September, Monday 19, 2011
Obama proposes new taxes on wealthy for half of debt plan
Why the White House changed course
Fed Runs Risk of Doing Less Than Investors Expect
Rearranging the Deck Chairs
Treasury bond yields dive as market bets on new Fed buying plan
Greek creditor talks to continue Tuesday
Greek creditor talks end without decision on return of inspectors, to continue Tuesday
Soros: Crisis ‘Worse Than Lehman’
Geithner denies ignoring Obama’s request on banks
Geithner denies new book’s allegations that he ignored Obama’s request on banking industry
Obama’s Economic Quagmire: Frank Rich and Adam Moss Talk About What’s Really in Ron Suskind’s Revealing New Book About the White House
SEC moves to limit firms’ bets against clients
News International to pay $4.7 million to settle hacking
Wall St. Protesters Say They’re Settled In
DOW – 108 = 11401
SPX – 11 = 1204
NAS – 9 = 2612
10 yr. Yld = 1.94%
GOLD – 30.40 = 1788.00
OIL – .14 = 85.56
We have three major stories in today’s market: President Obama’s debt plan, the Federal Reserve’s two day FOMC meeting later in the week, and the European meltdown.
Let’s start with the President’s plan: Obama came out with a plan to cut the deficit by $3 trillion dollars; half with spending cuts and half with tax increases.
Obama threatened to veto any plan to tame the debt that does not pair cuts to Medicare and Medicaid with increases in taxes on the rich.
“We can’t just cut our way out of this hole,” Obama said. “It’s going to take a balanced approach.”
So, Obama is taking a populist approach, diametrically opposed to many of the views supported by Republicans, who want to balance the nation’s books mainly through cutting spending, particularly in Medicare and Medicaid.
Republicans argue that Obama’s plan to tax the rich is a divisive political strategy. But Obama rejected that view Monday.
“This is not class warfare,” Obama said. “It’s math.”
Obama proposed new taxes on the wealthy, a new minimum tax rate for millionaires as part of a rewrite of the U.S. tax code, eliminating or scaling back a variety of loopholes and deductions for those making more than $250,000 a year. About half of the tax savings would come from the expiration next year of the George W. Bush administration’s tax cuts for the wealthy. The proposed tax will target the top 0.3 percent of American earners, whose income often comes from investment profits, which are taxed at 15 percent — compared with the top tax bracket of 35 percent that the wealthiest Americans would ordinarily pay.
Obama is calling the special tax the “Buffett Rule,” in reference to billionaire investor Warren Buffett, who has said that the richest Americans should pay more in taxes.
But the president did not call for any changes in Social Security and is seeking less-aggressive changes to Medicare and Medicaid than previously considered. Ninety percent of the Medicare savings comes from reducing overpayments.
Any reduction in Medicare benefits would not begin until 2017.
Other cuts in domestic spending would bring the total spending savings to $580 billion. These cuts include scaling back farm subsidies, altering pensions and benefits for members of both the civil service and military service, and other changes in government operations.
About $1.1 trillion in savings is also expected from winding down the wars in Iraq and Afghanistan.
Combined with the debt deal this summer, Obama’s plan would reduce the federal debt by $4.4 trillion over a decade.
At least in theory. In the real world Obama’s plan has little chance of passing. Republicans have vowed to oppose any new taxes, and even more strongly – they are just opposed to anything from Obama. If this sounds like political posturing – yep, that’s about right. Last week, Obama told supporters at a fundraiser in Washington that the upcoming debate would crystallize the difference between his views and those of the GOP. Nothing is going to get done, and the situation will be left to the SuperCommittee of 12, and nobody will be happy with that deal.
A deal this summer to raise the federal debt ceiling included nearly $1 trillion in cuts in domestic spending and the creation of a congressional committee to find between $1.2 trillion and $1.5 trillion in additional budget savings.
President Obama’s deficit-reduction plan is most interesting for what’s not in it. It does not cut Social Security by “chaining” the program’s cost-of-living increases. It does not raise the eligibility age for Medicare from 65 to 67. Nor does it include any other major concessions to Republicans. Rather, the major compromise it makes is with political reality — a reality that the White House would prefer not to have had to acknowledge.
Since the election, the Obama administration’s working theory has been that the first-best outcome is striking a deal with Speaker John Boehner and, if that fails, the second-best outcome is showing that they genuinely, honestly wanted to strike a deal with Speaker John Boehner.
That was the thinking that led the White House to reward the GOP’s debt-ceiling brinksmanship by offering Boehner a “grand bargain” that cut Social Security, raised the Medicare age, and included less new revenue than even the bipartisan Gang of Six had called for. It came close to happening, the “grand bargain” ultimately fell apart. Twice.
The collapse of that deal taught them two things: Boehner doesn’t have the internal support in his caucus to strike a grand bargain with them, and the American people don’t give points for effort.
The new theory goes something like this: The first-best outcome is still striking a grand bargain with the Republicans, and it’s more likely to happen if the Republicans worry that Democrats have found a clear, popular message that might win them the election. The better Obama looks in the polls, the more interested Republicans will become in a compromise that takes some of the Democrats’ most potent attacks off the table.
But the second-best outcome isn’t necessarily looking like the most reasonable guy in the room. It’s looking like the strongest leader in the room. That’s why Obama, somewhat unusually for him, attached a veto threat to his deficit plan: If the supercommittee sends him a package that cuts benefits for Medicare beneficiaries but leaves the rich untouched, he says he’ll kick the plan back to Congress.
In other words, it’s the triumph of the old way of doing things, partisan politics and let the voters decide.
The Federal Reserve has two days of meetings this week. Expectations are low. The idea is that they will do something – not that anybody really thinks there is anything great to be done but rather because it would be bad form for the Fed to meet for two days and then announce “Hey, we got nothin’.”
The overriding argument for action is the persistent weakness of the American economy, which has left more than 25 million Americans unable to find full-time work. If the Fed were not to do anything having built market expectations to a pretty decent level, I think the markets would react quite negatively to that.
But the Fed also faces mounting pressure against additional action. Moreover, the options available to the central bank have less power to generate growth, a greater chance of negative consequences, or both. In other words, they are running out of ammunition.
The move markets are anticipating is called Operation Twist, a new effort to reduce long-term interest rates, which would allow businesses and consumers to borrow more cheaply. Yields on the benchmark 10-year Treasury note fell to a record low of 1.88 percent at the start of last week, reflecting the Fed’s earlier efforts to lower rates and investors’ pessimism about the economy.
The hope is that an additional reduction in rates will provide a little more encouragement for companies to build factories and hire workers and for consumers to buy cars and dishwashers.
The Fed has held short-term rates near zero since December 2008, by increasing the supply of money.
To further reduce long-term rates, the Fed bought more than $2 trillion in government debt and mortgage-backed securities, reducing the supply available to investors and thereby forcing them to pay higher prices — that is, to accept lower interest rates.
The Fed could seek to amplify that effect by adjusting the composition of its portfolio, selling short-term securities and using the proceeds to buy long-term securities, which it predicts would further reduce rates.
An analysis by the forecasting firm Macroeconomic Advisers estimated that such an effort by the Fed could raise gross domestic product by 0.4 of a percentage point over the next two years, and create about 350,000 jobs. That is comparable to estimates of the impact of the central bank’s most recent aid campaign, the QE2, or quantitative easing, purchases of $600 billion in Treasury securities, which concluded in June.
Studies also have found the Fed’s success in reducing rates has not yielded the full measure of predicted benefits. There is this ongoing concern the Fed is doing nothing more than aggravating the lending situation by crushing down longer-term yields. The logic is that banks need some interest rate spread to justify lending. Mortgages and small business loans may be cheap, but lenders aren’t lending.
So, look for some kind of compromise announcement; the Fed could mollify the markets by announcing what amounts to a preview, by investing the proceeds of maturing securities — about $20 billion each month — in longer-term debt.
Such a move might not do much to move the economic needle, because the amounts involved would be minute by the standards of monetary policy, but it could be enough to preserve the valuable conviction that the Fed will do more soon. Whatever money the Fed has injected into the economy via QE2 has been reabsorbed by the Fed in the form of excess reserves rather than supporting loan growth in the economy. To solve that problem, charge banks for holding reserves at the Fed, thus inducing them to get their acts together and start lending.
If we hear this one, you can also expect a loud rumbling noise from the bankers screaming bloody murder – and the people holding short positions on financials crying hallelujah.
And if consumers are only charged for money they hold in the bank, effectively earning negative interest rates themselves, will they spend more money, or just start stuffing their mattress? And maybe start stuffing it twice as fast. You know its bad when banks won’t take your money. So, for anything to change in the economy we probably need to see additional monetary policy coordinated with additional fiscal policy – and what we’re seeing in Washington means it is probably time to dust off the Roubini portfolio – dried food, ammunition, and gold. I guess that is how gold can go off the charts in both an inflationary or deflationary environment.
There was a conference call today between the European Commission, the IMF, and the European Central Bank, and the Greek Finance Minister.
The three institutions have to finish reviewing Greece’s effort. Without a positive recommendation, the country won’t get the next ($11 billion) aid installment and most likely default on its debts within weeks.
Greece’s European eurozone partners and international creditors were stepping up the pressure at the start of a crucial week in Europe’s nearly two-year debt crisis. Out of patience with the Socialist government’s delays on promised reforms, creditors were threatening to cut the country’s cash lifeline, which would force Greece to go bankrupt in less than a month.
Athens is struggling with a deepening recession that is eating away at the impact of its austerity measures while also causing unemployment to spike and public anger to grow.
Greece’s economy is expected to contract about 5.5 percent this year and a further 2.5 percent in 2012.
The Greek government has hurriedly announced an extra two-year property tax — payable through electricity bills to ensure its collection — to compensate for the shortfall.
But the news was greeted with a fierce outcry from a public already reeling from salary cuts and the recession. State electricity company unionists also threatened to refuse to collect the taxes.
Yiannis Panagopoulos, head of Greece’s largest trade union, GSEE, said further revenue-boosting levies would be “unfair and imbalanced.”
“Our country has recently been undergoing a weekend nightmare: every weekend there is the threat of bankruptcy, whispers of a coming bankruptcy, we hear again and again that everything is about to collapse,” he said. “What our creditors are asking of the country is unthinkable … a country is its people, and above all it is they that must be saved.”
A Communist labor union is holding a protest against the tax outside parliament Wednesday.
The backlash from ordinary Greeks has led to skepticism among Greece’s creditors about whether the government would manage to raise the projected revenue.
Quote of the Day
Daniel Gros, director of the Center for European Policy Studies in Brussels, had a blunt explanation of why European governments have so far refused to recapitalize their banks.
“They don’t have the money and they are in the pockets of their bankers,” Mr. Gros said.
Best guesstimate is that European banks needed to raise at least 150 billion euros in new capital, even if they do not experience large losses on sovereign debt. With stock prices so low, though, that is difficult to do, and any new offerings of company stock would dilute the value of existing shares.
American money market funds, long a reliable financing source for capital starved European banks, have sharply cut back on their exposure — starting in Spain and Italy but now also France — making it harder for European banks to loan dollars.
The 10 biggest money market funds in the United States cut their exposure to European banks by a further 9 percent in July, or $30 billion, after a reduction of 20 percent in June.
Nevertheless, American institutions remain vulnerable to problems their French counterparts might encounter. At the end of the second quarter, JPMorgan Chase reported total cross-border exposure of $49 billion to France, while Citigroup had $44 billion and Bank of America had $20 billion.
French banks, which have huge holdings of sovereign debt from countries across Europe, have been among the hardest hit, despite the French government’s efforts to protect them. The authorities imposed a temporary ban on short-selling last month after shares in Société Générale, a bank considered too big to fail, tumbled on rumors it may be insolvent.
But shares of Société Générale are still sliding amid concern that it, like BNP Paribas and other major French banks, is having trouble raising dollars to finance its American and other dollar-based operations.
Société Générale officials say that the market’s fears are unfounded. The bank’s chief executive, Frédéric Oudéa, has described rumors that Société Générale was having trouble raising money as “fantasy.”
What is more, French banks, like other European banks, are able to obtain financing from the European Central Bank if necessary.
Meanwhile, problems in Spain were highlighted on Tuesday when one of Spain’s largest savings banks, Caja de Ahorros del Mediterráneo, reported a startling increase in bad loans to 19 percent of overall lending from 9 percent at the end of last year.