James Pethokoukis

Politics and policy from inside Washington

A Wall Street conspiracy to kill Social Security?

Mar 26, 2010 11:37 UTC

Finally, a Wall Street conspiracy theory without Goldman Sachs at its heart. This one posits that bond rater Moody’s wants to ding the U.S. credit rating so panicky politicos will privatize Social Security. That would sent big bucks to the firm’s big bank clients. If only it were true.

This bit of speculation comes from Dean Baker, a respected Washington think-tank economist, albeit with a liberal bent. Baker suggests that Moody’s increased debt warning of late “could be a reflection of the Wall Street agenda to cut” America’s social insurance safety net. Shifting government pensions into the private sector could entail billions, if not trillions, of retirement dollars flowing into personal portfolios managed by investment firms.

Like most conspiracy theories, this one reveals more about the storyteller than about reality. Baker, like other left-of-center economists such as New York Times columnist Paul Krugman, think Washington too concerned with deficits given the anemic economy. And they lump President Barack Obama into that camp, too. They fret this New Frugality — somewhat laughable give trillion dollar deficits — will be further fed by Obama’s new deficit commission. And they especially worry the panel will recommend trimming back Social Security to preserve its solvency. Add in displeasure that financial reform isn’t tougher on the major players in the financial meltdown, and a juicy tale of corporate collusion emerges.

A better theory: Raters have been intentionally insouciant so as not to incur the wrath of Congress as it fashions new regulations for the firms. U.S. debt-to-GDP may hit 90 percent by 2020, according to the Congressional Budget Office. The CBO also says that Social Security, which accounts for 16 percent of the government’s $46 trillion in long-term liabilities, will in 2010 for the first time pay out more in benefits it takes in from taxes.  That is six year earlier than predicted. The slow economy is the near-term cause. But the event marks a key milestone in the program’s long descent toward insolvency. Benefit cuts and tax hikes seem inevitable. But those will lower an already paltry rate of return, especially for younger workers.

Letting Americans shift at least some of their government-directed savings into the real economy would generate a bigger nest egg.  This is done in Chile and Sweden, for instance. Yes, stocks are risky. But the market ultimately reflect the real economy. If it booms, so will portfolios. And if doesn’t, Social Security is in even deeper trouble. If there isn’t a conspiracy, someone should hatch one.

COMMENT

“are asleep? Oh!” fiddle with the fire of the stick in the hands fling, maple carefully approached the night huddled under the full moon mulberries and Los dance.

Yup, America hates Big Anything

Mar 25, 2010 12:27 UTC

A new poll shows Americans hate Wall Street. Of course, bankers are never popular. But maybe never less so than right now. Yet polls also show Americans cynical about Big Anything — Big Money, Big Business, Big Government. As Sen. John McCain likes to say, the approval ratings of Congress are so low, its only supporters must be paid staffers and blood relatives.

That helps explains why the nation has not been flocking to government-created solutions such as the stimulus plan and healthcare reform. This isn’t a time when Americans are shifting from believing in markets to believing in government. It’s a time when the last remaining shred of faith in the country’s elite is quickly eroding.

COMMENT

I beg to differ, the US loves huge arsenals of weapons, nukes, oil, junk food, health care, extravaganza’s and last, but not least, its massive stock of flags.

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The Dodd Effect: 2010 starts great for Wall Street

Jan 7, 2010 18:39 UTC

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.

Obama vs. Wall Street

Dec 15, 2009 14:32 UTC

As usual, Ed Yardeni is exactly on point:

1) While Washington wants them to lend more, the bank examiners sent by Washington’s regulators are all over them to improve their credit quality and to tighten their lending standards.

2) They also observe that most of the big banks were forced to take TARP money they didn’t need or want last October 2008.

3) The bankers can’t deny that they contributed to the financial mess, but so did the government by pushing them to make subprime loans through the Community Reinvestment Act and by encouraging Fannie and Freddie to purchase these loans. In his recent book titled “The Housing Boom and Bust,” Thomas Sowell carefully documents this sordid tale of corruption in Washington and on Wall Street.

4) One of the main reasons that the banks are not lending is that the Federal Reserve is pegging the federal funds rate at zero. As a result, investors have scrambled to buy corporate bonds at a record pace. So corporations with access to the bond market have been able to raise lots of money. Indeed, many have raised more than they need, and they used some of the proceeds to pay down their bank lines of credit. Less fortunate borrowers are stuck with trying to get loans from their bankers. The problem is that many of them have become less credit worthy because the economy remains weak. The banks already have lots of problem loans and don’t want to make more such loans, especially with bank examiners on their backs.

Obama vs. Wall Street

Dec 14, 2009 19:41 UTC

A few thoughts on the banker summit at the White House:

1) Some banks were already trying to boost small business lending, such as Goldman Sachs and JPMorgan.

2) Lending was likely to rise anyway as economic growth picks up, so it will be tough to determine if this WH meeting had any independent impact.

3) For the all the talk about loan supply, far less about loan demand and how uncertainty over Obamanomics is chilling small biz expansion plans.

4)  The Obama reform plan is not nearly as tough as the Obama rhetoric.  It doesn’t embrace, for example, the preemptive dismantling of large, interconnected firms. It doesn’t reduce the Federal Reserve’s regulatory reach. It doesn’t restore the law separating commercial and investment banking. It doesn’t even give bankruptcy judges the power to alter mortgages.

5) Banks have clearly lost control of the narrative. Someone needs to highlight the role of government in creating the financial crisis.

COMMENT

Point (5) is well-taken, although I wouldn’t hold my breath waiting for any mea culpas from the likes of Barney Frank or Chris Dodd or Fannie or Freddie or any of the senior bureaucrats who thought they had a winner (and votes) in extending mortgages to unqualified individuals. Moreover, banking regulators who altered reserve requirements to encourage banks to buy mortgage-backed’s rather than holding actual mortgages – by dropping the reserve requirements – have NEVER been fingered as culprits. So much simpler to blame Wall Street and whine about bonuses and compensation, as Mr. Obama DID NOT FAIL to do today. Unfortunately for the banks, the truth is very complicated and, while there is plenty of blame to go around, it wasn’t entirely the banks’ fault. I don’t envy the spot they’re in. The optics are awful.

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The risk of a supertax on banker bonuses

Dec 11, 2009 14:31 UTC

U.S.-based bankers shouldn’t worry too much about their bonuses. Even though Wall Street remains wildly unpopular and Washington needs more revenue, it’s unlikely U.S. authorities will follow their UK counterparts with a giant windfall tax on banker payouts.

That upcoming election cycle will certainly give American politicians all the impetus they need. A combination of fat payouts of 2009 bonuses in the first quarter and high unemployment will tempt incumbent lawmakers to play the populist card ahead of the 2010 vote.

But past efforts at such radical moves have failed. Congress is again struggling to raise taxes on carried interest, the profit generated by private equity firms and hedge funds. Some Democrats want such performance-based compensation to be considered regular income taxed at a 35 percent rate rather than the current capital-gains treatment it gets with the accompanying 15 percent rate.

The policy logic is plausible. Plus, as Warren Buffett has famously argued, fund managers shouldn’t pay lower tax rates than their office assistants.

But legislation to change carried interest taxation probably isn’t going anywhere. Sure, the House just voted in favor of it. But the bill is DOA in the Senate, which has shown scant interest in direct higher taxes on the wealthy or on capital. For example, it declined to copy one of the House’s preferred methods of paying for healthcare reform — a surtax on the wages and capital gains of top earners.

Moreover, New York Democrat Charles Schumer, a key player on the Senate Finance Committee, is an avowed opponent of higher taxes on alternative asset managers.

What’s more, the United States has already trod this path unsuccessfully. The House voted overwhelmingly to tax 90 percent of AIG bonuses, but the effort went nowhere in the Senate. The Obama administration didn’t push the issue, and polls showed only a bare majority in favor once the issue was fully explained. There were also substantial questions about the constitutionality of a tax targeting a specific group.

U.S. bankers have another six weeks or so to stew before seeing an actual bonus check. But in reality, they should be able to enjoy the holidays.

Why bankers should worry in 2010

Dec 10, 2009 16:38 UTC

Already, the crazy ideas are returning, such as mortgage cramdowns. But more could be on the way in 2010, says the great Dan Clifton of Strategas (bank bonus tax, American version?):

We are entering a period where bank profits are increasing but lending is declining. Bonus season is on the horizon while job growth remains negative. And bank lobbying on financial regulation is increasing while politician’s approval ratings are declining. Adding even more fuel is that with government spending up and tax revenues lagging, sovereign fiscal issues are rising to the top of policy matrix.

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