James Pethokoukis

Politics and policy from inside Washington

John Taylor on the Lehman anniversary

Oct 1, 2009 18:15 UTC

From his blog:

Two weekends ago the big news was the one-year anniversary of the Lehman Brothers bankruptcy and the ensuing panic. But when you look at the data, the real one-year anniversary of the panic is closer to now.

In the four weeks from Friday September 12, 2008, just before the Lehman bankruptcy, through Friday October 10, the S&P 500 fell by a huge 28 percent. But the decline was relatively modest (3 percent) in the first two weeks of that period, from September 12 to September 26, a year ago today. It is not unusual to see that size of change in a one or two week period. The real panic (the remaining 25 percent of that 28 percent decline in the S&P 500) occurred later, from September 26 to October 10. If you look at interest rate spreads or stock prices in other countries you see the same timing. Such facts have led me and others to be skeptical about the commonplace claim that it was simply the decision not to intervene and bail out Lehman’s creditors that triggered the panic. Rather I focus on the chaotic rollout of the TARP which began later and continued through October 13 when its ultimate use was finally defined.

Accepting a nuclear Iran

Oct 1, 2009 17:56 UTC

Tom Barnett gives a reality check:

There are very few secrets left in this world, but never any shortage of revelations! Major spy services have been interested in the Qom site for years, and as we know, anything the West knows, the East ends up knowing too. So if we knew, they knew, the Israelis knew, and–by extension–the rest of the Big Five knew, for whom was this a revelation? Why, the approving or disapproving public, of course. There is a lot of PR going on with this whole dynamic, and it impresses me as little as the diplomacy. It’s like the entire world needs to wrap its head around the reality that Iran’s getting nukes and there’s next to nothing that can be done about it, except for delaying it–possibly–for a bit with air strikes. So we’re moving through the anger and denial and heading toward the real bargaining and acceptance. Helen Kubler-Ross would be proud.


Iran should not arouse concern. Georgia is the most dangerous flashpoint in Russia’s tense relations with the West. The Bible says: “At the appointed time [the king of the north = Russia] will return back [will regain the influence, which it lost after the break-up of the Soviet Union] and come into the south [many indicate that this might be Georgia], but it will not be as the former [1921] or as the latter [2008]. For the dwellers of coastlands of Kittim [the West] will come against him, and he will be humbled, and will return.” (Daniel 11:29,30a) Then Iran will be humbled also. “But ships will come from the direction of Kittim, troubling Asshur [Russia] and troubling Eber [inhabiting on the other side the Euphrates].” (Numbers 24:24a, BBE)

At that time, peace will be taken from the earth and the “great sword” – nuclear sword – will be used. (Revelation 6:4) However, it will be neither the great tribulation nor “the end of the world” (Armageddon). As Jesus foretold, that will be “the beginning of birth pains”. (Mathew 24:7,8)

If the Heavens planned a full return of Russia (and much suggests this) the present economic crisis will deepen. Then also the European Union and NATO will not stands.

Break up the risk-rating cartel

Oct 1, 2009 17:51 UTC

The meltdown of America’s financial system hasn’t exactly been a testimonial to the efficacy of public-private partnerships. Indeed, those kinds of linkages were at the heart of the problem.Government efforts to increase home ownership contributed to a housing bubble. Hybrid institutions Fannie Mae and Freddie Mac are now under federal conservatorship.And just as the White House and Congress are doing little to disentangle government from housing and the failed GSEs, they seem to be more or less committed to the status quo when it comes to the credit rating agencies.For the rating agencies are another example of government support gone awry. Anointed by government as the overseers of credit-worthiness, the agencies supplied overly optimistic assessments of mortgage debt securities that were eagerly gobbled up by yield-hungry financial institutions. Then those securities imploded.Representative Paul Kanjorski, a Pennsylvania Democrat who is shepherding the ratings agency piece of financial reform through the House Financial Services Committee, relies on the old standbys of more oversight and more regulation.Under his plan, for instance, the Securities and Exchange Commission could review the procedures and methodologies of the rating firms and fine executives for violations.The firms would be prohibited from consulting with companies whose debt they rate. Boards would have to have more independent directors. And then there’s the weird idea of imposing a sort of collective responsibility on the firms, allowing one to be sued for another’s mistakes.Rules, rules and more rules — but none that would either end the dominance of the issuer-paid ratings model or the firms’ government-backed role as a risk-rating cartel.There are alternatives, however. Congress could create a better environment for an investor-paid model by removing regulatory biases toward the designation of Nationally Recognized Statistical Rating Organizations.Alex Pollock, former president of the Home Loan Bank of Chicago, has proposed that a group of institutional investors set up and capitalize their own agency. But that is unlikely to happen if the current system continues to be geared toward the oligarchy of issuer-paid firms.And a free-market proposal from New York University’s Stern School of Business would let financial institutions take advice from whatever sources they want, as long as the regulator approved.But other than that, as the report advises. “the bond-advisory information market would be opened to new ideas — about business models, methodologies, and technologies — and new entry in a way that has not been true since the 1930s.”That’s what we need: a new system for a new financial era.

How’s the private sector doing?

Oct 1, 2009 17:32 UTC

Not so good. As this GDP chart from my pal Donald Marron shows:



Unemployment is rising.

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More on America and the VAT

Oct 1, 2009 17:13 UTC

The oh-so-smart Andrew Samwick on the chances of a VAT over at the Capital Gains and Games blog:

James Pethokoukis is on the case, putting together the pieces of a “yes.”  My prediction: regardless of how urgent the need for revenue may be, taxes on the highest earners would have to go up dramatically before a VAT of any size would be passed.  Failing that, the Left’s history of the first two decades of the 21st century would be that taxes on the wealthy were lowered and 2001 and 2003 and then raised on the middle class in 201x.  The Left is already smarting from what it perceives (correctly, I might add) as a similar thing that happened in the 1980s, when income tax rates were lowered while payroll taxes were increased.  They won’t go in for this again unless a very large income tax increase on the highest earners is part of the bargain.

Me: This is another example of why I feel we need major tax reform rather than trying to glom something else onto the current system. But the politics are amazingly tricky, which is another reason why I don’t see why cutting spending is necessarily more difficult than raising taxes, politically speaking.

Is Obama ignoring Wall Street?

Oct 1, 2009 13:10 UTC

This from Ed Yardeni, keying off a recent Charlie Gasparino’s column:

There is no one in the Obama administration like Robert Rubin, who had the ear of President Clinton. Rubin convinced Clinton that the Bond Vigilantes would riot if he pursued policies that would lead to a structural federal deficit, i.e., one that would widen despite a growing economy. So far, the Bond Vigilantes haven’t gone on a rampage despite projections of $10tn in deficits over the next 10 years. So it is no wonder that Obama’s political advisors are acting as though they’ve been handed a blank check by the bond market. However, the longer they ignore the economic advisors, the greater is the likelihood that the blank check will bounce.

Me: Indeed, at a think tank conference I attended yesterday, both Rubin and Roger Altman expressed great concern about the deficit. They definitely seemed to want budgetary action sooner rather than later. Actually, they implied financial markets will demand it.

Stop using tax cuts as industrial policy

Oct 1, 2009 12:57 UTC

Larry Kudlow is dead solid perfect here:

But here’s what I don’t like about this story: Big, central-planning, government-directed tax preferences for housing, like the $8,000 dollar tax credit for new buyers. Or even the popular mortgage interest deduction. And let’s not forget perhaps the biggest one of all: Home sales are basically capital-gains-tax free. That passed back in 1997. Many people (including myself) believe it helped create the bubble.

Why not eliminate the capital-gains tax for everyone and all sectors, including investors and stocks and bonds? Why direct it only to housing? Let’s abolish the capital-gains tax altogether. Let’s quit double-taxing investment, which is what capital gains does. But let’s do it for everyone and everything — not just housing. While we’re giving all these preferences to housing, what about manufacturing? What about transportation? Or health care? Or any other sector in the economy for that matter?

We also could be cutting business tax rates across-the-board for companies big and small.

Me: The story of the Great Recession is the error of government policy — the Fed, housing policy, Fannie and Freddie, ratings agency favoritism. Kudlow’s idea would be a big step in the right direction.


Why should capital gains tax on stock investments be eliminated? Buying on the secondary stock market is actually quite meaningless, as far as increasing productivity or any kind of activity that should be thought of as an investment. When I think investment, I think ‘direct money at a company so it can expand or improve itself, and in turn make more money’; buying stocks on the secondary market does not accomplish this in any way. Sure, if you want to eliminate tax on IPO purchase gains, that’s probably reasonable.

I agree inasmuch that tax breaks shouldn’t be directed at owning a home, but I think these kinds of measures were enacted with a figurative gun pointed at the government’s head. Lobby politics need to stop in Washington so appropriate responses to problems can be formed.

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The untried economic solution: tax cuts

Oct 1, 2009 12:24 UTC

If Germany can do it, why not America? More evidence of the wonder-working power of tax cuts, this time from Robert Barro and Charles Redlick:

The effects of tax rates on GDP growth can be analyzed from a time series we’ve constructed on average marginal income-tax rates from federal and state income taxes and the Social Security payroll tax. Since 1950, the largest declines in the average marginal rate from the federal individual income tax occurred under Ronald Reagan (to 21.8% in 1988 from 25.9% in 1986 and to 25.6% in 1983 from 29.4% in 1981), George W. Bush (to 21.1% in 2003 from 24.7% in 2000), and Kennedy-Johnson (to 21.2% in 1965 from 24.7% in 1963). Tax rates rose particularly during the Korean War, the 1970s and the 1990s. The average marginal tax rate from Social Security (including payments from employees, employers and the self-employed) expanded to 10.8% in 1991 from 2.2% in 1971 and then remained reasonably stable.

For data that start in 1950, we estimate that a one-percentage-point cut in the average marginal tax rate raises the following year’s GDP growth rate by around 0.6% per year. However, this effect is harder to pin down over longer periods that include the world wars and the Great Depression.

The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.

Me: Along the work of Christina Romer, now head of the CEA, powerful evidence that tax rates matter — a lot.

Obama’s unilateral move on climate change

Oct 1, 2009 11:54 UTC

OK, so the White House has greenlit the EPA to go forward with new rules, as the NYTimes puts it,  “to regulate greenhouse gas emissions from hundreds of power plants and large industrial facilities.”  I think this lobbyist quotes in the article gets the politics right:

Scott Segal, a utility lobbyist with the law firm Bracewell & Giuliani in Washington, said the rule should not be used to rush Congress into passing a poorly drafted bill.

But he also said that the proposal “strengthens the president’s negotiating hand in Copenhagen.”

“Even if the Senate does not act,” Mr. Segal said, “he can legitimately say to other nations, ‘We are taking action on a unilateral basis. What are you doing?’ ”


With reference to the above article, the short article below explains the scenario in the Asian Climate Change context.

“Green Energy : A Paradigm Shift in Sustainability”

Green energy is not something new since the discovery of the depletion of the ozone layer and global climate change as a direct impact of green house effect on a worldwide scale.

Various international conventions/agreements on the reduction of green house effect will remain forever on glossy papers if countries around the world are not serious in committing themselves towards real implementation within national boundary.

Political will power, or even real politics for that matter alone, is insufficient in promoting green energy as attested by the economics of reality in both developed and developing countries.

A paradigm shift is needed in forging a new instrument of international co-operation within the wider framework of Free Trade Agreements and joint conviction shared by stakeholders such as the OECD, major banking bodies(i.e. IMF, World bank, ADB) and leading industrial/corporate entities.

Jeong Chun-phuoc
[an an advocate of Competitive & Strategic Environmenting]

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IMF ups its estimate for 2010 global growth

Oct 1, 2009 11:44 UTC

Another unsurprising economic forecast that portends continued high US unemployment next year.



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