James Pethokoukis

Politics and policy from inside Washington

Goldman Sachs forecasts nightmare 2010 economic scenario for Dems

Nov 21, 2009 03:10 UTC

Trust me, these are not the kind of numbers that the White House and congressional Democrats want to see. Goldman Sachs is now forecasting unemployment to rise all next year, peaking at 10.5 percent. The firm expects the economy to grow at just 2.1 percent. Also, the budget deficit will be a few billion bigger at $1.6 trillion. If correct, these stats absolutely confirm the collective freakout happening right now among Ds on Capitol Hill, such as calling for Geithner to resign. Economist Jan Hatzius:

Until hiring resumes in earnest, the jobless rate is apt to keep drifting up. This is less tautological than it sounds, as net changes in unemployment mask significant flows into and out of the pool of unemployed workers. However, most research finds that stronger hiring rather than reduced layoffs is the key driver of changes in unemployment early in a recovery. Unfortunately, none of the indicators of labor demand—job vacancies, help-wanted indexes, and consumers’ perceptions of job availability— shows any significant sign of life. The best that we can find is that respondents to the Michigan confidence survey, who have a decent track record for forecasting one-year changes in unemployment, are looking tentatively for stabilization.

COMMENT

Their only argument will be that things would have been worse if they hadn’t been in charge. How well will that go over?

The Fed’s ‘crystal meth’ monetary policy

Nov 20, 2009 18:50 UTC

A classic from David Goldman:

The crystal-meth monetary policy at the Fed makes everyone feel better, until they don’t. The nonstop rise in the price of dollar hedges tells us that it can’t last forever. Large balance sheets attached to the Fed’s money pump can show profits, and the price of spread assets (as PIMCO’s Bill Gross keeps emphasizing) is stupid rich. But at the capillary level, through, the economy is dying and gangrene is setting in. … It isn’t just the 17.5% broad-measure unemployment number that we should worry about, but the massacre of smaller businesses, who are concentrated in the most vulnerable sectors: real estate, construction, and retail. Retail sales may get a temporary shot in the arm from cash for clunkers, and a combination of tax credits and (de facto) subsidized mortgage rates may hold up the bottom of the housing market for a short time. But today’s data show how fragile these matters are.

COMMENT

Monetary policy is one of the tools that a national Government uses to influence its economy. It is mainly used to low unemployment, low inflation, economic growth, and a balance of external payments.
http://www.mikeastrachan.com/

Posted by Nikkilarsson | Report as abusive

6 healthcare taxes that violate Obama’s tax pledge

Nov 20, 2009 18:23 UTC

These seem pretty indisputable. From Keith Hennessey:

1. The clearest violation is the 5% excise tax on cosmetic surgery and similar procedures (including teeth whitening). I assume that cosmetic surgery and similar procedures are skewed toward the high end of the income distribution, but there certainly are many people getting these treatments with annual family income less than $250,000.

2. The bill would allow State insurance exchanges “to charge assessments or user fees to participating health insurers, or to otherwise generate funding, to support its operations.” [ §1311(d)(5)(A) ] Health insurers would pass these “assessments or user fees” through to consumers as higher premiums. This would affect anyone who buys health insurance, including those with family income less than $250,000.

3. The bill would impose a 40% excise tax on health coverage in excess of $8,500 (individuals) / $23,000 (families). While policies this generous are almost certainly skewed higher on the income distribution, there are definitely families with income less than $250,000 receiving these plans. Again, health insurers would pass these tax increases through to those families.

4. The bill would increase taxes on all health insurance plans, as well as on brand-name drugs and biologics, and on medical devices. These tax increases would affect anyone who buys these goods, even if their family income is less than $250,000.

5. According to CBO, “By 2019, … the number of nonelderly people who are uninsured would be reduced by about 31 million, leaving about 24 million nonelderly residents uninsured (about one-third of whom would be unauthorized immigrants.)” (p 8 ) These roughly 16 million people would pay “penalties” of $95 per adult in 2014, $350 per adult in 2015, and $750 per adult in 2016 and later. You’re charged half as much for each kid. Most of these 16 million people paying higher taxes will have family income less than $250,000 and will pay higher “penalties,” although not all will pay these full amounts.

6. The bill would create a new 0.5 percentage point increase in payroll taxes on individuals with incomes greater than $200,000 in 2013 and families with incomes greater than $250,000 in 2013. Since these amounts are for 2013 and not indexed, someone making $233K in 2009 would be affected by this in 2013, assuming 1% annual real wage growth and CBO’s assumptions about inflation. If you’re making $220K this year, you’ll probably be hit by the new tax in 2016. $210K this year, you first get bit in 2017, and so on.

COMMENT

In all honesty, until the politicians can put a dollar amount on a life (much less a dollar amount on quality of life), nothing but failure can come out of legislating budgets for life or quality of life.

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Fed audit throws a monkey wrench

Nov 20, 2009 18:01 UTC

It’s easy to understand why the House Financial Services Committee would vote to open the Federal Reserve’s monetary policy decisions to government audits. Transparency is one of the buzz concepts of 2009. And if measured pound-for-pound of power, the central bank is probably the most opaque institution in Washington.The Fed is also terribly unpopular. And deservedly so. Its easy monetary policy and lax regulation helped create the American housing and financial crisis that spawned the Great Recession. Moreover, its role in the policy responses to the crisis from TARP to the AIG bailout have earned it scorn across the political spectrum. Attacking the Fed is good politics. Just ask Christopher Dodd, the embattled Senate Banking chairman, who hopes to Fed-bash his way to another term.But such combativeness makes for poor economic policy. When you’re a nation preparing to float $11 trillion or more in government debt over the next decade, you don’t want your creditors musing whether political pressure could nudge your central bank to go soft on inflation. And auditing monetary policy would likely lead to an explicit congressional assessment of that policy. Who might do the assessing? How about dovish House Financial Services Chairman Barney Frank? He already wants to boot the regional Fed banks presidents from the FOMC because they vote too often for higher interest rates.The Fed audit bill also makes it a bit harder to pass financial regulatory reform next year. There are jagged policy disagreements between Frank and Dodd, as well as between Dodd and Richard Shelby, the ranking GOP member on his committee. The Fed audit amendment doesn’t make agreement any easier since the idea is less popular in the Senate. (Senator Judd Gregg, the New Hampshire Republican, calls it absolutely inexcusable.)”For the first time, I now think it’s possible financial reform doesn’t happen this election cycle,” says one financial industry insider in Washington. And who knows what the 2011 political environment for reform will be like with a likely influx of anti-Fed, anti-Wall Street Republicans and the Fed perhaps tightening despite continued high unemployment.Make no mistake, renewing faith in the U.S. economy requires a sweeping financial overhaul. And now that might now happen.

Here comes Sarah Palin and the anti-Wall Street GOP

Nov 20, 2009 17:08 UTC

Don’t interpret passage of the watered-down Kanjorski amendment as the peak of the “break up the banks” movement. It may be about to get some new allies on the right, folks tired of Big Government, Big Money and crony capitalism.

For the moment, though, it was arguably the best that Representative Paul Kanjorski, a Pennsylvania Democrat, could have gotten through the House Financial Services Committee. All the committee Republicans and even some of the Democrats voted against it. And even in its much-diminished state, the Kanjorksi amendment would likely be weakened further in the Senate. At the same time, the Obama administration seems little interested in such pre-emptive powers.

Wall Street, however, is hardly getting any more popular with Main Street. The Goldman Sachs Apology Tour is evidence of that. And there are mid-term elections in less than a year. Republican candidates will probably do well as high unemployment continues to drive voter anger at incumbents. As Gallup diplomatically puts it, “Republicans seem well-positioned to win back some of their congressional losses in 2006 and 2008.”  More accurately, fear of losing the House is now running high among congressional Dems.

And all those new Republicans are likely to be infused with the ethos of the Tea Party movement: anti-TARP, anti-Fed (the House GOP is already there on this), anti-bailouts and anti-Wall Street. It could be a group of newcomers, as John McCain recently said, that is populist, protectionist when it comes to China and the yuan and pro-financial regulation.

Sarah Palin could be a harbinger. Although she diligently promotes the wonder-working power of Reaganomics in her autobiography, she also warns about “the return of corporatism – government collusion and co-option of big business.”

On the web, right-of-center bloggers wrote favorably of a recent proposal by Bernie Sanders, the socialist independent senator from Vermont, to break up the banks.

Even among conservative intellectuals, there is little love for an unrestrained Wall Street these days. University of Chicago economist Luigi Zingales argues that “the finance sector’s increasing concentration and growing political muscle have undermined the traditional American understanding of the difference between free markets and big business.” Like a 21st century Teddy Roosevelt, Zingales would use anti-trust law to disperse financial power.

And one veteran Republican politico says he would be surprised if the 2012 GOP nominee wasn’t far tougher on Wall Street than President Barack Obama.

So it isn’t hard to imagine that the next incarnation of Congress — filled with “free-market populist” Republicans — might take another look at the state of Wall Street and conclude, as has Alan Greenspan, that any firm too big too fail really is too big to exist.

COMMENT

If she isn’t the biggest jerk,even in the Republican party,who is ? This is a vile,stupid,moronic idiot. A crass about as rogue as any other neo-con. How can such a conformist be a rogue ?

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Just how much danger is Tim Geithner in?

Nov 20, 2009 14:29 UTC

When both Paul Krugman and the WSJ editorial page are hammering you, as they are Geithner, either you are doing something really right or really wrong.

First Krugman:

For the A.I.G. rescue was part of a pattern: Throughout the financial crisis key officials — most notably Timothy Geithner, who was president of the New York Fed in 2008 and is now Treasury secretary — have shied away from doing anything that might rattle Wall Street. And the bitter paradox is that this play-it-safe approach has ended up undermining prospects for economic recovery. For the job of fixing the broken economy is far from done — yet finishing the job has become nearly impossible now that the public has lost faith in the government’s efforts, viewing them as little more than handouts to the people who got us into this mess.

Now the WSJ:

In the fall of 2008 the New York Fed drove a baby-soft bargain with AIG’s credit-default-swap counterparties. The Fed’s taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties’ mortgage-backed securities at 100 cents on the dollar, effectively canceling out the CDS contracts. This was miles above what those assets could have fetched in the market at that time, if they could have been sold at all.

The New York Fed president at the time was none other than Timothy Geithner, the current Treasury Secretary, and Mr. Geithner now tells Mr. Barofsky that in deciding to make the counterparties whole, “the financial condition of the counterparties was not a relevant factor.”

This is startling. In April we noted in these columns that Goldman Sachs, a major AIG counterparty, would certainly have suffered from an AIG failure. And in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr. Geithner now says the AIG bailout wasn’t driven by a need to rescue CDS counterparties, then what was the point? Why pay Goldman and even foreign banks like Societe Generale billions of tax dollars to make them whole?

This means a more complete explanation from Mr. Geithner of what really drove his decisions last year, how he now defines systemic risk, and why he wants unlimited power to bail out creditors—before Congress grants the executive branch unlimited resolution authority that could lead to bailouts ad infinitum.

‘A whole mess of crazy’ coming from Capitol Hill

Nov 20, 2009 14:11 UTC

That is how one Congress watcher from the financial industry describes the current state of affairs, from the Fed audit bill to calls for a transaction tax. I think this William Greider piece gets at the heart of it:

The center is not holding. … It feels like carnival time, when up is down and down is up, when humble folks parade as kings and queens and the reigning royals are dressed as clowns. … The most startling evidence of reversal is Chris Dodd, chair of the Senate Banking Committee, who has been a loyal friend of Wall Street and especially Connecticut-based insurance companies. Dodd proposes to strip the Fed of its regulatory functions because of its “abysmal failure” to protect the public, and to replace it with an overarching regulatory administration. …
Taxing Wall Street is a more provocative departure, but some representatives are warming to the idea, drawn to Oregon Representative Peter DeFazio’s appealing Let Wall Street Pay for Wall Street’s Bailout Act. A very small excise tax on all financial transactions–trading stocks, bonds and derivatives–could yield hundreds of billions in revenue. House majority whip Jim Clyburn suggests the securities tax is “a painless way” to pay for highways. …

Senator Bernie Sanders asks another one. If some banks are “too big to fail,” why not just make them smaller? His bill would require Treasury to identify and break up too-big financial institutions within one year. Goldman Sachs and JPMorgan Chase are reacting with alarm. They do not normally worry over the senator’s progressive thinking, but what’s dizzying is that former Fed chair Alan Greenspan has embraced the same concept. When the socialist from Vermont achieves bipartisan consensus with the right-wing Maestro, can Barack Obama be far behind?

How the economy is killing the Obama agenda

Nov 20, 2009 14:00 UTC

The less popular Obama gets, the less political capital he has to push forward his agenda. I think this chart from Nate Silver nicely encapsulates things:

112009poll

Dobbs vs. Kudlow? Get the popcorn ….

Nov 19, 2009 20:14 UTC

Lou Dobbs will be landing on CNBC’s Kudlow Report tonight at 7 PM.  I am sure Larry will bring up the issue of trade, so too — I hope — the budget deficit, China’s currency and the role of the Federal Reserve. I already have my DVR set for this one.  BTW, I frequently appear on the KR and was on Lou’s radio show just yesterday …

On the calls for Timothy Geithner’s resignation …

Nov 19, 2009 19:56 UTC

If Republicans had any fear of the Obama White House on the economy, congressmen wouldn’t be calling for Tim Geithner to resign, much less right to his face as happened today. Then there is Peter DeFazio, the Oregonian Democrat, on MSNBC’s Ed Schultz show when asked if the treasury secretary should resign:

DEFAZIO: I do, especially if you look back at the AIG scandal and Goldmans and the others who got their bets paid off in full. Instead of saying, well, you bet, you lost, they got paid back in full with taxpayer money through AIG. We channeled the money through them.

Geithner would not answer my question when I said, “Were those naked credit default swaps by Goldman or were they a counter party?” He said, “I will not answer that question.”

I think they were naked credit default swaps. They were bets. They should not have gotten their money back.

SCHULTZ: So he‘s not coming clean with the Congress?

DEFAZIO: Absolutely not.

SCHULTZ: OK. So have you asked the Obama administration to remove him, or will you?

DEFAZIO: The populist caucus is considering questions regarding both him and some other members of the economic team in the near future.

This a sign that some Democrats do fear the Obama White House on the economy — they fear being too closely aligned with it. Look, the NJ and VA elections when combined with the high unemployment rate  are causing an absolute Dem freakout on Capitol Hill. Fun fact: Dems are defending 38 of the 50 most vulnerable House seats, as measured by the Cook Political Report.

COMMENT

Giethner defends naked swaps because he defends the status quo. That’s where his power base is. If congress is successful in providing meaningful reform Giethner will lose his advantage in dealing with the complex and corrupt financial system.

He’ll fight meaningful reform to the end. Because when it happens, he’ll be out of a job.

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