That’s the DC buzz, that the WH will use bank tax to de facto pay for a 1-2 year extension of ALL the Bush tax cuts, including capital gains. The assumption was that the wealthier folks would be left out. But this would give Ds a tax cut to vote. With unemployment high and maybe going higher, Ds are scrambling for ideas.
Politics and policy from inside Washington
Ed Yardeni expounds:
I’m not sure, but it seems to me that the dollar is the best of a dodgy breed. The Old World nations–Europe, Japan, and the United States–have rapidly aging populations. Their outlays on social welfare are rising faster than their GDPs. Their dependency ratios–the number of retired persons supported by each worker–are taking off. This suggests to me that the dollar, the euro, the pound, and the yen (DEPY) might all continue to be good shorts relative to gold. (See Figure 5 in our Gold chart book linked below.) Gold is widely viewed as a hedge against inflation. More broadly, it is a hedge against out-of-control debt-financed government spending.
The currencies of the New World should also continue to outperform those of the Old World. While the economies of the Old World are likely to stagnate as a result of the expansion of their social welfare states, the economies of the New World are likely to continue to rapidly improve their standards of living. The proliferation of free trade and globalization should continue to boost prosperity in the emerging economies of Asia, Africa, the Middle East, and Latin America. As discussed below, China is leading this charge and pushing up commodity prices. Australia, Canada, South Korea, and Taiwan are included in my New World paradigm.
The WH wants to tax banks to pay for the $120 billion that TARP may end up costing taxpayers. A few thoughts:
1) Remember that most major banks have repaid their TARP capital injections, earnings Uncle Sam a decent return.
2) The tax would apply to these banks. For the biggest banks like JP Morgan, it would cost them $20 billion a year over the next five years.
3) The tax would not apply to the folks actually losing the government money: AIG, the automakers and homeowners.
4) The WH wants to banks to loan more but it also wants to suck up $120 billion in capital. And it is unclear how the WH would prevent this costs from being passed on to customers through higher borrowing rates.
5) Right now, the chances of this happening are less than 50-50.
6) A cynic might say that this is all an distraction by a WH seen as too cozy with Wall Street and whose financial reform plan neither limits the size nor complexity of banks. As it is, its financial reform plan is stalled in the Senate.
Goldman Sachs thinks 4Q growth could be as a high as 6 percent. But don’t think the firm is as cheery about the labor market despite the “stable” 10 percent unemployment rate in December. Some bullet points:
1. The persistent underperformance of the household survey strongly suggests that the establishment survey’s “birth-death model” is too optimistic and future “benchmark” revisions to payrolls will be negative.
2. Since December 2008, participation has fallen 1.2 percentage points, the biggest drop of the postwar period. If participation had remained constant over the past year, unemployment would now be over 11½%.
3. The combination of inventory-driven GDP strength and employment weakness is not good news because it means that we have “used up” a larger-than-expected share of the inventory boost without having anything to show for it in terms of employment.
4. The ISM composite index (a weighted average of manufacturing and nonmanufacturing) remains barely above 50. This is historically consistent with only about 2% GDP growth, which would not be enough to create jobs on a scale sufficient to push down the unemployment rate.
5. The parallels with the early part of the recovery from the 2001 recession remain substantial. Back then, the initial GDP release for the first quarter of 2002 showed 5.8% growth with a massive contribution from inventories. Meanwhile, payrolls stubbornly refused to show significant growth, and the employment/population ratio continued to drop. The GDP strength ultimately proved unsustainable, the economy slowed to a below-trend growth pace later in the year, and the unemployment rate didn’t peak until more than a year later.
Talk about one last gasp from the horrible year that was 2009. On the political front, the December jobs numbers were terrible news for the White House and congressional Democrats in a midterm election year. Here’s how it plays out:
1. Remember this simple formula: Unemployment drives presidential approval numbers, and presidential approval numbers drive midterm election results.
2. President Barack Obama’s approval numbers are hovering just a tick below 50 percent. Since 1962, the average House midterm loss for the president’s party when his approval is sub-50 percent is 41 seats. The GOP needs 40 to take the House.
3. And make no mistake, the December unemployment numbers were bad both economically and politically. The 85,000 job loss was worse than expected and will be played that way the media. The continuation of double-digit unemployment also resonates with voters. And not a in a good way.
4. Then will come the second-take stories that will notice the shrinking labor force, which dropped by nearly 700,000 from November. Had it stayed stable from last month, the jobless rate would have been 10.4 percent. Had it stayed stable since August, the jobless rate would be 11 percent!
5. But wait, there’s more! The U-6 rate rate which combines the basic jobless rate, discouraged workers, part-timers-who-would-rather-be-full-timers climbed to 17.3 percent. And the average duration of unemployment rose to a record high 29.1 weeks.
6. Also, there is every indication that as the slowly growing economy eventually draws workers back into the labor force, the jobless rate will creep up to new highs. (Big companies remain cautious about hiring, and small biz remains under pressure due to tight capital markets.) The validity of the Obama recovery plan will seriously be cast in doubt.
7. The sickly labor market will also make it that much harder for the White House and Hill Dems to celebrate what is likely to be a brisk upcoming GDP report in the 4-5 percent range. That seems like an abstract number compared to the unemployment rate.
8. Combine a weak labor market – which may appear to be getting worse to voters – with the moribund housing market and rising gas prices, and you have a toxic triple threat that will be poisonous to Democratic incumbents and further drain Obama’s political capital.
9. Also, watch how these numbers play with Senate and House Dems thinking about resigning like Chris Dodd and Byron Dorgan. A big improvement in the jobs numbers might have reassured any worriers that 2010 might not be as tough as some currently think. Now it looks a bit more like the worst fears of Democrats might be realized: losing the House and a half-dozen or more Senate seats.
I think the “jobless recovery” meme stays firmly in place. Beyond the 85k jobs loss was the sharp drop in the labor force participation rate. If another 600k+ workers had not dropped out of workforce, unemployment rate would have been 10.4 percent. Here is what I have tweeting on the subject this AM:
Washington just got a little more welcome for Wall Street. The retirement of Christopher Dodd, the Democrat from Connecticut, probably hands the chairmanship of the Senate Banking Committee to a friend of the industry in 2011. It also improves the odds of a weaker version of financial reform passing Congress in 2010 — if anything passes at all.
Of course, 2009 really wasn’t all that bad for Wall Street, politically speaking, given the outrage on Main Street. Washington didn’t use its new financial clout to sweep out many top executives. Forced pay limitations and restructuring of financial institutions was far more restrained than it could – and should – have been.
And none of that will happen this year either. By foregoing an almost certain reelection campaign defeat (Connecticut now leans heavily back to the Democrats and probably nominee Richard Blumenthal), Dodd can ditch the populist mantle he adopted to help Connecticut voters forget his links to the stricken insurer AIG. That temporary guise helped shape his initial version of financial reform.
The first Dodd plan called for creating a single financial regulator and a powerful consumer financial protection agency. But when it thudded, Dodd engaged with Republicans. He will in all likelihood redouble efforts to fashion a compromise to serve as his legacy. For instance, a consumer agency, if it can even survive GOP opposition, will be toothless.
Banks will be pleased with the senator in line to replace Dodd as chairman, Tim Johnson. His South Dakota is home to call centers for numerous banks and credit card companies. Moreover, Johnson was the only Democrat in the Senate to vote against President Obama’s credit card reform bill. He once spoke out against capping the interest rates military members pay for short-term loans, fearing such leniency would spread to other “sympathetic” groups. Even if Johnson were to be passed over, Jack Reed and Chuck Schumer would also be to Wall Street’s liking.
Oh, and despite a sudden flurry of “Dodd to Treasury” rumors, he will not be replacing Timothy Geithner. I mean, Geither could get the ax — news that he told AIG to withhold details about payment to banks doesn’t help him — but Dodd won’t be the person stepping in.
Then there’s Sen. Byron Dorgan’s retirement, an added bonus for financiers. His North Dakota seat is apt to be filled by a Republican, balancing out Dodd’s probable replacement by another Democrat. Dorgan’s exit means one less advocate on Capitol Hill for bringing back the separation of commercial and investment banking. The year is off to a good start for masters of the universe.
The good folks at Public Opinion Strategies have an interesting analysis (in chart form!) of the impact of presidential approval ratings on congressional elections:
A 30-point gap against a popular politician is a steep hill to climb. But my great pal Larry Kudlow makes the case:
Dick Blumenthal is just as liberal-left as Dodd.
If Linda McMahon runs a tea-party/free-market/populist/no-bailout/cut-taxes-and-spending/tough-on-terrorism/pro-Gitmo campaign she can win. She has the dough. I’m having dinner with her tomorrow night.
Blumenthal’s a nice guy, but will be an ineffective campaigner. He’ll be pro-Obama and Obamacare. He’s ripe for losing.
Rob Simmons could also do it, but he’s not a tea-party guy and he’s a weak campaigner.
The White House got Dodd out because he was a sure loser. They’ll make him an ambassador someplace.
From Public Policy Polling:
Chris Dodd’s retirement has shifted one of the Democrats’ most vulnerable seats to one of their safest. A Public Policy Polling survey conducted Monday and Tuesday, before Dodd made his announcement, finds Attorney General Richard Blumenthal with leads of 30 points or greater against all three Republican candidates.
Blumenthal leads Rob Simmons 59-28, Linda McMahon 60-28, and Peter Schiff 63-23. That’s quite a contrast from Dodd’s numbers in the same poll, which found him trailing Simmons 44-40, tied with McMahon at 43, and leading Schiff 44-37. 59% of voters in the state have a favorable opinion of Blumenthal to just 19% who view him unfavorably. He’s liked by 71% of Democrats and 60% of independents, and even a slight plurality of Republicans by a 37/35 margin.
While Blumenthal now appears to be the likely Democratic nominee, the poll results also confirm that just about any Democrat other than Dodd would have been favored to hold onto the seat. Chris Murphy was also tested in the poll and found to lead Simmons and McMahon by 7 points and Schiff by 16. Dodd’s approval rating stands at 29%, with 57% of voters in the state disapproving of him. 45% of Democrats, 24% of independents, and 7% of Republicans express support for the job he was doing.
“The Blumenthal/Dodd swap should bring a huge sigh of relief to Democrats,” said Dean Debnam, President of Public Policy Polling. “Dodd was probably going to lose this fall, while Blumenthal starts out as an overwhelming favorite.”