Market Talk

University of Maryland economics professor Peter Morici takes both parties to task over the issue of budget reform, saying neither side is facing up to the reality of the situation and the challenges. His last line is actually the most telling (we journos would say he buried the lede): “Americans really need adults to govern but few can be found on either side of Pennsylvania Avenue.”

Ain’t that the truth?

The Budget Follies: Demagoguery and Sophistry Reign

Federal finances are in shambles, and Americans should be amused if not disgusted by the explanations and solutions both political parties offer.

The President’s budget plan issued in February projects a $1.6 trillion deficit for 2011 and a cumulative shortfall of $11 trillion through 2021.

Things may get worse, as additional revenue and cost savings from health care reforms don’t materialize and the 4 percent growth assumed by the President’s budget for the next four years proves Pollyanna.

Time and again, House Democratic Leader Nancy Pelosi and President Barack Obama have demagogued the problem, blaming two wars and tax cuts instigated by President Bush and the Great Recession.

To set the record straight, in 2007, the year before the financial crisis, with wars in Afghanistan and Iraq at full tilt and Bush tax cuts in place, the federal deficit was only $161 billion. In 2011, with the economy in its second year of recovery and TARP money returning to the Treasury, the deficit is ten times larger and greater than $1.4 trillion notched in 2009, the pit of the recession.

Continue reading…

Um, what?

WASHINGTON—President Barack Obama on Monday told corporate leaders they must shoulder responsibility for lifting the shaky economy and vowed to “knock down” government barriers that hamper business growth.

That’s the lede (that’s how we spell it in the news business) of the Journal’s story about President Obama’s speech today to the U.S. Chamber of Commerce.

But here’s my question: at a time when corporate profits are near their all-time peak, when profit margins are near their all-time peak, when we just pointed out how much the government has already done to goose corporate profits, exactly what government barriers are there to business growth?

Here’s a few more grafs (yeah, more newspaper stylings) from the story to flesh this thing out:

Mr. Obama, speaking to the U.S. Chamber of Commerce, the large business lobby, said he wants the business community’s help in revamping the corporate tax code, expanding the economy and making government run more efficiently.

“We’re trying to run the government more like you run your businesses—with better technology and faster services,” Mr. Obama said at the Chamber.

In exchange for their help, Mr. Obama said, to applause, “I’ll go anywhere anytime to be a booster for American businesses, American workers, and American products.”

So what this largely boils down to is that the administration is going to lower corporate taxes. Great, one more giveaway. Now, what could possibly be the justification for that? Do not tell me high taxes are killing profit growth. Profit growth is doing just fine. Better than fine, actually.

Continue reading…

I’ll tell you what, if I’m Hosni Mubarak, I’ve got my bags packed. “Just in case” more and more looks like you can just remove the “just.” And the “in case.”

The surge against the Mubarak regime continues to build steam in Egypt, and all the latest headlines point toward his eventual ouster. The one that really puts it over the edge, far as I’m concerned, is the bit from the Obama administration, which called for an “orderly transition” to a new government. They stressed that they weren’t calling for Mubarak’s ouster, but that’s a fig leaf at best. Obama sees the handwriting on the tank.

Then’s there the stance of the army in Egypt. Here, too, it’s not looking so hot for Hosni. The army has stated it won’t use force against the people and opined that their complaints are “legitimate.” That’s not just an air quote for the sake of it; that’s what the army said.

Now the protesters are trying to get a million people to march in Cairo tomorrow, and governments and businesses are scrambling to get their people out. The protests are only growing in size, incidentally.

So the only real question now is what the new government will look like, how will it address the grievances of the Egyptian people, how will it comport itself with its neighbors and the world at large. Also, will the protests continuing spreading, and topple other governments. Actually, that’s several questions. Several big questions.

While most businesses in Egypt have been shut down, the Suez Canal is still operating normally. Regardless, crude oil futures in Europe topped $100/barrel (subscription link) and $90/barrel in New York. Stocks in New York are modestly higher, but the market is reacting more to its own internals than the geopolitical externals. I still think the sell-off Friday had as much to do with a market that was poised for one as it did the events in Egypt, which is what I said on Friday’s News Hub.

All this is making Israel very nervous. As we’ve said, there’s no guarantee the events unfolding will lead to governments more friendly toward the west and Israel; it’s a good bet to go the other way, in fact, if for no other reason than that the social problems besetting citizens in Egypt and across the Mideast, high unemployment, rising food prices, aren’t easily fixed, no matter who’s running the show.

It’s always easier to find a scapegoat than solve problems, and the U.S. and Israel have been convenient ones in the Middle East for decades. Israeli Prime Minister Benjamin Netanyahu said Egypt’s revolution could end up producing a regime like Iran’s, a radical, hard-line Islamic ruling party, after the fall of the Shah. Seeing as the Israelis have been very careful about what they’ve said during the past week, this speaks to the level of anxiety in Israel.

Still, it’s happening. Anybody want to take bets on whether Mubarak lasts the week?

Lot to digest today, a raft of earnings, Verizon, Johnson & Johnson, DuPont, 3M as well as others, Obama’s State of the Union address tonight, the Fed meeting, but they still give us only three minutes.

It’s interesting that the Dow and S&P 500 both got very close to some big, round numbers, 12000 and 1300 respectively, the kind of numbers that usually get the animal spirits flowing. But before the could kiss those targets, the spirits started flowing in the other direction. See how long that lasts, but we’re on guard for an at least short-term top.

I read another comment from a Wall Street type this morning crowing about the “sustainable” recovery in the U.S. The strategist is quite pleased with earnings, noting they’re exceeding “expectations,” but also pleased that sales are likewise exceeding “expectations.” This is a sign that the recovery is building some kind of momentum.

You don’t say?

Let’s see President Obama tell the nation tomorrow night that it can’t afford the tax giveaways the government, in fact, just gave away, and that he’s going to reverse them. Let’s see the FOMC on Wednesday come out and say it’s going to raise rates and scuttle QE2. Then we’ll see how “sustainable” the “recovery” is.

Any talk of the economy’s fundamental strength is useless when the federal government not only leaves the Bush tax cuts in place, afraid to upset the fragile state of the consumer, but also goes ahead and cuts payroll taxes. When the Federal Reserve has short-term interest rates pinned to the floor with the spilled beer and peanut shells, and is out there pumping $80 billion a month into the marketplace, which acts both as a continuing back-door bailout for the banks and a ready stream of liquidity to feed speculators with easy money.

Ask any state treasurer how sustainable the recovery is.

Ask anybody who saw their wages slashed if the “recovery” is “sustainable.” Ask anybody who’s lost their job if the recovery is sustainable. Ask any of the more than, well more than, one million people who have been out of work for more than two years if the “recovery” is “sustainable.”

Hell, ask them if there’s even been a recovery.

Continue reading…

This has got to be the emptiest threat I’ve heard in I don’t know how long, and I hear a lot of them these days.

From the Journal’s Damian Paletta:

WASHINGTON (Dow Jones)–Top White House economic adviser Lawrence Summers praised the White House’s tax-cut compromise with Republicans, but issued a defiant warning to Congress to not make some of these cuts permanent when major elements expire in two years.

“Compromises that were necessary with a weak economy in 2010 should be inconceivable as recovery accelerates in 2012,” Mr. Summers said in a speech at the Economic Policy Institute Monday.

Really? Oh, really, Mr. Summers? Let’s see if we can guess what the argument’s going to be in two years time.

If the economy’s good: low tax rates boost spending, which boosts economic activity, so raising rates would be a bad thing.

If the economy’s bad: the economy’s bad. Raising rates now would make it worse.

If the Democrats caved now, think they’ll have any more gumption in two years time? With Obama facing a bracing re-election fight against Sarah Palin? Good luck with that one. Face it, the tax rates are here to stay. Nobody cares about deficits in Washington, absolutely nobody, unless it’s to use them as a wedge against the other party.

You know what, I’ll be as happy as the next guy to see my paycheck get bumped up a bit next year, both because my taxes won’t be rising, and the reduction in the FICA tax. I’ll finally be able to complete my collection of racoon-proof garbage cans, and I can easily afford that new ice scraper for my car, and maybe I’ll buy a few Beatles songs at the iTunes store. Hell, I might even buy a new winter coat. The wife says my current one makes me look like the Unibomber.

But, I mean, come on! $860 billion? $860 billion?!

That’s what the Obama-GOP tax-cut deal is going to cost the US government over the next decade. Does that strike anybody else as, well, insane? Especially considering the bill effectively covers a two-year period? How’s that math work? You know what all those Congressmen and Congresswomen and the President should do with their savings? But some dictionaries. Turn to the first section, “A,” and look up “austerity.” It comes after “asinine.”

For two years, all we’ve heard out of Washington, and the GOP especially but even from the White House, has been this canard about how the government needs to straighten out its finances. Looming fiscal train wreck I believe is a phrase I’ve heard bandied about.

Continue reading…

This isn’t the time for a divided government, and I don’t necessarily mean Democrats controlling one branch and Republicans another. I mean this isn’t the time to have the two parties that ostensibly run this nation squabbling like a bunch of children out in the schoolyard, while the school’s on fire. But it seems like that’s what we’re gonna get.

While the GOP is pretty clearly going to take the House, creating the much ballyhooed gridlock, the Senate seems a long shot. The conventional wisdom on Wall Street is that this is a good thing; if Washington is locked in its own box, it can’t get in the way of private enterprise. But, as Miller Tabak’s chief economic strategist Dan Greenhaus pointed out to me a little while ago, “gridlock” is a benefit for the stock market and businesses in a fully functioning economy. Needless to say, that is something we do not have right now.

Further complicating matters: Greenhaus says he went back 100 years, and couldn’t find a single example of a situation where the President had a split Congress. Usually, he said, both houses turn together. What this could mean, obviously all the returns aren’t in yet, is that Obama may have less to fear from Congress than, say, Bill Clinton did in 1994, since nothing that comes out of the House will get past the Senate, Greenhaus said. So this idea that Obama may have to tack to the center just may not come to fruition this time around.

“These guys can’t come close to repealing healthcare,” Greenhaus said of the tea partiers, “but they’re gonna give it a try.” So the GOP, out of some ideological zeal, is going to waste as much time trying to repeal the healthcare bill as the Obama administration did trying to get it passed. Meanwhile, precious time will be wasted (remember, this is not a fully functioning economy.)

And all the big questions and problems, tax cuts, financial reform, government spending, won’t be solved with a hopelessly divided government, he said.

He pegged the over/under on GOP advances in the House at 50; less than that would rob the Republicans of a clear victory, and a larger mandate. But more than how many seats change hands, he said, is how the divergent views of the new Republican Congressmen play out. The rowdy tea partiers who are making the big splash tonight may not hold much sway with the GOP leadership. Their policies sound good, he said, but they don’t poll so well. That dynamic will be more important that how many seats are won or lost tonight, Greenhaus said.

Barry Ritholtz nails the problem with the Obama administration:

The great irony is that the man who ran on the campaign slogan of Change failed to deliver it in any meaningful way — at least, where the public wanted it — in getting the reckless runaway banks under control, and in stimulating the moribund, post-credit crisis economy.

Read the whole post. It’s a better take on the same topic I wrote about yesterday, that Obama wasted a chance to do something big, something lasting, something important. Instead, he went for healthcare.

I’m starting to think, too, for whatever it’s worth, that the Democratic calculus at some point became, who cares if we lose the midterms, that’s a historical fight we’re not going to win anyway, let’s do the healthcare bill. Which stinks, frankly. They should’ve gone big on the economy, as big as possible. They should’ve forced some real accounting from the financial industry, instead of that milquetoast reform bill and those white-wash stress tests.

But, think about this: the electorate has rejected the GOP, in 2006 and 2008. They’re rejecting the Democrats tonight. They’re angry. They’ll probably still be angry after two more years of what promises to be rabidly partisan politics. Who are they going to reject in 2012?

God, I hope it’s both parties. I think it’s too much to hope for, but I’m hoping for it all the same.

Now that the recession’s “officially” over, what changes if any can we expect to see?

- I expect that tomorrow the FOMC, the rate-setting committee of the Federal Reserve, will announce that it’s going to start raising interest rates, now that the recession’s over. After all, the Fed cut its overnight fed funds rate to zero in response to the recession. If the recession’s over, it should be self-evident that a zero percent interest rate is manifestly irresponsible. So forget all this talk about QE II, about another bond-buying scheme from the Fed. It’s time to start the exit strategies and rate tightening.

- I expect the Obama administration to phase out all stimulus programs, and to scuttle the programs it proposed just a few weeks ago, now that the recession’s over. Forget about extending the Bush tax cuts. They are not needed. The economy’s expanding.

- The debate over whether or not to extend unemployment benefits will disappear on its own now that the recession’s over, as companies start hiring again and that army of the unemployed dwindles down to nothing.

- The FASB, the Financial Accounting Standards Board, reinstates the rules for mark-to-market accounting that existed before the recession started, now that the recession’s over. After all, the rules were suspended because of the emergency created by the credit crisis. If the crisis is over, it’s time to reinstate the old rules.

- States and local governments will balance their budgets again, as their revenue rises, since now that the recession’s over and the economy’s expanding citizens will see their incomes recover, which will boost the tax rolls.

How many of those things do you expect to happen? I’d put the odds on them, in order, at zero, zero, zero, zero and zero. So long as the Fed is keeping interest rates at zero, a number that in any other context would be considered dangerously irresponsible, so long as hiring remains stagnant, so long as the government is more concerned about stimulus than austerity, so long as state and local governments remain on the edge of the budgetary abyss, whatever tag we give the economy won’t matter. It’s a point John’s made a few times, and it’s worth bearing in mind as you hear people trying to talk up the recovery.

It’s going to a long, protracted, painful phase we’re going through here.