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Preview: RealClearPolitics - Articles - Lawrence Kudlow

RealClearPolitics - Articles - Lawrence Kudlow





Last Build Date: Tue, 31 Mar 2009 00:00:00 -0600

Copyright: Copyright 2009
 



A New Era of Govt-Controlled Business?

Tue, 31 Mar 2009 00:00:00 -0600

Sen. Bob Corker (R., Tenn.), probably the most knowledgeable man in Congress about the car bailout, and someone who argued months ago in favor of a pre-planned government-sponsored bankruptcy for GM and Chrysler, calls the Wagoner firing "a major power-grab by the White House on the heels of another power-grab from Secretary Geithner, who asked last week for the freedom to decide on his own which companies are 'systemically' important to our country and worthy of taxpayer investment, and which are not." Corker calls this "a marked departure from the past," "truly breathtaking," and something that "should send a chill through all Americans who believe in free enterprise." Mr. Corker has hit the nail on the head. And I think his idea of "a truly breathtaking" government departure from American free enterprise -- whether it's the banks or the bankrupt Detroit carmakers -- is exactly what caused stocks to plunge 250 points on Monday. Incidentally, most of the big bankers who met with President Obama in the White House last Friday want to pay back their TARP money, not take more of it. But the Treasury is conducting stress tests that could stop the TARP pay-downs and force the banks to take more taxpayer funds in return for even more federal control. The big bankers say they are profitable. And with an upward-sloping Treasury yield curve and some market-to-market accounting reform coming from the Financial Accounting Standards Board (FASB), the outlook for banks should be getting better, not worse. So why is the Treasury jamming more TARP money down bankers' throats, especially after announcing a new plan to use private capital to clean up bank balance sheets and solve the toxic-asset problem? It kinda sounds like the Treasury doesn't want to let go of its new uber-regulator status. As for Detroit, the carmakers should have been in bankruptcy months ago. And it is a bankruptcy court that should have fired GM's Wagoner and his board. Along with some serious pain for bondholders, bankruptcy would have broken the high-cost labor contracts with the UAW as well as carmaker contracts with dealers across the country. That's what bankruptcy courts are for. They're part of the free-market capitalist system. Former SEC chair Richard Breeden is arguing against a systemic uber-regulator for banks, and in favor of special financial bankruptcy courts. Once again, the story is court-ordered restructuring, not government control by political bureaucrats who like their power so much they want to keep running the various companies in question. And why isn't Obama's special auto task force ordering a replacement for Ron Gettelfinger, the UAW's president? Weren't their oversized pay and benefit packages a big part of the problem? Well, that's never gonna happen. The election power of the union is too strong. But this does reveal the political nature of these government bailout operations. Incidentally, in President Obama's speech on Monday about the Wagoner firing, as well as in Treasury term sheets for GM and Chrysler, there are multiple references to "the next generation of clean cars," to new CAFE-standard mileage increases, and to green power-train developments. All this is a big green climate-change priority for the new administration. But the simple fact is, small, tinny, and expensive green cars just don't work for consumers. And even if those cars are designed better, the cost structure of the carmakers will have to be brought down so far that UAW wages will be forced below those of the non-union shops in Detroit south (including Honda, Toyota, and other foreign carmakers who are now producing in the United States). So add the green revolution to the industrial-policy plans of the White House. Expect a big increase in CAFE fuel standards, even though small cars are simply not profitable. And plan on bailout nation taking a new left-turn toward the kind of central planning that has held down economic growth in Europe and Japan for so very long.[...]



A Hidden Agenda Behind the 90 Percent Tax?

Sat, 21 Mar 2009 00:00:00 -0600

Note that the $250,000 cut-off point for the tax is the same line drawn in the sand in Obama's budget for tax hikes on investors and successful earners. The president is proposing a tax rate of 40 percent, not 90 percent. But connecting the dots between Speaker Pelosi and Pres. Obama, it will be interesting to see if the president dares sign this bill.

And even though the 90 percent tax is a reaction to the AIG bonus fiasco, you have to wonder if the very-liberal-left House Democrats have a much broader agenda: to completely overturn the supply-side tax cuts of Ronald Reagan and John F. Kennedy.

A bit of history is in order. Following WWI, the Harding-Coolidge-Mellon Republicans returned the country to tax normalcy by reducing Woodrow Wilson's 75 percent wartime tax to 25 percent -- thus triggering the roaring growth of the 1920s. Then came the Depression, spawned in large part by Herbert Hoover and FDR, who raised the top tax rate to 63 percent, 70 percent, and finally 94 percent.

The Robert Taft Republican Congress elected in 1946 lowered those tax rates, but they later bounced back to 91 percent, where they held until JFK proposed sweeping tax reform in the 1960s. The top tax rate was reduced to 70 percent, igniting the 1960s boom -- until it was undone by the inflationary Fed and Nixon's de-linking of the dollar from gold. But Pres. Reagan slashed the top tax rate all the way down to 28 percent. This launched a multi-decade boom, with the top rate not straying far from Reagan's vision.

Now, Pres. Obama has said that he has no intention of returning to the 70 or 90 percent tax rates of the past. But one wonders if the 90 percent House Democratic tax rate on so-called unearned income (bonuses) might not be the congressional tail that wags the presidential dog.

Most folks will say this scenario is farfetched. But it's worth pondering. Is there truly a tax-the-rich hidden agenda in Washington that goes far beyond the Obama budget?

I wonder about this simply because there's a much better way to recoup the misbegotten AIG bonuses. Though no one in Congress is paying any attention to beleaguered Treasury man Tim Geithner, he explained in a March 17 letter to Nancy Pelosi that the Treasury "will impose on AIG a contractual commitment to pay the Treasury from the operations of the company the amount of the retention awards just paid. In addition, we will deduct from the $30 billion in assistance an amount equal to the amount of those payments." So the AIG bonus problem can be remedied in a much calmer and simpler way than returning to 90 percent tax rates.

But the bigger point is this: A 90 percent tax rate on financial bonuses is so punitive that it will surely drive away the best and brightest from the very banks that must heal the credit system. Do we really want D-minus students -- who are willing to accept massive tax punishment -- in charge of a trillion dollars in taxpayer money and spearheading economic recovery? The perverse incentives of tax retribution against AIG and other TARPed banks will surely backfire, and taxpayers and economic recovery will take the hit.

You see, taxes matter. They hugely impact economic behavior. The whole economic system is run on incentives to work, invest, and take risks. And it must pay, after tax, to ignite the entrepreneurial activity that really drives the economy. Like it or not, our free-market capitalist system is driven by the economic activist, provided he or she is properly rewarded.

So the real battle here in fact could be a war between the left wing of the Democratic party and the Reagan supply-side incentive model of economic growth.

Republicans in the House who just voted for massively high marginal tax rates had better think twice. When financial calm returns to the country, the GOP will not want to be accomplice to a confiscatory tax system that will stifle the economy and push America into decline for decades to come.




The AIG Outrage

Wed, 18 Mar 2009 00:30:00 -0600

But as things stand now, there still is no clear roadmap for the dissolution of AIG. There are ideas, but nothing is set in concrete.

And as for the $165 million or so in AIG bonus payments, the Obama administration -- including the president, Treasury man Tim Geithner, and economic adviser Larry Summers -- knew all about them many months ago. They were undoubtedly informed of this during the White House transition.

So there's no big surprise. Nobody should be shocked. But President Obama is doing his best play-acting ever. He knows full well that the nationwide outcry against federal bailouts and takeovers is only going to get worse on his watch. His poll numbers are already falling, and this AIG episode is going to pull them down more.

Incidentally, has anybody asked Team Obama why it is more than willing to break mortgage contracts with a bankruptcy-judge cram-down, but won't cram-down compensation agreements for AIG, despite the fact that the U.S. government owns the company? Kind of odd, don't you think?

The Wall Street Journal editors get it right when they ask: Who's in charge and what's the game plan? The whole AIG story is an outrage.

What's more, AIG is acting as a conduit for taxpayer money that is being sent to dozens of derivative counterparties, including foreign banks and American banks like Goldman Sachs. If we're going to bail out all these other firms, why not bail them out in full taxpayer view? Why is the money being laundered furtively through AIG? And where exactly is the end game for AIG? How are the taxpayers going to be repaid?

And what is Treasury man Geithner's role in all this? He appears to be the biggest bungler in what has become a massive bungling. My CNBC friend and colleague Charlie Gasparino thinks Geithner can't survive this. I am inclined to agree.

Nevertheless, behind the furor over AIG, there is some good news to report on the banking front. This week's decision by the Federal Accounting Standards Board (FASB) to allow cash-flow accounting rather than distressed last-trade mark-to-market accounting will go a long way toward solving the banking and toxic-asset problem.

Many experts believe mortgage-backed securities and other toxic assets are being serviced in a timely cash-flow manner for at least 70 cents on the dollar. This is so important. Under mark-to-market, many of these assets were written down to 20 cents on the dollar, destroying bank profits and capital. But now banks can value these assets in economic terms based on positive cash flows, rather than in distressed markets that have virtually no meaning.

Actually, when the FASB rules are adopted in the next few weeks, it will be interesting to see if a pro forma re-estimate of the last year reveals that banks have been far more profitable and have much more capital than this crazy mark-to-market accounting would have us believe.

Sharp-eyed banking analyst Dick Bove has argued that most bank losses have been non-cash -- i.e., mark-to-market write-downs. Take those fictitious write-downs away and you are left with a much healthier banking picture. This is huge in terms of solving the credit crisis.

In a column last week I suggested that not one more dime of government money is necessary for the banks. Instead, the marriage of the cash-flow valuation of bank assets and the upward-sloping Treasury yield curve will do the trick. Net interest margins are rising as banks purchase money for near-zero interest and loan it out at profitable rates. And the new mark-to-market reform will allow banks to hold their toxic assets for several more years and work them out -- just as they did back in the 1990s.

We don't need more TARP. We don't need to take over more big banks. And we don't need to have the government run things it simply isn't capable of running.




A Shotgun-Marriage Proposal

Sat, 14 Mar 2009 00:00:00 -0600

Out of the blue, bank stocks mounted an impressive rally this week, jumping nearly 40 percent on the S&P financial list. One after another, big-bank CEOs like Vikram Pandit of Citi, Ken Lewis of B of A, and Jamie Dimon of JPMorgan are telling investors they will turn a handsome profit in the first quarter, their best money gain since 2007. This is big news. And it triggered the first weekly stock gain for the Obama administration. But this anticipated-profits turnaround doesn't seem to have anything to do with the TARP. It's about something called the Treasury yield curve -- a medical diagnostic chart for banks and the economy. When the Fed loosens money, and short-term rates are pulled well below long rates, banks profit enormously from the upward-sloping yield curve. This is principally because banks borrow short in order to lend long. If bankers can buy money for near zero cost, and loan it for 2, 3 or 4 percent, they're in fat city. Their broker-dealer operations make money, as do all their lending divisions. So the upward-sloped yield curve is the real bailout for the banking system. Now, turn the clock back to 2006 and 2007. In those days, the Treasury curve was upside down. Due to the Federal Reserve's extremely tight credit policies, short-term rates moved well above long-term rates for an extended period, and that played a major role in producing the credit crunch. Since interest margins turned negative, the banks had to turn off the credit spigot, and all those exotic securities -- like mortgage-backed bonds and various credit derivatives -- could no longer be financed. The Fed's long-lived credit-tightening also wreaked havoc on home prices and was directly responsible for the recession that began in late 2007. At the time, Fed head Ben Bernanke said the inverted yield curve wouldn't matter. Gosh was he wrong. Today, however, after about a year of a positively sloped yield curve, bank interest margins and profits are turning up. In fact, despite the perpetual pessimism, the normalized yield curve is a leading indicator of economic recovery, according to models created by the New York Fed and others. Here's the second big point: Instead of spending a trillion TARP dollars to rescue toxic assets, why not ease or liberalize mark-to-market accounting rules? You see, banks still have a bunch of underwater toxic assets on their balance sheets. And unless the SEC or someone in Washington changes these rules, the banks may have to erase their new cash-flow-rich profit margins by marking down the value of mortgage- and consumer-related loans. These loans can't be sold in the current market. But if somebody tells the banks they don't have to sell these loans at distressed prices, and therefore don't have to take a big hit on profits and capital, the banks will enjoy plenty of breathing room to reap the benefits of the upward-sloping yield curve. Let the banks hold these investments over a long period, rather than force them to sell now. The economy will get better, as will housing and other impaired assets. You could even have a two-tiered disclosure process: Accounting purists could be satisfied with a full mark-to-market disclosure, while regulators could forbear capital-standard rules that shouldn't apply during this period of severe distress. As a result, banks would be in better shape to pass the Treasury's new stress test and wouldn't need new TARP capital injections that further extend taxpayer liabilities. Think of this: As net interest and profit margins rise while the yield curve is upward-sloping, higher bank profits can be used to replenish capital. Meanwhile, government authorities can cease and desist -- not only their punishment of private-equity shareholders, but also their clumsy attempts to control various bank operations (compensation, golf outings, means of[...]



Subsidize Bad Behavior?

Fri, 20 Feb 2009 00:30:00 -0600

All this took place on the air to the cheers of traders. Santelli called for a new tea party in support of capitalism. He's right. Obama's so-called mortgage-rescue plan amounts to $275 billion in new debt that will have little if any lasting impact on deeply corrected housing prices or the mortgage-default problem that stemmed from the insistence of government to throw home loans at lower-income people. A modest reduction in mortgage rates will have little impact on home prices, as Harvard professor Ed Glaeser has shown. And by the way, re-default rates on modified mortgages have been running 50 percent to 60 percent. This is not going to change. So why should we throw more good money after bad? Meanwhile, Wall Street is awakening to the disappointment that the securitized mortgages behind the toxic assets that have done so much damage to banks and the credit system are not being treated in the Obama program. The oversight is incredible. There are no safe-harbor provisions to protect mortgage servicers against lawsuits if agreements are broken. The ownership of these securitized mortgage pools is wide and far, spanning the globe. Breaking contracts is exceedingly difficult, especially without any legislated legal protection. Of course, banks that have whole loans can choose to modify them if they want. And in some cases it's much better to modify than foreclose. But 70 percent of this bank-owned paper is performing. It's the securitizations that have clogged up the world credit system. Then there's the bankruptcy-judge cram-down, which would allow the courts to renegotiate interest rates and loan principal. This would abrogate private contracts and throw out the rule of law. Do we think future investors will put up mortgage capital if they fear judges will overturn the terms of contracts? Home-loan supplies will fall and mortgage rates will rise. Then there's Fannie and Freddie, the big winners here. Only their products are eligible for mortgage relief. Jumbo mortgages are not. Neither are private-label mortgages created by various non-bank lenders. Fan and Fred already run 48 percent of the mortgage market. Obama's proposal would greatly enlarge that and move the mortgage system toward government nationalization. What's even more incredible is Team Obama's stubborn refusal to have any faith in the free market. In some of the hardest hit areas of the country, markets are already solving the housing problem. Writing on his Carpe Diem blog, University of Michigan professor Mark Perry notes that while California home prices dropped 41 percent in 2008, home sales in the state jumped 85 percent. It now looks like 2008 sales for single-family houses will exceed levels reached in 2007. What's more, the unsold-inventory index for existing single-family detached homes in December 2008 was 5.6 months, compared with 13.4 months for the year-ago period. And the median number of days it took to sell a single-family home dropped to 46.1 in December 2008, compared with 66.7 in December 2007. So inventories are dropping, the number of days to sell a home is falling, and sales are rising in the wake of lower prices. If the government really wants to help, instead of bailing out irresponsible mortgage-holders, it should support new and younger families who want to buy starter homes and begin to climb the ladder of prosperity. All this is free-market economics 101. And I say, let free-markets work. Let's remember that most folks -- even those with underwater mortgages, where the loan value is more than the home value -- do not walk away from their obligations. They don't want to wreck their credit -- and their homes are their castles. That's the American way. But if we penalize the good guys and subsidize the bad ones, we are undermining the moral and economic fabric of this country.[...]



Is Geithner Ready for Prime Time?

Wed, 11 Feb 2009 00:00:00 -0600

You can say a lot of things about President George W. Bush's big-government mistakes. But blaming the Bush tax cuts for the credit-crunched downturn is utter nonsense. It's ideological politics at its worst. (It's worth noting that while Obama was trashing supply-siders on Monday night, Scott Rasmussen's latest poll showed 62 percent of U.S. voters wanting the stimulus plan to include more tax cuts and less government spending.) Later in the news conference, Obama acknowledged how businesses that suddenly couldn't get credit pulled back on their investment and laid off workers -- workers who then cut back on their spending. That -- along with the Fed's stop-and-go monetary policy and a huge oil shock -- is much closer to the true cause of this recession. This is all most strange. Obama's attack on supply-side economics would rule out the successful Kennedy-Johnson tax cuts that spurred growth in the 1960s and the Reagan tax cuts that ignited growth in the 1980s. Even Bill Clinton cut the capital-gains tax. And George W. Bush's tax cuts helped generate a six-year economic expansion before the oil shock and credit crunch took hold. On Tuesday morning, stocks opened down about 75 points in the wake of Obama's pessimism. But stocks really started to tumble when Tim Geithner stepped to the microphone. He totally bombed in his debut. Geithner had no real plan to deal with the problem of unmarketable toxic assets on bank balance sheets. He offered no new architectural structure, no good way to remove the toxic assets, no clear pricing or funding proposals, and no meat on the bones. According to Merriam-Webster, a "plan" is "a detailed formulation of a program of action; a method for achieving an end." But Mr. Geithner had none of this. As a result, stocks plunged about 250 points. Prominent investment strategist Ed Yardeni described Geithner as an empty suit with an empty plan. A week earlier, ace CNBC reporter Charlie Gasparino scooped the speech by chronicling how Wall Streeters advising the Obama administration talked Geithner out of a government-backed "bad bank" that would somehow buy toxic assets to be either worked out profitably or resold to private investors. These were the same "greedy" executives that Obama and Geithner had been trashing. So now Geithner talks vaguely about some sort of public/private investment fund that will use government capital and provide financing for private investors, who are then supposed to buy toxic assets. Nobody on Wall Street is buying it right now. Geithner said the fund might cost $1 trillion, but there's no "there" there. No wonder bank stocks dropped 12 percent on Tuesday. By the way, Geithner did not offer any regulatory accounting relief, such as putting an end to the disastrous mark-to-market rule that has wrecked bank capital and is one of the root causes of the whole financial problem. Geithner did talk about an expansion of the Fed's Term Asset-Backed Lending Facility, or TALF, to help finance consumer-loan securitization packages that provide upwards of 40 percent of all consumer and small-business lending. This might work, but again there were no details. And the Fed has yet to start its TALF operation. Finally, Geithner talked about a comprehensive $50 billion housing-and-mortgage modification plan. But once again, no details -- especially on the controversial issue of having bankruptcy judges determine home-loan interest rates and lending totals without bank recourse to contractual obligations. One positive comes from a New York Times story claiming that Geithner beat back Obama's political advisers who want to nationalize big banks, fire senior bank executives, and establish heavy government controls over bank operations. But at the end of the day the absence of any clarity or pragmatic details from Mr. Geithner left stock markets sadder and poorer for the effort. Geithner would have been better off not giving a speech until[...]



Jobs Down, Stocks Up?

Sat, 07 Feb 2009 06:43:53 -0600

Mustard seeds planted a while back are now pointing to economic recovery. The huge energy tax cut is one such mustard seed. The related inflation collapse is another. By the way, in today's jobs report, wages rose again, and now stand nearly 4 percent higher than a year ago. With zero inflation, that's a real increase in worker purchasing power for the 92.4 percent, or 135 million workers, still employed.

Then, of course, the Federal Reserve has been pumping in money to offset credit and asset deflation. The old Milton Friedman M2 money measure has grown by $590 billion since early September for a 20 percent annual rate of increase.

In the short-run, as money rises and GDP declines during a recession, the turnover (or velocity) of money plunges. But the use of money eventually picks up, which means all that new M2 growth is going to stimulate the economy this year -- and by a whole lot more than the goofy stimulus bill now before Congress.

Monetary lags are long and variable. But the money supply historically kicks in somewhere between six and 12 months. Through January we've had five months of money stimulus. So stocks may now be telling us that the gloom-and-doom crowd -- and its pessimistic economic prognostications that cover all of 2009 and in some cases 2010 -- is about to be proven wrong.

The commodity markets -- among the first asset sectors to respond to money stimulus -- are stabilizing. Broad commodity indexes are 6 percent or so above their lows. Ditto for energy. The Baltic Dry Index, which measures shipping volume around the world (those commodities are in the cargoes), has mounted a big rally, up almost 100 percent off its bottom. Gold is up more than 20 percent. (Investors call this the "reflation" trade.) And long-term Treasury rates have moved from 2 percent to around 3 percent in the 10-year market, another sign that the future economy will be stronger than the past.

There's also hope for the hard-hit financial sector. A new bank-rescue plan to be announced Monday will probably guarantee a bunch of toxic assets. At the same time, the Fed is stepping up its efforts to refinance asset-backed bonds for banks, consumer-finance companies, and hedge funds in the secondary markets.

And while the quantity of money is rising significantly, the quality of credit is improving, too. All the credit-fear indicators -- from LIBOR all the way out to corporate-bond spreads -- have declined substantially.

Meanwhile, Bank of America CEO Ken Lewis told CNBC on Friday that he can get out from under TARP in three years. There will be no nationalization. Lewis also said his firm's acquisition of Merrill Lynch will be successfully executed over time. So it's no surprise that bank stocks were one of the leaders in Friday's huge rally.

With all the fiscal mania and Keynesian government-spending-multiplier talk in Washington these days, most folks have forgotten Milton Friedman's dictum that money matters. Indeed, money growth could well produce the biggest economic surprise this year. And as Art Laffer has taught us all, taxes also matter -- a lot. In fact, the only real stimulative part of the behemoth stimulus package is the simple fact that marginal tax rates will not be raised.

So cheaper energy, bundles of new money creation, zero inflation, and no tax hikes could very well combine to produce a stronger economy as the year progresses -- to the great surprise of the majority of economic pundits. That may well be the message of Friday's stock market rally, which shrugged off yesterday's painful slide in jobs.




Shelve This Stimulus Plan

Fri, 30 Jan 2009 00:40:00 -0600

Clinton economic adviser Alice Rivlin made the same point in testimony before the House Budget Committee. Her message: Divide up the package and slow down the process. And Sen. Richard Shelby told CNBC that Washington should "shelve the stimulus package" and instead attack the banking and credit problem first -- probably with a government-sponsored bad bank that would relieve financial institutions from their toxic-asset problem. Mr. Shelby believes the credit crunch remains the biggest obstacle to economic recovery. Later in the day when I interviewed Senate Republican leader Mitch McConnell, he agreed with Shelby that the stimulus plan should be shelved. For the first time -- as far as I know -- McConnell pledged to vote no on the package. Instead he wants larger tax cuts and smaller spending. McConnell might be willing to change his mind if the package changes, but he told me he didn't expect that to happen. And in what may prove to be the biggest stimulus-package hurdle of all, news reports suggest that Team Obama is contemplating as much as $2 trillion in TARP additions to rescue the banking system in one form or another. That would be $2 trillion on top of the nearly $1 trillion stimulus package. Government spending, deficits, and debt creation of this magnitude is simply unheard of. So the added TARP money will surely imperil the entire stimulus package as taxpayers around the country begin to digest the enormity of these proposed government actions. Financing of this type would not only destroy the U.S. fiscal position for years to come, it could destroy the dollar in the process. What's more, the likelihood of massive tax increases -- which at some point will become front and center in this gargantuan funding operation -- would doom the economy for decades. By the way, Scott Rasmussen's latest poll shows that already -- before the new TARP money is included -- public support for the humongous stimulus package has dropped to 42 percent. It remains to be seen whether Republicans can in fact stop the stimulus package, but that certainly would be a very good idea. The long-run financial consequences will certainly force higher future tax rates -- a prosperity killer feared by Arthur Laffer. And while all the social spending gets baked into the long-run budget baseline, the short-run implications of the plan have little economic-growth potential. Meanwhile, there's no shortage of alternative tax proposals that would truly re-ignite the economy. Former Ronald Reagan and George W. Bush economist Larry Lindsey criticized the Democrat package in Wednesday morning's Wall Street Journal, describing it as "heavily weighted toward direct government spending, transfers to state and local governments, and tax changes that have virtually no effect on marginal tax rates." Instead, Lindsey proposes a big payroll tax cut that would slice three points off the rate for both employer and employee. Rush Limbaugh also made an appearance in the Journal. He has a clever idea to give Obama 54 percent of the $900 billion package -- equating that amount to the new president's electoral majority -- while 46 percent, which was John McCain's electoral tally, would go to a plan that would halve the U.S. corporate tax rate and provide a capital-gains tax holiday for one year, after which the investment tax would drop to 10 percent. It was Sen. John McCain on Fox News last Sunday who started the stimulus revolt when he said he couldn't support the package and called for less spending along with a large corporate tax cut. Over in the House, Republican leaders John Boehner and Eric Cantor have successfully launched an opposition drumbeat by attacking congressional Democrats rather than directly hitting President Obama. Now all eyes will turn to Republican Senate leader Mitch McConnell to see if he can keep up this drumbeat. Will commonsense Americans[...]



Obama's Wounded Treasury Man

Tue, 27 Jan 2009 00:35:12 -0600

The surprising number of no votes suggests that both parties will keep Geithner on a short leash. And it was President Obama who ran over to the Treasury Department to swear Geithner in right after the Senate vote. This was unusual, but it's clear the new president is trying to stop the bleeding of his new Treasury man. Instead of a hoped-for early confirmation to get the next stage of the financial-bailout package moving, Geithner wound up being one of the last cabinet officers confirmed. But Geithner's gaffes are not all tax related. He tripped up again last Friday when it was discovered that he attacked China in written responses to Senate Finance Committee questions. This caused quite a stir on Wall Street, as gold soared and the dollar fell. Mr. Geithner will be the biggest bond salesman in American history as he attempts to successfully finance what will be trillions of dollars in new debt obligations. That's why it's hard to understand how he would poke a stick in the eyes of his biggest banker, namely China, by labeling them a "currency manipulator." Currency manipulator is an actionable phrase that could trigger a 27 percent tariff on Chinese imports, according to the highly protectionist resolution sponsored by Republican Lindsey Graham and Democrat Charles Schumer. Henry Paulson took great care to avoid that phrase during his tenure. The yuan appreciated close to 20 percent in recent years, before falling as China moved to help its sagging economy by stopping its deflationary currency policy. And during Obama's presidential campaign there were numerous protectionist overtones aimed at halting trade deals with Colombia, Panama, and South Korea, and at rewriting NAFTA. But the China card is a new one. During the Clinton years, Treasury man Robert Rubin and economic advisor Larry Summers, under whom Geithner served, maintained a strong and stable dollar policy. So with all these government bonds to sell, you would think Mr. Geithner would also want a stable currency to help his funding efforts. But his attack against China undermines the stable-dollar idea, and could force Treasury rates much higher during his term. Since Geithner is something of a wounded warrior from the tax non-payment controversy, Team Obama's economic policy is shifting toward a Larry Summers power-center right now. So it is equally important to note Summers's clear statements on Meet the Press on Sunday, when he called for repeal of the Bush tax cuts on investors and successful high-end economic activists. However, investor capital is on strike against stocks, real estate, and distressed toxic assets. So it's puzzling that Summers told NBC's David Gregory that the Bush tax cuts must be repealed. He left open the date. But he left no uncertainty about the intent. Of course, this could have a significant deterrent effect on investor decisions. It certainly connects the dots between Obama policy and the rantings of House Speaker Nancy Pelosi, who has similarly called for repeal of the Bush tax cuts. One would think, in today's deflationary investor environment, that pro-growth economic policies would seek to reward investors, not punish them. If Summers and Geithner propose a new government "bad bank" to purchase toxic assets, then somebody in the private sector is going to have to buy them at resale. This is why some economists have proposed a multi-year capital-gains tax holiday, including a significant increase in capital-loss write-offs against future tax liabilities. Or at a minimum, the new administration could spur interest in distressed assets by extending the Bush tax cuts, not repealing them. But even before Mr. Geithner settles into his new job, prosperity-killing threats from investor tax hikes, protectionism, and a weak dollar could throw a wet blanket over economic recovery. [...]



What Did Reagan's Inaugural Say?

Tue, 20 Jan 2009 00:25:00 -0600

Media commentators regularly compare the current downturn with the Great Depression, which seems like a big stretch. And there's a good chance Reagan was dealt a much tougher hand than the one Obama is holding today. For one thing, inflation today is zero. Back in Reagan's time it was double-digits. Interest rates today are historically low. In Reagan's day, they were 15 percent to 20 percent. We have suffered a tremendous oil shock, as did Reagan. But today's shock has completely reversed. And while today's recession is over a year old, Reagan inherited a recession that began in 1979 and didn't end until late 1982. Obviously, we now have the housing problem and the bank credit crunch. But some of that was present in Reagan's challenge, too. And a recent study from the Minneapolis Fed shows that several measures of output and employment haven't come close to the severe levels reached during many post-World War II recessions, much less the Great Depression. Rising to these challenges, Reagan gave his Fed chairman, Paul Volcker, the political ground to stand on to slay inflation with tough monetary restraint and a strong dollar. It was a signature achievement, and it opened the door to more than 25 years of unbelievable prosperity and wealth creation. Reagan also fingered excessive taxes as a chief recessionary factor. His second great achievement was dropping the top marginal tax rate on individuals from 70 percent to 28 percent. It's interesting how Obama has also cast himself as a tax-cutter, even though he's not slashing marginal tax rates. He instead opts for tax credits. But there's a similarity here to Reagan. So far, we don't know if Obama will repeal the Bush reductions in marginal tax rates on investment, but he seems to be leaning against it (even as House Speaker Nancy Pelosi wants immediate repeal). One inaugural line of Reagan's in some sense encapsulates his philosophy: "In this present crisis, government is not the solution to our problems; government is the problem." It arguably is the most famous line of the speech. Fifteen years later, in a State of the Union message, President Bill Clinton said, "The era of big government is over." Yet Barack Obama has said that only government can solve our current economic problems. Will he say as much in his inaugural address, and will it represent a complete reversal of the past three decades? Reagan, of course, was the quintessential optimist, and his inaugural speech is chock full of optimism: "It is time to reawaken this industrial giant. ... And as we renew ourselves here in our own land, we will be seen as having greater strength throughout the world. We will again be the exemplar of freedom and a beacon of hope for those who do not now have freedom." He also said: "We are not, as some would have us believe, doomed to an inevitable decline. So, with all the creative energy at our command, let us begin an era of national renewal. Let us renew our determination, our courage and our strength. And let us renew our faith and our hope." One can only hope that Obama, who has been sounding very bearish lately, can strike such a bullish and optimistic tone about America's economic future. Finally, regarding our enemies, Reagan spoke of "the will and moral courage of free men and women." He said, "Let that be understood by those who practice terrorism and prey upon their neighbors." Reagan mentioned George Washington, Thomas Jefferson and Abraham Lincoln. He praised all those who gave their lives in defense of America's freedom and national security. He said, "We are a nation under God, and I believe God intended for us to be free." It is reported that Barack Obama is reading past inaugural spee[...]



How Big-Government Is Obama?

Fri, 09 Jan 2009 00:26:41 -0600

Nobody really believes infrastructure spending will end the recession or create permanent new jobs. However, it's interesting just how much the Obama plan has changed since the election. The size has been roughly constant. But the mix of tax cuts and spending increases is now totally different. Instead of $100 billion worth of tax credits, there are now $300 billion worth of tax cuts. This includes a big new piece for business, more cash-expensing for small-business investment, and a restoration of the five-year tax-loss carry-back, which will especially help banks and homebuilders. It might even result in tax refunds for businesses, and might also allow banks to rid themselves of toxic assets, since the losses will now be spread over many years. So what we have now is an $800 billion stimulus package with $300 billion of so-called tax cuts which could infer less spending than before -- maybe only $500 billion worth. Obama's economic advisers are bragging to me about their new tax-cut package. They say they're very pro-growth. And you know what? I acknowledge it. People like Larry Summers, Austan Goolsbee, Christy Romer, and Tim Geithner are no left-wing big-government whackos. They may not be hard-core supply-siders. But in terms of the economics profession, I would call them center-right. And they absolutely understand the importance of private business and investment in the job-creating economic-growth process. And I think their views are the main reason for the reshaping of the Obama package between the campaign trail and the eve of inauguration. The problem is that they're not reducing marginal tax rates on large and small businesses or individuals. Their tax credits will be two-year's worth, not permanent. There will be no incentive effects to maximize growth. And many of the tax cuts are refundable credits, which really are a form of government spending. So it's not a supply-side package. However, I've really never met a tax cut I didn't like. And any tax cut is better than a spending increase since private companies and individuals will at least get the money instead of government. This is the interesting part of the Obama plan. Somewhere in there the tax cuts will have a small positive economic effect. I would have designed it differently, but then again Team Obama won the election. I guess I could say it could have been worse. Of course, Team Obama will have to contend with the sticker shock of a $1.2 trillion deficit for 2009, just printed by the Congressional Budget Office. And that's before the Obama stimulus plan. But I don't think Republicans really have a leg to stand on with the deficit argument -- or for that matter the spending argument. Yes, Obama is raising the ante, and the new numbers are just about over the edge. But a lot of that new deficit is TARP money that should be scored as investment -- not real spending. And in view of all the economic pessimism out there, I doubt if the public is very worried about deficits. What's most regrettable is that congressional Republicans have yet to make the alternative case. They haven't pressed for marginal tax-rate cuts as an option to Obama's credits. So far, the GOP is me-too. They've offered an echo instead of a choice. Meanwhile, polls now say the public favors Obama's plan by 55 to 65 percent. His personal approval rating is even higher. And he's being politically astute by reaching out to Republicans. He has virtually removed partisan rhetoric. Simply put, Obama is in the driver's seat right now. Sure, the Democratic Congress may mangle Obama's plan. They might even repeal the Bush tax cuts this year. So there is considerable uncertainty about the details of the final package. But I must say, a crafty Obama is doing his best top employ his version of the Reagan tax-cut p[...]



GOP Must Confront Obama on the Economy

Sat, 03 Jan 2009 05:12:25 -0600

The Republican leader is drawing a clear line in the sand. Okay, good. But the GOP has got to do more. It must start talking about tax cuts to grow the economy. And it must get back to the supply-side by talking about lower marginal tax rates on individuals, businesses, and investors. We don't need bailout nation. Nor do we need the government picking winners and losers in a massive, Keynesian, new-New Deal spending extravaganza. And it's not Obama's middle-class tax cut that's going to get us out of this economic jam. At best his vision is incomplete. But at worst his aversion to successful earners and investors is a real obstacle to full economic recovery. Social historian and early supply-side activist Irving Kristol taught us three decades ago that the top earners are the economic activists. They're the ones with the highest propensity to consume and invest. They're the ones who buy the yachts, which are built by blue-collar workers. And they're the ones who run the small businesses and provide the capital for the new entrepreneurial start-ups that are the lifeblood of the economy. It is they who energize free-market capitalism. If we had an economy without rich people we wouldn't have much of an economy. That's why lower tax rates to reward the economic activists -- the most prominent capitalists -- are so essential. In fact, the GOP has a great opportunity to challenge Obama's Keynesian pump-priming by insisting there be a major tax-cut component in any new fiscal package. Republicans shouldn't merely push for somewhat less government spending. They have to make a bold case that tax rates matter for economic growth and job creation. They must insist that any recovery package includes this key element. Shift the debate. Say clearly that a reenergized economy cannot occur without lower marginal tax rates. In particular, the GOP position should include lower tax rates on large and small businesses. Right now the top federal tax rate for C-corps is 35 percent. Small businesses, which pay the individual rate, also are taxed at 35 percent. These rates should be 20 percent for both C-corps and S-corps (including LLCs). This would make a huge difference. It would be a boon for our global competitiveness, since companies in the U.S. (as well as Japan) are taxed way above the rates of other advanced countries. It also would attract job-creating investment flows to the U.S. at a time when capital is on strike in our financial markets and economy. And while businesses collect corporate taxes, it's really consumers who pay the final cost. Republicans also could promote a middle-class tax cut that would reduce the 28 percent and 25 percent brackets down to 15 percent. And of course, the GOP should work hard to maintain the Bush tax cuts on capital gains, dividends, inheritance, and top individual rates. Senior Obama advisor David Axelrod recently told the Sunday talk-show hosts that the Bush tax-cut package of 2003 is "something we plainly can't afford moving forward." Well, in static terms, the sum-total of the 2003 tax cuts comes to somewhere between $25 billion and $40 billion. Compare that to a trillion-dollar spending plan. In fact, lower capital-gains tax rates will raise revenues, since this is the single most sensitive tax on the Laffer curve. Indeed, many economists -- including Alan Reynolds at the Cato Institute -- argue that the growth and simplification effects of reducing the corporate tax rate would be revenue positive. But the congressional Republicans have to step up to the plate right now. Me-too-ism on spending is a big mistake in both political and economic terms. Instead, the GOP should argue that fiscal policy needs a choice -- not an echo (to paraphrase the late conservative stalwart Barry Gold[...]



Time for a Choice -- Not an Echo

Wed, 31 Dec 2008 00:25:00 -0600

The Republican leader is drawing a clear line in the sand. Okay, good. But the GOP has got to do more. It must start talking about tax cuts to grow the economy. And it must get back to the supply-side by talking about lower marginal tax rates on individuals, businesses, and investors. We don't need bailout nation. Nor do we need the government picking winners and losers in a massive, Keynesian, new-New Deal spending extravaganza. And it's not Obama's middle-class tax cut that's going to get us out of this economic jam. At best his vision is incomplete. But at worst his aversion to successful earners and investors is a real obstacle to full economic recovery. Social historian and early supply-side activist Irving Kristol taught us three decades ago that the top earners are the economic activists. They're the ones with the highest propensity to consume and invest. They're the ones who buy the yachts, which are built by blue-collar workers. And they're the ones who run the small businesses and provide the capital for the new entrepreneurial start-ups that are the lifeblood of the economy. It is they who energize free-market capitalism. If we had an economy without rich people we wouldn't have much of an economy. That's why lower tax rates to reward the economic activists -- the most prominent capitalists -- are so essential. In fact, the GOP has a great opportunity to challenge Obama's Keynesian pump-priming by insisting there be a major tax-cut component in any new fiscal package. Republicans shouldn't merely push for somewhat less government spending. They have to make a bold case that tax rates matter for economic growth and job creation. They must insist that any recovery package includes this key element. Shift the debate. Say clearly that a reenergized economy cannot occur without lower marginal tax rates. In particular, the GOP position should include lower tax rates on large and small businesses. Right now the top federal tax rate for C-corps is 35 percent. Small businesses, which pay the individual rate, also are taxed at 35 percent. These rates should be 20 percent for both C-corps and S-corps (including LLCs). This would make a huge difference. It would be a boon for our global competitiveness, since companies in the U.S. (as well as Japan) are taxed way above the rates of other advanced countries. It also would attract job-creating investment flows to the U.S. at a time when capital is on strike in our financial markets and economy. And while businesses collect corporate taxes, it's really consumers who pay the final cost. Republicans also could promote a middle-class tax cut that would reduce the 28 percent and 25 percent brackets down to 15 percent. And of course, the GOP should work hard to maintain the Bush tax cuts on capital gains, dividends, inheritance, and top individual rates. Senior Obama advisor David Axelrod recently told the Sunday talk-show hosts that the Bush tax-cut package of 2003 is "something we plainly can't afford moving forward." Well, in static terms, the sum-total of the 2003 tax cuts comes to somewhere between $25 billion and $40 billion. Compare that to a trillion-dollar spending plan. In fact, lower capital-gains tax rates will raise revenues, since this is the single most sensitive tax on the Laffer curve. Indeed, many economists -- including Alan Reynolds at the Cato Institute -- argue that the growth and simplification effects of reducing the corporate tax rate would be revenue positive. But the congressional Republicans have to step up to the plate right now. Me-too-ism on spending is a big mistake in both political and economic terms. Instead, the GOP should argue that fiscal policy needs a choice -- not an echo (to paraphrase the lat[...]



We Need Rich People

Fri, 26 Dec 2008 00:25:59 -0600

And then in today's meeting Biden talked about the stimulus package with all that new spending. It's going to be an avalanche of government spending.

In today's Wall Street Journal, Nobel Prize winning economist Robert Lucas said all this spending isn't necessary. Let the Fed take care of the economy, he argued. He wrote, "It entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities. These seem to me important virtues."

Lucas is right. We do not need bailout nation. Nor do we need the government picking winners and losers in some massive new New Deal industrial policy. In fact, the absorption of scarce private resources by the government may very well make economic matters worse, not better.

And then of course Biden went on about how Obama is going to help the middle class, and how it's the middle class that's going to get us out of this jam. While I listened carefully, I never heard him say anything about rich people, or successful earners and investors. No mention of businesses. Irving Kristol taught us 3 decades ago that the top earners are the "economic activists". They are the ones with the highest propensity to consume and invest. They're the ones who purchase the yachts, which are subsequently constructed by blue-collar workers. And they're the ones who run the small businesses and provide the capital for new entrepreneurial startups that are the lifeblood of this economy.

If we had an economy without rich people, we wouldn't have much of an economy. That is why lower tax rates to reward the economic activists--that is, the most prominent capitalists--would be ever so helpful. Or slashing business tax rates that would create investment inflows to promote high wage earning new jobs. And, it would give consumers a break since they're the ones that bear the brunt cost of high corporate taxes.

As it happens, there was a story in Sunday's Washington Post that indicated Team Obama is considering some kind of business tax breaks. Now that would be a very good thing indeed. But mostly I want to put a good word in for rich people. Can't do without them.




Shock-and-Awe Easing

Wed, 17 Dec 2008 00:30:00 -0600

However, the really big news is not the fed funds target. It's this sentence: "The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level." (Italics mine.) The Fed goes on to say it will purchase large quantities of agency debt -- meaning Fannie and Freddie -- and more mortgage-backed securities (quite possibly toxic assets). In other words, it wants to drive mortgage rates down. What's more, the Fed may buy long-term Treasury securities, also to drive bond yields lower. And it will purchase the Term Asset Backed Securities Loan Facility in order to finance consumer-related bonds and pump liquidity to consumer lenders. The message here is that Bernanke & Co. is locked and loaded, ready to shoot every last bullet to help credit markets and the economy. In particular, the Fed is formally adopting a Milton Friedman-type approach that is directed at expanding its balance sheet and stimulating the economy. The Fed's balance sheet already has more than doubled from roughly $900 billion to $2.2 trillion. For all we know it may soon double again. Money-supply measures are already growing at 7 to 8 percent. And while some economists worry about higher future inflation from all this money-creation, Tuesday's consumer price report actually showed deflation of 10 percent annually over the past three months. That gives the central bank ammunition to ignore inflation and aim instead for a massive monetary easing. Will it all work? In the short-run it may. But is a near-zero interest rate, and even more pump-priming, really the best longer-term solution? It's still troubling that Fed policy lacks a true anchor or compass. In the past, targeting the economy alone has resulted in higher inflation. That's why many conservatives wish the central bank would keep a sharp eye on the value of the dollar and commodity prices (including gold). While energy and other commodity prices have experienced a wicked plunge since the summer, in recent days -- ahead of the Fed's new policy decision -- the dollar has fallen and commodities have rebounded. But the question is this: In the future, will the Fed be able to unwind its huge cash-liquidity injections? The same can be asked about government bailouts for banks and quite possibly Detroit. Yes, this is an emergency. But it's also unprecedented government intervention in the economy. How we restore traditional free-market capitalism remains unsaid and unknown. That is worrisome. Stocks cheered the Fed's move by rallying nearly 400 points on Tuesday. Savvy investors Ken Heebner and Robert Doll -- two financial and political conservatives -- strongly endorsed the Fed moves on CNBC. This massive easing almost certainly underscores the likelihood that stocks bottomed on November 20. Both the monetary surge and the upturn in equities are pointing to economic recovery next spring or summer. Meanwhile, on the fiscal policy front, everyone has been focusing on Obama's huge big-government-spending infrastructure play. But Team Obama is also drawing up plans for a massive purchase of mortgages in order to get long-term borrowing rates down to 4.5 percent -- a full percentage-point drop. The specifics are sketchy, but there's no question the Obama Treasury, led by Tim Geithner, will be working hand-in-glove with Geithner's former Fed boss Ben Bernanke to drive down mortgage rates and stop the housing slump. Perhaps Bernanke himself scored a few points with his historic shock-and-awe easing move. It's as though Be[...]