James Pethokoukis

Politics and policy from inside Washington

Another banking crisis would not be good

Sep 4, 2009 17:52 UTC

Curious Capitalist Justin Fox notices that time is running out on financial reform:

Earlier this year, when this regulatory crackdown was still in the hypothetical future, it was easy to sound tough about it. But now the big banks are making money again. The global economy seems to be recovering. The time to start cracking down is coming soon. Because if big financial regulatory reform doesn’t happen in the next year or so, it may never happen.

Me: I do know this: We can’t afford another banking crisis anytime soon. American debt-to GDP is already going from 33 percent to at least 80 percent by 2019. Another one and we just might have to follow Andrew Mellon’s advice and liquidate, liquidate, liquidate.

COMMENT

Dear James,
After reading your short article on banks in America,i started smiling.
I have not seen anywhere,except in developed countries like America,Germany,England and some western countries banks are in serious troubles,and their crisis are multiplying day by day.
Because of no proper banking regulations and loopholes of functioning and maintaining their day today operations.
Who are all suffering?Only deposit holders,saving bank pass holders and retired people.
This is not a good sign at all.
Hereafter,there should be very strict regulations,transparent banking transactions,and a very good audit mechanism for creating,consolidating confidences from public and for correct,balanced growth for smooth transition to real good results.

How high unemployment undercuts Obama’s agenda

Sep 4, 2009 17:43 UTC

At the end of the 2000 film “The Perfect Storm”, a Gloucester swordfish boat captain (played by George Clooney) finally accepts that his crew won’t escape a monster hurricane in the North Atlantic. “She’s not gonna let us out,” he says as the trapped vessel moves from the eye of the storm and back into the raging winds.

The White House economic team can probably relate. The nation’s unemployment rate jumped to 9.7 percent in August, said the Labor Department, after dipping to 9.4 percent in July. “That drop in July had been too good to be true,” sighed Nigel Gault, the chief U.S. economist at IHS Global Insight. Merely the eye of the storm, perhaps.

To be sure, the pace of monthly job losses is abating, falling to 216,000 compared with a high of 741,000 in January. It now also seems unlikely that the unemployment rate will hit a post-World War II high of 10.8 percent. Good news all. But the employment declines do continue nonetheless, with more than 7 million jobs lost since the recession began in December 2007

Also continuing to decline is President Obama’s approval rating, which has plunged to 53 percent from 61 percent during the past three months, according to an average of polls calculated by RealClearPolitics. Almost nothing poisons a president’s popularity like high unemployment.

And why think that the job market or the president’s approval rating will improve dramatically during the next year or so? Let’s assume a snappy recovery in 2010 with GDP growth of 3.5 to 4 percent. That’s the JPMorgan forecast. But despite a mild V-shaped recovery, the firm’s economists still see an average unemployment rate of 9.4 percent in the fourth quarter of that year.

Even the superbulls at First Trust Advisors, looking for 4.5 percent GDP growth in 2010, don’t see unemployment breaking much below 8.5 percent. Keep in mind that those rates are almost double what Americans have come to expect the past two decades. It’s going to seem like a jobless recovery to many voters.

The labor market isn’t going to let Team Obama out. Its troubles will continue to drain the president’s popularity and perhaps result in large losses for congressional Democrats in the 2010 midterms. If Obama still wants to pass big change from a position of moderate bargaining strength — and while he still has maximum muscle on Capitol Hill — it needs to be now. This would mean centrist proposals like healthcare reform that would expand coverage while also making it easier for individuals to purchase their own private insurance, or a climate change bill where revenue from carbon emission allowance auctions would offset payroll taxes rather than given away to companies or spent by government.

Rahm Emanuel, White House chief staff, famously said that you “never want a serious crisis to go to waste.” With the moment of acute economic crisis past and a long “muddling through” begun, the president’s time of opportunity is nearing an end.

COMMENT

But is’nt it so that, would the democrats have opposed the spending of the main part of the pre-crisis deficit (i.e. on the war in Iraq), they would have been marked as being unpatriotic or may-be even traitors?And, as far as te bail out for the banks is concerned, that was the only possibillity for the economy to sort of survive, if that had’nt come through the problems would still be there to a far bigger extend and then we would not have been given time to rebuild at all.So I think it was the best option for the Democrats to voted with the previous president in that case.Remains the big problem of export of work, did you see today’s info on this agency about the current deficit on the trade balance? (what are the main causes behind this deficit….?)The opposition is very good in turning facts around, see the lies about healthcare and the like (obama’s birth certificate) and then of course the lies that were part of the selling process for the Iraq war…and the political mess (trustworthiness) that followed.That money spent on supporting the economy should also be spent on products made locally, not on the other side of the globe at slave’s wages to increase profits for shareholders.If they would earn a decent wage out there and if their governments would look for improvement for the life of the poorest we would not have this problem. Everybody would be better ofBut of course in a free market economy we have to live with that or……should we do something about it?best regards,JB

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Government’s real role in healthcare

Sep 4, 2009 17:22 UTC

Some wise words from economist Andrew Samwick over at Capital Gains and Games:

1) The scenario I envision is that the public option does nothing to control costs.  Its payment system is set up to resemble Medicare, and it is the growth in real, age-adjusted Medicare expenditures per capita that has most people concerned about long-term deficits.  But with a public option, there will now be recourse for every citizen to petition the government to get a better deal on its health insurance premiums.  The pressure will be enormous to subsidize the public option, just as there has been enormous pressure to offer services in Medicare that increase its cost at (future) taxpayer expense.

2) There is no way to keep politics out of the operation of an entitlement program as complicated as Medicare.  Legislators simply cannot help themselves.  Staying with the follies of former Senator Stevens to whom Stan referred in his post, recall what he did for Medicare payments in Alaska on his way out the door.  I have argued that the government does have an important role to play in the regulation of health insurance markets (Community rating, Guaranteed issue, Ex post risk adjustment, and an individual mandate, with Medicaid for a fee as the backup option).  To the extent possible, it should stay out of the business of delivering health care.  Markets should determine the allocation of goods and services, not legislators and bureaucrats.
Me: The compromise is obvious, unless you want to basically phase out private health insurance. And this what many Dems really want to do. That is the problem.

What does 9.7 percent unemployment mean for Democrats?

Sep 4, 2009 17:09 UTC

Marc Ambinder looks at this question and concludes a) that anything under 10 percent is better than expected, b) 0.3 percent makes a big difference politically, and c) Team Obama will be able to more or less successfully blame Bush. His bottom line:

The economy is expected to play a big role in the 2010 elections, with Democrats bearing the brunt of a worsening situation. That’ll depend a lot on the duration of the decline, just how bad things get, and what direction they’re heading as November 2010 approaches. Right now, 9.7 percent doesn’t tell us a whole lot about how that will play out.

Me: How about this instead: Unemployment is killing the White House, and it doesn’t need to get a 0.1 percent worse to continue to suck the life out of this administration. Obama’s approval ratings are down 8 points in three months. People have become accustomed to very low rates of unemployment and short recessions. Those expectations are politically devastating to Democrats.

Obama stimulus: promises vs. reality

Sep 4, 2009 13:40 UTC

This from the WaPo:

IHS Global Insight, an economic consulting firm, estimates that the stimulus has increased the 2009 gross domestic product by about 1 percent over what it otherwise would have been, with the benefit almost entirely in the second half of the year.

The firm also forecasts that the package will, in total, result in about 2 million more jobs than otherwise would have existed at the end of 2010. Moody’s Economy.com estimates that the initiative will increase employment by 2.5 million jobs. Both estimates are below the 3 million to 3.5 million jobs the Obama administration estimated the package would create or save …

Me: Again, arguing that the economy would have been worse without the stimulus plan is not as helpful as arguing the plan has restored prosperity.

The worrisome fiscal situation of states

Sep 4, 2009 13:36 UTC

A fun factoid from Gov. Mitch Daniels of Indiana shows just how much trouble states are in (via WSJ):

From 1930 to 2008, our national average annual real GDP growth rate was 3.49%. After crunching the numbers, my team has estimated that it would take GDP growth of at least twice the historical average to return state tax revenues to their previous long-term trend line by 2012.

More on August unemployment

Sep 4, 2009 13:21 UTC

I will say, though, that the worst-case scenario for unemployment is fading fast as this chart from economist Robert Brusca shows. (Though one cautionary note: watch out for more state/local government layoffs).

augunemployment

August unemployment at 9.7 percent; 216,000 jobs lost

Sep 4, 2009 12:42 UTC

The unemployment rate in August jumped to 9.7 percent from 9.4 percent. The economy lost another 216,000 jobs. While the economy may be shifting into recovery mode, the labor market clearly still needs lots of work. The best-case scenario I can find (4 percent GDP growth next year) still would have the jobless rate at 8.5 percent or so a year from now. Also note that the labor force participation rate remained steady last month. So the blip up in unemployment was not caused by discouraged workers returning to the workforce. Also the broader U6 rate surged to 16.8 percent.

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