9/30/09
- Health care reform passed, extending coverage to 32 million Americans. The bill still faces resistance from Republicans and some state governments.
- Interest rates were kept low to stimulate bank lending. Though the folks in charge see some economic recovery, they’re not optimistic yet.
- TALF, one of the government’s bailout programs, expired this week, reducing federal financial support to the struggling financial sector.
- Mortgage rates are low, but the housing market is still in pretty bad shape. The rate of inflation hasn’t changed since last month.
Health Care Reform and Rebellion
The health care reform bill finally passed on Sunday, extending health coverage to 32 million more Americans – including those with “pre-existing conditions.” Democrats say that after 10 years, the costly bill would actually reduce the federal deficit, though there is much debate. Before the bill turns into a law, the Senate will go through a process called “reconciliation,” which is basically a final touch-up. With Republicans uniformly opposed to the bill, reconciliation is not expected to go smoothly.
A dozen states want to sue the federal government, possibly in the Supreme Court, because they believe the bill is unconstitutional. Virginia and Idaho have even passed laws that directly interfere with the bill’s national healthcare requirements for every citizen.
The bill will largely be funded by increased taxes: When the “Bush Tax Cuts” expire in 2011, the tax rate for certain individuals will increase by 5 to 8.8%.The Medicare tax, which comes out of everyone’s weekly paycheck, will increase by slightly less than 1%. There will also be a 3.8% tax increase on “unearned income” for folks making more than $200k per year. (Unearned income includes investment income such as capital gains, dividends, and interest income.)
Rates and Recession Recovery
This week the Senate passed a bill designed to promote hiring by reducing the tax burden on businesses who hire new employees in 2010 – as long as the new employee has been out of work for at least two months.
Elsewhere in D.C., the committee in charge of setting an interest rate for banks borrowing money from other banks (the FOMC) has decided to keep their interest rate very low (0.00%-0.25%). The idea behind keeping this rate (the “federal funds rate”) low is that allowing banks to access money more easily (and cheaply) will encourage them to spend that money – ultimately stimulating the whole sluggish economy. Though the FOMC mentioned in their statement that the economy was “stabilizing,” they decided to keep the rate low because of continuing problems: the high unemployment rate, reluctance on the part of small buisinesses to rehire, and a weak housing market. The committee also decided to end TALF – the government buying program created to minimize some of the damage done by mortgage- and other loan-based securities. This move shows some confidence in the economy’s ability to recover, but the folks over at FOMC made it a point to not sound too optimistic.
After these FOMC annoucements, rumors circulated that the committee might raise the discount rate to 1%. The discount rate is the interest rate that Federal Reserve Banks charge when they loan money to banks. Like the federal funds rate, lowering the discount rate allows banks to access money more cheaply, which is supposed to stimulate the overall economy. Raising the discount rate might mean that the government is stepping away from its role as economic bailer-outer in the wake of the financial crisis. Senator Dodd proposed that the Fed only be responsible for the nation’s 35 largest banks (those with assets totalling more than $50 billion). Oversight of smaller banks would go to the FDIC and the Office of the Comptroller of the Currency. But Ben Bernanke, Chairman of the Fed, shot down that idea because it would limit the insight the Fed has into the state of the banking system. He also expressed concern that the proprosed reform would make the Fed the “too-big-to-fail regulator.”
Elsewhere in the Economy…
According to the Consumer Price Index, the rate of inflation didn’t change much this month. Excluding food and energy costs, the current “core” inflation rate is only 1.3%.
Applications for mortgages fell -1.9% this week because of a decrease in both home purchases and mortgage refinancing, and the housing market is still doing very poorly despite the fact that mortgages are their cheapest in months. 30-year mortgages were being handed out at an average rate of 4.91%
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