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Column: US candidates’ fiscal options fade
September 29, 2008
In Friday’s televised debate between John McCain and Barack Obama, the candidates were pressed to say how the financial crisis and the proposed rescue scheme would affect their plans for government. The debate’s moderator – Jim Lehrer of the Public Broadcasting Service, who gave a master class in that demanding craft – was courteous but persistent on the point, and got nowhere.
Mr McCain defaulted to a standard talking-point: the need to get a grip, without saying how, on public spending. He again underlined his opposition to earmarks (local spending projects tacked on to larger pieces of legislation). He is right that they are abusive, but they are small in relation to public spending as a whole. Spending bills in the current year included $17bn (€11.6bn, £9.2bn) in earmarks, compared with total outlays of about $3,000bn, and a deficit of roughly $400bn. The Treasury’s Troubled Asset Relief Program (Tarp) envisages new outlays of $700bn.
Beyond earmarks, Mr McCain said, every government programme needed to be examined for effectiveness. A partial spending freeze should also be seriously considered. No doubt: all appropriate measures should be taken, and none that are inappropriate. But this broad position was his policy before the crisis broke. No need, apparently, to think again on tax cuts. For Mr McCain, apparently, nothing has changed.
The remainder of this column can be read here. Please post comments below.
The US economy will get hit by a huge double whammy. The first blow has already sent the banking/insurance sector reeling. The second blow will inevitably be a period of low growth,
possibly no growth or most likely a recession; no statistical cover-up will alter that scenario.
There isn’t much point in the two candidates talking about expenditure, since it’s a no-brainer that the tax receipts will fall.
The best news for the US economy would be to bring the troops back home and circle the wagons, imo.
Posted by: J.J. | September 29th, 2008 at 9:57 am | Report this commentClive,
When Sen. McCain has brought up important spending issues like Healthcare and Social Security Reform, the press (and their partners the Democrats) have screamed liked spoiled children.
The Democrats tried to inject a huge pork platform into the bailout during a time of crisis. How can one expect to have an honest discussion with Frank, Dodd, Durbin etc on making a long term financial plan for pensions (for example)?
You are right, whoever is president will be faced with a resource allocation problem, but if the public will not allow a discussion of the two biggest items on the spending agenda, I don’t know how it can be discussed in an adult manner.
JBP
Posted by: John Powers | September 29th, 2008 at 1:23 pm | Report this commentNo matter how desperate the economic situation may become, we can always trust the Republicans, especially the “anti-spending” hypocrites on the far right of the party, to find money in subsidies and tax breaks, not to mention wars of choice, for the big oil companies, drug companies, HMO”s and defense companies that really run this country.
By the same token, even if the economy should recover and improve beyond our wildest dreams, they will never agree that there is enough money for Social Security, Medicare, Healthcare, education, infrastructure and other badly needed programs that benefit all Americans, not just the rich. That is what this election is really about, and this is why we should be focusing on these core differences between the two parties (such as they are in this age when even the Democrats take the “Republican lite” road all too often)), instead of wasting time analysing who is looking at whom more often during the debates.
Posted by: algasema | September 29th, 2008 at 2:37 pm | Report this commentalgasema. Re Cox, I don’t know enough about US politics yet…but there will be 100s of books written about this whole scandal. Maybe it’s time for a second Revolution in the USA: the Boston Tea Party (”No taxation without representation”) ignited the first one - right? Maybe this time it will be “No taxation without a full explanation”?
Btw, how are the FBI guys getting along with their investigations into this whole drama?
Posted by: J.J. | September 29th, 2008 at 3:40 pm | Report this commentIf I read anything about that in the media over here, be sure I will let you know.
Roger,
Given the miserable performance by Washington in regulation the financial system, why would anyone want them more involved with pensions, healthcare, infrastructure, etc?
Couldn’t the politicians please get out of the way so the taxpayers can have control of their own money?
JBP
Posted by: John Powers | September 29th, 2008 at 3:50 pm | Report this commentalgasema. Forgot to ask about who is in charge at the FBI - I hope it’s not another ex-GS man?
P.S. Lovely autumn wether here! I feel grate apart from the fact that the Swiss economy is expected to slow down dramatically in 2009 to 0,3 percent growth. So we are all praying for lots of snow - if it starts falling from tomorrow and doesn’t stop till June 2009 would be just fine for the tourism sector here.
Posted by: J.J. | September 29th, 2008 at 4:49 pm | Report this commentThe American president, as executive head, has two roles to play. First, he must reassure the public that no matter what we face we can handle it. Catastrophies - acts of terrorism; acts of god; financial disaster - whatever they are - we will face them and prevail given our history, resilience, national character and system of government. Second, he must have the good sense to choose the best people - the “best and the brightest” - to execute the governmental functions. Which candidate will best perform these two roles in the public’s interest?
Posted by: claudia | September 29th, 2008 at 4:52 pm | Report this commentIt is reliably reported (The Times, London) that the McCain camp is expecting a miracle, its expectations rather resembling those of a millenarianist group camping on a hillside awaiting The Second Coming.
The anticipated miracle is the shotgun marriage of Sarah Palin’s pregnant seventeen-year old and her eighteen-year old redneck (his description, not mine) boyfriend (aka, in polite Republican circles, as her “fiancé”) coming just in time to save a faltering political campaign.
For those who don’t know America well, big white weddings with all the trimmings remain - despite the social and sexual upheavals of the last half century, despite wars and threats of wars - an important part of popular culture.
A couple may have been living together for years, may even have had kids, but when “the guy” finally gets around to “popping the question,” the world suddenly reverts to 1953, Ike and Mamie are in the White House, and Spot the dog is every child’s favorite literary character.
The couple may not have a dime to spare after trips to Disneyland and a second air-conditioned SUV, but the parents are paying (an obligation often requiring a second mortgage), so who cares? Planning begins immediately on throwing away $20,000 or more in one afternoon. After all, marriage is once-in-a-lifetime, even though at least half of all American marriages end in divorce.
Well, it is by appealing to such boiled-frosting, satin-ribbon fantasies that Republicans hope to push John McCain over the campaign finish line and into the White House.
The last week or two of the campaign would be ideal timing, surrounding John McCain and Sarah Palin in a fluffy, sugar-sprinkled haze. Imagine voting against the distinguished-looking old man in a tuxedo on the front pew with the beneficent countenance of a proud grandfather? Or the mother, gowned rather than in mukluks and hunting gear, eyes moist, watching “her baby” march to the alter?
Clearly, this is not matter on which an election anywhere should rest, much less in the world’s most powerful country, one staggering through war and financial crisis. Indeed, the Republican campaign, as it well deserves, has faltered on the merits. McCain is a tired old man with a sour temperament and a narcissistic personality who picked as his sidekick a person who would have reached the limits of her talent as captain of a cheerleading squad. Although certainly not the limits of her ambitions, but isn’t that what America is about, your reach exceeding your talent?
The hope may not be without some basis. The event, if it happens and happens in time, will of course be exploited to the limits of broadcasting and publishing and advertising. Money will flow from the same immensely rich sources that accomplished such past miracles as a nose-job for a witness against Bill Clinton. Theirs will undoubtedly be the most publicized and costly wedding in Alaska’s history.
Imagine the glamor with heads of state attending, all those with whom Sarah Palin has recently had five-minute appointments? Perhaps we’ll see Henry Kissinger himself, hobbling to his seat, resembling nothing so much as Doctor Strangelove taking faltering steps from his wheelchair, declaring to his Fuehrer that he can walk.
Perhaps there’ll be the president of that wealthy narco-state, Columbia, surrounded by bodyguards and arriving in an armored limousine.
Perhaps, too, the Mayor of Kabul, better known in America as the President of Afghanistan, will be there, exotic in his flowing robes.
And I’m sure there will be a large delegation from across the Bering Sea, Russian officials familiar with Sarah Palin, her just-over-the-backyard-fence neighbors as it were.
The sight of the nervous young woman marching up the aisle will remind many of the young Princess Diana. The swollen tummy might detract from the fantasy, but that can be artfully disguised by a good dressmaker. In the haze of dewy-eyed sentimentality, few will ask about the judgment of a mother who pushes a seventeen-year old girl into marriage and motherhood, or of just how the sweet young Diana turned out.
And the same with the spiffed-up boyfriend who only wanted to play hockey and “hang-out” and find more girls like Sarah’s daughter at parties. He will look handsome and almost iconic, shaved and showered in his tuxedo. Few will reflect on the inappropriate pressure brought to bear on this young man by the governor of his state, or, indeed, what kind of a husband someone with his attitudes might be.
But if Sarah and her daughter cannot set this event before the election date, its importance will decline considerably, the free nose-job donors fading away, the publicity evaporating, the international guests sending regrets, and the Palins in need of a second mortgage.
Posted by: JOHN CHUCKMAN, TORONTO | September 29th, 2008 at 6:22 pm | Report this commentGrowth in the US economy depends two thirds on increased consumption by the US consumer. The outlook is not good - see below from the WSJ online:
>>August data on personal consumption was extremely weak. The August reading, flat in both nominal and real terms, was responsible for some of the weakness but much also came in downward revisions to previous months*. These pulled the track of real consumer spending into the third quarter to about -2-1/2%, an extremely weak result. The breakdown of spending was weak: durable goods posted a 1.6% increase as auto sales recovered somewhat in August — after a terrible July — but services consumption fell 0.1% and nondurable goods consumption declined 0.3%. – Goldman Sachs Economics
3Q real consumption [is] tracking well below our expectations. In last week’s GDP forecast we estimated that real consumption would decline 1.2% q/q annualized in 3Q. However, because of weaker than expected August figures and downward revisions to prior months, it appears that 3Q consumption is now tracking a decline of more than 2%. Given that auto sales are likely to decline in September, real consumption could fall 2.5%. The last time real consumption declined during a quarter was in 1991. – Abiel Reinhart, J.P. Morgan Chase<<
* Re “downward revision to previous months”.
Posted by: J.J. | September 29th, 2008 at 6:24 pm | Report this commentIn other words, don’t believe the official statistics when they are published. Revisions are the norm, imo.
I hate to be a wet blanket about the 50’s John Chuckman, but the marriage between Ike and Mamie was less than ideal and she would up having to spend time in rehabilitation for chronic alcoholism. To get back to the main point, J.J., I just heard that the House Republicans have blocked the bailout bill. Evidently they still think that Paulson is giving them a snow job. At least you have the real thing in Switzerland, and here’s hoping that there will be lots of it, for everyone’s sake.
We need a lot more snow, of both varieties, to get things moving again.
Posted by: algasema | September 29th, 2008 at 8:17 pm | Report this comment133 House Republicans…and 95 Democrats. Bipartisanship at its finest.
The Democrats have an absolute majority in the House.
JBP
Posted by: John Powers | September 29th, 2008 at 8:55 pm | Report this commentJBP: I agree with you on this issue. Who knows why the rank and file Republican Representatives asserted themselves - likely because they legitimately fear the wrath of constituents in a month or so - but thank god for their decisive contribution in defeating this proposal.
I just hope that the Bush Administration and the Congressional “leadership” hears the voice of the people in this and spends a week or whatever it takes to seriously consider the many alternatives out there. Prof. Nouriel Roubini - long-time predictor of this mess - has an excellent short piece in the Guardian on the issue. From news reports the Bush Administration and Congressional “leaders” still want to try ramming this proposal down the throats of the electorate, but I hope the Representatives continue to resist.
Posted by: Wendell Murray | September 29th, 2008 at 9:59 pm | Report this commentWachovia-Citi-FDIC proved that the US financial and legal systems still work. Sheila Bair is one of the few first-class professionals one has had the opportunity to see in Washington recently. The Bailout, in principle, said that the existing frameworks were inadequate or even unsound. (Ditto the Bush Admin approach to foreign policy.)
In fact, the world has long followed the US lead (albeit pre-Clinton-Bush) because of the quality, flexibility and relative consistency/objectivity of its legal and financial systems. The past 15 years–beginning with Greenspan–have undermined the fundamental integrity that was the US.
Obama’s comments suggest that he shares Paulson’s concerns about the system and will make his own rules. Here in France, Sarkozy is having wet dreams about becoming the saviour of the global financial system. Cheap, too-often-ignorant poltics must be put in check.
That said, McCain is certainly wishing he could move somewhere else.
Without leadership, US pain will be much greater than it need be. Such leadership voids have, historically, yielded futile and tragic wars.
Vigilance, please.
Posted by: wcm | September 29th, 2008 at 10:26 pm | Report this commentIt’s now time to close the stock markets.
Posted by: J.J. | September 29th, 2008 at 10:36 pm | Report this commentExceptionalism must be checked.
Let the markets play out and by the end of week real values may actually have a real price.
Also, if Americans would rediscover the concept behind the word “citizen” and drop the term “consumer”, which has replaced it, you’ll have a chance of rediscovering self-respect.
I see political risk in the US unless your tried-and-true systems and governance are restored to their pre-1993 integrity.
Lastly, it was dismaying to watch the comportment on the floor od the House of Representatives during the vote. A BBC reporter said all were behaving like they were watching a baseball game. Pelosi, the revered Speaker, didn’t even sit on her appointed throne during the most important vote in modern history.
Return to basics. Value will follow. If not, we’re braced to watch you slide into a less-than-sweet version of Brazil.
Posted by: wcm | September 29th, 2008 at 11:27 pm | Report this commentMuch talk is centred on accounting standards, and Paulson’s plan would permit accounting manipulation, in addition to exempting the entire process from judicial claims and most existing and proven US law.
Neither IFRS nor US GAAP per se are responsible for the exposures of weakness or worse in the US banking systems. However, FAS certainly has in place high enough standards that would’ve required to Big Four accountancies to raise alarms a long time ago.
Is it not time to hold these firms accountable?
Are they not central to the crisis facing the financial services industry today?
It is sickening to observe how they have strategically underinvested in audit SINCE the Enron failure. Looking at the client failures/losses (i.e., Bear Stearns, Fannie Mae, Merrill Lynch, Morgan Stanley, and WaMu) for one firm alone should serve as warning that they are incapable of reinforcing audit quality. Then look at reports of pre-crisis layoffs.
The next US Administration should restructure the audit profession. This should be included in any fiscal plan.
This look back at parallels with the 1994 peso crisis should offer little comfort:
http://www.retheauditors.com/
Posted by: wcm | September 30th, 2008 at 11:41 am | Report this commentwcm,
Given the tragic consequences of mark-to-market accounting, I think the opposite is true. Companies with fundamentally sound cash flow (Washington Mutual for example) are forced to mark down assets to fire sale prices, and kill their own credit, to satisfy auditors.
There was plenty of cash and the business model was good enough, but WaMu (and Merrill and Lehman etc) played by the crazed rules and lost their companies in the meanwhile.
JBP
Posted by: John Powers | September 30th, 2008 at 3:18 pm | Report this commentThe US financial services sector has long failed to apply principle to cash management. The observed rate of homeowners with negative equity when home prioes had only begun to decline reflected loose lending. Economists were looking at the trends and risks around heavily marketed home-equity financing–which finances the US education, system, car sales, tourism, etc.–when the Resolution Trust was formed.
CNN-I showed a Wall Street a couple of weeks ago criticising the US Fed for not understanding that the issue wasn’t banking, “it’s the fact that American cannot move without credit”. The two used to go together where I went to school.
George Magnus’ concept of recapitalising the system and letting institutions manage their toxic portfolios with existing laws and regs is a responsible and reasonable one. Paulson obviously picked his USD 700B number from the same calculation; the mark-to-market values will be far costlier under the taxpayer-supported plan.
Mark-to-market is a fine case where theory and reality do not align. I agree on its flaws, and can offer theoretical arguments on consistent assumptions over actual observations. Mark-to-market data have short shelf lives.
Obama and McCain are right to pick up on the FDIC issue, which was raised and considered by many objecting to the proposal. Sheila Bair should be listened to.
Meanwhile, the markets are profit taking as though cocaine had just been legalised. Co-dependency–in the clinical sense–is an epidemic.
Posted by: wcm | September 30th, 2008 at 6:34 pm | Report this commentAmazing how out of touch both candidates are. Useless. Spineless.
At least some Congressmen actually represent their constituents. How dare they! The cheek! To oppose the Federal gods who know what’s best! Since when does the average citizen have the right to think and act for themselves?
Posted by: Shevvers | September 30th, 2008 at 6:52 pm | Report this commentwcm,
Mark-to-market is, to paraphrase Churchill, the worst kind of accountancy except all the others. I recommend you read the following by Jennifer Hughes:
http://www.ft.com/cms/s/0/6bfac918-8a5d-11dd-a76a-0000779fd18c.html
Posted by: RCS | September 30th, 2008 at 6:59 pm | Report this commentIt would not be that hard to have a separate publication for mark-to-market accounting and another for fair value accounting.
A lender could use either one he choses, and not risk jail time over what in many cases is a ridiculous notational exercise.
My observation is that bankers are scared of a repeat of the witchhunt (and jailings) that occurred after the tech bust against those whom the regulators decided to declare villains.
JBP
Posted by: John Powers | September 30th, 2008 at 7:57 pm | Report this commentJBP,
Did you mean fair-value accountancy vs historic cost accountancy?
Your point is one Jennifer Hughes also makes in her column (please see the link I attached to my previous post). Nevertheless, fair-value (mark-to-market) is the most economically relevant of the two and should be always presented in the accounts themselves (as opposed to the notes). It is also that which is specified in IFRSs. In a globalised age we need global accountancy standards and so the latter reason is also important.
Posted by: RCS | September 30th, 2008 at 8:09 pm | Report this commentAh,
Fair-value I am taking to mean as internal value (historical cost if you will), vs last sale value at market.
Hughes column is sensible, but there needs to be a declaration that one will not go to jail based on a totally optional accounting method.
JBP
Posted by: John Powers | September 30th, 2008 at 8:39 pm | Report this comment