President Obama presented his budget plan ("A New Era of Responsibility") to Congress yesterday, and as you might expect it's controversial. There's really not much in the 10 year "blueprint for our future" that we did not already know, but it's the first realistic budget we've had in a long time and it's sobering, to say the least.
Obama has said he wants to restore "a sense of honesty and accountability to our budget." This means his budget includes expenses not included in recent years: little things like the cost of the war in Iraq or the annual fix to the Alternative Minimum Tax (AMT). As President Obama said to Congress, "for seven years, we have been a nation at war. No longer will we hide its price."
Even apart from leaving out major expenses, the Bush administration had a tendency to overlook obvious problems and paint an "optimistic" picture for taxpayers. The budget Bush prepared a year ago for the 2009 fiscal year (starting October 1, 2008) included a deficit of $407 billion, and projected a balanced budget by 2012. At the time, the Democratic staff of the Senate Budget Committee pointed out that the 5 year budget omitted almost a trillion dollars in cost from the war in Iraq and the annual AMT fix.
A lot has happened in the last year, but even the mid-year review in late July, 2008 only increased the projected 2009 deficit to $482 billion, and projected a budget surplus by 2012! Keep in mind that Congress had already provided the initial $70 billion in Fannie/Freddie bailout funds, $29 billion in loan guarantees to allow Bear Stearns to be "saved," and we were only weeks away from the $700 billion Troubled Asset Relief Program (TARP). This was at best incompetent, and at worst dishonest.
The Obama approach is a big change from the fictitious budgets we've had in recent years, and Republican opposition is already lining up. One of the points of contention will be Obama's plan to allow the Bush tax cuts for wealthy Americans to expire in 2010. Hedge funds are upset because their special loopholes will be closed. Lobbyists are coming out of the woodwork and swarming around our nation's capital to be certain they don't have to make any sacrifices.
President Obama deserves credit for giving us a clear picture of what we are facing, but as it stands, the 10 year plan is unacceptable. Over this period, it projects an increase of $7 trillion in our National Debt. Even allowing for the cost to bring our economy out of a serious depression, rescue the financial system, and pay ongoing costs as a result of the war(s), this is excessive.
Maybe a realistic 10 year plan will make us all realize the consequences of the past 8 years, and begin an honest discussion about who we are as a nation and what we plan to leave our children and grandchildren.
Friday, February 27, 2009
Wednesday, February 18, 2009
TARP Payback
It seems the big banks don't like the executive compensation limitations Obama announced two weeks ago (see Reigning in Wall Street), and now they are "threatening" to repay loans from the Troubled Asset Relief Program (TARP) early.
So far, Goldman Sachs, Bank of America Corp., JPMorgan Chase & Co., and Morgan Stanley have said they plan to pay back the loans early. It may be that this was simply a reaction to the grilling they endured at the hands of House Financial Services Committee members. Apparently they didn't see the drubbing the automakers took in December for a measly $17.4 billion in loans. They missed the part where the CEO's of the Big 3 automakers were asked if they would work for $1 a year. More likely it never occurred to them that they would come under the same scrutiny, even though taxpayer funds to bail out banks far exceeds anything given to the automakers. They are, after all, banks.
Some of the banks have claimed that they were pressured to take TARP funds by former Treasury Secretary Hank Paulson, and there may be some truth in this. After promising Congress to use TARP funds to buy mortgages and mortgage-related assets, Paulson decided to dole it out to his buddies on Wall Street and hope for a "trickle down" effect. It didn't work.
At least in public, Paulson claimed the idea was to avoid any "stigma" from accepting TARP funds (after all, we wouldn't want anyone to have their feelings hurt over this disaster). This way, none of the other banks would know who was about to go broke, and either would investors or the American taxpayer. He even applauded the willingness of the initial group of banks to accept government money, saying "these are healthy institutions, and they have taken this step for the good of the U.S. economy."
The problem: banks must lend to each other for credit markets to function smoothly, and the banks themselves couldn't tell who was about to go broke. Very little TARP money was actually used to provide loans, and the hope that confidence would improve as a result of TARP loans was replaced with growing uncertainty and a lack of consumer confidence. The Paulson strategy of secrecy failed.
So the Obama administration has put compensation restrictions in place, and the message is clear; we will allow banks to fail, and the Paulson game of "Who's Got the Button?" is over. The message to the banks: if you don't need taxpayer money, send it back. If you do, don't expect to continue to hand out bonuses larger than the average American will earn in a lifetime. It's a step toward transparency.
It will be interesting to see how many other banks decide to take him up on the offer.
So far, Goldman Sachs, Bank of America Corp., JPMorgan Chase & Co., and Morgan Stanley have said they plan to pay back the loans early. It may be that this was simply a reaction to the grilling they endured at the hands of House Financial Services Committee members. Apparently they didn't see the drubbing the automakers took in December for a measly $17.4 billion in loans. They missed the part where the CEO's of the Big 3 automakers were asked if they would work for $1 a year. More likely it never occurred to them that they would come under the same scrutiny, even though taxpayer funds to bail out banks far exceeds anything given to the automakers. They are, after all, banks.
Some of the banks have claimed that they were pressured to take TARP funds by former Treasury Secretary Hank Paulson, and there may be some truth in this. After promising Congress to use TARP funds to buy mortgages and mortgage-related assets, Paulson decided to dole it out to his buddies on Wall Street and hope for a "trickle down" effect. It didn't work.
At least in public, Paulson claimed the idea was to avoid any "stigma" from accepting TARP funds (after all, we wouldn't want anyone to have their feelings hurt over this disaster). This way, none of the other banks would know who was about to go broke, and either would investors or the American taxpayer. He even applauded the willingness of the initial group of banks to accept government money, saying "these are healthy institutions, and they have taken this step for the good of the U.S. economy."
The problem: banks must lend to each other for credit markets to function smoothly, and the banks themselves couldn't tell who was about to go broke. Very little TARP money was actually used to provide loans, and the hope that confidence would improve as a result of TARP loans was replaced with growing uncertainty and a lack of consumer confidence. The Paulson strategy of secrecy failed.
So the Obama administration has put compensation restrictions in place, and the message is clear; we will allow banks to fail, and the Paulson game of "Who's Got the Button?" is over. The message to the banks: if you don't need taxpayer money, send it back. If you do, don't expect to continue to hand out bonuses larger than the average American will earn in a lifetime. It's a step toward transparency.
It will be interesting to see how many other banks decide to take him up on the offer.
Saturday, February 14, 2009
More Priority
"We got plenty of money in Washington. What we need is more
priority."
George W. Bush, June 2, 2008
Notwithstanding his grammar, and the apparent lack of awareness of the fact that he nearly doubled the National Debt in only eight years, there's a grain of truth in Bush's statement.
Nowhere is this more evident that in the reaction to the economic stimulus plan (American Recovery and Reinvestment Act of 2009) that cleared the House this week. With a ten year cost of $787 billion, this is definitely a "big ticket" item, and deserving of close scrutiny. But those who cried "pork" without an alternative solution did nothing to help the process.
Is it worth it? One way to look at it is to consider the benefits. The non-partisan Congressional Budget Office has estimated that it will create 3.6 million jobs next year and as many as 11.6 million over the next five years.
The latest estimate from the CBO also shows that the stimulus includes $288 billion in tax benefits, so the "spending" part is just under $500 billion.. Tax credits generally provide less economic stimulus than direct spending, and the least stimulative of these is the Alternative Minimum Tax (AMT) patch for 2009. At a cost of $70 billion, The Tax Policy Center has said this change provides "virtually no economic stimulus," because it benefits only upper middle income taxpayers.
The AMT fix was inserted by our own Sen. Chuck Grassley. In his defense, this issue has been around for a long time. If we're going to "patch" the AMT every year, as we have since 2001, maybe we should make the patch permanent. But let's not count the $70 billion cost for the 2009 AMT patch as part of the stimulus; this would have been done anyway.
Another way of looking at the stimulus is to compare it with other "big ticket" items in recent years:
- The Bush 2001 tax cuts (EGTRRA): $1.35 trillion (mostly to top 10% income levels)
- The War in Iraq: $1.7 to $3 trillion
- The Bank Bailouts: $2 trillion+
It's worth noting, that a number of Republicans in both houses of Congress offered up extending the Bush tax cuts beyond their 2010 expiration as the primary solution to our economic woes. The estimated cost according to the Center on Budget and Policy Priorities: $4.4 trillion over 10 years. How exactly is this going to stimulate the economy? This sounds more like the definition of insanity: "doing the same thing over and over again and expecting different results.”
Since the Senate Republicans objected so strongly to the stimulus plan, it's worth taking a look at the voting on the 2001 Bush tax cuts for wealthy Americans. (click here) Only two Republican Senators voted against the 2001 tax cuts for wealthy Americans (including, to his credit, John McCain). But for some reason, many of these same Senators feel they can't support spending half this amount to create almost 12 million jobs during an economic crisis.
Like the man said, "what we need is more priority," or at least different priorities.
Wednesday, February 4, 2009
Reigning in Wall Street
After publicly criticizing Wall Street for paying employees $18.1 billion in bonuses for 2008 (see Wall Street Arrogance), President Obama announced plans to limit compensation for executives at banks will receive assistance at taxpayers' expense to $500,000.
Full details have not yet been released, but at this point it appears the gesture is largely symbolic. It's been reported that this only applies to the top five executives in each company, and would not be applied to those firms that have already received assistance from the Troubled Asset Relief Program (TARP). Setting aside the opinions of those that will cry "government interference" and "socialism" at this latest move, this doesn't go far enough. If a bank takes TARP money, they should expect the government to control excessive spending, at least under this administration.
Obama is astute enough to understand the outrage of taxpayers reading about $50 million jets and million dollar bonuses, and this has put him in a difficult position. Next week the White House will release a bank bailout plan (in addition to the $825 billion stimulus plan working its way through Congress) with a two or three trillion dollar price tag. Obama needed to try to get the bonus issue out of the way first to avoid public outrage.
Someone will sit down in the next few days and calulate that the new limitations would have reduced $18.1 billion to something like $17 billion, and this will then be seen as only a token effort. A step in the right direction, perhaps, but not enough to calm taxpayers that have suffered as a result of Wall Street greed.
I've already resigned myself to the liklihood that I won't like the bailout plan. Obama doesn't have any good choices at this point. He can only play the hand he's been dealt.
P.S. The misspelling of "reining" is purely intentional.
Full details have not yet been released, but at this point it appears the gesture is largely symbolic. It's been reported that this only applies to the top five executives in each company, and would not be applied to those firms that have already received assistance from the Troubled Asset Relief Program (TARP). Setting aside the opinions of those that will cry "government interference" and "socialism" at this latest move, this doesn't go far enough. If a bank takes TARP money, they should expect the government to control excessive spending, at least under this administration.
Obama is astute enough to understand the outrage of taxpayers reading about $50 million jets and million dollar bonuses, and this has put him in a difficult position. Next week the White House will release a bank bailout plan (in addition to the $825 billion stimulus plan working its way through Congress) with a two or three trillion dollar price tag. Obama needed to try to get the bonus issue out of the way first to avoid public outrage.
Someone will sit down in the next few days and calulate that the new limitations would have reduced $18.1 billion to something like $17 billion, and this will then be seen as only a token effort. A step in the right direction, perhaps, but not enough to calm taxpayers that have suffered as a result of Wall Street greed.
I've already resigned myself to the liklihood that I won't like the bailout plan. Obama doesn't have any good choices at this point. He can only play the hand he's been dealt.
P.S. The misspelling of "reining" is purely intentional.
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