Why is Wall Street Worried?—Let us count the ways.
1) The proverbial Wall Street capitalists believe that, with new federal income tax rates, the removal of FICA ceilings, increases in capital gains rates, decreases in deductions, and simultaneous tax raises, not only will Obama remove incentives for innovation and productivity, but that he does not seem to care about—or perhaps appreciate—he consequences?
2) On the spending side, investors see too many subsidies and entitlements that may Europeanize the populace and erode incentives, while creating so much debt that in the next decade, should interest rates rise, the federal budget will be consumed with servicing borrowing and entitlement obligations. A redistributive economy in which government ensures an equality of result is Wall Street’s worst nightmare. Debt can only be paid back by floating more foreign debt, issuing more US bonds at home, raising taxes, or printing money—all bad options in the mind of the investor.
3) Too many are beginning to think Obama is, well, a naïf—and hence dangerous. He chest-thumps speeches Geithner cannot deliver. He says we are near the Great Depression—but then, after the stimulus package passes, suddenly hypes future growth rates to suggest that we will be out a recession, soon after all? Add in all the talk of high-tax, Al-Gorist cap-in-trade, wind and solar, socialized medicine in the midst of a financial crisis, and at best Obama comes across as confused and herky-jerky, and at worse, clueless on the economy—as if a Chicago organizer is organizing a multi-trillion-dollar economy. Talking about ‘gyrations’ and confusion about profits and earnings, and offering ad hoc advice about investing do not restore authority.
`4) Given the amount of debt the US is incurring (and the decades needed to pay it off), given the loose talk about the ‘rich’, and given the rumors about nationalization, investors are unsure whether the United States will remain a safe haven for investment, or even offer a climate for profit-making, since it would either be taxed to the point of seizure, or its beneficiaries would be culturally and socially demonized. Ultimately perhaps some will accept that as the price of doing business in a socialist US, but for now it creates doubt. This is not a defense of Wall Street (a year ago Richard Fuld and Robert Rubin were our Zeuses on Olympus who strutted like gods), simply a warning that we are going from excess to stasis, and the cure will be as bad as or worse than the disease.
5) Uncertainty. Who is now our Commerce Secretary? Which cowards is the Attorney General talking about? What did Geithner mean about pernicious oil and gas companies? What is with this Solis, and card check? How hard is it to ensure a Richardson or Daschle is clean? In other words, market watchers see after five weeks chaos, and think there is no sure and steady paradigm in which they can make careful business decisions and anticipate with some surety future risk.
So the perfect storm forms, and millions of individuals come to millions of identical conclusions: “Cut your losses with these guys, and get your cash out before it gets worse” rather than “Wow, what bargains! I gotta get in before the window of profit opportunity closes.”
But is there an alternative?
Do Republicans offer an antithesis? Can they explain the Bush deficits and take responsibility for them, as well as the Republican congressional creepiness from 2002-06 (Craig, Stevens, Cunningham, Foley, etc)? And most importantly, will they offer counterproposals—a stimulus much smaller, mixtures of loan guarantees, tax cuts, and (some) public works alone, coupled with spending caps as soon as GDP growth returns? Can they articulate how the market corrected, say, in 1980-3, without our government going socialist? Can we get a plan not merely to balance the budget, but to pay off the debt? If not, legitimate criticisms of Obama fall on deaf ears without some positive alternative.
The rants of Sec. Geithner about oil and gas companies and global warming were quite unusual. Does he grasp that the transition to his solar and wind nirvana requires some rather tough hombres working tonight on rigs in the Gulf, and some brave engineers driving a Jeep in a Libya or out in the Kuwaiti desert looking for more oil, or some poor fellow freezing out in the Arctic Circle so that Mr. Geithner can be driven in his government limo to the hearings? Solar panels do not power the President’s chopper—yet. And Hillary flew to the Middle East on fossil fuel engines not via clipper ship.
Meanwhile, note that the campaign flip-flop positions of supporting off-shore drilling, nuclear, shale oil, and coal, are now insidiously back to the original positions of ‘no—maybe’.
The Utopian Ranters
Energy Secretary Chu ranted that we warmed up the planet so Californians must the pay the price by seeing their farms dry up and blow away. Attorney General finger pointed and labeled us “cowards.” So why the attack on oil companies by Geithner—and why these lectures about our supposed racism and environmental crimes? What deep psychological need does it fulfill for a Holder, our first African-American AG, to blast us as cowardly racists, or why does an elite like Geithner think fossil fuels are not the linchpin that our economy still for a bit hinges upon? They all need to go back to work, ensure the debt is paid down, and quiet down the Harvard Yard sermons.
The Worst of Both Worlds
There is much talk about Obama merely returning to the tax rates of the Clinton administration. But that is misleading for two unfortunate reasons: (1) Clinton did not tamper with FICA ceilings and other deductions in addition to the income tax hikes; (2) he had spending limits imposed by the post 1994-Congress, so at least his income tax increases led to a balanced budget. But Obama is not only raising taxes far higher in aggregate than did Clinton with the present trillion-some spending hikes, but ensuring that we will still end up with astronomical deficits. So we get the tax hikes of Clinton—but without the balanced budgets; and we get far higher deficits than under Bush—but sans the tax cuts.
Fear of Government–Part Two.
Last week I wrote of my encounters with municipal garbage trucks spewing garbage, and city bus drivers doing rolling stops into the cross walk, one hand with cigarette, one hand with cell phone—as a reflection of the old Roman worry “Who will police the police?”
In a world of government employees there is no real redress of grievances, but real difficulty of accountability (what government employee fines the government-employed bus driver for violating state law concerning driving while on a cell phone?). My latest example was Thursday afternoon.
As I drove out of the parking lot of the San Jose parking lot, of the six exit pay stations, only one was open. But at the window, a city tractor and a city pick-up were parked and idled blocking the exit. The drivers were both out and talking to the parking attendant about their “lost” ticket. After watching them all nonchalantly talk—joined by the other parking attendant with his booth closed on “break”—I got out and asked the four ‘what’s up’?
You know what followed—abuse, yelling, ‘how dare you question us!’, etc. A number of backed-up drivers like me now got out and were yelling back, and finally the city employees moved through and unblocked the exit while the idle attendant ran back to open a second station to handle the irate idling cars. Total elapsed time? 24 minutes of waiting. Imagine four employees blocking the only way out the San Jose parking lot, while cars line up, their drivers watching the four josh around and apparently laugh at the fee-paying customers.
I had nightmares that this is what the new 40% government GDP USA will look like by 2012—$20 trillion now in aggregate debt to ensure a nation of city-employees lounging around the toll booth, while cars line up and drivers cool their heels. No success, no failure, no stress, no calm—just endless existence.