James Pethokoukis

Politics and policy from inside Washington

Why Obama loves Bernanke’s big deficit warning

Jun 3, 2009 20:23 UTC

Ben Bernanke seemed to buy into the “bond vigilante” theory today in his House testimony as an explanation for the recent backup in long yields:

Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. … These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings.

Me: Some folks are interpreting this as bad news of Obamanomics, that deficit fears mean he’ll have to trim back his spending agenda. (I’ve seen plenty of posts about how Bernanke’s warning means he won’t get reappointed in 2010.) But recent history shows that deficit fears often lead to tax hikes (1982, 1990, 1993) and higher taxes are just what Obama needs to pay for “investments” in healthcare, energy and eduction. Here is a bit from a column that should go up later today:

Chatter about budget deficits and fiscal responsibility is exactly what Team Obama needs right now. Here’s why: If you buy the theory of bond vigilantism — that credit markets will force interest rates higher in reaction to unsustainable national budget deficits — then you also have believe the White House will need to raise taxes sharply to pay for all its spending programs or risk a revolt. Indeed, plenty of White House folks, particularly if they worked for Bill Clinton, likely do believe in the theory. Recall that it was Clinton who chucked his investment agenda in favor of a “bond market strategy” to boost growth by persuading credit markets that the administration would balance the books. As Clinton nicely boiled it down, “You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of [expletive] bond traders?”

… And today, Bernanke’s sharp warning contributed to that effort. So not only has Bernanke’s unprecedented monetary stimulus allowed Obama to focus on pushing forward his policy agenda rather than a pure stimulus effort (such as a suspension of payroll taxes), but the weight of his authority is now being used to help persuade Americans that the budget deficit is the Next Scary Problem. In short, Bernanke is “preparing the battlespace” for Obama tax initiatives to pay for Obamacare and who knows what else. What more could one Fed chairman do for a Democratic president?


Pethokoukis, Yes I am sure Bernanke wants a massive tax increase in the middle of a massive recession. Afterall, what spells job increases like a massive tax on income. I do hope Obama takes Pethokoukis’s advice though. It takes a Carter to make a Reagan and 4 years from now we are going to be needing a Reagan big time.

Posted by robtr | Report as abusive

A ‘what if’ on GM, Hummer and China

Jun 3, 2009 14:28 UTC

Daniel Ikenson of the Cato Institute makes a great point on the Hummer deal:

The willingness of this Chinese company to purchase Hummer serves as a stark reminder of what could have been. Had George W. Bush not allocated TARP money to GM last December, in circumvention of Congress’s rejection of a bailout, then GM likely would have filed for bankruptcy on January 1. At that point, there would likely have been plenty of offers from foreign and domestic concerns for individual assets to spin off or for equity stakes in the New GM. There would have been plant closures, dealership terminations, and jobs losses, as there is under the nationalization plan anyway. But taxpayers wouldn’t be on the hook for $50+ billion, a sum that is much more likely to grow larger than it is to be repaid. It is also a sum that will serve as the rationalization for further government interventions on GM’s behalf.

Taming the bond market vigilantes

Jun 3, 2009 14:21 UTC

Whatever the politics, fixing Social Security is easy conceptually.  And if Team Obama is starting to get a bit anxious about an adverse reaction from the bond market to its fiscal policies, why not offer a fix as evidence of its seriousness about America’s entitlement woes? Here is Ed Yardeni on this very topic:

The Obama Team needs to negotiate a peace treaty with the Bond Vigilantes. The Administration will agree to slash the structural federal deficit. The Vigilantes will stop pushing bond yields and mortgage rates up to levels that will abort the recovery. This would be a win-win solution in the spirit of doing what is best for the country. The President could do what Nixon did. It took an anti-communist hawk to recognize Red China. It may take a liberal community organizer to address the looming financial crisis in the social welfare state, particularly Social Security and Medicare. Now is a good time to push for means testing of these two programs. Actually, there is already some means testing in both programs, but the testing should be expanded. The programs shouldn’t be entitlements. They should be insurance programs that provide a safety net for those who are truly in need of public assistance. If the Obama Administration seriously addresses this issue, the outlook for the structural deficit will improve dramatically. In this scenario, both Treasury bonds and the US dollar could rally as the Administration actually delivers on its promise to reduce the structural federal deficit.

Me:  I wonder if bond investors are more worried about inflation, default or inflating to avoid default? I would also be concerned that any Obama solution would include higher payroll taxes. Some economists blame FDR’s institution of a payroll tax in the 1930s for extending the Great Depression. Raising the retirement age and linking benefits to inflation rather than wages would actually create huge budget surpluses, by the way.

Should Obama get credit for ending the recession?

Jun 3, 2009 14:07 UTC

Mustard seeds (or green shoots, if your prefer) are appearing everywhere, from credit markets to manufacturing to housing. And of course the 40 percent surge in the U.S. stock market since mid-March is hard to miss.

So here’s a question: If the American economy shifts back into growth mode this year, does Barack Obama deserve the credit? Now if you click over to Recovery.gov, you’ll see that the U.S. government has paid out roughly $37 billion in funds from the $787 billion American Recovery and Reinvestment Act. That’s not too much dough for a $14 trillion economy. And while 110 million households will eventually receive some $55 billion from the Making Work Pay tax credit, that money has only been popping up in paychecks since April 1.

Now compare the Obama fiscal stimulus to the money stimulus of the Federal Reserve. As described by Brian Wesbury and Bob Stein at First Trust Advisers: “Money supply measures are surging – in the past six months, M1 is up 25.2% at an annual rate, currency outstanding is up 15.4%, checking account balances are up 74.2%, and M2 is up 15.9%. To top this off, the Fed has … $1 trillion plan to basically print money and buy assets including treasury bonds.” Also note the language of Richard Fisher, president of the Dall Fed, in speech yesterday: “We have succeeded in pulling the economy back from the brink. We’ve come back from the abyss.”

Of course, the bigger question is whether voters in the 2010 midterm elections will view Obamanomics as a success. Let me know what the November 2010 unemployment rate is, and I will give you an answer.


My indication would be how many U.S. Republican senators are going to be vulnerable to the Obama effect, you know all that “Time for Change” stuff, we’d have to look at all the Republican senators from 2006, what were the voting results and who did they run against. My Theory would be a number of these guys would lose their seats, Democratics could easily be up to 68-69 going into 2012. The Obama effect could still be there and alot of these Senators that didn’t have to worry about the tidal wave of Democratic support could still be lingering in 2010. Where is my generations Reagan???? whimper whimper…

Posted by Diavoli | Report as abusive