James Pethokoukis

Politics and policy from inside Washington

Unemployment rate skewing U.S. politics

Oct 12, 2010 16:25 UTC

Between the House passing the China currency bill (and I think the Senate may as well) and various politicians pushing for a foreclosure moratorium, one has to wonder what sort of politics/policy another year of 9-10% unemployment will generate. I am guessing China will finally emerge as the new bipartisan big bad for U.S. politics (more for economic than military reasons), while  there will probably a flurry of new housing ideas like this one proposed by economist Glenn Hubbard.

How Ben Bernanke is trying to raise taxes

Oct 12, 2010 16:05 UTC

It’s the return of the inflation tax, as Ed Yardeni rightfully notes:

The rational for another round of QE is to boost economic growth and to avert deflation. In other words, Fed officials would welcome a pickup in the inflation rate. The problem is that they are stoking an inflationary fire in the commodity pits. I doubt that’s the sort of inflation they are rooting for. Presumably, they want prices for consumer goods and services to rise moderately to stimulate producers to expand their capacity and to hire more workers. Higher commodity prices are a tax on consumers and producers and can have the opposite effect.

9.6 reasons why the jobs report is bad for Democrats

Oct 8, 2010 17:55 UTC

How bad was the September jobs report? Even the White House had trouble spinning it. As economic adviser Austan Goolsbee wrote on his WH blog: “Given the volatility in the monthly employment and unemployment data, it is important not to read too much into any one monthly report.” But this chart sort of says it all:

goolschart

Foreclosure freeze could put banks at home in DC

Oct 7, 2010 21:33 UTC

It’s not just JPMorgan and Bank of America that need to worry about President Obama’s rejection of a bill potentially unfriendly to homeowners and Congress investigating reports of improperly evicted borrowers. The fallout risks further erosion of the whole industry’s already shaky position in Washington. Wall Street could easily find itself in the crosshairs again next year.

With financial reform passed and a bank tax looking unlikely, big banks had been looking forward to some time out of the harsh glare of Washington’s spotlight. But as fast as a mortgage lender “robo-signing” its way through a pile of foreclosure orders, politicians are calling for hearings into charges that some financial institutions played fast and loose with the procedures for reclaiming homes.

It’s a bipartisan effort ahead of the midterm elections. The lead Republican on the Senate Banking Committee is urging regulators and lawmakers to examine mortgage practices at BofA, JPMorgan and Ally Financial, formerly known as GMAC. The president, meanwhile, said “no thanks” to legislation that could have made it harder for homeowners to challenge dodgy foreclosures.

The imbroglio will surely keep the bad headlines coming for the banks involved. Many politicians will urge the stoppage of foreclosures, but really there’s little time left this year for Congress to do more than talk. It’s on extended vacation until after the November elections and will likely obsess over tax issues when it returns.

But industry lobbyists fear a renewed wave of public invective against banks will make for an unexpectedly rough 2011. The more Wall Street — and its campaign cash — is considered radioactive, the harder it will be for banks to influence lawmakers and regulators as they implement the sweeping reform bill that passed last summer.

Banks would love to see, for instance, a narrow interpretation of new limits on activities such as proprietary trading. And the more unpopular banks are, the greater the likelihood they eventually get nicked with new taxes by revenue-hungry politicians. Conversely, the more politicized the housing issue, the less chance for reform of Fannie Mae and Freddie Mac — another big issue for the banks — any time soon.

The year hasn’t even finished, and Wall Street may have just secured itself another long and grueling battle on Capitol Hill.

Dems want to use trade as a political weapon

Oct 6, 2010 20:21 UTC

Here is what James Carville and Stan Greenberg want Democrats to say about trade to voters (Via Sean Higgins at Investor’s Business Daily:

My passion is “made in America,” working to support small businesses, American companies and new American industries. (REPUBLICAN HOUSE CANDIDATE) has pledged to support the free trade agreements with Colombia, Panama, and South Korea and protect the loophole for companies outsourcing American jobs. I have a different approach to give tax breaks for small businesses that hire workers and give tax subsidies for companies that create jobs right here in America.

COMMENT

As I wrote the other day, the Democrats care not a whit about tax policies or trade policies or whatever. For the present it is all about appealing to their ill-informed blue collar union base with a lot of anti-free trade rubbish. Unfortunately, there is a lot more to come.

P.S. This Carville guy was last seen shrieking hysterically on the tube in the wake of last spring’s BP oil spill. Is he really the kinda guy from whom you want to seek advice?

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Five depressing thoughts from Goldman Sachs

Oct 6, 2010 19:05 UTC

Via the GS econ team (as excerpted and outlined by me):

1. We see two main scenarios for the economy over the next 6-9 months—a fairly bad one in which the economy grows at a 1½%-2% rate through the middle of next year and the unemployment rate rises moderately to 10%, and a very bad one in which the economy returns to an outright recession.

2. There is not much probability of a significantly better outcome.  The reason is that “short-cycle” factors such as the inventory cycle and the impulse from fiscal policy are likely to continue deteriorating through early 2011, keeping GDP growth very sluggish.

3. However, the recession scenario also has significant probability (we still think about 25%-30%).

4. Relative to our baseline scenario of extension of the lower- and middle-income tax cuts, we estimate that full expiration would result in a further hit to GDP growth in early 2011 of nearly 2 percentage points (annualized).

5. Meanwhile, the slow-motion improvement in areas such as excess housing supply and bank credit quality is likely to continue.  This should add up to a gradual acceleration in growth to a trend or slightly above-trend pace by late 2011 and going into 2012.

Obama’s sinking polls

Oct 6, 2010 19:03 UTC

Presidential approval ratings are hugely influential in congressional midterms. Unfortunately for Democrats:

obamaapproval

COMMENT

I am not surprised!

I sent to Mr. Obama 14 registered letters asking him to put Hydrologists in the Patenting System to judge Hydrology avoiding my ‘scientific discovery’ US pat 6,766,817 be violated by flawed patents that even do not work. So far I got no answer.

A drunken teenager sent him an email cursing him and the next day FBI knocks his door and expel the student from the country for good.

Hydrology is being neglected in the US and that well spilling oil could have been clogged in few hours if instead of using golf balls and shredded tires in the ‘junk shot’ it were used high density sinking geometry. I was an upward bubbling flow against gravity moving at 2-3 cm/s.

He also assigned Dr. Regina Benjamin as General Surgeon which is 42 lbs overweight to lead Americans to fight against obesity.

His support is simply falling because he is failing on his leadership.

How hard is for a leader to understand that Health staff need to be healthy and that Hydrology needs to be addressed by Hydrologists and the worst oil spill in the US is a consequence of neglecting a science called HYDROLOGY.

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Another enlistee for the trade war with China

Oct 6, 2010 18:54 UTC

China just lost Martin Wolf. The FT columnist spends a good chunk of his latest column on why the yuan needs to rise. He then outlines a plan of action:

This leads to the final question: how might China be cajoled or coerced into changing its policies? Negotiation remains a hope. The rest of Group of 20 leading countries should unite in calling for these changes. But if negotiation continues to fail, alternatives must be considered. Import surcharges are one possibility. Fred Bergsten of Washington’s Peterson Institute called for countervailing currency intervention in the FT this week; and Daniel Gros of the Centre for European Policy Studies in Brussels recommends capital account reciprocity: affected countries could prevent other countries from purchasing their financial instruments, unless the latter offered reciprocal access to their financial markets. This idea would also make the Bergsten plan more effective.

I find ideas for intervention in capital markets far more attractive than those involving action against trade, as the US House of Representatives proposed last week. First, action on trade would have to be discriminatory: there is no reason to attack all imports, merely to change Chinese behaviour. But this would almost certainly be a violation of the rules of the World Trade Organisation. A trade war would be very dangerous. Insisting that China stop purchasing the liabilities of other countries so long as it operates tight controls on capital inflows is, instead, direct and proportionate and, above all, moves the world towards market opening.

Some fear that a cessation of Chinese purchases of US government bonds would lead to a collapse. Nothing is less likely, given the massive financial surpluses of the private sectors of the world and the continuing role of the dollar. If it weakened the dollar, however, that would be helpful, not damaging.

Me: In addition, China is losing big US multinationals and the GOP, both key members of the old free-trade lobby. This will be a major US political issues next year with unemployment continuing to stay an elevated levels.

What happened to Obama’s bank tax?

Oct 5, 2010 16:56 UTC

Via my Breakingviews opinion-torial:

Detecting a political pulse on the proposed U.S. bank tax is hard. Yet bankers still fret a revival. They know Congress, eager to pay for expiring tax cuts, sees them as a pool of ready cash. And even if Wall Street dodges that bullet, the cost of rescuing mortgage giants Fannie Mae and Freddie Mac may still shock the levy back to life.

Britain and Germany have already introduced such taxes to reduce risk taking. And many in Europe would like to go further and implement a financial transactions fee if major economies could agree to take the plunge jointly. But the idea is nowhere on the U.S. public policy radar, especially with the Treasury Department opposed.

Even the Obama administration’s previously announced bank tax is an iffy proposition. The 10-year, $90 billion “crisis responsibility fee” was directed at banks with over $50 billion in assets. Institutions that took more risk and more “hot money” would also pay more. But it wasn’t included in the summer’s financial reform bill for fear of scaring away Republican support. In any case, the original concept was designed as a way to recoup losses on the bank bailout. The latest estimates scaled those back dramatically to less than $50 billion.

The tax received a second life as a way to help pay for various expiring tax cuts for individuals. But Congress didn’t get around to acting on those. Lawmakers might yet move during the upcoming “lame duck” session, making big banks nervous. If Congress wants to pay for various tax cuts, nicking Wall Street and other banks would be one way to do it.

It’s a long shot. But not long enough to keep America’s community bankers from firing off a fresh letter on Friday opposing any bank levy or fee. Although Republicans loathe the idea, the government remains on the hook for $150 billion of aid to Fannie and Freddie. When Washington gets around to figuring out what do with those troubled enterprises – probably after the 2012 election – the bank tax may reemerge as a way of covering losses. Maybe it isn’t so much dead as it is in suspended animation.

COMMENT

We need to make those who were careless with their money and careless with other people’s money to pay for the damage they caused.
There should be a 50% tax on the pay of every executive in every institution which was bailed out by taxpayers. There should also be a transaction tax on every trade, especially in those credit default swap types of gambling so we can be ready for the next time they are both stupid and “too big to fail”.

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COMMENT

Areas hardest hit appear to be the “rust belt” and high population states. Could it be that pro-free market policies accepted on faith over the last 30 years have not produced wealth for the nation. The Honda Accord came out in 1980 and US Auto Management has not been able to beat it. I guess you could say Reaganomics and the Honda Accord were too much for American Business to negotiate. National planning is needed to balance business’s short term planning problem. Hiring more MBAs will not fix this threat to national security.

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