Leeds on Finance

Time for my typical New Year’s resolution.  I’m hoping to write more and keep the posts short.  You can feel comfortable that this will last as long as most of my resolutions (three to five days)…

Today, three quick topics on today’s blog:

1. McCombs alumni — join me in Dallas on Wednesday

2. improvement in banks

3. party like it’s January 7, 2010

McCombs Alumni — Join Me in Dallas

I’m speaking this Wednesday night (January 11^th) in Dallas at a McCombs alumni event.  Join us.  Here is the link.  (In the coming months, I’ll also publicize events in Austin, Washington DC and New York.)

Improvement in Banks

Fed Governor Elizabeth Duke gave a great speech on Friday with her thoughts on the economy and housing.  (I’ll discuss housing later this week.)  She made a great point that banks are in much better condition than they have been in a long time.  Banks are crucial to economic growth.  In the past, we’ve discussed research that shows that recessions accompanied by a financial crisis are more severe and recoveries are slower.  Below, I describe her thoughts and display her slides.

Some reasons for optimism:

1. Financial institutions in the US have stronger capital positions and can withstand stress.  See chart 14.

2. Bank deposits have grown substantially.  This reduces banks’ dependence on more volatile wholesale funding.  See chart 15.

3. Loan balances have increased but are well below their peak.  There is substantial liquidity available.

4. Credit quality (nonperforming assets, delinquencies and charge-off rates) is improving.

5. Banks are actively seeking loan growth to improve profitability.  A survey of loan officers shows that there are fewer banks tightening standards on commercial and industrial loans.  (It’s not an impressive chart, but it’s an improvement.)  See chart 16.

6. Spreads on business loans have stopped increasing.  See chart 17.

These are all small steps, but they are consistent with the cyclical recovery that we’ve been experiencing.  Of course, this could all come undone due to problems in Europe.  In addition, we have huge long-term structural issues that are not improving.  But, we’re not going to improve if the banks aren’t healthy and lending.

Party Like It’s January 7, 2010

As you read this blog, I’m partying like it’s January 7, 2010.  If that date doesn’t mean anything to you, that’s the last time that Alabama won the national championship.

Big game tonight.  I’m nervous.  I went to the game the last two times that the Tide won the national championship (Jan. 1993 and Jan. 2010).  I’m not going to be at the game tonight.  (If we lose, maybe you Tide fans will pay for my trip next time?)

Let me say something that will really annoy the LSU fans.  This is something that annoys them even more than “the keg is empty – you’re going to have to have something else with your cereal.”  Here it is…you’d be nothing without Saban.  In the two seasons before he resurrected LSU football, you were 7-15.  Monday night is a great night for you to pay homage to him.  Roll Tide!

Have a great week.

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Richmond Fed President Jeffrey Lacker gave a speech two weeks ago concerning lessons from the past year of US macroeconomic performance.  He made several interesting points that I’ve tried to summarize below.  President Lacker had overestimated how much the economy would grow in 2011.

Persistent Factors Impede Growth

“The most significant lessons learned over the course of this past year, in my view, concern the importance of relatively persistent impediments to economic expansion in the US.”  He described the following persistent impediments:

1. “The still-overbuilt housing market tops the list of persistent factors that continue to impede growth.”  Residential construction normally expands during recovery, but it’s been flat.  The fact that there is low demand for new homes despite low mortgage rates indicates that home building is likely to remain depressed for some time to come.  All gains in residential construction have been in multi-unit rental properties – indicating a shift away from home ownership.

2. Consumer spending is expanding at a more moderate pace than in past recoveries.  There are diminished income prospects and tighter credit terms.   These factors have resulted in consumers paying down debt and building up savings.

3. Labor market conditions improved at a disappointingly slow pace.  “Evidence suggests that one impediment to more rapid employment gains is the magnitude of the skills mismatch between the unemployed and the needs of the growing segments of the economy.”  It is possible that this accounts for one percent of our unemployment rate.

4. “Another impediment to growth cited by a wide range of observers is the array of changes in tax and regulatory policy, both actual and anticipated.  There are persistent anecdotal reports that these policy changes are discouraging firms from making new hiring or investment commitments.”

5. “The murky federal budget outlook also imposes significant uncertainties on consumers and businesses.  Realistic projections under current law show federal debt outpacing our national income for decades to come, with no bound on the ratio of debt to GDP.  This simply is not feasible.”  “Any sustainable configuration of fiscal policy” will affect a broad range of citizens either through higher marginal tax rates, cuts in programs’ benefits or reductions in government payrolls and supplier contracts.

Other Lessons

1. Inflation can accelerate despite elevated levels of unemployment.  As of last December (2010), the twelve month inflation rate was 1.4%.  To date (2011), inflation has averaged 2.8%.  This was more than just food and energy; it was broad based.  Core inflation was .9% last December and has averaged 1.9% this year.

2. “Monetary policy is often credited with entirely too much influence on real growth.  Monetary policy is about inflation – that is, the value of money.  Growth is governed almost entirely by the evolution of a society’s technology, skills, resources and trading opportunities.  This might be consistent with everything else already discussed – maybe monetary policy was able to increase inflation, but not improve employment.”

Future Risks

President Lacker anticipates growth of 2% – 2.5% for 2012.  He sees three risks to his forecast:

1. “The accretion of consumer confidence in their economic prospects could proceed either more or less rapidly than projected.”

2. “The pace that which businesses have invested in equipment and software has surprised on the upside throughout the recovery.  While some moderation in the rate at which that investment is expanding seems likely, we could easily miss on that forecast.”

3. “The trajectory of economic activity in Europe is likely to hold significant implications for US growth in the coming year.  Euro areas governments are grappling with the financial market volatility that inevitably follows from ambiguous commitments to protect creditors using taxpayer funds.  In this case, the ambiguity surrounds protection that might be forthcoming, both for sovereign debt holders and the creditors of large European banks.  The rapid fiscal and balance sheet adjustments, and the accompanying uncertainty regarding prospective tax policy, appear to be dampening euro zone growth, and that is likely to cut into US export demand in the year ahead.”

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I hope everyone is having a nice holiday season.  This past week, I read some testimony concerning the European financial crisis.  Two Fed officials testified before the House of Representatives’ TARP Subcommittee.  I thought that a quick summary might help to frame what is at stake (and there is also a postscript at the end of the story).

The first testimony comes from Steven B. Kamin (Director, Division of International Finance, Board of Governors of the Fed’l Reserve System).  Realize that Mr. Kamin was justifying / defending recent Fed policy (reducing the pricing of dollar swap lines) – so this means that it’s always possible that his testimony is making the risks sound greater than they are.  Here were some of his key thoughts:

1. The combination of high debt levels and low growth prospects in several European countries using the euro has raised concerns about their fiscal sustainability.

2. This has led to substantial increases in their sovereign borrowing costs.

3. Pessimism about their fiscal situation, in turn, has helped to undermine confidence in the strength of European financial institutions, increasing their cost of raising funds and threatening to curtail their supply of credit.

4. These developments have placed significant strains on global financial markets and have weighed on global economic activity.

5. The financial stresses in Europe are undoubtedly spilling over to the United States by restraining our exports, helping to push down business and consumer confidence and adding to pressures on US financial markets and institutions.

6. Of note, foreign financial institutions, especially those in Europe, are finding it more difficult to fund themselves in dollars.

7. A great deal of trade and investment the world over is financed in dollars, so many foreign institutions have heavy borrowing needs in our currency.  These institutions also borrow heavily in dollars because they are active in U.S. markets, purchasing government and corporate securities as well as making loans to households and firms.  (This makes it harder for US households and businesses to get loans.  He also argued that this could raise the cost of funding for US financial institutions.)

8. Although the breadth and size of all of these effects on the US economy are difficult to gauge, the situation in Europe poses a significant risk to US economic activity and bears close watching.

New York Fed President Dudley also testified before the same subcommittee.  Here were his comments:

1. Although the US economy is currently expanding at a moderate pace, we face significant downside risks, mostly relating to the sovereign debt crisis in Europe.

2. If the European situation deteriorates, the euro area would face even more serious fiscal and economic challenges.  As a result, European growth would weaken and this would hurt US exports (and hurt our jobs).  The European market is the world’s second largest economy (after the US).  Europe is also a significant investor in the US economy.

3. If the European situation deteriorates, this could put pressure on the US banking system.  While US banks have bolstered their capital, the exposures of the US banks climb quite sharply when you consider the exposure to the core European countries and to the overall European banking system.

4. If the European situation deteriorates further, financial markets would become more stressed.  This could hurt the availability of credit.  This would also hurt our retirement savings and result in lower output and job creation.

The Postscript

Of course, since all of this testimony, the ECB has loaned 489 billion euros ($641 billion) to European banks.  The assumption is that the banks will take the cheap funding and buy sovereign debt, temporarily easing the crisis.  This is the European version of kicking the can down the road (they probably do this in speedos) and it delays the day of reckoning.

Happy New Year!

Have a great week.

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Albert Einstein has been credited with saying that insanity is doing the same thing over and over again and expecting different results.  So my question is why we keep electing career politicians and expecting that they will solve our fiscal crisis.  I also wonder why we have this insane political process where the cast of candidates each swears that they will maintain the party line that is established by the party extremists (and this is true for both Democrats and Republicans).  Just as long as they commit to these ideas rather than doing what they think is right, we should be fine…

If I could select our next leader, I’d want someone who understands the economy, is clearly willing to say what he believes is true and has a record of insulting both Democrats and Republicans.  (No, I’m not throwing my hat in the ring – while I’ll admit that my ability to insult both parties is pretty strong, I’m not an economist.)  I’ll take Richard Fisher (the Dallas Fed President).   Take the time to read his most recent speech.  Here’s the link.  Don’t just read my excerpts.  See what you think.

Here’s another important idea.  I don’t agree with everything he says.  But, I’m not looking for someone who will pander to me.  I’m not an extremist and I’m not someone who is 100% sure that I’m right on all issues (other than college football).  I believe that he’s smart, understands the economy and speaks the truth.  That’s what I’m looking for in a leader.  We don’t have to be on the same page about everything.

Before I summarize some of President Fisher’s comments (and you’ve got to admit…President Fisher has a nice ring to it, doesn’t it?), I’ll mention one of the places that I struggle with what he says.  He complains about all of the regulation we have today.  There is no question in my mind that regulation has huge costs and can put us at a competitive disadvantage – there are obvious financial costs to complying, there are legal costs to understanding regulation, there are business costs that we incur and our foreign competitors don’t, there’s the reality that we don’t pursue business opportunities because of regulation, etc.  We could describe many more problems.

But, if we want to reduce regulation, I need to know that people are going to do the right thing on their own (without regulation).  I need to know that they want to do the right thing.  I need to know that they are not going to enrich themselves and inflict the cost on me.  In my house, there are regulations that we impose on the kids because we’re not sure that they will always do the right thing yet.  (Jenny also has imposed some regulations on me, but I’ll have to save that for another blog.  I don’t complain about the regulation – I’m proud that I need to be regulated.)   Regulation is costly and hurts our economy.  But what really hurts us is the fact that we have too many people who don’t do what’s right and force us to create rules.   As an aside, you should read this story about Rudy (of Notre Dame fame)…if you can’t even trust Rudy, who can you trust?

Here are a few key points from President Fisher’s comments on Friday.  He was speaking in Austin at the 2012 Economic Forecast Luncheon.  For all of the McCombs (Texas Business School) alumni, note that President Fisher started his speech by recognizing Tom Gilligan (our Dean) for his “spot-on forecast for the prime rate” that was made at last year’s forecasting meeting.  Now, on to some of the other ideas:

1. Fisher spoke about the cost-push pressures in 2008 that led to companies trying to cut costs by lowering head count.  I thought that this was REALLY interesting.  I tend to only remember back to subprime and the financial crisis.  But, with $147 oil, there were other things going on that had a huge impact on our employment situation.

2. Today, businesses still have this same focus on cost control (limiting employment).  Liquidity won’t change this.

3. Further Fed accommodation “might even prove counterproductive should it give rise to fears the Fed is so hidebound by academic theory as to be blind to the practical consequences of harboring an ever-expanding balance sheet.”  He discussed the possibility that we’re distorting our fixed income markets and we could be seen as monetizing our debt.  (Does anyone not believe that?)

4. Our domestic economy is recovering.  But, there’s little we can do about (a) Europe; (b) the possibility that China will not be able “to contain the pricking of their real estate bubble or the shadow banking industry that enabled it”; or (C) a possible slowdown in Brazil.

5. Corporate liquidity and low interest rates will not encourage a company to expand or invest if they don’t know how much it will cost to run their business.  In addition to his comments against regulation, he said that we must be “reassured that the sinkhole of unfunded liabilities like Medicare and Social Security that Republican – and Democrat-led congresses and presidents alike have dug will be repaired so that our successor generations of Americans will prosper rather than drown in dark, deep waters of debt.”

6. He used a great analogy (crediting Fed Governor Sarah Bloom Raskin) concerning our fiscal and economic problems.  He described a situation in which you have food, coffee grinds and a bit of hair clogging your sink.  You could do the unpleasant task of reaching down and scooping up the gunk.  Or, you could turn the water on full blast, providing immediate relief, but knowing that you might be destroying the entire plumbing.  (We’re just blasting liquidity into our plumbing system.)

7. “All I know is that the “honorable” members of Congress and presidents past, Republicans and Democrats alike, have conspired over time, however unwittingly, to drive fiscal policy into the ditch.  They purchased their elections and reelections with popular programs so poorly funded that they now threaten the economic well-being of our children and our children’s children.”

8. “Like all of you here, I am sickened by our politicians’ tendency to kick the can down the road, even when it is starkly clear that doing so jeopardizes America’s well-being.”

I realize that we’re not going to draft someone like this.  I also realize that having a great leader would still leave us with a black hole known as Congress.  But, I also know that if we keep electing career politicians and expecting different results, it’s simply evidence that we’re insane.

Have a great Holiday season.

_______________

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I recently read a very brief Economic Letter from the Dallas Fed titled, “How the U.S. Tax System Stacks Up Against Other G-7 Economies.”  Here’s the link.  It was written by Anthony Landry, a senior research economist at the Dallas Fed.

I want to show you some charts that you might find interesting (all are pulled from the above-referenced Economic Letter).

First, you can see that G-7 tax revenue (from all levels of government)  increased from an average of 27% of GDP in 2007 to 36% in 2009.  Canada, the U.K. and the U.S. were the most stable.  When I look at Chart 1, I ask myself how a country like Italy (with a debt-to-GDP ratio of 120% and taxes that are equivalent to 40% of GDP) is ever going to make it.

Second, notice that labor income is the greatest source of tax revenue (by far) for all seven countries.  Our tax revenue (as a percentage of GDP) from capital income (i.e., capital gains) is larger than most other countries and our consumption taxes (sales tax) are a smaller source of revenue than all other G-7 nations (many of the other countries have a VAT).  See Table 1 below.

Third, our corporate tax rate appears relatively high compared to most other G-7 nations.  See Chart 3.

Have a great week.

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You’re Going to Love This!!!

I’ve written earlier about an academic paper concerning politicians earning excess returns (here’s the link) and the 60 Minutes story on this issue.  Now, there are two Senate bills and a House bill that would prohibit Senators and Representatives from trading on information that they’ve gathered as a result of their political business.  Here’s the part that I LOVE…the legislation would require Congressmen to report their trades within 90 days.

When Congress decided to crack down on corporate executives, they decided that immediate disclosure was really important.  They passed Sarbanes Oxley which requires insiders to report trades within two days!  Yet, as they discuss a bill about their own behavior, they are giving themselves 90 days.

If you want even more perspective on how absurd this is, think about the law prior to Sarbanes Oxley.  At that point, insiders had to report trades by the tenth day of the month following the trade.  That means that, at the very longest, insiders had 40 days to report their trades.  This was too long and it was reduced to two days.  Yet, for politicians, apparently 90 days will be soon enough.  Where do these Congressmen come from?  How can we send them back there?

Propping Up the EU

We all saw what happened this past week with central banks and the stock markets.  Six central banks made a coordinated effort to prop up the EU.  Of course, there were six banks (and China) involved, but it was primarily a Fed action.  The Fed agreed to loan dollars to other central banks (particularly the ECB) at a lower rate.  Then, the ECB will loan the dollars to European banks.  As a result, the market rallied.

Of course, I’m just a pessimist.  But, to me, this is like giving cash to a drug addict so that he can get his fix and feel better in the short term.  Then, when our drug addict seems to temporarily feel better, we kid ourselves that we have solved his problem.  Maybe the only thing that would make my analogy better would be if it were another drug addict that loaned money to the suffering drug addict.   These countries (including the US) have long-term issues.  Adding liquidity is a short-term fix, but it does nothing to solve the underlying problems.

The Employment Report

Lets go for the trifecta and include a third pessimistic story.  If you do a Google search for “lowest unemployment rate”, you’ll pull up approximately 2,000 stories that were published in the past two days.  Headlines across the country announced that our unemployment rate has dropped to 8.6% — the lowest since March 2009.  Let me give you a few quick things to think about:

1. the labor force participation rate (the percentage of work-age people who either have a job or are looking for a job) dropped this month from 64.2% to 64% (see chart below).  The participation rate dropped because people were either discouraged or didn’t look for a job in the past four weeks (so you’re not counted as participating).  If the participation rate had not changed, the unemployment rate would have been 8.9%.

2. if the labor participation rate was 66% (it was higher than this prior to the recession), our unemployment rate would be 11.4%.

3. if you want a good indication that the report is misleading, realize that the number of employed people as a percentage of the entire population hardly changed this month (see below).  This number is not skewed by people dropping out of the labor force.

4. we added 140K jobs in the private sector and lost 20K jobs in the public sector.  But we’re not creating high-paying jobs.  We added 50K jobs in retail, 22K in leisure and hospitality (this was actually comprised of 33K jobs in food and drink and some losses in other places) and 17K in health care.  So, it’s fair to say that 100K (of the 120K jobs created) came from retail, food and drink and health care.

5. the bottom line is that the labor market is getting better, but it’s not nearly as positive as the low unemployment rate would have you believe.  Use your common sense: 2 – 3% growth (some of which results from productivity gains) is not going to be enough to fix our labor markets.  In addition, while our participation rate is dropping, many of these people will eventually return to the labor market.

Have a great week.

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I want to share an op-ed piece (End Welfare for the Wealthy) that Republican senator Tom Coburn wrote.  Here’s the link.  You really should read it for yourself.  He argues that we need to end subsidies for the wealthy.  He complains about tax earmarks and deductions for the wealthy as well as direct handouts.  Below, I’ve copied a few quotes from his piece.  My favorite is #5 (in bold) at the bottom – where he discussed tax expenditures.  Again, these are direct quotes from his piece:

1. The goal of highlighting these excesses is not to demonize those who are successful.  Instead, by highlighting the sheer stupidity of pampering the wealthy with lavish benefits through our safety net and tax code, I hope to make a moral and economic argument for real entitlement and tax reform.

2. The most troubling gap in America today is not an income gap.  It is an integrity gap – and even intelligence gap – between Washington and the rest of the country.

3. Families are struggling to make ends meet and are making painful economic choices as politicians in Washington borrow billions to provide welfare to the wealthy.  Politicians on both sides refuse to fix big problems and defend stupid policies because changing those policies would involve upending a comfortable political status quo.

4. These provisions are intentional efforts to get all Americans to buy into a system where everyone appears to benefit while the poor and middle class are being robbed.

5. Defending spending in the tax code is not conservative.  Providing tax earmarks and deductions to millionaires is a tax increase on everyone who doesn’t receive the benefit.

Have a great weekend.

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In the past few days, I’ve read some interesting statistics / ideas.  Here are some:

European Bond Market

1. Germany was only able to sell 2/3 of an $8.1 billion bund offering.  They were priced at 1.98% — slightly above the market rate.  There is fear that Germany will be bailing out the rest of Europe or assuming responsibility for their debt.
2. Don’t forget that we’re talking about German debt that had a yield below 2%.  The flight to German safety (during the past two years) has probably saved them about $27 billion per year (approximately 3% of their budget).  The yield on ten-year German bunds was 4.7% in mid-2008.
3. In addition, Germany has had nine previous shortfalls this year (so this recent news is not that significant).  But, few have seen such a large supply / demand gap (35%).
4. If the euro breaks up, German bonds could gain value because the deutsche mark would be more valuable than the euro.
5. Ten year French bonds are yielding 3.63%.  Belgian bonds are yielding 5.12%.  Spanish bonds are 5.8%.  Italian bonds are at 6.98%.
6. Italy sold six-month bills yielding 6.5% — approximately 3% higher than the yield three months ago.  In other words, investors see short-term risk.
7. Spain paid 5.11% on three-month bills.  This is more than double what they paid last month.
8. The EC is considering issuing bonds backed by all EU countries.  The last time that I heard such a great idea to repackage risk, it was called a collateralized debt obligation.

The EU

1. Nearly 57 percent of Italian debt is held by Italian banks, insurance companies and individuals.  The argument is like the one we make about Japan – a country is less likely to experience a run on its debt if the debt is held by the country’s citizens.
2. Also similar to Japan, Italy has a very high median age.  Japan’s is 44.8 years and Italy’s is 43.5.
3. Italians have 8.6 trillion euros of net wealth (340,000 euros per household).  This is the highest among industrial nations.  Approximately 3.6 trillion euros is in the form of financial assets.
4. The Italians have strong domestic savings.  The question is when the Italians will decide to keep their savings in Germany or Switzerland.  They could do this if they fear that Italy will leave the EU.
5. Greece forecasts a 5.5% deficit next year and 2013 growth of less than 1%.  Good luck on that one.
6. Barclays Capital surveyed almost 1,000 investors.  Almost half expect at least one country to leave the euro.  Three months ago, this was only one-quarter.  In Q2, it was just 1%!
7. If a country withdraws from the euro, estimates are that their new currency will drop by approximately 50%.
8. The IMF has a new plan to allow countries to borrow five to ten times their standard quota.  Lets keep loaning money and not fixing anything.  That should work pretty well.
9. Three month LIBOR is above .5%.  This is the highest level since July 2010.  It is double the June low.

The World Economy

1. The US’ Q3 GDP was revised down from 2.5% to 2%.
2. HSBC’s Purchasing Manager Index for China had a reading of 48 for November – indicating contraction.  The index was last at this level in early 2009.  This is where we expect growth to come from!
3. A survey of euro-zone purchasing managers showed manufacturing output fell for the fourth straight month.  It dropped at the steepest rate since June 2009.
4. A survey of US and European CFOs found that optimism dropped to the lowest level since Q2 of 2009.  US optimism fell below European optimism for the first time.  US CFOs expect earnings to increase 16% (they increased 21% in Q2).  They said that the debt and deficit are the biggest problem.

The US

1. We sold $35 billion in five year notes for a yield of .937% — the lowest level on record.
2. The S&P 500 has dropped 7% in the last seven sessions.  All ten sectors are negative.
3. Black Friday sales were 6.6% higher than last year.  Online sales increased 24.3%.  (I was shopping online and I still got pepper sprayed.)
4. Credit default swaps on Bank of America rose to 495 basis points ($495K / yr on $10mm of debt).  There is concern about Europe, toxic assets and litigation.
5. Initial jobless claims were 393K this week.  While seen as a positive sign, I’m wondering if we’re just running out of people who are eligible for benefits (so they’re not filing).  In other words, it doesn’t feel like we’re creating jobs.
6. Groupon’s shares are selling 15% below their IPO price.  It has traded as high as 30% above their IPO price.  Maybe they need to arrange a group deal to buy their stock.

Commodities

1. Oil prices have been bolstered by a reduction in US inventories and tensions around Iran.
2. The International Energy Agency’s chief economist said that 90% of future growth in oil production needs to come from countries in the Middle East and North Africa.  But, political turmoil may lead to under-investment and slow output growth.
3. The CRB (commodities) index has fallen 4% since MF Global declared bankruptcy four weeks ago.  Jim Rogers said that this drop resulted from forced liquidations at MF Global.  Agricultural commodities have fallen the most.  Rice has fallen 14% and wheat is down 9%.

Other

1. The WSJ did a story describing the idea that Fed officials meet with investors and analysts and give them clues concerning future policy.
2. Mitt Romney has a commercial in New Hampshire that attacks President Obama.  In the commercial, President Obama says “if we keep talking about the economy, we’re going to lose.”  This is an edited version of what Obama said in 2008 (while running for President).  He actually said, “Senator McCain’s campaign actually said, and I quote, ‘If we keep talking about the economy, we’re going to lose.”
3. Dealogic says that the average company that went public in 2011 is trading 8% below their IPO price.
4. The number of investment bank and brokerage firm employees between the ages 20 and 34 fell by 25 percent from the third quarter of 2008 to the same period of 2011, a loss of 110,000 jobs from layoffs, attrition and voluntary departures.  Industry headcount dropped by 27% during the same period.

Have a great week.

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News sources are leading us to believe that the debt “super committee” will not reach a consensus to cut $1.2 trillion from our deficit over the next ten years.  Of course, even cutting $1.2 trillion (over ten years) would be meaningless.  Our 2011 deficit (for one year) was $1.3 trillion.  Cutting $1.2 trillion over ten years may be a start, but it’s a very slow start.

Here’s a link to the best article that I’ve read about all this.  It’s called “Capitalizing on Collapse” and it was written by Thomas B. Edsall.  Here were his key ideas (as you can see through the link, some of these are direct quotes and others are slight paraphrases…but they are all his work):

1. Both sides may have incentive to see these talks fail.  The Republicans probably have the stronger incentive.
2. The Democrats would like to see the Bush tax cuts terminate at the end of 2012.  There are estimates that this could result in $3.8 trillion more tax revenue and this may allow politicians to postpone dealing with Social Security and Medicare for some time.  This could be the Democrats’ incentive.
3. The Republicans have a high-risk, high-reward incentive.  Intrade (a futures market that allows us to gauge sentiment) favors the Republicans to take over the Senate and retain the House in 2012.  A majority of Americans currently believe that the next President will also be Republican.  In other words, the Republicans believe that there is a possibility that they could gain complete power.
4. If the Republicans control both the legislative and executive branch, they can change the tax code and also change the entitlement programs in exactly the way that they want.  They believe that we are headed in that direction and that is their incentive to see the committee fail.
5. This could be the last chance for Republicans to dominate due to demographic trends.  There is growth in the Democratic base – there is growth in the minority electorate and in increasing number of unmarried, Democratic-leaning voters (especially single women).
6. The economic policy gulf between the parties is so wide that it seems impossible for Democrats and Republicans to split the difference.
7. The anti-tax, anti-government ideology of the right cannot be legitimately reconciled with the pro-government, high-tax commitment of the left and vice versa.  On top of that, these competing ideologies have acquired a moral dimension that makes ordinary political give-and-take intolerable.
8. Notions of unilateral victory, whether through Republican domination of Washington or through the expiration of the Bush tax cuts, become increasingly attractive, no matter how fanciful, if the alternative is engaging in the processes of honest bargaining, accommodation, negotiation and compromise.

My Thoughts

Ultimately, I think that Edsall is saying what we all believe: that this is not about doing what is right; rather this is about what is good for my particular party.  Preservation of power (or regaining power) is especially significant when we have career politicians.

I think that most Republicans feel like they have no room to compromise on taxes due to the pledge that most of them have signed with Grover Norquist.  You should spend a few minutes watching the 60 Minutes story (from last night) on this topic.  Here’s the link.  If a pledge-signer votes to raise taxes, they’re likely to have a well-funded opponent in their next Republican primary.

The only thought that I disagree with is Edsall’s argument that demographics are turning against the Republicans and 2012 is the last chance for them to gain control.  Ultimately, both parties recognize that the key to getting elected is to win the middle.  Each side has their share of crazies who believe that one side is good and the other side is evil.  The question is how you win the middle (people like me who believe that both sides are evil).

If we can’t figure out a way to meet in the middle (especially over something as small as $1.2 trillion over ten years), we should all be discouraged.  The possibility that one side is going to ultimately force their way on the other is dangerous.  Neither side is correct on all issues.  (It’s more likely that they’re both wrong on most issues.)  I continue to believe that our country is slowly moving in the wrong direction – seeing each other as the enemy rather than recognizing that we’re competing as a nation against other countries that want to pass us in economic and political importance.

Have a great Thanksgiving.

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You really need to take 15 minutes and watch this 60 Minutes segment.  It’s all about the legal insider trading that goes on in Washington.  It involves both Republicans and Democrats…including Nancy Pelosi and John Boehner (true leaders).

CNN quoted Pelosi’s spokesman as saying, “It is very troubling that 60 Minutes would base their reporting off of an already-discredited conservative author who has made a career out of attacking Democrats.”  This is classic.  Did he watch the piece (he was in it…so I hope he watched it)?  If anything, it was more about Republicans (Boehner, Bachus and Hastert) than Democrats.  So I don’t think that this was some attack of Democrats.  It was just an attack on corruption – which certainly isn’t party-specific.  Boehner wasn’t available for comment.  I assume he was crying somewhere.

You might also want to go back and read my blog from July 17^th, titled “The World’s Best Asset Managers?”  The blog was written about a paper called, “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives.”  It was written by four academics (Alan J. Ziobrowski, James W. Boyd, Ping Cheng and Brigitte J. Ziobrowski).  The paper had just been published in Business and Politics (2011) when I wrote the entry.  It’s interesting how often academic papers uncover big news before we hear about it in the mainstream media.

Have a great week.  Keep kidding yourself that you’re trading in fair markets.

If you enjoy this blog, please forward it to others who may be interested.

If you want to receive these emails, here’s how:

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IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.