Randomly Noted

If you are looking to make a contrarian macroeconomic bet in 2011, how about this one: real progress will be made in the U.S. at the federal and state level on reducing large, structural budget deficits.

I know it is a doozy. And I did say contrarian, which means if you believe it most people will say you are crazy. But contrarian sometimes does happen.

It’s pretty easy to build a case against deficit-cutting progress. Sky-high budget deficits at the federal level were just recently met by continued tax cuts, which makes the deficit worse. Messing with Social Security or Medicare still means flirting with the ‘third rail’ of American politics. State and city promises to retired workers are massive and underfunded. A divided government in Washington promises nothing but hostility and inaction.

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To no one’s surprise, The U.S. Treasury passed today on the opportunity to brand China a manipulator of its currency.

That was done as a way to avoid for now an artificial exercise imposed by law.

More telling, in the real world of hardball negotiations, the broad recent decline in the U.S. dollar’s value against many currencies could well give the U.S. less heft as it tries to jawbone Chinese leadership into submission on the yuan.

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In the wake of the Securities and Exchange Commission’s party line decision to allow big investors increased power over director nominations, the reactions have been as predictable as the long, long-coming decision appeared inevitable.

The “adoption of the proxy access rule by the SEC is an important advancement of the principles of investor protection,” said Rob Feckner, president of the board of administration of the California Public Employees’ Retirement System, better known as CalPERS. It is the biggest public pension fund in the country and exactly the type of institution that will benefit from the rule.

“We commend the SEC for its thoughtful, fair rule, and we are confident that with its use it will be considered a win-win for business and investors,” he said.

On the other side, the Business Roundtable said in part: “Far from effective reform, this ruling will allow special interest groups to pursue narrow agendas and exacerbate the market’s short-term focus, adding more uncertainty than workable solutions at a fragile time in our country’s economic recovery.”

The Business Roundtable is made up of chief executives of many publicly traded companies.

The rule allows shareholders who own at least 3% of a public company for three years to nominate up to 25% of a board of dirrectors. Those directors’ nominatiosn will be carried with board-nominated candidates on the proxy materials sent out each year to holders by companies. It gives big investors a low-cost way of nominating directors and increasing their ifluence with executives at their portfolio companies.

A mutiny in Australian politics is not unheard of, but certainly this one has caught many people by surprise.
Kevin Rudd was increasingly unpopular as prime minister in voter opinion polls for a number of reasons—his rollback of a pledge on a carbon emissions scheme and a plan to levy a new tax on profits in the mining sector–but to remove him so close to an election, with one expected within a matter of months, is a high-stakes gamble.

The anecdotal feedback among voters so far is that the manner in which the centre-left Labor party leadership has ousted Rudd, and installed Julia Gillard as the country’s first female prime minister, was all a bit unpleasant.

The move came swiftly, and most probably in response to internal party polling that would have shown Rudd–who came to power on a wave of optimism and popularity in late 2007–would struggle to win a federal election against his Liberal party counterpart, Tony Abbott. The government was in danger of becoming the first since before World War II not to secure a second term.

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If you asked a trader in U.S. stocks at the beginning of this week what the main catalysts would be for price action, it’s unlikely you would have been told an Obama administration plan to separate banks from their trading activities and limit their size would turn out to be a big one.

Another factor: the unlikely election of a Republican to a Massachusetts Senate seat, changing the balance of power in the U.S. Senate and changing the outlook for health care reform legislation, among other things.

Oh, throw in a deterioration in the position of Federal Reserve Chairman Ben Bernanke’s standing in the Senate, where he needs approval to carry on with his responsibilities passed the end of this month.

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At least for the day, the most powerful man in the U.S. financial industry and for equities markets is 82 years old, a man who ended his leadership of the Federal Reserve more than 20 years ago.

But Paul Volcker is back. Big time. Reportedly on the margins of the Obama administration even in his current role as an adviser, “the tall guy behind me,” in the words today of President Barack Obama, is back on stage figuratively and literally.

As the president announced two major initiatives that would radically change the world of America’s big banks, he was flanked by the Treasury Secretary, Tim Geithner, and economic adviser Larry Summers. He had with him two key Congressional leaders, Rep. Barney Frank, D-Mass., and Sen. Christopher Dodd, D- Conn. Importantly, he had Volcker and he had another regulatory veteran who’s been a straight shooter unbound by ideological restraints or misplaced party fealty. That’s William Donaldson, former head of the Securities and Exchange Commission.

Obama thanked both Volcker and Donaldson for their counsel, which, given the nature of the Obama proposals, was “old school” in more senses than simply a reference to the vast combined experience of both men.  

Agree with it or not, the “Volcker Rule,” enunciated by the president earlier today that would keep a bank from having anything to do with investment vehicles such as hedge or private equity funds, certainly signals Volcker’s return.

It is a fascinating resurrection. Volcker himself hasn’t changed his thinking. In fact, the consistency, strength and clarity of his convictions is what sets Volcker apart from so many other financial leaders inside or outside government. He tells it like he sees it and always has.

Just last month Volcker was pushing the essence of what’s now the “Volcker Rule” to a group of European bankers gathered at a Wall Street Journal conference in Horsham, England. I wrote then that he sounded like a disappointed and tough school master as he dismissed the bankers’ ideas for regulatory reform as “inadequate.” 

What has changed is the environment. The heavy, popular furor as big bank profits and big bonuses are rolled out likely played a role in the new Obama plan. That plan includes flat-out limits on bank size and restrictions on industry consolidation.

The election of a Republican as U.S. senator in Massachusetts, marking a  power shift in the Senate, might also have influenced Volcker’s rise and today’s program. Maybe the populist move is an attempt to get back on the favorable side of American voters.

Obama seemed a man trying to pick a fight with the banking industry. He used the word “obscene” again to talk about bonuses. He referred to a “binge of irresponsibility” by bankers that helped bring us last year to the edge of a second Great Depression. He scored bank industry lobbyists.

If enacted by Congress, these two points really do change the banking industry. Government involvement is significant. Bank freedom is clipped. Participants in the stock market know it and they don’t like it. The Dow Jones Industrial Average is down more than 200 points.

Did you read Dorothy Rabinowitz’s WSJ opinion piece on Massachusetts District Attorney Martha Coakley, the Democratic Senatorial candidate who’s up for election on Tuesday? You should, because it will make you wonder why President Obama is bothering to stump for Coakley in a last-ditch effort to save the seat for his party. Oops! That’s why he’s doing it. The Dems are in trouble as the 2010 midterm elections loom, and the party’s leader is doing what’s necessary to protect each and every Congressional vote. As I wrote yesterday in another context, desperate times call for desperate measures. But do they? If I were the president’s advisers, I’d be telling him to take a deep breath and craft a noble plan to salvage a presidency that still has a lot of potential to re-tie the fraying bonds which Peggy Noonan writes about today. All this said, I and perhaps you, too, took a bit of satisfaction from Obama’s attack on big banks this week, even as one felt slightly seamy for doing so. Rich bankers are such a cheap and easy target these days that it almost seems beneath the President of the United States to go after them when the problems afflicting our economy – including the financial services industry – are so much bigger and complex than what amounts to a payroll issue. The fundamental fin services issue before policy makers, regulators and us, the voters, is: what should a bank look like? Should it be a multi-tasking, uncontrollable behemoth like Citigroup or a slim, streamlined boutique like Lazard or the cliched Main Street deposit-taking bank? Is there a particular industrial structure, regulatory regime and compensation system that will protect us from the dangers of the just-ended decade – easy credit and easy mortgages put through the derivative department’s Cuisinart and peddled to the gullible? Aren’t we, who squandered our savings on McMansions only to get anti-foreclosure assistance,  as blameworthy as the be-suited M.B.A.s we’re flogging so publicly?