James Pethokoukis

Politics and policy from inside Washington

GM IPO gives little reason for celebration

Nov 18, 2010 17:25 UTC

Now you too can directly own a piece of Government Motors:

General Motors Co shares gained as much as 9 percent on Thursday as investors bet that the top U.S. automaker can make a lasting recovery after repaying a big chunk of last year’s government bailout with funds raised in a landmark initial public offering. The start of trading in GM shares represents one of the final steps in a blockbuster initial public offering negotiated by the Obama administration that raised $20.1 billion after pricing its common and preferred shares.

Obama administration officials said the strong market debut for GM showed they made the right choice in restructuring the auto maker with $50 billion in financing. “This is a bit better than people had been projecting. As to a year ago,  it’s not even in the same ballpark,” Ron Bloom, the U.S. Treasury official in charge of the GM investment told Reuters Insider. “A year ago, people said ‘you have no exit, you have no strategy. This company is not fixed.’”

The point is not whether government can revive, at least temporarily, a floundering company by sinking into it billions of taxpayer dollars and trampling hundreds of years of contract law. As with TARP, it’s all about opportunity cost and unintended consequences. What else could have been done with that money? How does it incentivize companies to treat risk? What sort of uncertainty does it create among business and bondholders? The answers: Much, recklessly and vast.


Very much agree. And add the trampling of bankruptcy law.

Posted by tpatch750il | Report as abusive

Sink the Fed’s dual mandate and QE2

Nov 18, 2010 16:23 UTC

Multitasking is hard, even for the Federal Reserve. But by law — yet another horrible policy relic of the 1970s – it has to promote both “maximum employment” and “stable prices.” Some Republicans think it better that the Fed, like its European Central Bank counterpart, focus solely on prices getting neither too hot nor too cold. And an effort by Representative Mike Pence of Indiana and Senator Bob Corker of Tennessee is just the start of a GOP push to roll back Team Bernanke’s vast authority.

A just-offered bill by Pence would simply strike the bit about jobs from the Federal Reserve Act. The casus belli is part procedural, part economic. Corker and Pence say the Fed’s attempt to boost the economy by buying bonds usurps the proper fiscal role of Congress and the president. It also risks devaluing the dollar and boosting inflation.

The political context is clear. The opaque, unelected Fed is wildly unpopular with Republicans, particularly those of the Tea Party variety. They blame its interest rate policy for the housing and bank busts. And Bernanke is seen as an enabler of the hated bank bailouts and explosion in government spending under President Barack Obama. Tea Party support would be helpful to Pence if he decides to run for higher office, as he is supposedly considering.

Corker, on the other hand, is just trying to keep his current job. His efforts to forge a compromise with Democrats on financial reform made him enemies on the right where some folks already doubted his conservative bona fides. So clipping the Fed might just help him avoid a Tea Party primary challenge if he runs for reelection in 2012.

But the gentlemen also know the effort makes for sound economics. The existence of the dual mandate is a big reason why the Fed has launched its bond-buying QE2 plan, a triple-bank shot effort to artificially boost jobs by lowering interest rates,  weakening  the dollar (and boosting exports) and lifting stocks (and creating a wealth effect). Now the Fed knows QE2 will make it that much tougher to eventually shrink its balance sheet — thus risking higher inflation —  but feels it has no choice since Congress and the president are unlikely to agree on new, pro-growth fiscal policies. Of course, Fed action also eases the pressure on Washington to act. So instead of cutting taxes to empower business and allow consumer to repair their personal balance sheets, the Fed’s bubble machine gets restarted.

A Republican would have to nab the presidency that year for the Corker-Pence idea to become law. Democrats love the dual mandate and wish the Fed were doing even more to boost jobs. They expanded the Fed’s mandate in 1978 as a way of forcing the central bank to print money. But thankfully things have not worked out that way. The 1980s combo of hard-money Paul Volcker and tax-cutting Ronald Reagan created a low-inflation, high-growth economy that has produced 50 million net new jobs during the past generation.

But the dual mandate gives ample authority and justification for an easy-money Fed chairman to run the presses, particularly is he’s under political pressure to do so. Now Democrats may argue that a mandate change would tie the Fed’s hands in a financial crisis. A Fed chief could easily cite price stability as justification for setting up lending facilities as Bernanke did in 2008 and 2009. After all, U.S. prices fell sharply during the worst of the 2008 downturn. Indeed, one possible future GOP pick to run the Fed doubts whether such rule would limit his policy actions. If Republicans take the White House in two years, he just may find out.


While you make some valid points, there are a couple of statements that are incorrect.

While many republicans do agree with the majority of the Tea Party ideals, ie smaller government, lower taxes, the ones that have even the slightest clue about world financial markets do not hate the Fed. In fact, they understand its crucial role in the world economy. To go even further, those with economics and finance degrees understood the importance of bailing out the banks during the crisis.

The other problem with the editorial is the mention of inflation. Where is it? It doesn’t exist. Energy and fuel prices may have ticked up a bit but you should know that they are volatile components of the pricing indexes. Inflation isn’t a real concern until the slack, unemployment and excess industrial capacity, are taken out of the system. We know that is a long way off.

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Now it’s the Domenici-Rivlin plan to cut the deficit

Nov 17, 2010 15:54 UTC

Alice Rivlin (who is on the Obama deficit commission) and former Senator Peter Domenici have cooked up their own plan to restore America’s long-term fiscal solvency. But first, a chart from the plan itself that says a lot:


Liberals hated the Bowles-Simpson plan because it used some of the savings from eliminating tax breaks to lower tax rates. Well, this plan does the same thing — but it also tacks on a national sales that will raise nearly $20 trillion (for a net $6 trillion tax increase) between 2012 and 2040. Conservatives will not be happy:


Will Roger Altman replace Larry Summers?

Nov 17, 2010 15:53 UTC

The latest buzz is that investment banker and former Deputy Treasury Secretary Roger Altman is the likely choice to replace Larry Summers as director of the National Economic Council.  A few thoughts:

1. He is another high-tax guy. At a symposium held by the Center for American Progress, I heard Altman advocate a large (like $500 billion) value-added tax ASAP to deal with the deficit.

2. Boy, if liberals were screaming about Bristol Palin making it to the “Dancing With the Stars” finale, this would make a terrible doubleheader. Not only is he a banker (from Wall Street!) who bought the tabloid National Enquirer in 1999, he is another ex-Clinton administration guy.

3. This would mean we would once again get to hear about  …. Whitewater (via NYTimes from 1994):

Roger C. Altman, a rising star in the Administration until Whitewater led both Democrats and Republicans in Congress to attack his truthfulness, submitted his resignation today as Deputy Treasury Secretary but said that it would not take effect until the Senate confirms his successor.

4. I guess this would be a sign of Obama reaching out to business. But this and a corporate tax cut would be more compelling.

Republicans grudgingly refuse pork with their tea

Nov 17, 2010 15:14 UTC

Zero pork is good for hawks. The grudging decision by U.S. Senate Republican leader Mitch McConnell to back a voluntary ban on earmarked funding for pet local projects is a win for his party’s Tea Party faction. But deficit worriers of all political stripes should welcome it, too. Financial pork may “only” cost some $17 billion a year, but it invites undisciplined spending.

Earmarks are federal funding commitments that members of Congress can discreetly direct to their home districts and states. They are quietly folded into massive spending bills, seldom with public debate or review, and have long been targeted by good government types and fiscal nitpickers alike. One of the most infamous examples was the $223 million “Bridge to Nowhere” that would have linked a sparsely populated Alaskan island to the mainland.

Tea Party groups made ending earmarks a big issue during the recent midterm election campaigns, pushing favored candidates to sign up to a ban. House Republicans have already said they will stop the practice when they take control of the lower chamber in January. In the Senate, the powerful McConnell, who has himself requested $114 million in earmarks so far this year, had resisted. But he acquiesced under pressure from outside groups and colleagues like South Carolina’s Jim DeMint and incoming Tea Party favorites such as Florida’s Marco Rubio and Pennsylvania’s Pat Toomey.

The importance of earmarks has little to do with their dollar value. They add up to only about 1 percent of the total federal budget, and are usually carved out of already-approved spending. But they have a corrosive effect on government. By their nature, they can easily turn into what amounts to legalized bribery in which elected representatives grab earmarks in exchange for campaign contributions.

The habit also serves to discourage spending discipline. If a member of Congress pushes for overall budget restraint or criticizes a “Bridge to Nowhere” project, he might find that federal money earmarked for a museum in his district suddenly gets axed.

It’s not even clear earmarks help the folks back home. A Harvard University study found a surge in a state’s earmark funds is often followed by a decline in business investment as the private sector gets “crowded out” by government. Ending earmarks won’t balance the U.S. budget, but it could make that tough task a bit easier.

McConnell reverses on earmark ban

Nov 15, 2010 21:09 UTC

Score another one for the Tea Party:

Senate Minority Leader Mitch McConnell declared Monday that he now supports a GOP ban on earmarks, a stunning reversal that puts the Kentucky Republican in line with the tea-party wing of his party and conservative senators who have long sought to kill off pet projects. “What I’ve concluded is that on the issue of congressional earmarks, as the leader of my party in the Senate, I have to lead first by example,” McConnell said on the Senate floor. “Nearly every day that the Senate’s been in session for the past two years, I have come down to this spot and said that Democrats are ignoring the wishes of the American people. When it comes to earmarks, I won’t be guilty of the same thing.”

McConnell’s backpedal on earmarks is also a remarkable win for Sens. Jim DeMint (R-S.C.) and Tom Coburn (R-Okla.), who had been gaining ground in their effort to force their Republican colleagues to adopt an earmark moratorium.

A complete ban on earmarks would a) save some $16 billion a year, b) make it harder for the big-spenders to bribe/threaten other members to vote for more spending; and c) make life harder for lobbyists. On that last point, getting rid of tax breaks and moving to flat tax would also be a blow on behalf of good government. Here are the biggest earmarkers this year in the Senate and House:



Yep, the rubes got rolled again. Even before the moratorium is adopted, some influential GOP senators are dismissing the ban as political gamesmanship and say they are prepared to defy the moratorium and continue to pursue earmarks.

Lisa Murkowski, James Inhofe, and Thad Cochran are all saying they will ignore the ban. Not surprising at all, since Alaska, Oklahoma, and Mississippi are three of the biggest welfare states in the nation.

Of course, this is all political theater anyway, since earmarks constitute about 1% of the budget.

Posted by Yellow105 | Report as abusive

Again, America has a spending — not revenue — problem

Nov 15, 2010 19:50 UTC

Jim Glassman of JPMorgan illustrates the problem thusly:


Balance the U.S. budget? I did it in under a minute

Nov 15, 2010 17:20 UTC

So I took a crack at the budget simulator cooked up over at the NYTimes Web site. It starts out with a projected 2015 deficit of $418 billion and a projected 2030 deficit of $1.355 trillion. My goal was to do it through 100 percent spending cuts.


Here is what I did:

1.  Eliminated earmarks  ($14 billion)

2. Cut the pay of civilian workers by 5 percent ($17 billion)

3. Reduced the federal workforce by 10 percent ($15 billion)

4. Reduced nuclear arsenal and space spending  ($38 billion)

5. Reduce military to pre-Iraq War size and further reduce troops in Asia and Europe ($49 billion)

6. Reduce Navy and Air Force fleets ($24 billion)

7.  Cancel or delay some weapons programs ($18 billion)

8. Reduce the number of troops in Iraq and Afghanistan to 60,000 by 2015 ($149 billion)

9. Enact medical malpractice reform ($13 billion)

10. Increase the Medicare eligibility age to 68  ($56 billion)

11. Reduce the tax break for employer-provided health insurance ($157 billion)

12. Cap Medicare growth starting in 2013 ($562 billion)

13. Raise the Social Security retirement age to 70 ($247 billion)

14. Reduce Social Security benefits for those with high incomes ($54 billion)

15. Tighten eligibility for disability ($17 billion)

16. Use an alternate measure for inflation ($82 billion)

In the end, my budget would have a minuscule 2015 deficit of $80 billion and a 2030 surplus of $187 billion. Now I would have preferred an option for deeper domestic spending cuts. The Heritage Foundation has ideas for over $300 billion worth. And I think eliminating hundreds of billions of tax breaks and lowering tax rates across the board would boost growth and revenue. The simulator only lets me use the Bowles-Simpson plan which would lower rates by cutting tax expenditures —  but uses some of the dough for deficit reduction. Plus, the simulator assumes no impact on growth from higher taxes or lower taxes. Also, there is no doubt the Medicare cuts would be rightly labeled as “rationing.”  But Americans really have only two choices, I think: severe government healthcare rationing (since right now healthcare costs are rising much faster than GDP growth) or voucherization.

The simulator also shows how tough it is to balance the budget through tax increases alone. If you went for every tax increased offered, you would still have a slight deficit in 2030. And again, that assumes zero impact on economic growth from a) letting all the Bush tax cuts expire; b) eliminating tax breaks; c) adding a national sales tax, carbon tax and bank tax. That is a fantasy. Letting all the Bush tax cuts expire, for instance, would probably knock 2-3 percentage points from GDP next year.


I think there is a much better way to balance the budget.

1. Outsource all Goverment jobs to China
2. Creat Chinese outsourced Medical Centers at Walmart for all medicare and even consider using Chinese hearbal medicnes for Medicaid.
3. Sell Las Vegas to china in exchange for all the debt we owe them and all previous casino owners can divide up JP Morgan Chase.

Posted by MrHooHaa | Report as abusive

Bernanke probably agrees with the anti-QE2 letter

Nov 15, 2010 15:32 UTC

A bunch of right-of-center investors, economists and journalists (under the banner of the great e21 group) have signed an open letter to Ben Bernanke:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in The Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

A few thoughts here:

1. I have no doubt that Bernanke would prefer not to be doing QE2, either. I think his preference, like those who signed the letter, would be for more fiscal action accompanied by a long-range deficit reduction plan. But, seeing that is not likely to happen, he is using what tools he has.

2. In most countries where the central banks are politicized, the pressure is to running the printing presses. In America, it’s just the opposite — at least from conservatives.

3. Is there any chance that Bernanke gets a third-term? Almost certainly not if a Republican wins the presidency in 2012.


The American gov’t and the Obama administration above all need to provide CERTAINTY for American businesspeople. Even if its bad certainty, there must be certainty so businesspeople can start planning and investing again. No one knows how the healthcare bill will ultimately impact business or even if it will ever get implemented. No one knows if or when the gov’t will stop its regulatory binge. When will they finally make a decision on taxes? Other things are beyond the President’s control, like a bottoming of the housing market, but he can still send some signals. Obama seems too fixated on his long-term social(ist) agenda to realize that the country needs some fundamental leadership on a day-to-day basis. Pres. Bush would have by now established a few (decidedly simple) guiding principles, giving the American people something to hold onto, i.e. CERTAINTY. The economic equivalent of “you’re with us or your against us.”

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