James Pethokoukis

Politics and policy from inside Washington

Another bad poll on the Obama agenda

Jul 30, 2009 15:17 UTC

This one is just out from Pew:



The more people understand his policies the lower that approval rating will continue to go. Folks are not satisfied with general comments anymore and it is hurting his popularity because he has to give details. Worked on the campaign trail but won’t work on the job.

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The case against Ben Bernanke

Jul 30, 2009 15:01 UTC

Over at ClusterStock, former Merrill Lynch strategist Richard Bernstein tells us why it should be “one and done” for Ben Bernanke. (He compares BB to Burns and Miller from the 1970s. Ouch!)

1) He is a status quo chairman when big change is needed.

His policies both before and after the banking and credit crises have attempted to maintain financial market status quo. … Mr. Bernanke’s comments regarding his inability to proactively control financial bubbles, and the ease with which the Fed could manage a bubble’s deflation, were astonishing for their naïveté. The fact that the credit bubble’s deflation caused the worst recession of the post-war period seems to demonstrate that Mr. Bernanke has failed even according to his previously expressed expectations.
2) He is too close to Wall Street.
Wall Street thrives on financial asset inflation’s cheaper and more abundant credit. Mr. Greenspan and Mr. Bernanke made sure that the Street was not disappointed regardless of the longer-term detrimental effect on the US economy. The next Fed Chairman should be more concerned with the stability of the financial sector, rather than with the growth of the financial sector.
3) He doesn’t understand the dangers of financial asset inflation.

The future of monetary policy, in my opinion, will focus on the delicate balance between real and financial asset inflation. The US economy does not function well when there is excessive real asset inflation. The 1970s have proven that. However, the US economy also does not function well when there is excessive financial asset inflation. … Yet most central bankers, like Mr. Bernanke, do not yet appreciate this delicate balance. They continue to operate under the assumption that real asset inflation is bad and financial asset inflation is good.  In this respect, Mr. Bernanke’s term as Fed Chairman seems to mimic those of Arthur Burns and William Miller during the 1970s.

Bernstein’s bottom line:
The next Fed Chairman should probably come from one of the Federal Reserve’s district banks. The person should not primarily focus on Wall Street, but rather should fully understand how the optimal cost of capital in the financial markets drives efficient real investment and maintains a stable banking system. The next Fed Chairman should have a thorough understanding of small businesses lending (imagine if TARP money had gone to the Small Business Administration instead of to bank trading desks?) and how the future of the US economy depends on efficient real investment and not on financial engineering. That person undoubtedly exists somewhere within the Federal Reserve Board but, unfortunately, it is not Mr. Bernanke.

I was curious to see how Bernstein concluded his opinion on Bernanke. The beginning parts of his case were the general & dated talking points from the Obama campaign.

1) I don’t know how anyone could call Bernanke “status quo” especially in light of the extreme & heroic measures the Fed has undertaken over the last 10 months (which has had the not so small benefit of saving Obama’s bacon these few months later & more importantly the Country & the world economy– but never miss a chance to bite the hand that feeds you). I thought it was universally accepted that the heavy lifting by the Fed was a key component of averting complete disaster(?) and creating current stability. Today the President inexplicably stated it was his Stimulus bill that is goosing the “recovery.” What was in that Bud Lite?

2) Next the nonsense about being “too close to Wall St.” — another deeply held article of faith for Obamacrats. This has proven to be one big obstacle to first class government appointments. Accordingly, it’s best to apponit someone who is removed from the source, academics are best or even someone who has an arcane or tangential connection to the subject at hand(!!!?) They lost out on appointing Rodgin Cohen. This extends to foreign policy where even Sec. of State Clinton has groused about the appointment procedures. Is the Treasury Dept. even close to half staffed yet?

To his 3rd point, who the heck puts any kind of “asset inflation” on the top of the list right now –really -? The bigger risk is hyper-inflation, which would be a result of the Fed not having an exit strategy for quantative easing. It’s going to be tough to turn off the spigot & we’d all prefer someone who won’t be leveraged by the politicos.

Last, Bernstein’s concluding argument was rife with nonsense. TARP, Small Biz, etc. Does he forget how TARP came to be, what it’s purpose was? It was meant to avert collapse.

Is his concluding argument an opening salvo for gov. involvement & investment in small biz? Does he forget that all this commenced with “real investment” – homes? He wants to expand the recklessness further when the first mess isn’t cleaned up?

Kinda dumb.

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America’s top 1 percent pay 40 percent of all taxes

Jul 30, 2009 14:17 UTC

The Tax Foundation review of new IRS data (through 2007) finds some remarkable things about America’s progressive tax system:

1) The top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government — the highest percentage in modern history — while the top 1 percent paid 24.8 percent of the income tax burden.

2) The share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined. In 2007, the bottom 95 percent paid 39.4 percent of the income tax burden. This is down from the 58 percent of the total income tax burden they paid twenty years ago.

3) To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.

4) Some in Washington say the tax system is still not progressive enough. However, the recent IRS data bolsters the findings of an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations. We rely more heavily on the top 10 percent of taxpayers than does any nation and our poor people have the lowest tax burden of those in any nation.



The last post is 45% off. The top 1% owns half the wealth in this country but that is a mute point. Income taxes are bases on INCOME for a specific year. The Estate Tax taxes accumulated wealth after it has been taxed many times in a lifetime. In 2005 the top one percent EARNED 18% of total income and PAID 38% of federal income taxes.

Also, why do we not analyze work habits when we talk about income disparity. Those in higher income brackets have more education, put in more hours at work and watch less television than those in the bottom income brackets. My husband works at least 70 hours a week in a very stressful job and has to travel and be away from his family. He has been doing this for 25 YEARS. He is a first generation college graduate not a trust fund baby. Only 2% of the top 1% are trust fund babies. The rest started out as the average American. You want to be in the top 1%, go for it but you will have to work for it.

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Getting a recovery in the worst way possible

Jul 30, 2009 14:03 UTC

It is like opening a present and finding a bomb inside. Gluskin Sheff economist David Rosenberg on the “recovery”:

The government has its hands in 40% of the economy and when public sector officials can influence how banks can value their assets, how mortgage servicers should be doing their business, who shall fail in the financial industry and who shall not; and when we have a central bank that is not just the lender but the market of last resort, even for RVs, and a government willing to run up its deficit to levels that would have made FDR blush, then perhaps we can end up seeing a recovery occur sooner than we had thought.

One-way health reform from Washington

Jul 30, 2009 13:57 UTC

Arnold Kling rightly notes that only left-of-center ideas are being considered for healthcare reform. I find this particularly weird since I’ve read about company after company coming up with interesting healthcare innovations.  Here is Kling:

The basic problem that the Democrats have with health care reform is that when it comes to taking our system away from free markets, there is just not that much farther we can go. We already regulate the practice of medicine and allied health services with licensing cartels. We already regulate individual health insurance practically out of existence, particularly in states that require “community rating” and “must-carry,” which force insurance companies to charge the same price to all comers, which means that the only price they can safely charge is the price that assumes you are only asking for insurance because you just came down with a really expensive illness. We already have government insuring the poor and the elderly.

In contrast, there is a lot of room to move health care in the other direction–toward free markets. The only real health care reformers are those of us on the libertarian fringe. The two major parties are just posturing. That’s why I haven’t written much about the day-to-day debate on “reform.” It is not clear to me that defeating the Democrats’ legislation is something I should root for. We’re still nowhere near considering real reform.

7 Ways to (Finally) Fix Housing

Jul 30, 2009 13:13 UTC

Has there been some good news in housing lately? You betcha. New home sales jumped 11 percent in June, while the inventory of new unsold homes tumbled sharply. Better yet, May home prices were pretty much flat rather than plunging. “Recent housing reports have been promising,” opines Patrick Newport of IHS Global Insight.

But a housing bottom is not the same as a housing boom. The total number of new home sales was the lowest in a generation. And home prices are now off as much as 33 percent nationwide since their peak. What’s more, foreclosures remain a huge and growing problem, so much so that President Obama met with mortgage servicers to push them to modify more troubled mortgages under his administation’s plan announced last spring.
[Find out five smart ways to boost the economy and create jobs]

In short, it was housing that started America’s economic crisis in 2007, and it’s housing that continues to prevent a strong recovery in 2009. So given that the White House loves to appoint “czars,” maybe American needs a Housing Czar who could push one of these big proposals to help struggling homeowners, reduce foreclosures and strengthen the housing market:

Forgive and forget. A $75 billion plan devised by Ross DeVol and Michael Klowden of the Milken Institute would use government loans to refinance underwater mortgages. If your mortgage is worth $500,000 but your home just $400,000, Fannie Mae would provide a new loan for $400,000. Then the Treasury Department would provide a second loan of $100,000 — the difference between your mortgage value and home value. For each year that the homeowner keeps making payments, one-fifth of the Treasury loan would be forgiven. After five years, you might again have some positive equity.

Give lenders a piece of the action. When companies restructure, such as troubled automakers, creditors often exchange debt for an equity stake in the company. So what’s good for GM is good for homeowners, says Luigi Zingales of the University of Chicago. Under his plan, homeowners who are more than 20 percent underwater on their mortgages could reset the value of the loan to the house’s current value. But in exchange, they would have to give half of any future upside in price to the bank.
[See if Obama's big economic gamble is paying off for you]

Turn owners into renters rather than defaulters. Renting your own house — rather than getting booted out of it — might be the new American Dream. Economist Dean Baker of the Center for Economic and Policy Research says Congress should temporarily change the law so homeowners facing foreclosure would have the right to stay in their home as long as they could pay the market rent for an extended period of time. This wouldn’t cost any taxpayer money, while also reducing the number of vacant homes blighting many neighborhoods. Plus it would give lenders incentive to substantially modify more mortgages so they don’t have to become landlords.

Tell it to the judge. Rep. Barney Frank, the powerful chairman of the House Financial Services Committee, says he’s so angry that lenders haven’t modified more mortgages that he is threatening to bring back the once-failed mortgage “cram-down” bill. This would allow homeowners to declare bankruptcy and turn to a judge who could then modify terms of primary mortgages, including reducing the principal. The reason a previous effort to change bankruptcy laws failed was over fears that this would create more risk for lenders who would then charge higher interest rates to compensate.
[Find out how healthcare taxes would affect you]

Foreigners buy our bonds, let them buy our homes, too. Real estate developer Richard LeFrak and economist Gary Shilling think Uncle Sam should offer permanent residence status to foreigners if they buy a house here. Now they wouldn’t have to live in the house, but they couldn’t rent it out either. The goal, remember, is take the unit off the market and reduce supply. After five years, temporary status would turn permanent. LeFrak and Shilling think the mere announcement of the program would help beaten-down markets where foreigners love to go such as Miami, San Francisco and Las Vegas.

Make the “second stimulus” a homeowners stimulus. For $300 billion to $400 billion, the government could buy mortgages from banks and then issue more affordable new loans to struggling homeowners. Or rather than focusing on homeowners, the government could focus on buyer by nationalizing Fannie Mae and Freddie Mac and then offering 30-year, fixed-rate mortgages at four percent or so to buy a new or existing home.
[See how the healthcare reform will affect your health insurance]

Help homeowners keep their jobs. America’s housing problem has changed over the past two years. The big problem isn’t so much people who bought too much house for their income, it’s people who have lost their income because of job loss. So right now jobs policy is housing policy. Former White House economist Lawrence Lindsey says that cutting the payroll tax in half could put $1,500 in the pockets of workers and perhaps create as many as four million jobs in a year. If you want more of something, the theory goes, tax it less. This plan would lower the taxation of labor, so America would get more of it.

Of course, the Obama mortgage modification might still work, given more time for lenders to ramp up staff and expertise. And doing nothing helps first-time buyers who can get homes on the cheap. But then again, they don’t hire Housing Czars to do nothing.


Why are you trying to encourage “fixing” a market? The reason people aren’t buying is because the market is indeed fixed. Prices are being propped up so that buyers cannot come in. Thus, there is no organic support for home prices.

Those of us who rent might like to buy, but will not buy in a market with such price manipulation. So houses sit empty and mortgages go into default.

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