize an otherwise widely available product over their religious and moral objections serves no legitimate, let alone compelling, government interest,’ lawyers for the U.S. Conference of Catholic Bishops wrote in a letter to federal regulators. Several small Catholic universities have already filed suit over the policy…The bishops’ notice came in 20 pages of comments submitted to the Department of Health and Human Services (HHS) on a forthcoming rule to accommodate certain religious organizations, such as Catholic hospitals, that were not exempted from the original mandate.” Elise Viebeck in The Hill.

Obamacare will expand healthcare options for immigrants. “The Obama administrationas drive to cut down on Americaas uninsured is about to get multilingual. Come 2014, when core provisions of the Affordable Care Act kick in, millions of legal immigrants will have new options for gaining health coverage. And like U.S. citizens, most will be subject to the individual mandate, under which they will be required to get coverage to avoid a penalty. The national health law explicitly excludes illegal immigrants — a politically explosive topic — and bans them from the new state insurance exchanges, even if they use their own money. They will make up a big chunk of the remaining uninsured population. But advocates say states have good reasons to reach out and get uninsured legal residents covered — especially as the federal government picks up most of the tab…In 2014…legal immigrants will be able to shop for health coverage through the new state insurance exchanges.” Kyle Cheney in Politico.

Domestic Policy

The backlash against standardized testing is growing. “The increasing role of standardized testing in U.S. classrooms is triggering pockets of rebellion across the country from school officials, teachers and parents who say the system is stifling teaching and learning. In Texas, some 400 local school boards–more than one-third of the state’s total–have adopted a resolution this year asking lawmakers to scale back testing. In Everett, Wash., more than 500 children skipped state exams in protest earlier this month…The efforts are a response to the spread of mandatory testing in the past decade. Proponents say the exams are needed to ensure students are learning and teachers’ effectiveness is measured. Critics say schools are spending disproportionate time and resources on the tests at the expense of more-creative learning. They also contend the results weigh too heavily in decisions on student advancement, teacher pay and the fate of schools judged to have failed.” Stephanie Banchero in The Wall Street Journal.

The NLRB suspended implementation of its union elections rule. “The National Labor Relations Board (NLRB) suspended implementation on Tuesday of a rule that would speed up union elections. On Monday, U.S. District Judge James Boasberg struck down the regulation. In his ruling, the judge said the labor board only had two members vote on the final rule in December 2011 when it needed three members to form a quorum. In the wake of the court decision, the agency is temporarily suspending the rule’s implementation, which went into effect on April 30. Further, Lafe Solomon, the NLRB’s acting general counsel, withdrew guidance he sent to the labor board’s regional offices and told those offices to follow the old union election rule instead. The agency is still considering its response to the court ruling…’We continue to believe that the amendments represent a significant improvement in our process and serve the public interest by eliminating unnecessary litigation,’ said NLRB Chairman Mark Pearce.” Kevin Bogardus in The Hill.

Dog’s-eye view interlude: Life from on top of puppies.

Energy

Energy independence is no pipe dream. “Every president since Richard Nixon has called for the U.S. to wean itself from needing oil from unstable or unsavory countries. The nation’s new-found energy riches are likely to bring that ambition closer to reality in the next two decades, according to many forecasters. It’s no pipe dream. The U.S. is already the world’s fastest-growing oil and natural gas producer. Counting the output from Canada and Mexico, North America is ‘the new Middle East,’ Citigroup analysts declare in a recent report. The U.S. Energy Information Agency says U.S. oil imports will drop 20% by 2025. Oil giant BP projects the U.S. will get 94% of its energy domestically by 2030, up from 77% now, as oil imports fall by half…Most enticing, a team of analysts and economists at Citigroup argues that the U.S., or at least North America, can achieve energy independence by 2020.” Tim Mullaney in USA Today.

@umairh: So consider how our political institutions are paralyzed by a financial crisis. Now think about energy, water, etc crises. Sweet!

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

Sen. Tom Coburn (R-Okla.) served on the Simpson-Bowles commission, is a member of the Gang of Six, and just published aThe Debt Bomb: A Bold Plan to Stop Washington from Bankrupting America.a We spoke last week in his office. This interview, which focuses on Americaas debt and growth problems, is the first in a two-part series. The second interview, which focuses on health care, will be published later this week.

Ezra Klein: So ataxmageddona is coming at the end of the year. Depending on how you look at it, itas an opportunity for Congress to trigger a massive and unnecessary fiscal crisis, or to actually get some serious legislating done on our long-term fiscal issues. Are you optimistic about the outcome?

Tom Coburn: No. But it depends on what the mix is. If President Obama is still president and weare in control of the Senate, I think youall see significant attempts to get something done. But I donat think theyall be much more successful than what we saw in August. And I wouldnat consider that very successful. If Romney wins and we win control in the Senate, we have to send a signal that weare going to fix it in order to take away all that potential risk to the economy. You have to say weall work all over the Christmas holidays to get it fixed.

EK: When you look at the Romney scenario, it seems Republicans have spent a few years now learning how to take tough votes on the budget, particularly on the Ryan plan. So if Republicans control the House and Senate, it seems to me that youad see quite dramatic action on those issues, as they can be passed with 51 votes through budget reconciliation.

TC: Well, you can. Ryan has a good plan. I donat think it goes fast enough. But the fact is heas got a plan. The president wonat put out a plan. The Senate Democrats wonat put out a plan. Itas kind of like boxing with a shadow. You canat ever hit it. But it doesnat matter if youare Democrat or Republican. The pain will get worse every year we donat fix these things. And there will come a time when it wonat matter if youare a Republican or Democrat. And I donat have much faith right now that weare up to the task of coming to agreement to fix this.

EK: I want to come back to the question of the plans in a second,. But your book opens by imagining a very dire fiscal crisis in 2014. And this goes to your contention that Ryanas plan doesnat bring down the debt fast enough. Where do you get the urgency of your schedule? I look at Treasuries and theyare selling with very low yields. So you can say thatas just the Federal Reserve manipulating prices. So then I look at credit default swaps on the United States, and there are no alarm bells there, either. I look at countries like Japan and England that have carried on with very high debt levels for a very long time. Weave seen other countries that control their own currency manage very high debt levels throughout the 20th Century.

TC: Well, you need to go study Japan. Theyare going to crash.

EK: People have been saying that for 20 years.

TC: You have two things coming together. This is the first year theyall be a net issuer of debt outside their country. Theyave totally financed all their debt internally. We havenat. Thatas one big difference. They also have a much lower birth rate. Seven births for every 1,000 people. So their population is shrinking and their demographic shift is much worse than ours. And this year, the postal system there that runs all their retirement accounts will not be buying any government debt. Zero. So the Japanese government, for the first time, is going into the international market. And the yenas value is going to decline against every major currency. Whether that happens this year or next year or in three years, itas going to happen. And theyave now had almost two decades of no real GDP growth. So Japan isnat going to make it. The reason they havenat had any problems is they havenat asked anyone else in the world to buy their debt. Now theyare going to have to.

The same thing ultimately will happen to us, but weall be the last person it happens to. The world still views this as the safest place. You see Greece, which will probably be out of the euro by the end of this year. Then you look at Spain and Italy and Portugal and Ireland. Europe is going to print money just like Ben Bernanke is printing money. And whatas the end result of that? Inflation.

EK Well, it depends how you manage it.

TC: How do you sterilize $3 trillion worth of debt?

EK: The difficulty for me when you say that is Iam a market-oriented guy. I trust the markets, more or less. And if you look at the marketas inflation expectations, theyare not high. They donat think what the Fed has done will lead to inflation.

TC: They donat now. But nobody ever does when you print money like that. If you study [Carmen] Reinhart and [Kenneth] Rogoff and what they said, they know whatas coming. Every country thatas ever been with a debt crisis and has printed money has ended up with an intentional inflation problem. Think for a minute that youare Ben Bernanke. Youare trying to control inflation, jumpstart the economy, and improve the unemployment rate. What do you think his long-term answer for this is?

EK: At the moment, I donat think he has one.

TC: His long-term answer is inflation.

EK: Not only do I think that would be an okay answer, but Reinhart and Rogoff do, too. Rogoff has been arguing for higher inflation for a long time. But Bernanke says he wonat permit that. And I donat see a reason he would allow inflation later but oppose it now, when it could really help. In fact, what heas been saying is he wonat do the monetary stimulus many want now specifically because he doesnat want to deanchor inflation expectations later.

TC: But 10 years from now, our bonds wonat be two percent. So what percentage of the total budget do interest costs become if you normalize back to the historical average? If you do that today, you add $650 billion to our annual interest costs. How long do you think he can keep two percent inflation? If he does, then weall continue to have two percent growth. In other words, if we start getting the growth, then weall see the inflation. The reason thereas no inflation now is thereas no velocity to the money. Weave got $2 trillion sitting on the sidelines with corporations in this country. Another few trillion in personal bank accounts. And the reason is no one has confidence in the future. And itas not so much the details of the plan to fix it as the psychological confidence it will get fixed. And thatas why I voted for Bowles-Simpson.

EK: When Bowles-Simpson went before the House, it was rejected by a huge bipartisan majority. Do you see there as being any possibility that one outcome of the taxmageddon period could, be a grand bargain in the Gang of Six/Simpson-Bowles vein?

TC: I donat know the answer to that, frankly. My hope would be we reach a grand compromise. But the vote in the House proves what I said in the book. You had a vote in the House on a plan that could solve our problems and the Democrats didnat vote for it because it touches Social Security and Republicans vote against it because of revenues. Both sides accentuated their differences rather than sending a signal to the international community that we could get together and cut $4.5 trillion over the next 10 years. Which raises the question: Why are they here? If youare here just to get reelected, youare worthless to the country.

EK: Youare searingly critical of Congress in the book. So let me ask you: How do you fix the Senate?

TC: Let the Senate operate the way itas supposed to. put stuff through committees. bring it up in regular order. Have an open amendment process. Iam the number one amendment offerer in the Senate in the last few years.

EK: Congratulations.

TC: Well, itas not necessarily a compliment. But the point is the Senate really could work if you let it work on the real issues. If you were to put Simpson-Bowles on the floor and really have a strong debate on that bill, it could get through the Senate.

EK: When I talk to the party tactician types, the senators trying to figure this out, their argument is that when you try to do this out in public, with 24-hour news media broadcasting every move and every possible compromise, the issue polarizes, the interest groups descend, the party bases descend, and solutions get taken off the table. In the end, they think there will have to be some big backroom deal. They think a more open process would make this harder, not easier.

TC: I just adamantly disagree. Thatas the sickness of Washington. What that really says is the politician doesnat want to stand up and debate and tell their interest groups no. We had the pharmacists in here earlier. They want a bill to protect community pharmacies. And I said, you know what, the market is changing, Iam not about to support a bill, even though you support me, that doesnat allow the market to work this thing out. I think the reason you get this kind of analysis is because people wonat stand up and do what they think is right because it hurts their political chances. And on our bonds, our bonds will be fine until theyare not, till that tipping point comes when they say crap, we canat get out of it.

EK: As you just said, youare a market guy. You want the market to work things out. You believe in the marketas ability to work things out. So why do you think your view of our likely debt and inflation path is so much more dire than the marketas?

TC: Because the market is biased towards up. Why do you invest in the market? Not because you think youall lose money. Why do you invest in bonds? To make money. Where is the contrarian view?

Let me give you one example. Five weeks ago, Bernanke said there would be no QE3. What happened to the 10-year bond in four days? It rose 48 basis points. What the market said then is if thereas no more QE3, weare going to short the value of a bond. Thatas one little signal. What if you get 20 signals? How do you explain the Chinese getting rid $160 billion of our debt last year? Eventually, theyare not going to buy our debt. Who bought most of our debt last year? It was the Federal Reserve. Go out there and try and float $10 billion of our long-term debt. You canat. Thereas no market. Because the long-term market is saying, send us a signal that youall fix this. And so the reason we have the shortest debt maturity in our countryas history is first, because you canat sell long-term debt because no one wants to buy it, and second, because long-term debt makes the deficit look worse.

Look, I may not be right. But what I see and the people I read — all I do at night is read economic reports on peopleas view of us — and when you look at it, Spain, wonat make it, the European Central Bank will eventually print money. You agree?

EK: Iam hoping so.

TC: Theyall do that to buy time. And where I agree with Paul Krugman is you canat just have austerity. You need growth, The question is how do you get the growth. Do you get the government-driven growth, or do you get confidence and certainty so that the private money comes in and creates the growth? One costs you double. The other costs you half. So thereas a fourfold difference in where you get the growth from. When you borrow the money to spend $800 billion, you got that debt hanging on you, which Reinhart and Rogoff have proven without a doubt, when youare at 90 percent and above, and weare at 101 percent right now, debt-to-GDP, thatas at least a one percent cut to growth.

EK: To go back to Krugman, if he were sitting here, head say in this crisis thereas been no evidence anywhere that cutting deficits leads to growth. Weave not seen it in the euro zone or the UK. And head say the Reinhart/Rogoff story is a correlation story. It doesnat prove that high debt always and everywhere hurts growth.

TC: Go look at Sweden. Hereas what Sweden did. They cut their spending and their taxes. They have the best growth rate in Europe. They had a surplus this year. They had growth at six-plus percent. They actually did a Reagan style approach to their problem by cutting spending and cutting taxes. And theyare the fastest growing with a decline in their debt-to-GDP ratio.

EK: But correct me if Iam wrong, but if I recall, Swedenas monetary policy went towards a very sharp devaluation, theyave been driven by export growth, and alongside Israel, theyave been more aggressive than any other central bank in the world. Theyave done stuff that if we did it here, people would lose their minds.

TC: I think there are monetary parts to that. But their finance minister put in place tough stuff. They had people who left Sweden because of the tax ratio. Now theyave moved back. And itas not a perfect example, but itas an exception to the Krugman story.

EK: Is there anything we need but deficit reduction to get growth back on the right path?

TC: Itas signals. The number one thing, and I think most economists would agree, confidence matters. If you have negative confidence, then you get much lower growth. If you have positive confidence you get much better growth with the same set of numbers. I think people are so disgusted with Washington that if we send a signal weare actually going to fix this — with any combination of tax and spending, remember that I voted for Simpson-Bowles — weall get our mojo back when people have some confidence in the future and see their Congress solving their problems.

EK: It seems your view is that just as the market needs to have faith in your demographics and in the flexibility of your labor market and the competitiveness, it has to have faith in your political systemas capacity to deal with long and short-term threats. Do you see any reason for the market to have that faith right now?

TC: No. One of my biggest worries is what happens if Romney wins and Republicans control both chambers, do they have the courage to do what it takes to fix the country? Itas kind of their last chance. If theyare given the favor of control and they donat act on it, why should you ever trust them again? You shouldnat. Itall be the death knell of the Republican Party. They controlled it all for four years under Bush and grew the government. They created a new entitlement with no revenue. Went against the very tenets of what they said they believe.

One of the reasons I wrote the book was to show a whole lot of people how many stupid things we do. I donat really blame presidents too much. You gotta get appropriations. I say the problem is not that we donat get along. We get along too well. Government is twice the size it was 10 years ago. The president canat spend the money if we donat appropriate it. So itas not a president problem. Itas a congressional problem.

EK: On the other side of that hypothetical, letas say Obama wins, but Republicans hold the House and maybe even take the Senate. How do they act in that hypothetical? Are they more or less willing to compromise with Obama?

TC: I donat know. Iam not good at predicting that. If President Obama is president again, those problems are still there and we have to solve them. He knows that. Weave had conversations where heas told me heall go much further than anyone believes heall go to solve the entitlement problem if he can get the compromise. And I believe him. I believe he would.

On Saturday, at 9:17am, Henry Blodget, the editor of Business Insider, asked the question that was on everyone’s mind: “So, when is JP Morgan going to fire the incompetent fools who just lost $2 billion and trashed the firm’s reputation?”

The answer, according to the Wall Street Journal, is…soon. The paper reports that the botched trade is “likely to result this week in the departure of three of the highest ranking executives with direct ties to the investments.”

Over at Seeking Alpha, Gene Kirsch tried to put Hedgegate into a broader context. “JPMorgan losses are reported to be actually $800 million in Q2 with the potential for legal and other losses up to $4.2 billion over a longer period of time, possibly exceeding one year,” he wrote. “The banking unit of JPMorgan Chase alone made $12.4 billion last year. The holding company has over $2.26 trillion in assets and is the largest U.S. bank and 8th largest in the world. The holding company made $29.9 billion in operating income and just over $20 billion in net income for 2011. So, this initial loss of $800M represents approximately 4% of its total net profit for all of 2011, less than 2.7% of its operating income.”

The firm, in other words, can manage it. Though as Brad DeLong was quick to point out, tallying the direct losses misses the episode’s larger impact on the firm’s value. “The revelation that JPMC did not have control over its derivatives book–even though accompanied by promises of multiple firings and deep reforms–destroyed 1/7 of JPMCs franchise value.” Turns out the market doesn’t much like it when what’s reputed to be the safest bank on Wall Street turns out to be incompetent.

Jared Bernstein draws out the larger lesson nicely, and so I’ll quote him at some length. “The fundamental truth here is the one known since Adam (Smith, that is) and amplified by the great financial economist Hy Minsky: humans underprice risk. Their proclivity to do so increases as the business cycle progresses and confidence takes over (remember, JPas bet was unwound by the fact that the economy wasnat as strong as they thought). The advent of a global derivatives market with notional trades in the trillions greatly amplifies the risks.”

“The fact that humans like Jamie Dimonahe who presided over JPas self-proclaimed ‘fortress balance sheet’ahe who inveighed against financial reform as imposing unnecessary oversight on such skilled risk managers as he and his staffafall prey to this fundamental truth only underscores the lesson of this episode in financial hubris.”

“And that is this: financial markets are inherently unstable. They will neither self-correct nor self-regulate. Their instability poses a threat to markets and economies and people across the globe. Therefore, they need to be regulated. Thatas not to say that anyone knows the best way to do this yet in order to balance the necessity of oversight with the dynamics of the markets. We donat know where to set the speed limits. It must be an iterative process. But we do know they need to be set, and JPas loss should be taken as a warning that our tendency is to set them too low.”

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RCP Obama vs. Romney: Obama +2.0%; 7-day change: Obama -0.3%.

RCP Obama approval: 48.0%; 7-day change: +0.7%.

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Top stories

1) Euro zone leaders are seriously discussing a Greek exit. “Eurozone central bankers have talked publicly for the first time of managing a possible Greek exit from Europeas monetary union as stalemate in Athens talks on a coalition government raises the prospect that Greece will renege on the terms of its international bailout. The comments by members of the European Central Bankas governing council indicate that the risk of eurozone fragmentation is being taken increasingly seriously by the regionas policymakers. They mark a significant shift at the ECB, which has previously argued that European treaties do not allow for an exit and that a break-up would cause incalculable economic damage.” Ralph Atkins in the FT.

Greece is headed towards new elections. “Greece appears headed to new parliamentary elections next month, further delaying its efforts to meet international demands to overhaul its economy, after leaders of the countryas major political parties declared little hope Sunday for a last-ditch effort to form a coalition government…Greek President Karolos Papoulias met with politicians Sunday in an effort to construct a unity government that could guide the country through the bailout program, and he planned to continue discussions Monday. But with top leaders expressing little hope for compromise after a week of efforts, it appeared likely that Papoulias would be forced to call new elections, most likely for June 10 or 17. Hopes for compromise have rested on Alexis Tsipras, the leader of the anti-bailout Coalition of the Radical Left Party, also called Syriza…But Tsipras has refused to go along with the pro-business New Democracy party, which won 19 percent of the May 6 vote, and the Socialists, who won 13 percent.” Michael Birnbaum in The Washington Post.

KRUGMAN: “weare talking about months, not years, for this to play out.”

@TheStalwart: Weird. As @renovatio_news points out, #quediceKrugman (What Krugman Says) is trending in Spain. http://twitpic.com/9ktvbo

2) Wall Street looks the same to voters. The giant $2 billion trading loss at JPMorgan Chase highlights a central problem in President Barack Obamaas case for a second term: Four years after the financial crisis nearly brought the nation to its knees, very little appears to have changed. No high-profile bank executives are in jail. Special multi-agency task forces to go after financial fraud and mortgage market abuses appeared in State of the Union addresses, only to issue a few news releases and mostly vanish from public view. And now one of the largest banks in the United States, headed by a Democrat and operating with government guarantees, has turned in the kind of headline-grabbing, casino-style style loss that drives voters crazy and that Obamaas financial reform bill was supposed to stop. Ben White in Politico .

JPMorgan Chase has been lobbying to make exactly the kind of trades that just lost the company billions of dollars. “Soon after lawmakers finished work on the nationas new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank. Several visits over months by the bankas well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking…The loophole is known as portfolio hedging, a strategy that essentially allows banks to view an investment portfolio as a whole and take actions to offset the risks of the entire portfolio. That contrasts with the traditional definition of hedging, which matches an individual security or trading position with an inversely related investment — so when one goes up, the other goes down.” Edward Wyatt in The New York Times.

The real response to JPMorgan Chase’s loss may come from global regulators, not the Volcker rule. “The size and scale of the surprise $2bn loss at JPMorgan Chase last week is likely to accelerate plans by global regulators to force banks to improve their trading risk models…While initial reactions to the JPMorgan loss last week focused on how it could reshape the US debate over implementing the ‘Volcker rule’ ban on proprietary trading, the misstep by one of the worldas largest banks could have far broader consequences. The Basel Committee on Banking Supervision, which sets global rules, has already sought a replacement for Value at Risk – the main measure of potential trading losses – and looked at additional capital requirements to cover potential damages that are not adequately measured by existing models. That project was seen as a long-term effort when it was announced two weeks ago, but it has now gained urgency and could be pushed through more quickly.” Brooke Masters and Tracy Alloway in The Financial Times.

CONFUSED? Here’s an explainer on JPMorgan Chase’s loss.

@davidmwessel: Barney Frank on JPM: Case that banks don’t need new rules to avoid repeat of ’08 crisis “at least $2 billion harder to make todaya (DJNS)

3) Republican state officials are dragging their feet on setting up exchanges. “In about two dozen states across the country, the insurance marketplaces at the heart of the 2010 health-care law remain in limbo, with Republican governors or lawmakers who oppose the statute refusing to act until the Supreme Court decides its constitutionality…In states with Democratic governors, such as New Hampshire and Minnesota, it is often Republican-dominated legislatures that are causing the hold-up. And in six states where Republicans hold both branches of government, including Kansas and South Dakota, state assemblies havenat even considered laws to establish the marketplaces. Though the battles primarily break along partisan lines, there have been at least a half-dozen exceptions. Last spring, the Republican governor of Nevada chose not to stand in the way of an exchange bill adopted by the majority Democratic assembly.” N.C. Aizenman in The Washington Post.

4) Congressional transportation bills won’t fill America’s infrastructure funding shortfall. “The nationas population is growing at a steady pace, yet infrastructure investments lag. The lifelines of commerce — roads, bridges, runways, ports — are showing their age, and in this era of fiscal austerity it may be a long time before they get rebuilt…The financing fiasco has been well-known for years — in fact, the last transportation bill, enacted in 2005, ordered up a blue-ribbon commission tasked with studying the financing problem and making recommendations for how to fix it. The National Surface Transportation Policy and Revenue Study Commissionas final report, issued in January 2008, a year before the last transportation bill was to expire, recommended that the country needs to be investing at least $225 billion annually from ‘all sources’ for the next 50 years in order to upgrade infrastructure to a state of good repair and make transportation advances. The Senateas current transportation bill, in comparison, would fund highways and transit at $109 billion over two years.” Kathryn Wolfe in Politico.

Top op-eds

1) BAKER AND HASSETT: We need a targeted response to long-term unemployment. “Policy makers must come together and recognize that this is an emergency, and fashion a comprehensive re-employment policy that addresses the specific needs of the long-term unemployed. A policy package that as a whole should appeal to the left and the right should spend money to help expand public and private training programs with proven track records; expand entrepreneurial opportunities by increasing access to small-business financing; reduce government hurdles to the formation of new businesses; and explore subsidies for private employers who hire the long-term unemployed. Those who hire for government jobs must do their share, too: managers who are filling open positions should be given explicit incentives to reconnect these lost workers. Every month of delay is a month in which our unemployed friends and neighbors drift further away.” Dean Baker and Kevin Hassett in The New York Times.

@davidfrum: “50 to 100% increase in death rates for older male workers in yrs immediately following a job loss”

2) YGLESIAS: America is headed towards default. “House Republicans voted to take money away from programs meant to help poor people and give it to the military instead. Thatas not my idea of wise policy, but thatas what was terrible about it. The problem is that the vote constitutes a collective Republican welching on the agreement that was reached last spring to raise the statutory debt ceiling and avoid national default. Yesterdayas vote doesnat undo the deal or cause any immediate problems, but by so speedily backing out of their agreement, the Republicans have done something much worse–made it impossible for anyone to negotiate with them in the future, because itas clear they cannot be trusted to keep the promises they made. If President Obama wins re-election, the debt-ceiling issue will have to be confronted again, but now in a Congress that has been poisoned by the Republicansa welching on the last agreement. The country, in other words, is set for an even more severe version of the crisis that crushed financial markets last summer.” Matthew Yglesias in Slate.

3) KRUGMAN: JPMorgan Chase’s loss proves the need for bank regulation. “Banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk theyare allowed to take on. Why, exactly, are banks special? Because history tells us that banking is and always has been subject to occasional destructive ‘panics,’ which can wreak havoc with the economy as a whole…So what can be done? In the 1930s, after the mother of all banking panics, we arrived at a workable solution, involving both guarantees and oversight. On one side, the scope for panic was limited via government-backed deposit insurance; on the other, banks were subject to regulations intended to keep them from abusing the privileged status they derived from deposit insurance, which is in effect a government guarantee of their debts.” Paul Krugman in The New York Times.

@Austan_Goolsbee: #lettersyouwontsee: Dear Mr. Volcker, you were right all along. we’re now fixing things and won’t let it happen again. yours, wall St.

4) SLOAN: JPMorgan Chase doesn’t prove the need for the Volcker Rule. “The Volcker Rule, named for former Federal Reserve chairman Paul Volcker, is an example of the problem involved in regulating giant companies in a complex world. The principle sounds wonderful and simple: Donat let banks use federally insured deposits for risky trades. But implementing it is proving to be incredibly difficult, as realists, including me, predicted would happen. Once bank lawyers finish finding loopholes in the detailed provisions, whatever they prove to be, the rule will probably have little meaningful impact. So bash Morgan all you like for its trading losses, and feel free to snicker at the spectacle of Jamie Dimon losing his swagger and having to eat crow. But donat confuse Morganas mess-up with the supposed need for the Volcker Rule. The Volcker Rule would have symbolic impact, by appearing to rein in Wall Street. But it will prove to be more useful as a full-employment act for loophole specialists than for reining in the banks.” Allan Sloan in The Washington Post.

5) SNOW: Tax cuts on dividends and capital gains should stay. “Nine years ago this month Congress passed President George W. Bush’s Jobs and Growth Tax Relief Reconciliation Act. That bill’s lower rates on capital, as well as the continuity in tax policy it established, have helped make our economy far more resilient. The legislation’s centerpiece was a reduction in the taxation of dividends and capital gains to 15%. Unfortunately, the 2003 tax rates, including those on capital income, are due to expire at the end of the year. Capital warrants special tax treatment because of the central role it plays in generating economic growth and jobs. Capital is the very lifeblood of the market economy, the mainstay of innovation, and the foundation for future prosperity. As more of it is put to work today, labor output and wages will rise tomorrow. An appreciation of that critical relationship should guide how the tax system treats earnings from capital.” John Snow in The Wall Street Journal.

6) THALER: Beware of slippery slope arguments on healthcare. “One pernicious category of imaginary risks involves those created by users of the dreaded ‘slippery slope’ arguments. Such arguments are dangerous because they are popular, versatile and often convincing, yet completely fallacious. Worse, they are creeping into an arena that should be above this sort of thing: the Supreme Court, in its deliberations on health care reform…Justice Scalia is arguing that if the court lets Congress create a mandate to buy health insurance, nothing could stop Congress from passing laws requiring everyone to buy broccoli and to join a gym…Please stop! The very fact that a slippery slope is being cited as grounds for declaring the law unconstitutional — despite that ‘significant deference’ usually given to laws passed by Congress — tells you all that you need to know about the argumentas validity. Can anyone imagine Congress passing a broccoli mandate law, much less the court allowing it to take effect?” Richard Thaler in The New York Times.

Top long reads

Jeffrey Toobin on how John Roberts orchestrated Citizens United: “Citizens United is a distinctive product of the Roberts Court. The decision followed a lengthy and bitter behind-the-scenes struggle among the Justices that produced both secret unpublished opinions and a rare reargument of a case. The case, too, reflects the aggressive conservative judicial activism of the Roberts Court. It was once liberals who were associated with using the courts to overturn the work of the democratically elected branches of government, but the current Court has matched contempt for Congress with a disdain for many of the Courtas own precedents. When the Court announced its final ruling on Citizens United, on January 21, 2010, the vote was five to four and the majority opinion was written by Anthony Kennedy. Above all, though, the result represented a triumph for Chief Justice Roberts. Even without writing the opinion, Roberts, more than anyone, shaped what the Court did. As American politics assumes its new form in the post-Citizens United era, the credit or the blame goes mostly to him.”

Andrew Martin and Andrew Lehren on the skyrocketing cost of college: “With more than $1 trillion in student loans outstanding in this country, crippling debt is no longer confined to dropouts from for-profit colleges or graduate students who owe on many years of education, some of the overextended debtors in years past. Now nearly everyone pursuing a bacheloras degree is borrowing. As prices soar, a college degree statistically remains a good lifetime investment, but it often comes with an unprecedented financial burden. Ninety-four percent of students who earn a bacheloras degree borrow to pay for higher education — up from 45 percent in 1993, according to an analysis by The New York Times of the latest data from the Department of Education. This includes loans from the federal government, private lenders and relatives. For all borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000 and 3 percent more than $100,000.”

’90s nostalgia interlude: Nine Inch Nails play “The Becoming” in studio..

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

Still to come: Wholesale prices are down; rebates will be credited to the ACA; Secure Communities expands; the IEA doesn’t like Obama’s plans; and cats, in slow motion.

Economy

Europe’s woes could hit the U.S.. “During bouts of European turmoil in the past two years, U.S. financial markets regularly stumbled and growth ebbed due to fears of a euro-zone meltdown. But Europe muddled through and avoided calamity, and the effects on the U.S. economy weren’t all bad. U.S. exports to Europe rose, and many U.S. banks benefited as overseas competition fell away. Now, the troubles in the currency union–the threat of a Greek exit from the euro zone, rising borrowing costs in Spain and Italy, recessions in several European countries–are renewing fears of an escalating crisis that could deliver a more serious blow to the fragile U.S. recovery. U.S. companies are bracing for a hit. Networking giant Cisco Systems Inc. last week blamed worries about Europe, along with other uncertainty, for its cautious outlook. Watchmaker Fossil Inc. reported a slowdown in German sales on top of deeper pullbacks in Italy and Spain. Chemicals firm Celanese Corp. attributed its disappointing results to weakening European demand.” Sudeep Reddy in The Wall Street Journal.

Wholesale prices declined for the first time this year. “U.S. wholesale prices declined for the first time this year, suggesting a drop in energy costs is helping to keep inflation under control. The index of producer prices, which measures how much wholesalers and manufacturers pay for goods and materials, fell a seasonally adjusted 0.2% in April from a month earlier, the Labor Department said Friday. The decline, the first since December, was due entirely to cheaper prices for energy goods, including gasoline and utility gas…The report on producer prices suggests inflation is subdued, after a run-up in oil prices earlier this year pushed costs beyond the Federal Reserve’s annual inflation target of roughly 2%. Lower inflation could reassure Fed officials as they keep a key interest rate exceptionally low through late 2014 to stimulate the economy. Lower inflation also gives the Fed more room to act, perhaps through additional bond purchases, if economic growth falters.” Josh Mitchell in The Wall Street Journal.

@BobCusack: “Where are the jobs?” references (from both parties) in the Congressional Record between ’09-’12: 357. Between ’05-’08: 3.

Vintage bicycle manufacturing tutorial interlude: How a bicycle is made.

Health Care

Insurers will be required to credit premium rebates to Obamacare. “Health-insurance companies must tell customers who get a premium rebate this summer that the check is the result of the Obama administration’s health-care law, according to federal guidelines released Friday. The move is the latest sign the Obama administration is trying to draw attention to the law’s benefits before the fall elections, even though the law faces an uncertain future. The Supreme Court is expected to decide in June whether its central plank–a mandate that everyone carry insurance–violates the Constitution. Mitt Romney, the presumed Republican presidential nominee, has pledged to wipe out the law if elected. Under the 2010 legislation, insurers that don’t spend a specified amount of revenue on actual medical care–as opposed to administrative costs–must refund the difference to customers.” Louise Radnofsky in The Wall Street Journal.

Domestic Policy

The Senate cybersecurity bill is running into privacy concerns. “Thereas yet another hurdle for Sen. Joe Liebermanas cybersecurity bill: Democrats who say it doesnat go far enough to protect consumer privacy. With Senate Republicans standing firm against the measure, the friendly fire from Democrats means thereas only more work ahead as Lieberman and others scramble to cobble together 60 votes to move the bill. A handful of members, including Sens. Al Franken of Minnesota and Richard Blumenthal of Connecticut, are echoing the concerns of civil liberties groups, which are growing increasingly fearful that consumersa data could end up being passed around by companies and the government as security experts share with each other information about emerging cyberthreats. To them and others, the Senate measure as written would specify too few limitations on how data could be used and cover entities with too broad a protection from liability.” Tony Romm and Jennifer Martinez in Politico.

The Obama administration will expand the controversial Secure Communities program. “Obama administration officials have announced that a contentious fingerprinting program to identify illegal immigrants will be extended across Massachusetts and New York next week, expanding federal enforcement efforts despite opposition from the governors and immigrant groups in those states. In blunt e-mails sent Tuesday to officials and the police in the two states, Immigration and Customs Enforcement officials said the program, Secure Communities, would be activated ‘in all remaining jurisdictions’ this Tuesday…Last year, officials at the agency said they had determined that they did not require consent from states to start the program. Citing antiterrorism legislation that Congress passed in 2002, the officials canceled agreements they had signed in 40 states and said they would extend the program nationwide by 2013.” Julia Preston in The New York Times.

Minority contracts fell last year for the first time in a decade. “U.S. government contracts to black-and Hispanic-owned small businesses fell last year for the first time in a decade, declining at a sharper rate than awards to all companies. Contracts to the black-owned firms dropped 8 percent to $7.12 billion in the fiscal year that ended Sept. 30, compared with fiscal 2010. Awards to Hispanic-owned businesses decreased 7 percent to $7.89 billion, according to federal procurement data.Contracts to the two minority groups fell at a faster pace than all contracts, which dipped 1 percent as the U.S. government slowed spending to help reduce the federal deficit. The gap may reflect stiffer competition over a shrinking pool of revenue and the recessionas greater impact on black and Hispanic firms…The absence of these set-aside programs may help explain the dip in awards for some minority groups, said James McCullough, who leads the government contracts practice at Fried Frank Harris Shriver & Jacobson in Washington.” Danielle Ivory in The Washington Post.

Cuteness amplified interlude: Cats in slow motion.

Energy

Fracking is sparking a boom in sand mining. “Scouts armed with geological maps and elevations from Google Earth are knocking on doors in the upper Midwest in search of what seems too common to mine: sand. The sedimentary material is in high demand among U.S. oil and natural-gas producers, setting off a sand rush in Wisconsin, Minnesota and other Midwestern states. While adding jobs, the mining boom is prompting pushback from some local residents, who are surprised by the frenzy and leery of its impact on their communities. Sand mined in the Midwest is used in places such as North Dakota and Pennsylvania to tap oil and gas reserves. The U.S. producers’ demand for sand reached 28.7 million tons in 2011, up from six million tons in 2007, according to independent laboratory PropTester Inc. and consultancy Kelrik LLC…Sand, injected deep underground to prop open fractures in shale formations and allow oil and gas to flow out, is important in ‘fracking.’” Mark Peters and Isabel Ordonez in The Wall Street Journal.

Lawmakers are torn on how to use high-speed rail funds. “As roads become more crowded each year, transportation planners have been looking for a game-changer that can reduce congestion and efficiently move millions of people. Enter rail — a centuries-old mode that may be a shining savior to those hoping to push the United States into a new way of getting people around at high speeds. But it wonat work everywhere — a lot depends on simple geography. And lawmakers are torn between how to use limited funds: along the densely packed East Coast, which has a history of commuter rail, or out West, where California has ponied up billions of dollars to build a high-speed system, much of it from scratch. Amtrakas Acela service from Boston to Washington runs the fastest trains in the country, maxing out at 150 mph and increasing soon to 160 mph…Three thousand miles away, California is inching ever closer to its high-speed rail vision, having formally approved the initial Central Valley route.” Burgess Everett and Adam Snider in Politico.

The IEA has concerns about Obama’s plans to increase oversight of oil markets. “Barack Obamaas plans for strengthened supervision of the oil markets have come under fire from the International Energy Agency, which has warned they could lead to sharp swings in crude prices. The warning, contained in the agencyas monthly oil market report, came in response to moves by authorities in the US and Europe to crack down on what they see as excessive speculation in commodities markets using derivatives. The US presidentas proposal to give the Commodity Futures Trading Commission authority to direct exchanges to raise margin requirements to address increased price volatility or prevent excessive speculation or manipulation could have the opposite effect, the western countriesa oil watchdog said on Friday. The IEA said raising margin requirements in oil futures trading might increase price volatility and concentrate market share in the hands of large speculators while having no effect on price levels.” Guy Chazan in The Financial Times.

America is running out of helium. “Sure, Congress has plenty of crises to deal with: a weak economy, an expiring highway bill, the end-of-the-year ‘taxmageddon.’ But now thereas another one floating into view. The United States is running out of helium. Yes, helium. Thanks, in part, to a 1996 law that has forced the government to sell off its helium reserves at bargain-bin prices, the countryas stockpile of the relatively rare and nonrenewable gas could soon dwindle…Congress is slowly grasping the extent of the problem. At a sleepy Senate hearing Thursday morning, the Energy and Natural Resources Committee listened to an array of experts chat about the gas. The hearing was tied to a bill, sponsored by Sens. Jeff Bingaman (D-N.M.) and John Barrasso (R-Wyo.), that would change how the government sells helium from its Federal Helium Reserve (yes, this exists) in order to prevent shortages.” Brad Plumer in The Washington Post.

@mattyglesias: Helium Privatization Act is a classic example of inefficient pseudo-privatization gone horribly wrong

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

Massachusetts is inching toward health-care legislation that, if successful, could overhaul how the state pays for health care a and save billions in the process.

Both the Massachusetts Senate and House have released bills that aim to cut at least $150 billion in health-care costs over the next 15 years. They do so by setting a global cap on health-care spending, under which health-care providers get paid for the quality a rather than quantity a of medicine they provide.

As for making sure those bills make it across the finish line and become law? That task lies, in no small part, with Massachusetts state Sen. Richard Moore. As chairman of the Massachusetts legislatureas Committee on Health Care Financing, heas been at work on health cost control legislation for 15 months a and will be the guy negotiating what the final product looks like.

aIt hasnat been all harmony and light, but everybody seems to feel we need to move in the same direction,a Moore told me in an interview this week. aThereas the general agreement that, if we focus on getting the best quality, we can drive down cost and ensure access for everybody.a

But there are some differences of opinion among Massachusetts legislators that could become roadblocks, namely determining how aggressive the state ought to be in slowing health-care cost growth.

The House has proposed capping health-care cost growth slightly lower than the rest of the economy, while the Senate would go allow costs to rise just faster than Gross State Product. Moore, for his part, is open to a more restrictive cap albeit not as tight as the Massachusetts House proposal.

aIad love to get below inflation,a he says, aBut weare just concerned that might be too drastic. Thatas almost like cutting the average rates of the past few years increases in half. We think the House version moves in that direction too quickly.a

There are also questions of enforcement: If Massachusetts does cap its health-care spending, how can it make sure that health-care providers will stay within the budget? Both bills will have a state agency watch over the process, with authority to write a acorrective action plana if it didnat see costs moving in the right direction.

I asked Moore whether such an agency would have enough teeth to enforce steep spending cuts. aWe didnat want to hold the hammer all the way out there,a he explains. aI think the folks in health care understand this is their job, so you might not need the hammer. And we will have someone watching, with the authority to require work plans. Maybe theyall come back to us and eventually ask for more authority.

aWe view this as a step in the right direction but not necessarily the end solution.a

What Moore says he is committed to is ensuring that a bill moves this session, regardless of any obstacles that come up in ensuing weeks and months.

aThereas general agreement this has got to be the direction of health care,a he says. aI have been working on this for 15 months. You work on something for that long, with so many people, maybe itas not surprising that thereas a lot of agreement.a

For the President of the United States to endorse gay marriage is certainly, as Vice President Joe Biden would say, a big you-know-what deal. But what’s actually changed this morning?

In Slate, Emily Bazelon argues that President Obama’s position was actually trailing his administration’s legal strategy. They had long ago made the unusual choice to stop defending the Defense of Marriage Act in the courts. That is to say, they had stopped defending a law that pits the federal government against states that choose to to allow same-sex marriage. This largely predicted Obama’s evolution on the underlying policy issue — he personally supports gay marriage, but thinks that the actual decisions should be left up to the states.

Then, of course, there’s the political fallout. This is unpredictable, of course. And my guess is that it probably hurts Obama a bit more than it helps him. But overall, I think Jonathan Bernstein is right that it’s largely being overhyped by both sides.

“Yes,” he writes, “some marriage-equality advocates had talked about withholding support unless the president ‘evolved.’ But realistically, there was no way that political activists a people accustomed to the normal give-and-take of politics a were not going to appreciate the wide gulf between Obama and Mitt Romney on lesbian, gay, bisexual and transgender issues.” Similarly, “itas highly unlikely that anyone who, otherwise was fine voting for Obama despite disagreeing with him on ending ‘donat ask donat tell’ and each of the other measures he has supported and in many cases has enacted, would draw the line here.”

“And what of everyone else?” Asks Bernstein. “The millions of Americans, most likely a large majority, who donat really care very much? Theyare still not going to care very much.”

But there are many Americans for whom this will matter quite a lot. Many of them are young Americans who perhaps have only recently realized that they’re gay, and who live in places, or with families, they know will have trouble accepting that fact. To them, the president’s words are a signal that they can look forward to a future in which they will be accepted, and in which they can live in a way that makes them happy. His words are proof that it gets better. And that’s a big deal.

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Top stories

1) The polling on gay marriage has flipped. According to surveys included in the PollingReport.com database, an average of 50 percent of American adults support same-sex marriage rights while 45 percent oppose it, based on an average of nine surveys conducted in the past year. This is a reversal from earlier periods: support for same-sex marriage has been increasing, and opposition to it has been decreasing, at a relatively steady rate of perhaps two or three percentage points a year since 2004…In addition, there is no longer evidence of an aenthusiasm gapa with respect to same-sex marriage: an NBC News/Wall Street Journal poll in March found that 32 percent of Americans said they strongly favored same-sex marriage, while 31 percent strongly opposed it. Nate Silver in the New York Times.

2) The president’s personal position is catching up with his administration’s legal strategy. Obamaas Justice Department withdrew more than a year ago from defending the Defense of Marriage Actas definition of marriage as ‘a legal union between one man and one woman.’ Attorney General Eric Holder started backing away from DOMA in suits brought by same-sex couples in Connecticut, Vermont, and New Hampshire. The idea in these cases is that in states that recognize same-sex marriage, the federal government should follow state law and stop denying the economic benefits of marriageaestate tax deductions, Social Security benefits, pensions, and the likeato married gay couples….As Mother Jonesa Adam Serwer points out, Obama caught up to his administrationas legal position today without going beyond it. He said ‘at a certain point I’ve just concluded that for me personally it is important for me to go ahead and affirm that I think same-sex couples should be able to get married,’ and he also said he thinks the states should decide the question of legalization for themselves. Emily Bazelon in Slate.

3) The Bundesbank may accept higher inflation. “The Bundesbank, the most hawkish of central banks, has signalled it would accept higher inflation in Germany as part of an economic rebalancing in the eurozone that would boost the international competitiveness of countries worst-hit by the regionas debt crisis. A future German inflation rate above the eurozone average could be part of a natural adjustment process as crisis-hit countries pulled themselves out of recession, the Bundesbank argued in evidence to German parliamentarians submitted on Wednesday…The Bundesbank has for some time seen European Central Bank policy as too loose for Germany. The willingness to contemplate higher domestic inflation in public comments points to a new-found flexibility in German thinking…Despite the Bundesbankas conciliatory stance on inflation, German policy makers have been among the toughest in insisting that Greece sticks to its agreed reform programme underpinning its bailout in the aftermath of Sundayas Greek election.” Ralph Atkins in The Financial Times.

4) Banks are throwing their weight behind Obama’s Fed nominees. “President Barack Obama’s two nominees to the Federal Reserve Board have received support from the financial-services industry, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. Sen. David Vitter (R., La.) has effectively blocked Senate confirmation of the nominees, Harvard University economics professor Jeremy Stein and former private-equity executive Jerome Powell. Wall Street firms have been quietly pressing Mr. Vitter to drop his objections, an aide to the senator said. Senate leaders aren’t expected to bring the nominees to the floor for debate, a potentially lengthy process unlikely to be welcomed by either party in an election year. The Senate generally confirms nominees through the faster process of unanimous consent. Unless Mr. Vitter changes his mind, the two Fed nominations are unlikely to advance.” Kristina Peterson in The Wall Street Journal.

5) The House will vote today on a plan to cut health-care spending rather than defense. “The House is expected to vote Thursday on a Republican plan that would spare the Pentagon from the deep across-the-board spending cuts envisioned as part of last summeras debt-ceiling agreement, reviving what has been an emotional debate in Washington about the best ways to reduce the federal budget deficit. With a series of troubling end-of-year deadlines looming, Republicans are proposing to replace the first round of $110 billion in reductions, which are set to take effect in January. The cuts are a first-year down payment on $1.2 trillion in reductions spread over 10 years, which were to be split evenly between the military and domestic programs. To forestall the defense hit, the GOP proposal would cut funding for food stamps, eliminate key pieces of the federal health-care law and slash funding designed to help the government better monitor the financial sector.” Rosalind Helderman in The Washington Post.

@MichaelGrabell: The Sequester Replacement Reconciliation Act is probably the hottest name for a bill I’ve ever seen.

@ChadPergram: Ryan on bill to change sequester: The supercmte didn’t do its job. We’re doing what the supercmte was supposed to do: prioritize spending.

6) The FDIC will outline its plan to take down failing banks. “When the next crisis brings a major financial firm to its knees, U.S. regulators will seize the parent company but allow its units around the globe to keep operating while the mess is cleaned up, according to a planned announcement Thursday from the Federal Deposit Insurance Corp. The equity stakeholders of the large bank or other financial firm will be wiped out, and bondholders will face losses as their holdings are swapped for equity in a new entity, as a part of the FDIC’s plan. Nearly four years after the massive government bailouts of the financial crisis, regulators are looking to chip away at the tacit understanding that the government will step in to save top financial institutions seen as vital to the economy or banking system. As part of that effort, acting FDIC Chairman Martin Gruenberg will outline the agency’s strategy in a speech in Chicago Thursday, his first public remarks on the dismantlement plans for banks.” Victoria McGrane in The Wall Street Journal.

7) The CFPB will propose tighter mortgage lending regulations. “The Consumer Financial Protection Bureau said it planned to propose tighter mortgage lending regulations that would limit the ability of banks and mortgage brokers to charge certain transaction fees, possibly ending one of the most abusive costs levied on consumers when they buy a house. Bureau officials said that the rules, which were released Wednesday ahead of formal introduction this summer, would ban mortgage companies from charging origination fees that vary with the amount of the loan…The consumer bureau also said it would require that lenders offer a reduced interest rate when a consumer opted to pay upfront discount points and would require lenders to offer a loan option without points. During the financial crisis, some lenders charged the points without lowering the interest rate. Changing that rule, the bureau believes, will make it easier for consumers to weigh offers from multiple lenders.” Edward Wyatt in The New York Times.

Top op-eds

1) KLEIN: Polarization is largely attributable to Republicans. “Look no further than Senator Richard Lugaras concession statement Tuesday night, which showed, in its wan effort to make the two parties sound equivalently extreme, just how much further the Republican Party has gone…Whether the Republican Party is ‘the problem’ is a subjective judgment. Perhaps you loathe taxes and, in the face of all available evidence, consider global warming a hoax. In that case, the Republican Party is doing exactly what it should be doing. But there is simply no denying that the Republican Party has gone much further right than the Democratic Party has gone left, and that, from policy pledges to primary challenges, it has done much more to discourage its members from compromising than the Democratic Party has. So if you think polarization is the main problem in Washington today, then Mann and Ornstein are right: Your beef is largely with the Republicans.” Ezra Klein in Bloomberg.

2) HANSEN: If tar sands drilling continues it’s game over for the climate. “Global warming isnat a prediction. It is happening. That is why I was so troubled to read a recent interview with President Obama in Rolling Stone in which he said that Canada would exploit the oil in its vast tar sands reserves ‘regardless of what we do.’ If Canada proceeds, and we do nothing, it will be game over for the climate. Canadaas tar sands, deposits of sand saturated with bitumen, contain twice the amount of carbon dioxide emitted by global oil use in our entire history. If we were to fully exploit this new oil source, and continue to burn our conventional oil, gas and coal supplies, concentrations of carbon dioxide in the atmosphere eventually would reach levels higher than in the Pliocene era, more than 2.5 million years ago, when sea level was at least 50 feet higher than it is now. That level of heat-trapping gases would assure that the disintegration of the ice sheets would accelerate out of control…Civilization would be at risk.” James Hansen in The New York Times.

3) YGLESIAS: It shouldn’t be so hard for foreign visitors to come to the U.S. “For a depressed economy, exports function as a magic elixir. Demand–and with it jobs–appears from outside, generating new income that cycles through the economy, This is why President Obama, as part of his recovery strategy, has set a goal of doubling exports over five years. Talk of exports normally conjures up images of factories and container ships, but many of Americaas exports are services. The nationas biggest service export is in some sense not an export at all–itas travel and tourism, an industry begging for respect on National Travel and Tourism Week…As far as the national balance sheet goes, tourism functions exactly like an export. Foreigners come here and spend money, leaving extra funds in American hands, with which we can purchase oil and Chinese toys. Itas an export realm in which the United States has very strong fundamentals.” Matthew Yglesias in Slate.

4) SALMON: Principal reductions can benefit everybody. “Principal reduction in mortgage modifications has to become the rule rather than the exception. The reason the governmentas efforts to fix the mortgage market have failed so miserably is that those efforts have centered on interest payments, not the total amount owed. A sluggish housing market will act as an economic drag for as long as millions of homeowners owe vastly more than their house is worth. If done right, these policies can be implemented in a positive-sum way, making everybody — including the banks doing the write-downs — better off. For instance, the government could impose higher capital standards on banks that insist on marking underwater defaulted mortgages at par, and give the banks an incentive to write down principal that way, while making the whole banking system safer at the same time…If we donat want the United States to continue to suffocate under the weight of far too much debt, we have to start making serious efforts to bring our debt burden down.” Felix Salmon in Reuters.

5) WILL: The medical device tax will mean fewer life-extending inventions. “Congress, ravenous for revenue to fund Obamacare, included in the legislation a 2.3 percent tax on gross revenue — which generally amounts to about a 15 percent tax on most manufacturersa profits — from U.S. sales of medical devices beginning in 2013. This will be piled on top of the 35 percent federal corporate tax, and state and local taxes. The 2.3 percent tax will be a $20 billion blow to an industry that employs more than 400,000, and $20 billion is almost double the industryas annual investment in research and development. An axiom of scarcity is understood by people not warped by working for the federal government, which can print money when it wearies of borrowing it. The axiom is: A unit of something — time, energy, money — spent on this cannot be spent on that. So the 2.3 percent tax, unless repealed, will mean not only fewer jobs but also fewer pain-reducing and life-extending inventions…which have reduced health-care costs.” George Will in The Washington Post.

Top long reads

Marcus Walker examines the failings of Europe’s bailout of Greece: “Two years after Europe bailed Greece out to protect the euro, the rescue has become a debacle that threatens to unravel the common currency. After Greece’s May 6 elections left pro-bailout parties too weakened to govern the country, more elections are likely in June, with no guarantee a stable government will emerge. By next month, Athens must identify a!11.5 billion, or $15 billion, in fresh spending cuts or face suspension of the international loans it needs to pay pensions and run schools. If it doesn’t get the money, it would eventually have to print its own. Greece’s growing turmoil is the culmination of a radical austerity experiment and botched economic overhaul that have pushed the nation to the brink of social and political breakdown. The story of the ill-fated bailout suggests that forcing deep austerity on individual member states won’t save the euro and may worsen its crisis.”

Susan Headden on the search for better standardized tests: “Critics of testing habitually protest its cost, implying that the millions spent on assessment would be better put toward smaller class sizes, expanded library hours, or the restoration of art and gym. But despite testingas huge and growing role in education, the U.S. now devotes less than a quarter of a percent of per-pupil spending to assessments. Thatas less than the cost of buying each of Americaas students a new textbook. The American education system is at a major crossroads, one that few Americans are aware of. The new assessments–the product of a huge investment of time, knowledge, and talent–are only two years away from being put in place, and theyare desperately needed. Itas too early to know whether they will work as advertised, and even if they do, the danger is that states will quickly revert to their old habits of doing assessment on the cheap. But if we do this right, we could finally provide educators like Caryn Voskuil with one of the tools they need most: a test worth teaching to.”

Robert Rothman on the Common Core and its effect on innovation: “In some ways, the American elementary and secondary education system is undergoing a transition similar to what the American rail system underwent around the time of the Civil War. For decades, each state has set its own expectations for what students should know and be able to do at each grade level. These standards might reflect the tradition of local control of education, but they have made it difficult for students to move from state to state; students transferring from fourth grade in, say, Indiana, might face a different set of expectations when they arrive in fifth grade in Illinois. And, by fragmenting the educational marketplace, these varied standards have impeded the kinds of innovations that might otherwise come with economies of scale–in testing, textbooks, and teacher education.”

British post-punk interlude: Django Django plays “Default” live on Later with Jools Holland.

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

Still to come: The Fed approved Chinese banks; primary care doctors will be getting more for Medicaid patients; the F.T.C. and the White House want online privacy legislation; it’s a good time to be a solar installer; and a super-medley of songs from Super Mario Bros. 3.

Economy

Europe may be open to relaxing Greece’s payment deadlines. “As another day passed with Greece no closer to a working government, European officials suggested Wednesday that they had a new tool in their mission to keep the shared euro currency with all its partners: time. A ticking watch may be the most powerful bargaining chip Europe has against the possibility that anti-bailout voices in Greece will push it off the euro. Every day that ends without new European bailout money for Greece to pay its bills heightens the pressure on its leaders to comply with the austerity measures that come as a condition of the $171 billion rescue package. But German officials signaled Wednesday that they may be willing to relax some of the nationas payment deadlines if a pro-bailout government comes to power…They may even be willing to consider reducing the interest payments on Greeceas emergency loans, sweetening the deal without abandoning any of the fundamental overhauls they say Greece needs to get its economy on track.” Michael Birnbaum in The Washington Post.

@TonyFratto: I used to believe Greece couldn’t exit the euro. Now I think it’s only a matter of timing.

@esoltas: Likelihood of Eurozone exit soars on @Intrade — 69% by yearend 2014, 54% by 2013, 35% by 2012. http://pic.twitter.com/ES1kbQqF

Fannie Mae won’t need additional taxpayer aid for the first time since the bailout. “Fannie Mae, the government-backed mortgage financier, said on Wednesday that it made a profit in the first quarter and that it did not need additional bailout money — a first since the federal government took it over in fall 2008. A slowdown in the decline of home prices and in the number of homes entering serious delinquency allowed the company to eke out a profit after paying its dividend to the Treasury. Fannie Mae also said losses on its portfolio of home mortgages had probably peaked and that it expected better profits in the future, another sign that the worst might be over for the battered American housing market. The company reported quarterly net income of $2.7 billion, up from a $6.5 billion loss in the first quarter of 2011. Fannie has received about $116 billion from the Treasury over the last three and a half years and paid back about $23 billion in dividends.” Annie Lowrey in The New York Times.

Export-Import Bank reauthorization is headed towards the Senate. “Ending months of haggling, the House voted Wednesday to extend the Export Import Bankas charter through September 2014 and raise its loan exposure cap to $140 billion — a 40 percent increase. The bill must still pass the Senate but the lopsided 330-93 House margin makes it harder for conservatives to obstruct. Republicans split 147-93 for the measure, and Democrats, whose party controls the Senate, were unanimous in their support…Wednesdayas vote caps a remarkable odyssey is which all of modern Washingtonas politics seemed to descend with a thud on the once obscure enclave of overseas financing for U.S. manufacturers. Pushed to the brink, the bank is only weeks away now from seeing its charter expire at the end of May, by which point it will have also exhausted its $100 billion cap and be unable to take on further transactions in the pipeline.” David Rogers in Politico.

@TPCarney: 93 GOP votes against the Export-Import Bank, as compared to 50 Nays in 2002: Evolution!

@Amy_NJ: Overheard in a Capitol elevator: “Another day in the United States Senate. I couldn’t be more excited.”

The Fed approved the U.S. expansion plans of Chinese state banks. “Giant banks owned by the Chinese government are coming to the U.S. The Federal Reserve on Wednesday approved plans by three state-backed Chinese banks to expand in the U.S., including the first acquisition of a U.S. retail-banking network by a state-owned Chinese lender. The approval is a landmark step for U.S. banking regulators. Chinese banks long have sought access to the U.S. banking system in order to provide financing to Chinese companies operating overseas and to do business with foreign investors looking for exposure to the Chinese currency, the yuan. But they have been stymied in previous attempts by assorted delays and rejections…The Federal Reserve effectively is giving its seal of approval to China’s bank-regulatory system, a big step for U.S. regulators given their past concerns about the adequacy of Chinese supervision of banks.” Jon Hilsenrath, Robin Sidel, and Lingling Wei in The Wall Street Journal.

Compilation interlude: People say “you just don’t get it, do you?” a lot in films.

Health Care

A new regulation will boost Medicaid payments for primary care doctors. “Primary care doctors could get a pay raise next year for treating Medicaid patients, under a rule announced by the Obama administration Wednesday. The proposed regulation implements a two-year pay increase included in the 2010 health-care law. The increase, effective in 2013 and 2014, brings primary care fees for Medicaid, which covers indigent patients, in line with those for Medicare, which insures the elderly and some disabled patients. Although Medicaid is jointly funded by states and the federal government, the pay boost would be covered entirely with federal dollars totaling more than $11 billion over the two years it would be in effect…Administration officials also noted that the law has already increased Medicare payments to primary care doctors — awarding more than 150,000 physicians almost $560 million in additional compensation in 2011.” N.C. Aizenman in The Washington Post.

Some lawmakers want a permanent ‘doc fix.’ “Reps. Allyson Schwartz (D-Pa.) and Joe Heck (R-Nev.) introduced a bill Wednesday to reform how Medicare pays healthcare providers and to avoid a cut to reimbursement rates on Jan. 1. The bipartisan measure would repeal Medicare’s current reimbursement formula and replace it with a new system of payment models. It would also give doctors small boosts in payment rates for four years. Money for the changes would coming from war savings from troop withdrawals in Iraq and Afghanistan — a move Republicans have opposed in the past as a ‘Ponzi scheme.’…The proposal instructs the Centers for Medicare and Medicaid Services to create new payment model options aimed at giving providers more flexibility based on specialty, region or type of practice. Doctors who treat Medicare patients are scheduled to see a 30 percent cut to their reimbursements on Jan. 1, 2013, if Congress does not step in.” Elise Viebeck in The Hill.

Domestic Policy

The FTC and the White House are urging Congress to pass online privacy legislation. “The Obama administration and the nationas chief privacy regulator pressed Congress on Wednesday to enact online privacy legislation…Jon Leibowitz, chairman of the Federal Trade Commission, which enforces limited Internet privacy laws, and Cameron F. Kerry, general counsel for the Commerce Department, said at a hearing of the Senate commerce committee that writing new laws and giving the F.T.C. the power to enforce them with civil penalties would promote Internet commerce by increasing the trust that Americans put in online transactions. Currently, the F.T.C. monitors whether Internet companies that have privacy policies keep their promises to consumers about when and where they will share personal information. But the commission lacks the authority to assess penalties for most transgressions, and it has little authority over how companies operate when they have no written privacy rules.” Edward Wyatt in The New York Times.

Game music interlude: Meine Meinung play a super-medley of songs from the Super Mario Bros. 3 soundtrack.

Energy

Consumer resistance to ‘smart meters’ is slowing a grid upgrade. “A growing consumer backlash against new wireless digital technology for measuring power usage is slowing U.S. utilitiesa $29 billion effort to upgrade their networks. States including California, Maine and Vermont have responded to customer concerns about higher bills and safety by offering them the option of keeping their conventional devices for an extra charge. The fee may discourage drop-outs from the ‘smart-meter’ program, in which household usage data is transmitted over radio waves to local utilities such as PG&E Corp. (PCG), Central Maine Power Co. and Central Vermont Public Service Corp. (CV), which can use the information to charge higher rates during times of peak demand…The meters are key to the ‘smart grid’ being rolled out nationwide to increase delivery flexibility. Investment by utilities in the new grid has totaled $15.4 billion through the first quarter of 2012 and is projected to increase by another $13.4 billion through 2015.” Mark Chediak in Bloomberg.

Solar installers are thriving. “Jay Nuzzi, a New Jersey state trooper, had put off installing solar panels on his home here for years, deterred by the $70,000 it could cost. Then on a trip to Home Depot, he stumbled across a booth for Roof Diagnostics, which offered him a solar system at a price he couldnat refuse: free. Mr. Nuzzi had to sign a 20-year contract to buy electricity generated by the roof panels, which he would not own. But the rates were well below what he was paying to the local utility…Similar deals are being struck with tens of thousands of homeowners and businesses across the country. Installers, often working through big-box chains like Home Depot or Loweas, are taking advantage of hefty tax breaks, creative financing techniques and a glut of cheap, Chinese-made panels to make solar power accessible to the mass market for the first time. The number of residential and commercial installations more than doubled over the last two years to 213,957, according to Greentech Media, a research firm.” Diane Cardwell in The New York Times.

@AndrewRestuccia: Dingell quotes from “Oliver Twist” at hearing on electric reliability #youdontseethateveryday

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

Are you sitting down? Because you’re not going to believe this. The Senate actually got something done yesterday. Something big! They confirmed both Jeremy Stein and Jerome Powell to the Federal Reserve’s Board of Governors. That means, for the first time since 2006, there are no vacancies on the Fed’s Board.

Stein, a Harvard economics professor, was confirmed 70-24. Powell, a banker who served in George H.W. Bush’s Treasury Department, was confirmed 74-21. Neither seems evidently more qualified than Nobel laureate Peter Diamond, who Republicans filibustered last year. But the Obama administration’s ‘Noah’s Ark’ strategy — nominate one Republican and one Democrat — worked. Furthermore, the predicted collapse of the confirmation process after Obama recess appointed Richard Cordray to the Consumer Financial Protection Bureau hasn’t happened. So that’s another piece of good news.

The next question is whether Stein and Powell will exert any influence on the Fed, and if so, in what direction. That remains to be seen. Right now, the Federal Reserve seems in the unusual position of admitting that it has missed terribly on its mandate to maintain full employment, swearing that there is more it can do if need be, and yet not doing anything more. Given events in Europe, though, they may not be able to resist escalating for very much longer.

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According to Tim Geithner, we won’t hit the debt ceiling until a few months into 2013. By that time, either the Bush tax cuts will have already expired and the automatic spending cuts will have already begun or the parties will have come to some big fiscal deal and the debt ceiling will have been raised along the way.

I laid out some of the possible scenarios along these lines yesterday. But one thing I didn’t mention as clearly as I should have: In the no-deal scenario, our deficit problem is pretty much solved by the time we hit the debt ceiling.

According to the Committee for a Responsible Federal Budget, if there’s no deal on anything in the new year, the scheduled tax increases and spending cuts “would reduce ten-year deficits by over $6.8 trillion relative to realistic current policy projections a enough to put the debt on a sharp downward path but in an extremely disruptive and unwise manner.”

The Congressional Budget Office agrees. They’ve sketched the no-deal scenario out in their “current law” baseline. Public debt falls from 75.8 percent in 2013 to 61.3 percent in 2022. That’s as fast as Paul Ryan says it will fall under his budget.

For all sorts of reasons, simply doing nothing isn’t a desirable way to reduce deficits. It would probably throw us back into recession in the first half of next year, for instance. But it would be very odd for Republicans, in those circumstances, to refuse to raise the debt ceiling because America’s budgets are on an unsustainable path. The country would, at that very moment, be in the midst of the sharpest bout of deficit reduction in its history.

Wonkbook dashboard:

“We shouldnat dread the debt limit,” said Speaker John Boehner at the Peter G. Peterson Fiscal Summit. “We should welcome it. Itas an action-forcing event in a town that has become infamous for inaction.”

These comments have been the occasion for much wailing and gnashing of teeth, as if anyone, anywhere, believed that the Republicans’ 2011 debt-ceiling antics were some sort of one-off. But Boehner was clear on Tuesday. “I will again insist on my simple principle of cuts and reforms greater than the debt limit increase,” he said.

Of course he will. For one thing, it worked well for him in 2011. Republicans got more than $900 billion in immediate spending cuts, as well as $1.2 trillion in triggered spending cuts — though they don’t much like the $500 billion or so of those cuts scheduled to fall on the Pentagon. They also drove President Obama’s approval ratings beneath 40 percent. And while I’m not one who thinks Republicans intentionally tank the economy to undermine Obama, there’s little doubt that the effect of the debt-ceiling debacle was to set back the recovery, brightening Republican prospects and darkening Democratic ones. The fact is that it’s easier to be sanguine about economic showdowns when you’re not the ones in charge.

For another, it’s Boehner’s only option in 2012. The Democrats, for once, have nothing but fiscal leverage. They’ve got the expiration of the Bush tax cuts, which all Republicans would hate and many Democrats would welcome. They’ve got the aforementioned spending trigger, which Republicans really have begun to fear for its cuts to defense spending. They can do nothing — or, more likely, offer Republicans a deal they can’t accept — and the resulting paralysis will swing fiscal policy far, far, far to the left. Threatening to default on the national debt is Boehner’s only piece of counter-leverage.

So of course Boehner will try and use the debt ceiling as leverage again. And again. And again. It’s pretty clear that, at this point, there’s no going back to the time when debt-ceiling increases came smoothly. If I were the market, I’d take the fact that the leader of one of the two parties has publicly said that he “welcomes” debt-ceiling showdowns as evidence that the United States is almost certain to default on its debt — if only temporarily — within the next decade or so.

The question is what, aside from complain, Democrats and the business community will do to stop him. Somehow, the debt ceiling needs to be taken off the table once and for all, either because Republicans forced a default in a way that they were blamed for the consequences and scared into never doing it again or because the president successfully pulled off one of the more creative maneuvers suggested during last year’s showdown (Bill Clinton, for instance, argued that Obama should invoke the Fourteenth Amendment — which says “the validity of the public debt of the United States … shall not be questioned” — to raise the debt ceiling unilaterally).

Wonkbook dashboard

RCP Obama vs. Romney: Obama +1.8%; 7-day change: Obama +1.6%.

RCP Obama approval: 48.0%; 7-day change: +0.7%.

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Top stories

1) Boehner threatened another debt-mageddon “Washington braced Tuesday for a replay of last summeras tense battle over the burgeoning national debt as House Speaker John A. Boehner threatened again to block an increase in the federal debt ceiling without significant new cuts in spending. Treasury Secretary Timothy F. Geithner and other senior Democrats quickly blasted the Ohio Republican, arguing that his ultimatum could put the nationas credit rating — and the broader economy — at risk early next year, when the debt is expected to hit its $16.4 trillion limit.” Lori Montgomery in The Washington Post.

@damianpaletta: Boehner’s debt ceiling “line in the sand” is very similar to what he said last year; Definitely got the attention of White House and D’s

@ObsoleteDogma: Shorter Boehner: Regulatory uncertainty is bad. But default uncertainty is good.

INTERVIEW: Sen. Tom Coburn on defusing the debt bomb.

READ: Mitt Romneyas remarks on the debt.

@MichaelSLinden: As a fiscal policy analyst, I’d like to thank Mitt Romney for offering no specifics whatsoever so I can go home at a normal time tonight.

2) Greece failed to form a new government, triggering new elections. “The threat of a full economic collapse in Greece escalated Tuesday after warring political factions here failed to forge a new government, triggering fresh elections and heightening chances that this rudderless Mediterranean nation could be forced to abandon the euro…A nation in danger of running out of cash to operate the government, and where fearful residents in recent days have been rapidly withdrawing more of their savings from Greek banks, faces uncertain new elections next month. Opinion surveys have shown that Syriza, a party that wants to break the terms of Greeceas bailout deal and that came in a surprise second in the last vote, is polling in first place…European finance ministers — whose taxpayers have largely funded the bailout for Greece — were quick to push back Tuesday. Given the potential shock waves if Greece is forced to leave the euro zone, there have been suggestions in recent days that European officials might show more lenience with Athens.” Anthony Faiola in The Washington Post.

Surging bank withdrawals in Greece sparked fears of a bank run. “Greek depositors withdrew a!700 million ($898 million) from the country’s banks on Monday, fueling fears of a bank run amid the growing political disarray. With deposits falling, Greek banks become even more dependent on the European Central Bank to meet their funding needs, exposing the central bank to potentially huge losses if Greece leaves the euro area. Greek President Karolos Papoulias told the country’s political leaders that bank withdrawals plus buy orders received by Greek banks for German bunds totaled some a!800 million on Monday, a transcript of his comments said. A central bank official confirmed the figures…Monday’s deposit withdrawal far outpaced Greek banks’ steady decline in deposits since the start of the country’s debt crisis in 2009, as depositors withdraw cash and transfer funds overseas.” Brian Blackstone and David Enrich in The Wall Street Journal.

@grossdm: So, Greece is seeking to solves its economic problems through QE — quantitative electioneering

3) The Senate will vote on several GOP budget proposals today. “The Senate on Wednesday will hold six hours of debate and votes on four different Republican budget resolutions, in an apparent attempt to demonstrate that they will not be supported in the Democratic-led Senate. A fifth budget measure up for a vote, from Senate Budget Committee ranking member Jeff Sessions (R-Ala.), is based on President Obama’s budget and is seen as an attempt to embarrass the White House. But Senate Budget Committee Chairman Kent Conrad (D-N.D.) said Tuesday that debate and votes on the GOP proposals would show there is little appetite for these plans. He also said it would give the country a chance to understand that last year’s Budget Control Act already sets spending caps for Congress. Democrats have been under fire for failing to pass any budget resolution…One of the four GOP budget resolutions to be debated Wednesday is H.Con.Res. 112, the budget resolution approved by the House in March.” Pete Kasperowicz in The Hill.

4) The Justice Department started a criminal probe into JPMorgan Chase’s loss. “The Justice Department has initiated a criminal probe into the $2 billion trading loss at JPMorgan Chase, a law enforcement representative familiar with the situation said Tuesday. The inquiry is at a very early stage, said the person, who spoke on the condition of anonymity because the matter is private. Many details about the loss at JPMorgan are murky, so it is unclear what laws, if any, may have been violated. But the attention from federal officials indicates that regulatory pressure is rising on JPMorgan, and its chief executive Jamie Dimon, to explain what exactly led to the bankas multi-billion dollar misstep. That, in turn, has rekindled questions about whether government regulators are equipped to monitor banks making risky, complex trades…Dean Boyd, a Justice spokesman, declined to comment.” Jia Lynn Yang and Sari Horwitz in The Washington Post.

Too big to fail banks have gotten bigger. “JPMorgan Chaseas $2 billion blunder is throwing the spotlight on an awkward truth for President Barack Obamaas promise to end the era of big bank bailouts: The same institutions that were deemed ‘too big to fail’ before the financial collapse are even bigger now. Efforts to manage the size of such institutions were at the heart of the Dodd-Frank financial law passed in July 2010. But nearly two years later, many of the lawas regulations remain in limbo, as federal agencies muddle through long rule-making processes against stiff industry opposition…All the while, the countryas biggest financial institutions continue to grow. The five largest, which controlled $6.1 trillion in assets before the collapse, by the end of 2011 had assets worth $8.5 trillion — equal to more than half of U.S. economic output, according to Federal Reserve data.” Patrick Reis in Politico.

@BCAppelbaum: This whole JPM story underscores one reason we don’t have effective financial regulation: Our public officials don’t understand finance.

Top op-eds

1) PORTER: It’s time for the euro to come to an end. “Social upheaval across the euro area suggests that it may be time to call it quits and try to work out an orderly process to re-establish national currencies throughout the bloc. Europe would be in much better shape if the euro didnat exist and each member country had its own currency. Monetary union has shackled together nations with vastly different economies, depriving them of an independent monetary policy that can help them through rough times. The interest rate and exchange rate that serve Germany also have to serve Spain, though that country has more than four times Germanyas joblessness. The main problem is that while leaders eagerly embraced the monetary bond, they rejected its necessary complement: a central budget that would transfer money from successful regions to underperforming ones, as the United States government sends tax dollars collected in Massachusetts to pay for unemployment benefits in Nevada.” Eduardo Porter in The New York Times.

2) FROST: The FDIC shouldn’t protect investment banks. “I suggest that we divide the two functions into separately owned, managed and regulated entities. That’s the only way we can ensure that their riskier businesses don’t undermine the insured deposits that are the foundation of a stable and healthy economy. Taxpayer safety-net programs, such as the Federal Deposit Insurance Corporation (FDIC), should be available only to banks in business to provide insured deposits. Financial institutions that provide primarily investment, hedging and speculative services don’t deserve protection either by the FDIC’s explicit guarantees or by an implicit understanding that taxpayers will bail them out because there is no other alternative. Indeed, this kind of protection is a perversion of capitalism and can distort its good outcomes…We need a real and impregnable firewall that keeps one part of the banking system–and the economy–from being consumed when the other goes into flames.” Tom Frost in The Wall Street Journal.

3) ROSEN: Competitive bidding can hurt patients. “On the face of it, competitive bidding sounds like a very good idea. If one supplier can provide power wheelchairs or oxygen masks for 30 percent less than another, itas hard to argue for contracting with the more expensive supplier, especially at a time when everyone is looking for ways to save money. A one-year experiment with expanded competitive bidding that was recently conducted by Medicare yielded cost savings of 42 percent, without reducing the quality of care, and was hailed as a great success. But as a doctor working with patients on the ground, I have doubts about that quality-of-care measure, and I worry that those savings obscure a potentially serious problem…If competitive bidding is predicated on supplying equipment at the lowest possible price, something has to give. And more likely than not, that something will be patient care.” Dennis Rosen in The New York Times.

4) ORSZAG: Want good news on jobs? Look to big businesses. “Big business, we keep being told, has been so hampered by regulatory uncertainty over the past few years, it has been reluctant to hire workers. So it is surprising to read the results of a little-known survey from the Bureau of Labor Statistics: Very large businesses, it turns out, have been expanding their domestic workforces relatively rapidly. If, since January 2011, businesses of all sizes had hired at the same rate as those with 5,000 or more employees, we would have almost 4 million more jobs today…The JOLTS data highlight the importance of exploring how the continuing deleveraging process and resultant sluggish growth in demand is affecting smaller businesses in particular. With the percentage of working Americans stuck at a depressed level, we sure could use those extra 2 million to 4 million jobs.” Peter Orszag in Bloomberg.

5) ALEXANDER: Washington should take over Medicaid and let states handle education. “Staring down steep tuition hikes, students at the University of California have taken to carrying picket signs. As far as I can tell, though, none has demanded that President Barack Obama accept a Grand Swap that could protect their education while saving them money. Allow me to explain. When I was governor of Tennessee in the early 1980s, I traveled to meet with President Ronald Reagan in the Oval Office and offer that Grand Swap: Medicaid for K-12 education. The federal government would take over 100% of Medicaid, the federal health-care program mainly for low-income Americans, and states would assume all responsibility for the nation’s 100,000 public schools…If we had made that swap…states would have about $92 billion a year in extra funds, as they’d keep the $149 billion they’re now spending on Medicaid and give back to Washington the $57 billion that the federal government spends per year on schools.” Lamar Alexander in The Wall Street Journal.

Cover interlude: Screaming Females play Sheryl Crow’s “If It Makes You Happy” for the AV Club.

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

Still to come: Free trade with Colombia is in effect; Catholic bishops are close to suing over birth control; backlash against tests is growing; energy independence is within reach; and a puppies’-eye view of life.

Economy

The Senate will vote on two Fed nominees on Thursday. “Senate Majority Leader Harry Reid (D-Nev.) today set up a procedural vote for Thursday on two nominees to join the Federal Reserve whose nominations have stalled because of opposition from Sen. David Vitter (R-La.)…Vitter blocked attempts in March to quickly confirm Harvard University economics professor Jeremy Stein, a Democratic nominee, and former private-equity executive Jerome Powell, a Republican nominee…Asked whether he was confident that he would have the 60 votes to invoke cloture on the nominations, Reid said, ‘Well I sure hope so, weave been waiting months and months.’…Senate Minority Leader Mitch McConnell (R-Ky.) said he believes there is bipartisan support for the nominees…Without the two nominees in place, the Federal Reserve Board will remain short-handed as it attempts to support the economic recovery” Humberto Sanchez in Roll Call.

The dip in gas prices eased inflation. “The recent slide in gasoline prices in the U.S. has pushed the nation’s annual rate of inflation to its lowest level in more than a year, easing some economic strains on consumers. The consumer price index, which measures what Americans pay for everything from breakfast cereal to doctor visits, was unchanged from March to April, ending three months of increases, the Labor Department said Tuesday. A 2.6% drop in the gasoline-price index helped offset rising costs for many other items. Overall prices are now running 2.3% higher than a year ago, the smallest increase since February 2011…The inflation figures have mixed implications for the recovery. Lower gasoline and utility costs are keeping a lid on household expenses, effectively boosting Americans’ spending money. However, prices are climbing broadly, most notably for food, but also medical care, rents, autos and airfares.” Josh Mitchell in The Wall Street Journal.

States are using foreclosure prevention funds to plug budget gaps. “Hundreds of millions of dollars meant to provide a little relief to the nationas struggling homeowners is being diverted to plug state budget gaps. In a budget proposed this week, California joined more than a dozen states that want to help close gaping shortfalls using money paid by the nationas biggest banks and earmarked for foreclosure prevention, investigations of financial fraud and blunting the ill effects of the housing crisis. California was awarded more than $400 million from the banks, and Gov. Jerry Brown has proposed using the bulk of that sum to pay the stateas debts. The money was part of a national settlement valued at $25 billion and negotiated with five big banks over abuses in their mortgage and foreclosure processes…As part of the settlement, the banks agreed to pay the states $2.5 billion, money intended to help homeowners and mitigate the effects of the foreclosure surge.” Shaila Dewan in The New York Times.

House Republicans are planning a vote on a ‘fast track’ proposal for tax reform. “Speaker John Boehner said in a speech Tuesday that House Republicans would try to attach a timeline to fast-track a broad tax overhaul to a vote extending the George W. Bush-era tax rates before the November elections…’Our bill to stop the New Yearas Day tax increase will also establish an expedited process by which Congress would enact real tax reform in 2013,’ Boehner (R-Ohio) said in remarks to a fiscal summit in Washington. ‘This process would look something like how we handle Trade Promotion Authority, where you put in place a timeline for both houses to act.’…GOP aides said that, even though Boehner specifically discussed Trade Promotion Authority on Tuesday, House Republicans are looking at a variety of expedited processes that have been used in the past, and have yet to settle on just one.” Russell Berman and Bernie Becker in The Hill.

@grossdm: Memo to Boehner, the markets, etc.: the House passing legislation won’t be sufficient to avert tax increases. They’ll have to make a deal

The euro zone narrowly missed recession. “The euro-zone economy narrowly escaped recession in the latest quarter thanks to a surprising rebound in Germany, which offset deepening downturns in Spain and Italy. Although the region avoided two straight quarterly drops in gross domestic product, the common benchmark for recession, the figures nonetheless reflect a deepening divide between Germany and the rest of the euro zone that complicates the bloc’s efforts to stem its debt crisis…Euro-zone GDP was unchanged from the previous quarter, said Eurostat, the European Union’s statistics agency. In annualized terms, GDP rose 0.1% from the fourth quarter, according to calculations by J.P. Morgan Chase. Economists had expected an annualized contraction of around 1%. GDP fell at a 1.2% rate in the fourth quarter…European stock markets rose initially on the figures, which eased fears that the debt crisis may trigger an economic free fall.” Brian Blackstone in The Washington Post.

Export-Import Bank reauthorization cleared the Senate by a wide margin. “On a broad bipartisan vote of 78 to 20, the Senate voted Tuesday to extend the life of the U.S. Export-Import Bank and expand its authority to make loans to U.S. exporters. In the ‘Schoolhouse Rock’ version of how Capitol Hill works, this is what Congress does all the time — passes legislation. But it made for big news on this Capitol Hill, where protracted partisan warfare has meant that lately the story has more often been about votes forced by one party or the other to indignantly demonstrate the otheras opposition…Tuesdayas bill was the rarest of breeds: a lasting compromise on an issue of substance. It renewed the charter of what is commonly referred to as the Ex-Im bank for three years and will over that time raise the cap on the total financing the bank can guarantee from $100 billion to $140 billion.” Rosalind Helderman in The Washington Post.

The U.S.-Colombia free trade agreement took effect. “A free-trade agreement between the U.S. and Colombia took effect Tuesday after years of negotiations and despite strong opposition from U.S. labor organizations, which are worried about jobs being sent abroad and union-busting violence in Colombia. The first products shipped tariff-free were crates of Colombian roses and other flowers that landed Tuesday morning at Miami’s airport…President Barack Obama signed the free-trade agreement with Colombia in October, days after Congress gave its final approval following heated debates. The deal was originally negotiated by the Bush administration, but President Obama reworked the deal to satisfy Democrats. The U.S. exported $14 billion of goods to Colombia last year, everything from cars to consumer electronics to food, and exports are expected to rise by more than $1.1 billion as a direct result of the pact, according to the International Trade Commission.” Dan Molinski in The Wall Street Journal.

Adorable children singing interlude: Two girls cover Gotye’s “Somebody That I Used To Know” from the back seat of the car.

Health Care

Catholic bishops are threatening to sue over the birth control mandate. “The Catholic Church’s U.S. hierarchy warned Tuesday that without quick action by Congress, it will sue the Obama administration for mandating that insurance plans provide birth control to women without a co-pay. ‘[F]orcing individual and institutional stakeholders to sponsor and subsidize an otherwise widely available product over their religious and moral objections serves no legitimate, let alone compelling, government interest,’ lawyers for the U.S. Conference of Catholic Bishops wrote in a letter to federal regulators. Several small Catholic universities have already filed suit over the policy…The bishops’ notice came in 20 pages of comments submitted to the Department of Health and Human Services (HHS) on a forthcoming rule to accommodate certain religious organizations, such as Catholic hospitals, that were not exempted from the original mandate.” Elise Viebeck in The Hill.

Obamacare will expand healthcare options for immigrants. “The Obama administrationas drive to cut down on Americaas uninsured is about to get multilingual. Come 2014, when core provisions of the Affordable Care Act kick in, millions of legal immigrants will have new options for gaining health coverage. And like U.S. citizens, most will be subject to the individual mandate, under which they will be required to get coverage to avoid a penalty. The national health law explicitly excludes illegal immigrants — a politically explosive topic — and bans them from the new state insurance exchanges, even if they use their own money. They will make up a big chunk of the remaining uninsured population. But advocates say states have good reasons to reach out and get uninsured legal residents covered — especially as the federal government picks up most of the tab…In 2014…legal immigrants will be able to shop for health coverage through the new state insurance exchanges.” Kyle Cheney in Politico.

Domestic Policy

The backlash against standardized testing is growing. “The increasing role of standardized testing in U.S. classrooms is triggering pockets of rebellion across the country from school officials, teachers and parents who say the system is stifling teaching and learning. In Texas, some 400 local school boards–more than one-third of the state’s total–have adopted a resolution this year asking lawmakers to scale back testing. In Everett, Wash., more than 500 children skipped state exams in protest earlier this month…The efforts are a response to the spread of mandatory testing in the past decade. Proponents say the exams are needed to ensure students are learning and teachers’ effectiveness is measured. Critics say schools are spending disproportionate time and resources on the tests at the expense of more-creative learning. They also contend the results weigh too heavily in decisions on student advancement, teacher pay and the fate of schools judged to have failed.” Stephanie Banchero in The Wall Street Journal.

The NLRB suspended implementation of its union elections rule. “The National Labor Relations Board (NLRB) suspended implementation on Tuesday of a rule that would speed up union elections. On Monday, U.S. District Judge James Boasberg struck down the regulation. In his ruling, the judge said the labor board only had two members vote on the final rule in December 2011 when it needed three members to form a quorum. In the wake of the court decision, the agency is temporarily suspending the rule’s implementation, which went into effect on April 30. Further, Lafe Solomon, the NLRB’s acting general counsel, withdrew guidance he sent to the labor board’s regional offices and told those offices to follow the old union election rule instead. The agency is still considering its response to the court ruling…’We continue to believe that the amendments represent a significant improvement in our process and serve the public interest by eliminating unnecessary litigation,’ said NLRB Chairman Mark Pearce.” Kevin Bogardus in The Hill.

Dog’s-eye view interlude: Life from on top of puppies.

Energy

Energy independence is no pipe dream. “Every president since Richard Nixon has called for the U.S. to wean itself from needing oil from unstable or unsavory countries. The nation’s new-found energy riches are likely to bring that ambition closer to reality in the next two decades, according to many forecasters. It’s no pipe dream. The U.S. is already the world’s fastest-growing oil and natural gas producer. Counting the output from Canada and Mexico, North America is ‘the new Middle East,’ Citigroup analysts declare in a recent report. The U.S. Energy Information Agency says U.S. oil imports will drop 20% by 2025. Oil giant BP projects the U.S. will get 94% of its energy domestically by 2030, up from 77% now, as oil imports fall by half…Most enticing, a team of analysts and economists at Citigroup argues that the U.S., or at least North America, can achieve energy independence by 2020.” Tim Mullaney in USA Today.

@umairh: So consider how our political institutions are paralyzed by a financial crisis. Now think about energy, water, etc crises. Sweet!

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

Sen. Tom Coburn (R-Okla.) served on the Simpson-Bowles commission, is a member of the Gang of Six, and just published aThe Debt Bomb: A Bold Plan to Stop Washington from Bankrupting America.a We spoke last week in his office. This interview, which focuses on Americaas debt and growth problems, is the first in a two-part series. The second interview, which focuses on health care, will be published later this week.

Ezra Klein: So ataxmageddona is coming at the end of the year. Depending on how you look at it, itas an opportunity for Congress to trigger a massive and unnecessary fiscal crisis, or to actually get some serious legislating done on our long-term fiscal issues. Are you optimistic about the outcome?

Tom Coburn: No. But it depends on what the mix is. If President Obama is still president and weare in control of the Senate, I think youall see significant attempts to get something done. But I donat think theyall be much more successful than what we saw in August. And I wouldnat consider that very successful. If Romney wins and we win control in the Senate, we have to send a signal that weare going to fix it in order to take away all that potential risk to the economy. You have to say weall work all over the Christmas holidays to get it fixed.

EK: When you look at the Romney scenario, it seems Republicans have spent a few years now learning how to take tough votes on the budget, particularly on the Ryan plan. So if Republicans control the House and Senate, it seems to me that youad see quite dramatic action on those issues, as they can be passed with 51 votes through budget reconciliation.

TC: Well, you can. Ryan has a good plan. I donat think it goes fast enough. But the fact is heas got a plan. The president wonat put out a plan. The Senate Democrats wonat put out a plan. Itas kind of like boxing with a shadow. You canat ever hit it. But it doesnat matter if youare Democrat or Republican. The pain will get worse every year we donat fix these things. And there will come a time when it wonat matter if youare a Republican or Democrat. And I donat have much faith right now that weare up to the task of coming to agreement to fix this.

EK: I want to come back to the question of the plans in a second,. But your book opens by imagining a very dire fiscal crisis in 2014. And this goes to your contention that Ryanas plan doesnat bring down the debt fast enough. Where do you get the urgency of your schedule? I look at Treasuries and theyare selling with very low yields. So you can say thatas just the Federal Reserve manipulating prices. So then I look at credit default swaps on the United States, and there are no alarm bells there, either. I look at countries like Japan and England that have carried on with very high debt levels for a very long time. Weave seen other countries that control their own currency manage very high debt levels throughout the 20th Century.

TC: Well, you need to go study Japan. Theyare going to crash.

EK: People have been saying that for 20 years.

TC: You have two things coming together. This is the first year theyall be a net issuer of debt outside their country. Theyave totally financed all their debt internally. We havenat. Thatas one big difference. They also have a much lower birth rate. Seven births for every 1,000 people. So their population is shrinking and their demographic shift is much worse than ours. And this year, the postal system there that runs all their retirement accounts will not be buying any government debt. Zero. So the Japanese government, for the first time, is going into the international market. And the yenas value is going to decline against every major currency. Whether that happens this year or next year or in three years, itas going to happen. And theyave now had almost two decades of no real GDP growth. So Japan isnat going to make it. The reason they havenat had any problems is they havenat asked anyone else in the world to buy their debt. Now theyare going to have to.

The same thing ultimately will happen to us, but weall be the last person it happens to. The world still views this as the safest place. You see Greece, which will probably be out of the euro by the end of this year. Then you look at Spain and Italy and Portugal and Ireland. Europe is going to print money just like Ben Bernanke is printing money. And whatas the end result of that? Inflation.

EK Well, it depends how you manage it.

TC: How do you sterilize $3 trillion worth of debt?

EK: The difficulty for me when you say that is Iam a market-oriented guy. I trust the markets, more or less. And if you look at the marketas inflation expectations, theyare not high. They donat think what the Fed has done will lead to inflation.

TC: They donat now. But nobody ever does when you print money like that. If you study [Carmen] Reinhart and [Kenneth] Rogoff and what they said, they know whatas coming. Every country thatas ever been with a debt crisis and has printed money has ended up with an intentional inflation problem. Think for a minute that youare Ben Bernanke. Youare trying to control inflation, jumpstart the economy, and improve the unemployment rate. What do you think his long-term answer for this is?

EK: At the moment, I donat think he has one.

TC: His long-term answer is inflation.

EK: Not only do I think that would be an okay answer, but Reinhart and Rogoff do, too. Rogoff has been arguing for higher inflation for a long time. But Bernanke says he wonat permit that. And I donat see a reason he would allow inflation later but oppose it now, when it could really help. In fact, what heas been saying is he wonat do the monetary stimulus many want now specifically because he doesnat want to deanchor inflation expectations later.

TC: But 10 years from now, our bonds wonat be two percent. So what percentage of the total budget do interest costs become if you normalize back to the historical average? If you do that today, you add $650 billion to our annual interest costs. How long do you think he can keep two percent inflation? If he does, then weall continue to have two percent growth. In other words, if we start getting the growth, then weall see the inflation. The reason thereas no inflation now is thereas no velocity to the money. Weave got $2 trillion sitting on the sidelines with corporations in this country. Another few trillion in personal bank accounts. And the reason is no one has confidence in the future. And itas not so much the details of the plan to fix it as the psychological confidence it will get fixed. And thatas why I voted for Bowles-Simpson.

EK: When Bowles-Simpson went before the House, it was rejected by a huge bipartisan majority. Do you see there as being any possibility that one outcome of the taxmageddon period could, be a grand bargain in the Gang of Six/Simpson-Bowles vein?

TC: I donat know the answer to that, frankly. My hope would be we reach a grand compromise. But the vote in the House proves what I said in the book. You had a vote in the House on a plan that could solve our problems and the Democrats didnat vote for it because it touches Social Security and Republicans vote against it because of revenues. Both sides accentuated their differences rather than sending a signal to the international community that we could get together and cut $4.5 trillion over the next 10 years. Which raises the question: Why are they here? If youare here just to get reelected, youare worthless to the country.

EK: Youare searingly critical of Congress in the book. So let me ask you: How do you fix the Senate?

TC: Let the Senate operate the way itas supposed to. put stuff through committees. bring it up in regular order. Have an open amendment process. Iam the number one amendment offerer in the Senate in the last few years.

EK: Congratulations.

TC: Well, itas not necessarily a compliment. But the point is the Senate really could work if you let it work on the real issues. If you were to put Simpson-Bowles on the floor and really have a strong debate on that bill, it could get through the Senate.

EK: When I talk to the party tactician types, the senators trying to figure this out, their argument is that when you try to do this out in public, with 24-hour news media broadcasting every move and every possible compromise, the issue polarizes, the interest groups descend, the party bases descend, and solutions get taken off the table. In the end, they think there will have to be some big backroom deal. They think a more open process would make this harder, not easier.

TC: I just adamantly disagree. Thatas the sickness of Washington. What that really says is the politician doesnat want to stand up and debate and tell their interest groups no. We had the pharmacists in here earlier. They want a bill to protect community pharmacies. And I said, you know what, the market is changing, Iam not about to support a bill, even though you support me, that doesnat allow the market to work this thing out. I think the reason you get this kind of analysis is because people wonat stand up and do what they think is right because it hurts their political chances. And on our bonds, our bonds will be fine until theyare not, till that tipping point comes when they say crap, we canat get out of it.

EK: As you just said, youare a market guy. You want the market to work things out. You believe in the marketas ability to work things out. So why do you think your view of our likely debt and inflation path is so much more dire than the marketas?

TC: Because the market is biased towards up. Why do you invest in the market? Not because you think youall lose money. Why do you invest in bonds? To make money. Where is the contrarian view?

Let me give you one example. Five weeks ago, Bernanke said there would be no QE3. What happened to the 10-year bond in four days? It rose 48 basis points. What the market said then is if thereas no more QE3, weare going to short the value of a bond. Thatas one little signal. What if you get 20 signals? How do you explain the Chinese getting rid $160 billion of our debt last year? Eventually, theyare not going to buy our debt. Who bought most of our debt last year? It was the Federal Reserve. Go out there and try and float $10 billion of our long-term debt. You canat. Thereas no market. Because the long-term market is saying, send us a signal that youall fix this. And so the reason we have the shortest debt maturity in our countryas history is first, because you canat sell long-term debt because no one wants to buy it, and second, because long-term debt makes the deficit look worse.

Look, I may not be right. But what I see and the people I read — all I do at night is read economic reports on peopleas view of us — and when you look at it, Spain, wonat make it, the European Central Bank will eventually print money. You agree?

EK: Iam hoping so.

TC: Theyall do that to buy time. And where I agree with Paul Krugman is you canat just have austerity. You need growth, The question is how do you get the growth. Do you get the government-driven growth, or do you get confidence and certainty so that the private money comes in and creates the growth? One costs you double. The other costs you half. So thereas a fourfold difference in where you get the growth from. When you borrow the money to spend $800 billion, you got that debt hanging on you, which Reinhart and Rogoff have proven without a doubt, when youare at 90 percent and above, and weare at 101 percent right now, debt-to-GDP, thatas at least a one percent cut to growth.

EK: To go back to Krugman, if he were sitting here, head say in this crisis thereas been no evidence anywhere that cutting deficits leads to growth. Weave not seen it in the euro zone or the UK. And head say the Reinhart/Rogoff story is a correlation story. It doesnat prove that high debt always and everywhere hurts growth.

TC: Go look at Sweden. Hereas what Sweden did. They cut their spending and their taxes. They have the best growth rate in Europe. They had a surplus this year. They had growth at six-plus percent. They actually did a Reagan style approach to their problem by cutting spending and cutting taxes. And theyare the fastest growing with a decline in their debt-to-GDP ratio.

EK: But correct me if Iam wrong, but if I recall, Swedenas monetary policy went towards a very sharp devaluation, theyave been driven by export growth, and alongside Israel, theyave been more aggressive than any other central bank in the world. Theyave done stuff that if we did it here, people would lose their minds.

TC: I think there are monetary parts to that. But their finance minister put in place tough stuff. They had people who left Sweden because of the tax ratio. Now theyave moved back. And itas not a perfect example, but itas an exception to the Krugman story.

EK: Is there anything we need but deficit reduction to get growth back on the right path?

TC: Itas signals. The number one thing, and I think most economists would agree, confidence matters. If you have negative confidence, then you get much lower growth. If you have positive confidence you get much better growth with the same set of numbers. I think people are so disgusted with Washington that if we send a signal weare actually going to fix this — with any combination of tax and spending, remember that I voted for Simpson-Bowles — weall get our mojo back when people have some confidence in the future and see their Congress solving their problems.

EK: It seems your view is that just as the market needs to have faith in your demographics and in the flexibility of your labor market and the competitiveness, it has to have faith in your political systemas capacity to deal with long and short-term threats. Do you see any reason for the market to have that faith right now?

TC: No. One of my biggest worries is what happens if Romney wins and Republicans control both chambers, do they have the courage to do what it takes to fix the country? Itas kind of their last chance. If theyare given the favor of control and they donat act on it, why should you ever trust them again? You shouldnat. Itall be the death knell of the Republican Party. They controlled it all for four years under Bush and grew the government. They created a new entitlement with no revenue. Went against the very tenets of what they said they believe.

One of the reasons I wrote the book was to show a whole lot of people how many stupid things we do. I donat really blame presidents too much. You gotta get appropriations. I say the problem is not that we donat get along. We get along too well. Government is twice the size it was 10 years ago. The president canat spend the money if we donat appropriate it. So itas not a president problem. Itas a congressional problem.

EK: On the other side of that hypothetical, letas say Obama wins, but Republicans hold the House and maybe even take the Senate. How do they act in that hypothetical? Are they more or less willing to compromise with Obama?

TC: I donat know. Iam not good at predicting that. If President Obama is president again, those problems are still there and we have to solve them. He knows that. Weave had conversations where heas told me heall go much further than anyone believes heall go to solve the entitlement problem if he can get the compromise. And I believe him. I believe he would.

On Saturday, at 9:17am, Henry Blodget, the editor of Business Insider, asked the question that was on everyone’s mind: “So, when is JP Morgan going to fire the incompetent fools who just lost $2 billion and trashed the firm’s reputation?”

The answer, according to the Wall Street Journal, is…soon. The paper reports that the botched trade is “likely to result this week in the departure of three of the highest ranking executives with direct ties to the investments.”

Over at Seeking Alpha, Gene Kirsch tried to put Hedgegate into a broader context. “JPMorgan losses are reported to be actually $800 million in Q2 with the potential for legal and other losses up to $4.2 billion over a longer period of time, possibly exceeding one year,” he wrote. “The banking unit of JPMorgan Chase alone made $12.4 billion last year. The holding company has over $2.26 trillion in assets and is the largest U.S. bank and 8th largest in the world. The holding company made $29.9 billion in operating income and just over $20 billion in net income for 2011. So, this initial loss of $800M represents approximately 4% of its total net profit for all of 2011, less than 2.7% of its operating income.”

The firm, in other words, can manage it. Though as Brad DeLong was quick to point out, tallying the direct losses misses the episode’s larger impact on the firm’s value. “The revelation that JPMC did not have control over its derivatives book–even though accompanied by promises of multiple firings and deep reforms–destroyed 1/7 of JPMCs franchise value.” Turns out the market doesn’t much like it when what’s reputed to be the safest bank on Wall Street turns out to be incompetent.

Jared Bernstein draws out the larger lesson nicely, and so I’ll quote him at some length. “The fundamental truth here is the one known since Adam (Smith, that is) and amplified by the great financial economist Hy Minsky: humans underprice risk. Their proclivity to do so increases as the business cycle progresses and confidence takes over (remember, JPas bet was unwound by the fact that the economy wasnat as strong as they thought). The advent of a global derivatives market with notional trades in the trillions greatly amplifies the risks.”

“The fact that humans like Jamie Dimonahe who presided over JPas self-proclaimed ‘fortress balance sheet’ahe who inveighed against financial reform as imposing unnecessary oversight on such skilled risk managers as he and his staffafall prey to this fundamental truth only underscores the lesson of this episode in financial hubris.”

“And that is this: financial markets are inherently unstable. They will neither self-correct nor self-regulate. Their instability poses a threat to markets and economies and people across the globe. Therefore, they need to be regulated. Thatas not to say that anyone knows the best way to do this yet in order to balance the necessity of oversight with the dynamics of the markets. We donat know where to set the speed limits. It must be an iterative process. But we do know they need to be set, and JPas loss should be taken as a warning that our tendency is to set them too low.”

Wonkbook dashboard

RCP Obama vs. Romney: Obama +2.0%; 7-day change: Obama -0.3%.

RCP Obama approval: 48.0%; 7-day change: +0.7%.

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Top stories

1) Euro zone leaders are seriously discussing a Greek exit. “Eurozone central bankers have talked publicly for the first time of managing a possible Greek exit from Europeas monetary union as stalemate in Athens talks on a coalition government raises the prospect that Greece will renege on the terms of its international bailout. The comments by members of the European Central Bankas governing council indicate that the risk of eurozone fragmentation is being taken increasingly seriously by the regionas policymakers. They mark a significant shift at the ECB, which has previously argued that European treaties do not allow for an exit and that a break-up would cause incalculable economic damage.” Ralph Atkins in the FT.

Greece is headed towards new elections. “Greece appears headed to new parliamentary elections next month, further delaying its efforts to meet international demands to overhaul its economy, after leaders of the countryas major political parties declared little hope Sunday for a last-ditch effort to form a coalition government…Greek President Karolos Papoulias met with politicians Sunday in an effort to construct a unity government that could guide the country through the bailout program, and he planned to continue discussions Monday. But with top leaders expressing little hope for compromise after a week of efforts, it appeared likely that Papoulias would be forced to call new elections, most likely for June 10 or 17. Hopes for compromise have rested on Alexis Tsipras, the leader of the anti-bailout Coalition of the Radical Left Party, also called Syriza…But Tsipras has refused to go along with the pro-business New Democracy party, which won 19 percent of the May 6 vote, and the Socialists, who won 13 percent.” Michael Birnbaum in The Washington Post.

KRUGMAN: “weare talking about months, not years, for this to play out.”

@TheStalwart: Weird. As @renovatio_news points out, #quediceKrugman (What Krugman Says) is trending in Spain. http://twitpic.com/9ktvbo

2) Wall Street looks the same to voters. The giant $2 billion trading loss at JPMorgan Chase highlights a central problem in President Barack Obamaas case for a second term: Four years after the financial crisis nearly brought the nation to its knees, very little appears to have changed. No high-profile bank executives are in jail. Special multi-agency task forces to go after financial fraud and mortgage market abuses appeared in State of the Union addresses, only to issue a few news releases and mostly vanish from public view. And now one of the largest banks in the United States, headed by a Democrat and operating with government guarantees, has turned in the kind of headline-grabbing, casino-style style loss that drives voters crazy and that Obamaas financial reform bill was supposed to stop. Ben White in Politico .

JPMorgan Chase has been lobbying to make exactly the kind of trades that just lost the company billions of dollars. “Soon after lawmakers finished work on the nationas new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank. Several visits over months by the bankas well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking…The loophole is known as portfolio hedging, a strategy that essentially allows banks to view an investment portfolio as a whole and take actions to offset the risks of the entire portfolio. That contrasts with the traditional definition of hedging, which matches an individual security or trading position with an inversely related investment — so when one goes up, the other goes down.” Edward Wyatt in The New York Times.

The real response to JPMorgan Chase’s loss may come from global regulators, not the Volcker rule. “The size and scale of the surprise $2bn loss at JPMorgan Chase last week is likely to accelerate plans by global regulators to force banks to improve their trading risk models…While initial reactions to the JPMorgan loss last week focused on how it could reshape the US debate over implementing the ‘Volcker rule’ ban on proprietary trading, the misstep by one of the worldas largest banks could have far broader consequences. The Basel Committee on Banking Supervision, which sets global rules, has already sought a replacement for Value at Risk – the main measure of potential trading losses – and looked at additional capital requirements to cover potential damages that are not adequately measured by existing models. That project was seen as a long-term effort when it was announced two weeks ago, but it has now gained urgency and could be pushed through more quickly.” Brooke Masters and Tracy Alloway in The Financial Times.

CONFUSED? Here’s an explainer on JPMorgan Chase’s loss.

@davidmwessel: Barney Frank on JPM: Case that banks don’t need new rules to avoid repeat of ’08 crisis “at least $2 billion harder to make todaya (DJNS)

3) Republican state officials are dragging their feet on setting up exchanges. “In about two dozen states across the country, the insurance marketplaces at the heart of the 2010 health-care law remain in limbo, with Republican governors or lawmakers who oppose the statute refusing to act until the Supreme Court decides its constitutionality…In states with Democratic governors, such as New Hampshire and Minnesota, it is often Republican-dominated legislatures that are causing the hold-up. And in six states where Republicans hold both branches of government, including Kansas and South Dakota, state assemblies havenat even considered laws to establish the marketplaces. Though the battles primarily break along partisan lines, there have been at least a half-dozen exceptions. Last spring, the Republican governor of Nevada chose not to stand in the way of an exchange bill adopted by the majority Democratic assembly.” N.C. Aizenman in The Washington Post.

4) Congressional transportation bills won’t fill America’s infrastructure funding shortfall. “The nationas population is growing at a steady pace, yet infrastructure investments lag. The lifelines of commerce — roads, bridges, runways, ports — are showing their age, and in this era of fiscal austerity it may be a long time before they get rebuilt…The financing fiasco has been well-known for years — in fact, the last transportation bill, enacted in 2005, ordered up a blue-ribbon commission tasked with studying the financing problem and making recommendations for how to fix it. The National Surface Transportation Policy and Revenue Study Commissionas final report, issued in January 2008, a year before the last transportation bill was to expire, recommended that the country needs to be investing at least $225 billion annually from ‘all sources’ for the next 50 years in order to upgrade infrastructure to a state of good repair and make transportation advances. The Senateas current transportation bill, in comparison, would fund highways and transit at $109 billion over two years.” Kathryn Wolfe in Politico.

Top op-eds

1) BAKER AND HASSETT: We need a targeted response to long-term unemployment. “Policy makers must come together and recognize that this is an emergency, and fashion a comprehensive re-employment policy that addresses the specific needs of the long-term unemployed. A policy package that as a whole should appeal to the left and the right should spend money to help expand public and private training programs with proven track records; expand entrepreneurial opportunities by increasing access to small-business financing; reduce government hurdles to the formation of new businesses; and explore subsidies for private employers who hire the long-term unemployed. Those who hire for government jobs must do their share, too: managers who are filling open positions should be given explicit incentives to reconnect these lost workers. Every month of delay is a month in which our unemployed friends and neighbors drift further away.” Dean Baker and Kevin Hassett in The New York Times.

@davidfrum: “50 to 100% increase in death rates for older male workers in yrs immediately following a job loss”

2) YGLESIAS: America is headed towards default. “House Republicans voted to take money away from programs meant to help poor people and give it to the military instead. Thatas not my idea of wise policy, but thatas what was terrible about it. The problem is that the vote constitutes a collective Republican welching on the agreement that was reached last spring to raise the statutory debt ceiling and avoid national default. Yesterdayas vote doesnat undo the deal or cause any immediate problems, but by so speedily backing out of their agreement, the Republicans have done something much worse–made it impossible for anyone to negotiate with them in the future, because itas clear they cannot be trusted to keep the promises they made. If President Obama wins re-election, the debt-ceiling issue will have to be confronted again, but now in a Congress that has been poisoned by the Republicansa welching on the last agreement. The country, in other words, is set for an even more severe version of the crisis that crushed financial markets last summer.” Matthew Yglesias in Slate.

3) KRUGMAN: JPMorgan Chase’s loss proves the need for bank regulation. “Banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk theyare allowed to take on. Why, exactly, are banks special? Because history tells us that banking is and always has been subject to occasional destructive ‘panics,’ which can wreak havoc with the economy as a whole…So what can be done? In the 1930s, after the mother of all banking panics, we arrived at a workable solution, involving both guarantees and oversight. On one side, the scope for panic was limited via government-backed deposit insurance; on the other, banks were subject to regulations intended to keep them from abusing the privileged status they derived from deposit insurance, which is in effect a government guarantee of their debts.” Paul Krugman in The New York Times.

@Austan_Goolsbee: #lettersyouwontsee: Dear Mr. Volcker, you were right all along. we’re now fixing things and won’t let it happen again. yours, wall St.

4) SLOAN: JPMorgan Chase doesn’t prove the need for the Volcker Rule. “The Volcker Rule, named for former Federal Reserve chairman Paul Volcker, is an example of the problem involved in regulating giant companies in a complex world. The principle sounds wonderful and simple: Donat let banks use federally insured deposits for risky trades. But implementing it is proving to be incredibly difficult, as realists, including me, predicted would happen. Once bank lawyers finish finding loopholes in the detailed provisions, whatever they prove to be, the rule will probably have little meaningful impact. So bash Morgan all you like for its trading losses, and feel free to snicker at the spectacle of Jamie Dimon losing his swagger and having to eat crow. But donat confuse Morganas mess-up with the supposed need for the Volcker Rule. The Volcker Rule would have symbolic impact, by appearing to rein in Wall Street. But it will prove to be more useful as a full-employment act for loophole specialists than for reining in the banks.” Allan Sloan in The Washington Post.

5) SNOW: Tax cuts on dividends and capital gains should stay. “Nine years ago this month Congress passed President George W. Bush’s Jobs and Growth Tax Relief Reconciliation Act. That bill’s lower rates on capital, as well as the continuity in tax policy it established, have helped make our economy far more resilient. The legislation’s centerpiece was a reduction in the taxation of dividends and capital gains to 15%. Unfortunately, the 2003 tax rates, including those on capital income, are due to expire at the end of the year. Capital warrants special tax treatment because of the central role it plays in generating economic growth and jobs. Capital is the very lifeblood of the market economy, the mainstay of innovation, and the foundation for future prosperity. As more of it is put to work today, labor output and wages will rise tomorrow. An appreciation of that critical relationship should guide how the tax system treats earnings from capital.” John Snow in The Wall Street Journal.

6) THALER: Beware of slippery slope arguments on healthcare. “One pernicious category of imaginary risks involves those created by users of the dreaded ‘slippery slope’ arguments. Such arguments are dangerous because they are popular, versatile and often convincing, yet completely fallacious. Worse, they are creeping into an arena that should be above this sort of thing: the Supreme Court, in its deliberations on health care reform…Justice Scalia is arguing that if the court lets Congress create a mandate to buy health insurance, nothing could stop Congress from passing laws requiring everyone to buy broccoli and to join a gym…Please stop! The very fact that a slippery slope is being cited as grounds for declaring the law unconstitutional — despite that ‘significant deference’ usually given to laws passed by Congress — tells you all that you need to know about the argumentas validity. Can anyone imagine Congress passing a broccoli mandate law, much less the court allowing it to take effect?” Richard Thaler in The New York Times.

Top long reads

Jeffrey Toobin on how John Roberts orchestrated Citizens United: “Citizens United is a distinctive product of the Roberts Court. The decision followed a lengthy and bitter behind-the-scenes struggle among the Justices that produced both secret unpublished opinions and a rare reargument of a case. The case, too, reflects the aggressive conservative judicial activism of the Roberts Court. It was once liberals who were associated with using the courts to overturn the work of the democratically elected branches of government, but the current Court has matched contempt for Congress with a disdain for many of the Courtas own precedents. When the Court announced its final ruling on Citizens United, on January 21, 2010, the vote was five to four and the majority opinion was written by Anthony Kennedy. Above all, though, the result represented a triumph for Chief Justice Roberts. Even without writing the opinion, Roberts, more than anyone, shaped what the Court did. As American politics assumes its new form in the post-Citizens United era, the credit or the blame goes mostly to him.”

Andrew Martin and Andrew Lehren on the skyrocketing cost of college: “With more than $1 trillion in student loans outstanding in this country, crippling debt is no longer confined to dropouts from for-profit colleges or graduate students who owe on many years of education, some of the overextended debtors in years past. Now nearly everyone pursuing a bacheloras degree is borrowing. As prices soar, a college degree statistically remains a good lifetime investment, but it often comes with an unprecedented financial burden. Ninety-four percent of students who earn a bacheloras degree borrow to pay for higher education — up from 45 percent in 1993, according to an analysis by The New York Times of the latest data from the Department of Education. This includes loans from the federal government, private lenders and relatives. For all borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000 and 3 percent more than $100,000.”

’90s nostalgia interlude: Nine Inch Nails play “The Becoming” in studio..

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

Still to come: Wholesale prices are down; rebates will be credited to the ACA; Secure Communities expands; the IEA doesn’t like Obama’s plans; and cats, in slow motion.

Economy

Europe’s woes could hit the U.S.. “During bouts of European turmoil in the past two years, U.S. financial markets regularly stumbled and growth ebbed due to fears of a euro-zone meltdown. But Europe muddled through and avoided calamity, and the effects on the U.S. economy weren’t all bad. U.S. exports to Europe rose, and many U.S. banks benefited as overseas competition fell away. Now, the troubles in the currency union–the threat of a Greek exit from the euro zone, rising borrowing costs in Spain and Italy, recessions in several European countries–are renewing fears of an escalating crisis that could deliver a more serious blow to the fragile U.S. recovery. U.S. companies are bracing for a hit. Networking giant Cisco Systems Inc. last week blamed worries about Europe, along with other uncertainty, for its cautious outlook. Watchmaker Fossil Inc. reported a slowdown in German sales on top of deeper pullbacks in Italy and Spain. Chemicals firm Celanese Corp. attributed its disappointing results to weakening European demand.” Sudeep Reddy in The Wall Street Journal.

Wholesale prices declined for the first time this year. “U.S. wholesale prices declined for the first time this year, suggesting a drop in energy costs is helping to keep inflation under control. The index of producer prices, which measures how much wholesalers and manufacturers pay for goods and materials, fell a seasonally adjusted 0.2% in April from a month earlier, the Labor Department said Friday. The decline, the first since December, was due entirely to cheaper prices for energy goods, including gasoline and utility gas…The report on producer prices suggests inflation is subdued, after a run-up in oil prices earlier this year pushed costs beyond the Federal Reserve’s annual inflation target of roughly 2%. Lower inflation could reassure Fed officials as they keep a key interest rate exceptionally low through late 2014 to stimulate the economy. Lower inflation also gives the Fed more room to act, perhaps through additional bond purchases, if economic growth falters.” Josh Mitchell in The Wall Street Journal.

@BobCusack: “Where are the jobs?” references (from both parties) in the Congressional Record between ’09-’12: 357. Between ’05-’08: 3.

Vintage bicycle manufacturing tutorial interlude: How a bicycle is made.

Health Care

Insurers will be required to credit premium rebates to Obamacare. “Health-insurance companies must tell customers who get a premium rebate this summer that the check is the result of the Obama administration’s health-care law, according to federal guidelines released Friday. The move is the latest sign the Obama administration is trying to draw attention to the law’s benefits before the fall elections, even though the law faces an uncertain future. The Supreme Court is expected to decide in June whether its central plank–a mandate that everyone carry insurance–violates the Constitution. Mitt Romney, the presumed Republican presidential nominee, has pledged to wipe out the law if elected. Under the 2010 legislation, insurers that don’t spend a specified amount of revenue on actual medical care–as opposed to administrative costs–must refund the difference to customers.” Louise Radnofsky in The Wall Street Journal.

Domestic Policy

The Senate cybersecurity bill is running into privacy concerns. “Thereas yet another hurdle for Sen. Joe Liebermanas cybersecurity bill: Democrats who say it doesnat go far enough to protect consumer privacy. With Senate Republicans standing firm against the measure, the friendly fire from Democrats means thereas only more work ahead as Lieberman and others scramble to cobble together 60 votes to move the bill. A handful of members, including Sens. Al Franken of Minnesota and Richard Blumenthal of Connecticut, are echoing the concerns of civil liberties groups, which are growing increasingly fearful that consumersa data could end up being passed around by companies and the government as security experts share with each other information about emerging cyberthreats. To them and others, the Senate measure as written would specify too few limitations on how data could be used and cover entities with too broad a protection from liability.” Tony Romm and Jennifer Martinez in Politico.

The Obama administration will expand the controversial Secure Communities program. “Obama administration officials have announced that a contentious fingerprinting program to identify illegal immigrants will be extended across Massachusetts and New York next week, expanding federal enforcement efforts despite opposition from the governors and immigrant groups in those states. In blunt e-mails sent Tuesday to officials and the police in the two states, Immigration and Customs Enforcement officials said the program, Secure Communities, would be activated ‘in all remaining jurisdictions’ this Tuesday…Last year, officials at the agency said they had determined that they did not require consent from states to start the program. Citing antiterrorism legislation that Congress passed in 2002, the officials canceled agreements they had signed in 40 states and said they would extend the program nationwide by 2013.” Julia Preston in The New York Times.

Minority contracts fell last year for the first time in a decade. “U.S. government contracts to black-and Hispanic-owned small businesses fell last year for the first time in a decade, declining at a sharper rate than awards to all companies. Contracts to the black-owned firms dropped 8 percent to $7.12 billion in the fiscal year that ended Sept. 30, compared with fiscal 2010. Awards to Hispanic-owned businesses decreased 7 percent to $7.89 billion, according to federal procurement data.Contracts to the two minority groups fell at a faster pace than all contracts, which dipped 1 percent as the U.S. government slowed spending to help reduce the federal deficit. The gap may reflect stiffer competition over a shrinking pool of revenue and the recessionas greater impact on black and Hispanic firms…The absence of these set-aside programs may help explain the dip in awards for some minority groups, said James McCullough, who leads the government contracts practice at Fried Frank Harris Shriver & Jacobson in Washington.” Danielle Ivory in The Washington Post.

Cuteness amplified interlude: Cats in slow motion.

Energy

Fracking is sparking a boom in sand mining. “Scouts armed with geological maps and elevations from Google Earth are knocking on doors in the upper Midwest in search of what seems too common to mine: sand. The sedimentary material is in high demand among U.S. oil and natural-gas producers, setting off a sand rush in Wisconsin, Minnesota and other Midwestern states. While adding jobs, the mining boom is prompting pushback from some local residents, who are surprised by the frenzy and leery of its impact on their communities. Sand mined in the Midwest is used in places such as North Dakota and Pennsylvania to tap oil and gas reserves. The U.S. producers’ demand for sand reached 28.7 million tons in 2011, up from six million tons in 2007, according to independent laboratory PropTester Inc. and consultancy Kelrik LLC…Sand, injected deep underground to prop open fractures in shale formations and allow oil and gas to flow out, is important in ‘fracking.’” Mark Peters and Isabel Ordonez in The Wall Street Journal.

Lawmakers are torn on how to use high-speed rail funds. “As roads become more crowded each year, transportation planners have been looking for a game-changer that can reduce congestion and efficiently move millions of people. Enter rail — a centuries-old mode that may be a shining savior to those hoping to push the United States into a new way of getting people around at high speeds. But it wonat work everywhere — a lot depends on simple geography. And lawmakers are torn between how to use limited funds: along the densely packed East Coast, which has a history of commuter rail, or out West, where California has ponied up billions of dollars to build a high-speed system, much of it from scratch. Amtrakas Acela service from Boston to Washington runs the fastest trains in the country, maxing out at 150 mph and increasing soon to 160 mph…Three thousand miles away, California is inching ever closer to its high-speed rail vision, having formally approved the initial Central Valley route.” Burgess Everett and Adam Snider in Politico.

The IEA has concerns about Obama’s plans to increase oversight of oil markets. “Barack Obamaas plans for strengthened supervision of the oil markets have come under fire from the International Energy Agency, which has warned they could lead to sharp swings in crude prices. The warning, contained in the agencyas monthly oil market report, came in response to moves by authorities in the US and Europe to crack down on what they see as excessive speculation in commodities markets using derivatives. The US presidentas proposal to give the Commodity Futures Trading Commission authority to direct exchanges to raise margin requirements to address increased price volatility or prevent excessive speculation or manipulation could have the opposite effect, the western countriesa oil watchdog said on Friday. The IEA said raising margin requirements in oil futures trading might increase price volatility and concentrate market share in the hands of large speculators while having no effect on price levels.” Guy Chazan in The Financial Times.

America is running out of helium. “Sure, Congress has plenty of crises to deal with: a weak economy, an expiring highway bill, the end-of-the-year ‘taxmageddon.’ But now thereas another one floating into view. The United States is running out of helium. Yes, helium. Thanks, in part, to a 1996 law that has forced the government to sell off its helium reserves at bargain-bin prices, the countryas stockpile of the relatively rare and nonrenewable gas could soon dwindle…Congress is slowly grasping the extent of the problem. At a sleepy Senate hearing Thursday morning, the Energy and Natural Resources Committee listened to an array of experts chat about the gas. The hearing was tied to a bill, sponsored by Sens. Jeff Bingaman (D-N.M.) and John Barrasso (R-Wyo.), that would change how the government sells helium from its Federal Helium Reserve (yes, this exists) in order to prevent shortages.” Brad Plumer in The Washington Post.

@mattyglesias: Helium Privatization Act is a classic example of inefficient pseudo-privatization gone horribly wrong

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

Massachusetts is inching toward health-care legislation that, if successful, could overhaul how the state pays for health care a and save billions in the process.

Both the Massachusetts Senate and House have released bills that aim to cut at least $150 billion in health-care costs over the next 15 years. They do so by setting a global cap on health-care spending, under which health-care providers get paid for the quality a rather than quantity a of medicine they provide.

As for making sure those bills make it across the finish line and become law? That task lies, in no small part, with Massachusetts state Sen. Richard Moore. As chairman of the Massachusetts legislatureas Committee on Health Care Financing, heas been at work on health cost control legislation for 15 months a and will be the guy negotiating what the final product looks like.

aIt hasnat been all harmony and light, but everybody seems to feel we need to move in the same direction,a Moore told me in an interview this week. aThereas the general agreement that, if we focus on getting the best quality, we can drive down cost and ensure access for everybody.a

But there are some differences of opinion among Massachusetts legislators that could become roadblocks, namely determining how aggressive the state ought to be in slowing health-care cost growth.

The House has proposed capping health-care cost growth slightly lower than the rest of the economy, while the Senate would go allow costs to rise just faster than Gross State Product. Moore, for his part, is open to a more restrictive cap albeit not as tight as the Massachusetts House proposal.

aIad love to get below inflation,a he says, aBut weare just concerned that might be too drastic. Thatas almost like cutting the average rates of the past few years increases in half. We think the House version moves in that direction too quickly.a

There are also questions of enforcement: If Massachusetts does cap its health-care spending, how can it make sure that health-care providers will stay within the budget? Both bills will have a state agency watch over the process, with authority to write a acorrective action plana if it didnat see costs moving in the right direction.

I asked Moore whether such an agency would have enough teeth to enforce steep spending cuts. aWe didnat want to hold the hammer all the way out there,a he explains. aI think the folks in health care understand this is their job, so you might not need the hammer. And we will have someone watching, with the authority to require work plans. Maybe theyall come back to us and eventually ask for more authority.

aWe view this as a step in the right direction but not necessarily the end solution.a

What Moore says he is committed to is ensuring that a bill moves this session, regardless of any obstacles that come up in ensuing weeks and months.

aThereas general agreement this has got to be the direction of health care,a he says. aI have been working on this for 15 months. You work on something for that long, with so many people, maybe itas not surprising that thereas a lot of agreement.a

For the President of the United States to endorse gay marriage is certainly, as Vice President Joe Biden would say, a big you-know-what deal. But what’s actually changed this morning?

In Slate, Emily Bazelon argues that President Obama’s position was actually trailing his administration’s legal strategy. They had long ago made the unusual choice to stop defending the Defense of Marriage Act in the courts. That is to say, they had stopped defending a law that pits the federal government against states that choose to to allow same-sex marriage. This largely predicted Obama’s evolution on the underlying policy issue — he personally supports gay marriage, but thinks that the actual decisions should be left up to the states.

Then, of course, there’s the political fallout. This is unpredictable, of course. And my guess is that it probably hurts Obama a bit more than it helps him. But overall, I think Jonathan Bernstein is right that it’s largely being overhyped by both sides.

“Yes,” he writes, “some marriage-equality advocates had talked about withholding support unless the president ‘evolved.’ But realistically, there was no way that political activists a people accustomed to the normal give-and-take of politics a were not going to appreciate the wide gulf between Obama and Mitt Romney on lesbian, gay, bisexual and transgender issues.” Similarly, “itas highly unlikely that anyone who, otherwise was fine voting for Obama despite disagreeing with him on ending ‘donat ask donat tell’ and each of the other measures he has supported and in many cases has enacted, would draw the line here.”

“And what of everyone else?” Asks Bernstein. “The millions of Americans, most likely a large majority, who donat really care very much? Theyare still not going to care very much.”

But there are many Americans for whom this will matter quite a lot. Many of them are young Americans who perhaps have only recently realized that they’re gay, and who live in places, or with families, they know will have trouble accepting that fact. To them, the president’s words are a signal that they can look forward to a future in which they will be accepted, and in which they can live in a way that makes them happy. His words are proof that it gets better. And that’s a big deal.

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Top stories

1) The polling on gay marriage has flipped. According to surveys included in the PollingReport.com database, an average of 50 percent of American adults support same-sex marriage rights while 45 percent oppose it, based on an average of nine surveys conducted in the past year. This is a reversal from earlier periods: support for same-sex marriage has been increasing, and opposition to it has been decreasing, at a relatively steady rate of perhaps two or three percentage points a year since 2004…In addition, there is no longer evidence of an aenthusiasm gapa with respect to same-sex marriage: an NBC News/Wall Street Journal poll in March found that 32 percent of Americans said they strongly favored same-sex marriage, while 31 percent strongly opposed it. Nate Silver in the New York Times.

2) The president’s personal position is catching up with his administration’s legal strategy. Obamaas Justice Department withdrew more than a year ago from defending the Defense of Marriage Actas definition of marriage as ‘a legal union between one man and one woman.’ Attorney General Eric Holder started backing away from DOMA in suits brought by same-sex couples in Connecticut, Vermont, and New Hampshire. The idea in these cases is that in states that recognize same-sex marriage, the federal government should follow state law and stop denying the economic benefits of marriageaestate tax deductions, Social Security benefits, pensions, and the likeato married gay couples….As Mother Jonesa Adam Serwer points out, Obama caught up to his administrationas legal position today without going beyond it. He said ‘at a certain point I’ve just concluded that for me personally it is important for me to go ahead and affirm that I think same-sex couples should be able to get married,’ and he also said he thinks the states should decide the question of legalization for themselves. Emily Bazelon in Slate.

3) The Bundesbank may accept higher inflation. “The Bundesbank, the most hawkish of central banks, has signalled it would accept higher inflation in Germany as part of an economic rebalancing in the eurozone that would boost the international competitiveness of countries worst-hit by the regionas debt crisis. A future German inflation rate above the eurozone average could be part of a natural adjustment process as crisis-hit countries pulled themselves out of recession, the Bundesbank argued in evidence to German parliamentarians submitted on Wednesday…The Bundesbank has for some time seen European Central Bank policy as too loose for Germany. The willingness to contemplate higher domestic inflation in public comments points to a new-found flexibility in German thinking…Despite the Bundesbankas conciliatory stance on inflation, German policy makers have been among the toughest in insisting that Greece sticks to its agreed reform programme underpinning its bailout in the aftermath of Sundayas Greek election.” Ralph Atkins in The Financial Times.

4) Banks are throwing their weight behind Obama’s Fed nominees. “President Barack Obama’s two nominees to the Federal Reserve Board have received support from the financial-services industry, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. Sen. David Vitter (R., La.) has effectively blocked Senate confirmation of the nominees, Harvard University economics professor Jeremy Stein and former private-equity executive Jerome Powell. Wall Street firms have been quietly pressing Mr. Vitter to drop his objections, an aide to the senator said. Senate leaders aren’t expected to bring the nominees to the floor for debate, a potentially lengthy process unlikely to be welcomed by either party in an election year. The Senate generally confirms nominees through the faster process of unanimous consent. Unless Mr. Vitter changes his mind, the two Fed nominations are unlikely to advance.” Kristina Peterson in The Wall Street Journal.

5) The House will vote today on a plan to cut health-care spending rather than defense. “The House is expected to vote Thursday on a Republican plan that would spare the Pentagon from the deep across-the-board spending cuts envisioned as part of last summeras debt-ceiling agreement, reviving what has been an emotional debate in Washington about the best ways to reduce the federal budget deficit. With a series of troubling end-of-year deadlines looming, Republicans are proposing to replace the first round of $110 billion in reductions, which are set to take effect in January. The cuts are a first-year down payment on $1.2 trillion in reductions spread over 10 years, which were to be split evenly between the military and domestic programs. To forestall the defense hit, the GOP proposal would cut funding for food stamps, eliminate key pieces of the federal health-care law and slash funding designed to help the government better monitor the financial sector.” Rosalind Helderman in The Washington Post.

@MichaelGrabell: The Sequester Replacement Reconciliation Act is probably the hottest name for a bill I’ve ever seen.

@ChadPergram: Ryan on bill to change sequester: The supercmte didn’t do its job. We’re doing what the supercmte was supposed to do: prioritize spending.

6) The FDIC will outline its plan to take down failing banks. “When the next crisis brings a major financial firm to its knees, U.S. regulators will seize the parent company but allow its units around the globe to keep operating while the mess is cleaned up, according to a planned announcement Thursday from the Federal Deposit Insurance Corp. The equity stakeholders of the large bank or other financial firm will be wiped out, and bondholders will face losses as their holdings are swapped for equity in a new entity, as a part of the FDIC’s plan. Nearly four years after the massive government bailouts of the financial crisis, regulators are looking to chip away at the tacit understanding that the government will step in to save top financial institutions seen as vital to the economy or banking system. As part of that effort, acting FDIC Chairman Martin Gruenberg will outline the agency’s strategy in a speech in Chicago Thursday, his first public remarks on the dismantlement plans for banks.” Victoria McGrane in The Wall Street Journal.

7) The CFPB will propose tighter mortgage lending regulations. “The Consumer Financial Protection Bureau said it planned to propose tighter mortgage lending regulations that would limit the ability of banks and mortgage brokers to charge certain transaction fees, possibly ending one of the most abusive costs levied on consumers when they buy a house. Bureau officials said that the rules, which were released Wednesday ahead of formal introduction this summer, would ban mortgage companies from charging origination fees that vary with the amount of the loan…The consumer bureau also said it would require that lenders offer a reduced interest rate when a consumer opted to pay upfront discount points and would require lenders to offer a loan option without points. During the financial crisis, some lenders charged the points without lowering the interest rate. Changing that rule, the bureau believes, will make it easier for consumers to weigh offers from multiple lenders.” Edward Wyatt in The New York Times.

Top op-eds

1) KLEIN: Polarization is largely attributable to Republicans. “Look no further than Senator Richard Lugaras concession statement Tuesday night, which showed, in its wan effort to make the two parties sound equivalently extreme, just how much further the Republican Party has gone…Whether the Republican Party is ‘the problem’ is a subjective judgment. Perhaps you loathe taxes and, in the face of all available evidence, consider global warming a hoax. In that case, the Republican Party is doing exactly what it should be doing. But there is simply no denying that the Republican Party has gone much further right than the Democratic Party has gone left, and that, from policy pledges to primary challenges, it has done much more to discourage its members from compromising than the Democratic Party has. So if you think polarization is the main problem in Washington today, then Mann and Ornstein are right: Your beef is largely with the Republicans.” Ezra Klein in Bloomberg.

2) HANSEN: If tar sands drilling continues it’s game over for the climate. “Global warming isnat a prediction. It is happening. That is why I was so troubled to read a recent interview with President Obama in Rolling Stone in which he said that Canada would exploit the oil in its vast tar sands reserves ‘regardless of what we do.’ If Canada proceeds, and we do nothing, it will be game over for the climate. Canadaas tar sands, deposits of sand saturated with bitumen, contain twice the amount of carbon dioxide emitted by global oil use in our entire history. If we were to fully exploit this new oil source, and continue to burn our conventional oil, gas and coal supplies, concentrations of carbon dioxide in the atmosphere eventually would reach levels higher than in the Pliocene era, more than 2.5 million years ago, when sea level was at least 50 feet higher than it is now. That level of heat-trapping gases would assure that the disintegration of the ice sheets would accelerate out of control…Civilization would be at risk.” James Hansen in The New York Times.

3) YGLESIAS: It shouldn’t be so hard for foreign visitors to come to the U.S. “For a depressed economy, exports function as a magic elixir. Demand–and with it jobs–appears from outside, generating new income that cycles through the economy, This is why President Obama, as part of his recovery strategy, has set a goal of doubling exports over five years. Talk of exports normally conjures up images of factories and container ships, but many of Americaas exports are services. The nationas biggest service export is in some sense not an export at all–itas travel and tourism, an industry begging for respect on National Travel and Tourism Week…As far as the national balance sheet goes, tourism functions exactly like an export. Foreigners come here and spend money, leaving extra funds in American hands, with which we can purchase oil and Chinese toys. Itas an export realm in which the United States has very strong fundamentals.” Matthew Yglesias in Slate.

4) SALMON: Principal reductions can benefit everybody. “Principal reduction in mortgage modifications has to become the rule rather than the exception. The reason the governmentas efforts to fix the mortgage market have failed so miserably is that those efforts have centered on interest payments, not the total amount owed. A sluggish housing market will act as an economic drag for as long as millions of homeowners owe vastly more than their house is worth. If done right, these policies can be implemented in a positive-sum way, making everybody — including the banks doing the write-downs — better off. For instance, the government could impose higher capital standards on banks that insist on marking underwater defaulted mortgages at par, and give the banks an incentive to write down principal that way, while making the whole banking system safer at the same time…If we donat want the United States to continue to suffocate under the weight of far too much debt, we have to start making serious efforts to bring our debt burden down.” Felix Salmon in Reuters.

5) WILL: The medical device tax will mean fewer life-extending inventions. “Congress, ravenous for revenue to fund Obamacare, included in the legislation a 2.3 percent tax on gross revenue — which generally amounts to about a 15 percent tax on most manufacturersa profits — from U.S. sales of medical devices beginning in 2013. This will be piled on top of the 35 percent federal corporate tax, and state and local taxes. The 2.3 percent tax will be a $20 billion blow to an industry that employs more than 400,000, and $20 billion is almost double the industryas annual investment in research and development. An axiom of scarcity is understood by people not warped by working for the federal government, which can print money when it wearies of borrowing it. The axiom is: A unit of something — time, energy, money — spent on this cannot be spent on that. So the 2.3 percent tax, unless repealed, will mean not only fewer jobs but also fewer pain-reducing and life-extending inventions…which have reduced health-care costs.” George Will in The Washington Post.

Top long reads

Marcus Walker examines the failings of Europe’s bailout of Greece: “Two years after Europe bailed Greece out to protect the euro, the rescue has become a debacle that threatens to unravel the common currency. After Greece’s May 6 elections left pro-bailout parties too weakened to govern the country, more elections are likely in June, with no guarantee a stable government will emerge. By next month, Athens must identify a!11.5 billion, or $15 billion, in fresh spending cuts or face suspension of the international loans it needs to pay pensions and run schools. If it doesn’t get the money, it would eventually have to print its own. Greece’s growing turmoil is the culmination of a radical austerity experiment and botched economic overhaul that have pushed the nation to the brink of social and political breakdown. The story of the ill-fated bailout suggests that forcing deep austerity on individual member states won’t save the euro and may worsen its crisis.”

Susan Headden on the search for better standardized tests: “Critics of testing habitually protest its cost, implying that the millions spent on assessment would be better put toward smaller class sizes, expanded library hours, or the restoration of art and gym. But despite testingas huge and growing role in education, the U.S. now devotes less than a quarter of a percent of per-pupil spending to assessments. Thatas less than the cost of buying each of Americaas students a new textbook. The American education system is at a major crossroads, one that few Americans are aware of. The new assessments–the product of a huge investment of time, knowledge, and talent–are only two years away from being put in place, and theyare desperately needed. Itas too early to know whether they will work as advertised, and even if they do, the danger is that states will quickly revert to their old habits of doing assessment on the cheap. But if we do this right, we could finally provide educators like Caryn Voskuil with one of the tools they need most: a test worth teaching to.”

Robert Rothman on the Common Core and its effect on innovation: “In some ways, the American elementary and secondary education system is undergoing a transition similar to what the American rail system underwent around the time of the Civil War. For decades, each state has set its own expectations for what students should know and be able to do at each grade level. These standards might reflect the tradition of local control of education, but they have made it difficult for students to move from state to state; students transferring from fourth grade in, say, Indiana, might face a different set of expectations when they arrive in fifth grade in Illinois. And, by fragmenting the educational marketplace, these varied standards have impeded the kinds of innovations that might otherwise come with economies of scale–in testing, textbooks, and teacher education.”

British post-punk interlude: Django Django plays “Default” live on Later with Jools Holland.

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

Still to come: The Fed approved Chinese banks; primary care doctors will be getting more for Medicaid patients; the F.T.C. and the White House want online privacy legislation; it’s a good time to be a solar installer; and a super-medley of songs from Super Mario Bros. 3.

Economy

Europe may be open to relaxing Greece’s payment deadlines. “As another day passed with Greece no closer to a working government, European officials suggested Wednesday that they had a new tool in their mission to keep the shared euro currency with all its partners: time. A ticking watch may be the most powerful bargaining chip Europe has against the possibility that anti-bailout voices in Greece will push it off the euro. Every day that ends without new European bailout money for Greece to pay its bills heightens the pressure on its leaders to comply with the austerity measures that come as a condition of the $171 billion rescue package. But German officials signaled Wednesday that they may be willing to relax some of the nationas payment deadlines if a pro-bailout government comes to power…They may even be willing to consider reducing the interest payments on Greeceas emergency loans, sweetening the deal without abandoning any of the fundamental overhauls they say Greece needs to get its economy on track.” Michael Birnbaum in The Washington Post.

@TonyFratto: I used to believe Greece couldn’t exit the euro. Now I think it’s only a matter of timing.

@esoltas: Likelihood of Eurozone exit soars on @Intrade — 69% by yearend 2014, 54% by 2013, 35% by 2012. http://pic.twitter.com/ES1kbQqF

Fannie Mae won’t need additional taxpayer aid for the first time since the bailout. “Fannie Mae, the government-backed mortgage financier, said on Wednesday that it made a profit in the first quarter and that it did not need additional bailout money — a first since the federal government took it over in fall 2008. A slowdown in the decline of home prices and in the number of homes entering serious delinquency allowed the company to eke out a profit after paying its dividend to the Treasury. Fannie Mae also said losses on its portfolio of home mortgages had probably peaked and that it expected better profits in the future, another sign that the worst might be over for the battered American housing market. The company reported quarterly net income of $2.7 billion, up from a $6.5 billion loss in the first quarter of 2011. Fannie has received about $116 billion from the Treasury over the last three and a half years and paid back about $23 billion in dividends.” Annie Lowrey in The New York Times.

Export-Import Bank reauthorization is headed towards the Senate. “Ending months of haggling, the House voted Wednesday to extend the Export Import Bankas charter through September 2014 and raise its loan exposure cap to $140 billion — a 40 percent increase. The bill must still pass the Senate but the lopsided 330-93 House margin makes it harder for conservatives to obstruct. Republicans split 147-93 for the measure, and Democrats, whose party controls the Senate, were unanimous in their support…Wednesdayas vote caps a remarkable odyssey is which all of modern Washingtonas politics seemed to descend with a thud on the once obscure enclave of overseas financing for U.S. manufacturers. Pushed to the brink, the bank is only weeks away now from seeing its charter expire at the end of May, by which point it will have also exhausted its $100 billion cap and be unable to take on further transactions in the pipeline.” David Rogers in Politico.

@TPCarney: 93 GOP votes against the Export-Import Bank, as compared to 50 Nays in 2002: Evolution!

@Amy_NJ: Overheard in a Capitol elevator: “Another day in the United States Senate. I couldn’t be more excited.”

The Fed approved the U.S. expansion plans of Chinese state banks. “Giant banks owned by the Chinese government are coming to the U.S. The Federal Reserve on Wednesday approved plans by three state-backed Chinese banks to expand in the U.S., including the first acquisition of a U.S. retail-banking network by a state-owned Chinese lender. The approval is a landmark step for U.S. banking regulators. Chinese banks long have sought access to the U.S. banking system in order to provide financing to Chinese companies operating overseas and to do business with foreign investors looking for exposure to the Chinese currency, the yuan. But they have been stymied in previous attempts by assorted delays and rejections…The Federal Reserve effectively is giving its seal of approval to China’s bank-regulatory system, a big step for U.S. regulators given their past concerns about the adequacy of Chinese supervision of banks.” Jon Hilsenrath, Robin Sidel, and Lingling Wei in The Wall Street Journal.

Compilation interlude: People say “you just don’t get it, do you?” a lot in films.

Health Care

A new regulation will boost Medicaid payments for primary care doctors. “Primary care doctors could get a pay raise next year for treating Medicaid patients, under a rule announced by the Obama administration Wednesday. The proposed regulation implements a two-year pay increase included in the 2010 health-care law. The increase, effective in 2013 and 2014, brings primary care fees for Medicaid, which covers indigent patients, in line with those for Medicare, which insures the elderly and some disabled patients. Although Medicaid is jointly funded by states and the federal government, the pay boost would be covered entirely with federal dollars totaling more than $11 billion over the two years it would be in effect…Administration officials also noted that the law has already increased Medicare payments to primary care doctors — awarding more than 150,000 physicians almost $560 million in additional compensation in 2011.” N.C. Aizenman in The Washington Post.

Some lawmakers want a permanent ‘doc fix.’ “Reps. Allyson Schwartz (D-Pa.) and Joe Heck (R-Nev.) introduced a bill Wednesday to reform how Medicare pays healthcare providers and to avoid a cut to reimbursement rates on Jan. 1. The bipartisan measure would repeal Medicare’s current reimbursement formula and replace it with a new system of payment models. It would also give doctors small boosts in payment rates for four years. Money for the changes would coming from war savings from troop withdrawals in Iraq and Afghanistan — a move Republicans have opposed in the past as a ‘Ponzi scheme.’…The proposal instructs the Centers for Medicare and Medicaid Services to create new payment model options aimed at giving providers more flexibility based on specialty, region or type of practice. Doctors who treat Medicare patients are scheduled to see a 30 percent cut to their reimbursements on Jan. 1, 2013, if Congress does not step in.” Elise Viebeck in The Hill.

Domestic Policy

The FTC and the White House are urging Congress to pass online privacy legislation. “The Obama administration and the nationas chief privacy regulator pressed Congress on Wednesday to enact online privacy legislation…Jon Leibowitz, chairman of the Federal Trade Commission, which enforces limited Internet privacy laws, and Cameron F. Kerry, general counsel for the Commerce Department, said at a hearing of the Senate commerce committee that writing new laws and giving the F.T.C. the power to enforce them with civil penalties would promote Internet commerce by increasing the trust that Americans put in online transactions. Currently, the F.T.C. monitors whether Internet companies that have privacy policies keep their promises to consumers about when and where they will share personal information. But the commission lacks the authority to assess penalties for most transgressions, and it has little authority over how companies operate when they have no written privacy rules.” Edward Wyatt in The New York Times.

Game music interlude: Meine Meinung play a super-medley of songs from the Super Mario Bros. 3 soundtrack.

Energy

Consumer resistance to ‘smart meters’ is slowing a grid upgrade. “A growing consumer backlash against new wireless digital technology for measuring power usage is slowing U.S. utilitiesa $29 billion effort to upgrade their networks. States including California, Maine and Vermont have responded to customer concerns about higher bills and safety by offering them the option of keeping their conventional devices for an extra charge. The fee may discourage drop-outs from the ‘smart-meter’ program, in which household usage data is transmitted over radio waves to local utilities such as PG&E Corp. (PCG), Central Maine Power Co. and Central Vermont Public Service Corp. (CV), which can use the information to charge higher rates during times of peak demand…The meters are key to the ‘smart grid’ being rolled out nationwide to increase delivery flexibility. Investment by utilities in the new grid has totaled $15.4 billion through the first quarter of 2012 and is projected to increase by another $13.4 billion through 2015.” Mark Chediak in Bloomberg.

Solar installers are thriving. “Jay Nuzzi, a New Jersey state trooper, had put off installing solar panels on his home here for years, deterred by the $70,000 it could cost. Then on a trip to Home Depot, he stumbled across a booth for Roof Diagnostics, which offered him a solar system at a price he couldnat refuse: free. Mr. Nuzzi had to sign a 20-year contract to buy electricity generated by the roof panels, which he would not own. But the rates were well below what he was paying to the local utility…Similar deals are being struck with tens of thousands of homeowners and businesses across the country. Installers, often working through big-box chains like Home Depot or Loweas, are taking advantage of hefty tax breaks, creative financing techniques and a glut of cheap, Chinese-made panels to make solar power accessible to the mass market for the first time. The number of residential and commercial installations more than doubled over the last two years to 213,957, according to Greentech Media, a research firm.” Diane Cardwell in The New York Times.

@AndrewRestuccia: Dingell quotes from “Oliver Twist” at hearing on electric reliability #youdontseethateveryday

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

Family Finance: Moving back to Toronto from Guatemala for retirement might mean a reduced standard of living, but then again, they might just live longer

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