James Pethokoukis

Politics and policy from inside Washington

19 risks for 2010

Dec 29, 2009 15:43 UTC

Courtesy of the Naked Capitalism blog:

1. The Bulk of the Option Arm resets trigger in 2010-2011 – “The reality is that these loans were never meant to survive the reset. Unless an alternative is created, the human pain and loss will be massive.” Institutional Risk Analyst Chris Whalen
2. The Black Holes at FNM and FRE and other GSEs continue to grow
3. Bank hoarding in 2009, with no end in sight until those option arm resets trigger and all toxic assets have been brought back onto their balance sheets by 2013
4. State and local governments defaulting on financial obligations. To meet financial obligations, austerity measures will be required, social obligations will suffer, meaning more unemployment and less teachers, firemen, and policemen. This burden will be another source of drag on the U.S. economy.
5. Credibility of the Fed and U.S. Treasury and White House Administration will be on the forefront on Investors minds in 2010 and beyond. If their credibility suffers, there will be negative ramifications in the financial markets
6. Stock Market Rescue Operations like the one that got underway in March 2009 tend to last roughly two years, and are followed by bear market resumptions. My models indicate the 2009 bear market rally may end sometime in 2H 2010 followed by a resumption of the secular bear market into 2012-2013.
7. My models also indicate the 2009 bear market rally in the Dow Jones may peak at 11,750-to 12,000, near the bull market crest in 2000. That leaves maybe 12% further upside in 2010 and implies that most of the gains from this bear market rally are already in place. As David Rosenberg pointed out throughout 2009, this is a rally for investors to ‘rent.’ What reallocations can they make as and when the rally ends?
8. Advanced Economies in America and Europe all face Pension liability nightmares with shrinking workforces to support the retiring population, recent examples are GM and YRC pension nightmares. Are taxpayers going to be obligated to fund all private and public pensions of bankrupt companies and state governments?
9. Risk Aversion, saving more versus spending more will be a drag on the economy
10. U.S. government mandate requiring 30 million uninsured Americans to buy health insurance will curb consumer spending and act as a tax on the economy. It will also curb hiring plans amongst U.S. employers further prolonging Americans sidelined from employment opportunities and exacerbating the unemployment rate issues.
11. Will the kindness of foreigners continue to fund the U.S. deficit spending? Eric Sprott and David Franklin noted in their December 2009 missive titled “Is it all just a Ponzi Scheme?” that the “household sector” bought $528 billion of the $1.88 trillion of U.S. debt that was issued to them. This sector only bought $15 billion of treasuries in 2008, where would this group find the wherewithal to buy 35 times more than then bought in the previous year. Sprott concludes that makes no sense with accelerating unemployment and foreclosures, so the household sector must be a “phantom. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.”

Global Risks and Uncertainties
12. Sovereign Risks of Default are increasing as is their fiscal credibility in countries with large debts
13. Asymmetries within the EMU could precipitate a possible breakup of the EMU. The solidification of the countries in the EMU may break-up like ice sheets in the Artic tundra as the global financial meltdown puts further stress on the EMU. Incentives to remain in the EMU, for many EU countries it might be better to leave the EMU than stick around for its constraints and austerity measures
14. The One-size fits-all monetary policy in the EMU may be derailed by this crisis
15. Germany may not want to subsidize weaker countries in the EMU if their exports to those weaker euro countries are falling off a cliff as the crisis rolls on
16. The ECB may not be able to accept sovereign collateral and assets from countries in the EMU that have a negative credit outlook and are later hit with further downgrades. That could have spillover effects into the banks-at-large, including the ones the U.S. government sought so frantically to save.
17. The PIIGS (Portugal, Ireland, Italy, Greece, and Spain) debt ratios are all expected to exceed the 3% GDP 1992 Maastricht Treaty requirement.
18. PIIGs negative 2009 GDP resulting from global export decline leaves them with little incentive to stay strapped to an expensive Euro.
19. Italy is expected to be the first country that will first kiss the EMU good riddance. Greece and Spain might not be far behind as a domino-effect takes hold.

COMMENT

Agreed. These guys are WAY too bearish. We definitely need a dose of Larry Kudlow’s optimism.

Posted by gotthardbahn | Report as abusive

Repealing healthcare reform

Dec 29, 2009 15:28 UTC

Assuming ObamaCare passes, the GOP is already making a pledge to repeal it ASAP part of their 2010 (and beyond) electoral strategy. But Igor Volsky over at the Wonk Room makes some good points indicating the political difficulty of doing so, putting side an Obama veto of any attempts:

1) The bill immediately prohibits insurers from rescinding coverage, imposing life-time or annual limits or denying coverage to children with pre-existing conditions.

2) Applicants who are unable to find insurance in the individual market, can purchase catastrophic coverage and young adults can stay on their parents’ policies until their 27th birthday.

3) Small businesses that provide health coverage will also be eligible for tax credits beginning in 2010.

4) The bill requires health insurers to spend 80 to 85 percent of all premium dollars on medical care and reduces the size of the coverage gap in Medicare Part D “by $500 in the first year.” The bill also guarantees “50 percent price discounts on brand-name drugs and biologics purchased by low and middle-income beneficiaries in the coverage gap.”

5) These benefits could also improve as the Senate bill moves into conference. Several House progressives have pledged to push the conference committee to move up the implementation date of the exchanges in the final bill and front load more benefits into the interim period of the final legislation.

The news regs on private health insurance are likely to be quite popular. More than likely, any GOP efforts will have to work within the general framework that is created, such as healthcare exchanges.

COMMENT

So what.

If necessary, rescind the entire monstrosity and pass another with the 1% that makes sense.

Or pass a Republican version with tort reform, portability, limits on dropped coverage, and interstate competition.

It’s simply ridiculous to say we are stuck with a poison pill of 2700 pages when 20 pages might make sense.

And btw, a good bit of the 4 points listed are just plain stupid. Just because some nutter liberal likes government give-aways doesn’t mean that rational people can’t spot redistribution on a stick.

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One more reason why 2011 looks bad

Dec 28, 2009 15:34 UTC

Interesting analysis from Deutsche Bank, especially the last part which I put in bold (via Econbrowser):

Based in part on CBO estimates, we expect the combined positive effects on the level of real GDP of the tax cuts, transfers, and spending increases in the ARRA package to peak around the middle of next year and then to begin to diminish. Translating these level effects into impacts on the annual rate of growth of GDP yields a boost of 1 to 2 percentage points to GDP growth through mid-2010. That growth effect then drops to zero and eventually turns negative during the second half of the year, subtracting about a percentage point from growth during 2011. This is a key reason why we see growth receding somewhat in 2011 relative to 2010. We have not assumed that a major portion of the Bush tax cuts will be allowed to expire at the end of 2010, but that does pose a downside risk to the forecast.

Me: And here is all that in chart form:

chart

COMMENT

One additional comment: the expiration of the Bush tax cuts in 2011 should actually prove to be a stimulus for the economy in 2010, because it gives individuals and business an incentive to accelerate income, and to realize capital gains and reinvest the proceeds in projects with better returns on investment.

Big Government and the Big Split

Dec 28, 2009 14:57 UTC

The WSJ nicely sums up 2008:

To prevent crumbling housing and credit markets from sinking the broad economy, the Bush and Obama administrations and the Federal Reserve spent, lent and invested more than $2 trillion on one initiative after another. If you owned a credit card or a money-market fund, had a savings account, bought a Dodge pickup or even a hunting rifle, or borrowed to buy a home or finance a small business, odds are good that the U.S. stood behind you or the firm that served you.

Washington pumped $245 billion into nearly 700 banks and insurance companies and guaranteed almost $350 billion of bank debt. It made short-term loans of more than $300 billion to blue-chip companies. It propped up life insurers and money-market funds.

It bailed out two of the three U.S. auto makers. It lent billions trying to jump-start commercial-real-estate, small-business and credit-card lending. In two February stimulus bills enacted a year apart, the government committed $955 billion to rouse the economy. Today the U.S. government, directly or indirectly, underwrites nine of every 10 new residential mortgages, nearly twice the percentage before the crisis. Just last week, the Treasury said it would cover an unlimited amount of losses at mortgage giants Fannie Mae and Freddie Mac through 2012.

But voters don’t seem to be buying the idea that the government saved the economy. This from pollster Rasmussen (note the last sentence):

The number who believe that the stimulus plan has hurt the economy rose from 28% in September, to 31% in October, and 34% in November before jumping to 38% this month. The week after the president signed the bill, 34% said it would help the economy, while 32% said it would hurt.

The Political Class has a much different view than the rest of the county. Ninety percent (90%) of the Political Class believes the stimulus plan helped the economy and not a single Political Class respondent says it has hurt. (See more on the Political Class). The underlying reason for skepticism about the stimulus plan is that 50% of voters believe increasing government spending is bad for the economy. Just 28% believe that increased government spending helps the economy.

Me: Americans rightly think the economy is in terrible shape. The argument that the economy would be worse if not for government is a hard one to make for Team Obama … especially since government played a critical role in creating the housing and financial crises. Making all this worse is a 2010 economy that may be a muddle at best — so-so growth, unemployment still above 9 percent, rising interest rates and moribund housing.

Using Fannie and Freddie to influence the 2010 midterm elections

Dec 28, 2009 14:28 UTC

So the Treasury Department announces unlimited support for Fannie Mae Freddie Mac for the next thee years. I think Wall Street Pit raises a very provocative point on this might all relate to the 2010 election:

In an attempt to limit the damage the economy does to their majority in the 2010 elections, the administration is likely to go all in on mortgage modifications that require principal reduction. They can only take so much skin off of the banks in this effort and the last thing they want is to put the financial system back in another crunch. That leave Fannie and Freddie as the vehicles to bail out homeowners that so far have resisted efforts to “save” them. It makes perfect sense that the Treasury’s announcement of unlimited support would be followed by a big, new homeowner bailout program.

Business Insider also touches on this:

Revisions to the flagging Homeowner Affordable Housing Program (HAMP). Any changes will likely increase near term bailout costs to Fannie and Freddie if HAMP’s current reliance on interest reduction is replaced in part by principal reduction. The losses associated with a modification of a loan using an interest rate reduction are spread out over time while a modification using principal reduction results in taking a more immediate loss.

As does Calculated Risk:

There is a possibility that the Treasury is planning on introducing a principal reduction component to HAMP in January, and this could lead to significantly larger losses for Fannie and Freddie (just speculation on my part). There has been no announcement yet, and even if this is proposed it might only apply to Fannie and Freddie related loans, and not private MBS (the number of Fannie/Freddie loans compared to private MBS varies significantly by servicer).

Watch out for (yield) curves: Kudlow vs. Goldman

Dec 23, 2009 17:54 UTC

The super-steep yield curve is hinting at a powerful recovery in 2010, so says Larry Kudlow:

When the curve is wide and upward sloping, as it is today, it tells us that the economic future is good. When the curve is upside down, or inverted, with short rates above long rates, it tells us that something is amiss — such as a credit crunch and a recession.

The inverted curve is abnormal, the positive curve is normal. We have returned to normalcy, and then some. Right now, the difference between long and short Treasury rates is as wide as any time in history. With the Fed pumping in all that money and anchoring the short rate at zero, investors are now charging the Treasury a higher interest rate for buying its bonds. That’s as it should be. The time preference of money simply means that the investor will hold Treasury bonds for a longer period of time, but he or she is going to charge a higher rate. That is a normal risk profile.

The yield curve may be the best single forecasting predictor there is. When it was inverted or flat for most of 2006, 2007, and the early part of 2008, it correctly predicted big trouble ahead. Right now it is forecasting a much stronger economy in 2010 than most people think possible. So there could be a mini boom next year, with real GDP growing at 4 to 5 percent, perhaps with a 6 percent quarter in there someplace. And the unemployment rate is likely to come down, perhaps moving into the 8 percent zone from today’s 10 percent.

Unless it isn’t, as David Goldman predicts:

The yield curve is at record steepness. I think that’s an overreaction. In fact, the steep yield curve in the present environment is NOT a harbinger of recovery — it’s a brake on recovery because it encourages banks to own Treasuries rather than risky assets.

Goldman then goes on to list 9 other reasons why he doesn’t think the recovery will be particularly strong.

COMMENT

I have always liked Larry Kudlow’s optimistic view of the future and, frankly, I see nothing wrong with his analysis of the current yield curve. David Goldman, on the other hand, is a classic bond trader, forever bearish and always looking for clouds on the horizon, however small, to justify heading indoors. As for this current recession being “different”, as in “It’s different this time” – oh please. The equity rally of the late 90′s, the real-estate boom of the mid-00′s, virtually all the pundits said it was different this time. Of course they were all proven wrong, spectacularly so. Bet on inertia, bet on human nature, bet on optimism: Larry Kudlow has it right, once again.

Posted by gotthardbahn | Report as abusive

Democratic congressman Parker Griffith to switch to Republican

Dec 22, 2009 16:31 UTC

Blue Dog Parker Griffith of Alabama is making the switch:

POLITICO has learned that Rep. Parker Griffith, a freshman Democrat from Alabama, will announce today that he’s switching parties to become a Republican. According to two senior GOP aides familiar with the decision, the announcement will take place this afternoon in Griffith’s district in northern Alabama. Griffith’s party switch comes on the eve of a pivotal congressional health care vote and will send a jolt through a Democratic House Caucus that has already been unnerved by the recent retirements of a handful of members who, like Griffith, hail from districts that offer prime pickup opportunities for the GOP in 2010.

The switch represents a coup for the House Republican leadership, which had been courting Griffith since he publicly criticized the Democratic leadership in the wake of raucous town halls during the summer. Griffith, who captured the seat in a close 2008 open seat contest, will become the first Republican to hold the historically Democratic, Huntsville-based district. A radiation oncologist who founded a cancer treatment center, Griffith plans to blast the Democratic health care bill as a prime reason for his decision to switch parties—and is expected to cite his medical background as his authority on the subject.

Me: This is a district that McCain won with 61 percent of the vote. Griffith voted against the stimulus and has stated that he would not vote again for Nancy Pelosi as speaker. The Dems will now have a 40 seat majority in the House.

COMMENT

MCP Foundation (Mass Communication Power)

Letter to U.S. President
Mr. Barack Obama

Dear Mr. President, I have the honor to announce you that MCP representatives Foundation as at home and abroad have taken initiative to establish an International Club called “Dr. Martin Luther King “ within our organization.
We have decided this in a recent meeting with representative of active NGOs such as: ASSOCIATION OF WOMEN IN ROMANIA,AS.COL.CLUB,DEMOCRATIC NATIONAL ANTI-CORRUPTION ASSOCIATION,NATIONAL ASSOCIATION OF PENSIONEERS OF ROMANIA,ASSOCIATION FOR CITIZEN SAFETY.

These organizations will make common cause to fight for the rights of women, so that in Romania, breast cancer should no longer represent the first cause of death, as it happens, unfortunately, in 2010.

We request that Mr. President Barack Obama:

1.You agree to accept the position of honorary president of the MCP Foundation(Mass Communication Power).
2.You support us to achieve an excellent partnership.

We all know that Mr. Martin Luther King was the outstanding personality of the 20th century. He not only fought for the rights of one minority, but for any oppressed person in the world, for equality, liberty and fraternity, establishing a true culture of peace, life and love among people. As we all know, Martin Luther King , the hero of the civil rights was awarded on December 10, 1964, Nobel Peace Prize. That’s why we decided to set up this club, because the idea of a civil society can not be outside civil rights in a democracy and they have as the central reference point, the personality of Dr. King ,his life and activity.
“We need to be together to achieve a common goal: Equal opportunities and power of women in the world”.This is the message of the president of ASSOCIATION OF WOMEN IN ROMANIA, Ms. Liliana Pagu.
As it is known, since 1986, Martin Luther King’s day is a holiday in the United States, therefore, by popularizing this American holiday, MCP Press Agency, part of our organization, anticipated by media global coverage of this event, as early as 2007 the choosing of a representative of the civil society in the Oval Office of the White House and here you are at the White House.

We would like you to support us, if possible, to develop this club in its activities meant to spread in Romania the knowledge of the social movement for civil rights marked by the struggle of Dr. King and the extension of his message to the century that has begun.
For the start we are thinking of attracting personalities and groups interested in our enterprise.
The International Club “Dr. Martin Luther King” will focus on two areas: education-culture, civil and political. Since Martin Luther King was born on January 15, 1929, we would like a joint action in making this letter and text known all over the world a release of MCP Press Agency, as his birthday has been celebrated as a national holiday in the United States since 1986.

Looking forward to your answer which honor us, The editorial address:agency@mcppress.ro
Bank account:ROSSRNCB0090000509540001 BCR Lipscani Branch, Ontario.

With great esteem, president of MCP Foundation
(MASS COMMUNICATION POWER)

Ec. Mihail Georgevici

E-mail:agency@mcppress.ro / http://www.mcppress.ro
Str.Walter Maracineanu nr.1-3, et.6, camera 412, sect.1, Bucharest, Romania
Tel./Fax :+4031 80 40 152 // Mobil +4 0723 945 84

The bear case on healthcare reform

Dec 22, 2009 15:09 UTC

So now what? My pal Rich Lowry takes a crack at the bear case for healthcare reform. His main points:

1) Public opinion.  The bill was already under water in every major public-opinion poll, and opposed by a margin of almost 2 to 1 in the latest CNN poll. The latest NBC News/Wall Street Journal poll put its support at freezing, 32 percent. A few ticks downward and the bill will be in the 20s. … The Democrats have shown no inclination to let public opinion hold them back, but the stiff headwind makes everything a little harder and reduces an already-small margin for error. One subset of public opinion will be particularly important: Nebraska. If Ben Nelson is perceived to have made a career-defining choice that will end his designation as a conservative Democrat and a pro-lifer, and if he takes an immediate dive in the polls, it will cast a pall over other Blue Dogs inclined to play ball.

2) Abortion. After her initial 220–215 victory, Pelosi can afford to lose only two net votes. Bart Stupak has declared the Nelson language unacceptable and vows to oppose the final bill if it doesn’t include the restrictions contained in his amendment. As John McCormack points out, earlier in the year Stupak was part of a bloc of Democrats who wrote a letter to Pelosi saying they’d stand against “any health-care-reform proposal unless it explicitly excludes abortion from the scope of any government-defined or -subsidized health-insurance plan.” Eleven of those signatories voted for the House bill.

3) Money. The Senate relies on a so-called Cadillac tax on pricey insurance plans, the House on a surtax on the wealthy. The Senate long ago declared the surtax anathema, and the House is just as dismissive of the Cadillac tax. The unions hate the Cadillac tax, since they enjoy such plans themselves, the fruit of collective bargaining. If the House gives in, it will create even more unrest on the Left. If the Senate gives in, it could upset the fragile deal for 60. If this disagreement over financing doesn’t represent as dire a threat to the future of the bill as the other factors we are cataloguing, it’s still a stumbling block.

4) Blue Dogs. When Obamacare first passed the House, 28 Blue Dog Democrats, more than half of their 52-member coalition, were on board. This is a pool that surely includes some very nervous votes. As Michael Barone points out, nearly 70 percent of the Blue Dogs represent districts that voted for John McCain. A vote for this bill must look even more like a potentially career-ending decision now than it did the first time around.

Keep an eye especially on the Pennsylvanians. Rep. Patrick Murphy already has four GOP opponents in his suburban Philadelphia district. After supporting round one of Obamacare, the auto bailouts, TARP, and the stimulus, Murphy may be looking for a way back toward the center. Reps. Kathy Dahlkemper and Christopher Carney, both elected in the 2006 anti-Bush sweep, represent blue-collar districts in the Keystone State in which Obama failed to reach 50 percent last year. You can bet that trio is watching the polls. Other Blue Dogs are simply getting out. In the past month, Reps. Bart Gordon (D., Tenn.), Dennis Moore (D., Kan.), and John Tanner (D., Tenn.) have all announced their retirements.

5) Liberals. No fewer than 60 liberals in the House imprudently made a pledge to oppose a bill without a public option. Almost all of them can be expected to eat it. But what if one or two don’t? Public-option scold Rep. Anthony Weiner (D., N.Y.) is continuing to pressure Obama to move further left. “What we’re saying is now’s your moment, big guy, you’re the Mariano Rivera of this situation,” he said to MSNBC last week. “You’re going to come in at the end, and there’s still a chance to do it.” That’s not going to happen, but perhaps a few of Weiner’s colleagues are ideologically besotted enough to lash out at the president’s “betrayal” when he doesn’t “come in” the way they hope he will.

COMMENT

Shadow-boxing is only entertaining in situation comedy. The mainstream Democratic Party, like all its Republican brethren, has shown how uniformly serious it is about selling America out to zombie corporations on every single issue there is – banking, insurance, telecommunications, consumer and civil rights included.

So really, this laughable “detailed” analysis isn’t all that amusing right now. Neither of America’s major political parties is worth saving, or even listening to, any more.

There is only one thing to do with zombies. One.

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Rasmussen: Obama approval ratings at new low

Dec 22, 2009 14:49 UTC

Pollster Rasmussen indicates that healthcare is not helping the POTUS:

The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 25% of the nation’s voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-three percent (46%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -21 That’s the lowest Approval Index rating yet recorded for this President. … For the second straight day, the update shows the highest level of Strong Disapproval yet recorded for this President. That negative rating had never topped 42% before yesterday. However, it has risen dramatically since the Senate found 60 votes to move forward with the proposed health care reform legislation. Most voters (55%) oppose the health care legislation and senior citizens are even more likely than younger voters to dislike the plan.

COMMENT

I have to say, james, I liked your blogging way more when you were at USN&WR — you actually wrote stuff and provided your always interesting, not just cut’n'paste stuff I get anyway. Is Reuters not letting you off the leash? Or are you working on bigger/more thoughtful pieces elsewhere?

Posted by Ghost of Keynes | Report as abusive

Political impact of surprisingly weak 3Q GDP

Dec 22, 2009 14:32 UTC

First, the Commerce Department:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.2 percent in the third quarter of2009, (that is, from the second quarter to the third quarter), according to the “third” estimatereleased by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent. The GDP estimate released today is based on more complete source data than were available for the “second” estimate issued last month. In the second estimate, the increase in real GDP was 2.8 percent.

Me:  And, of course, the original estimate was 3.5 percent. Now  a few thoughts;

1) After such a nasty recession, the US economy should grow in the 6-8 percent range. The first seven quarters after the 1981-82 recession saw 7 percent average GDP growth.

2)  If that doesn’t happen soon, another sign that this recovery/expansion will different. And by different, I mean weaker than is typical.

3) And a weaker recovery, means weaker job growth. To drop unemployment by a full percentage point next year, it will take 4 percetn GDP growth generating 250k a month.

4) High unemployment and weaker growth means a higher level of danger for Democrat incumbents in the 2010 midterms. My working model translates 3 percent growth into typical losses of 25 seats in the House, 2 in the Senate. If growth comes in at closer to 2 percent, that is when you get the 1994-esque scenario with 40+ losses and 5+ Senate seats.

COMMENT

Not a bad deal if it means getting rid of a bunch of lefty politicians and shifting Nobama to the right. That’s what Bill Clinton did in 1994, and ya can’t argue with success.

Posted by gotthardbahn | Report as abusive
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