January 11, 2008
Making Sense Of The Mess On Wall Street
Americans who consider President Bush to be a lame-duck leader are wrong. One, there's that veto pen of his. And two, federal intervention will almost certainly be needed in order to circumvent a looming recession.
Under enormous pressure from economists and Wall Street, the White House is expected to roll out an economic stimulus package, as it did following 9/11. With financial anxiety roiling both Democrats and Republicans, expect the economy to take center stage when Bush delivers his final State of the Union address on Jan. 28.
Publicly, Bush is stressing what's right about the economy (GDP growth, job creation) while acknowledging in very broad strokes that his administration is closely monitoring turmoil on Wall Street. There's been some clamor for him to tackle the issues at hand head-on, as complaints from those he once joked were "his base" grow.
The big business story of the day is Bank of America's $4 billion decision to swallow up Countrywide Financial -- and all its many problems. In October, Countrywide CEO Angelo Mozilo lashed out at the federal government's paralysis as his sector and the rest of the economy grappled with the housing and credit meltdown.
"In terms of tangible effort from the federal government... there has been no program, no federal effort, no legislative assistance -- zero," Mozilo said, speaking at a Milken Institute conference. "First-time buyers cannot buy a home now. Only the wealthy and privileged can afford to buy homes."
"It takes a village to do this," Mozilo later added.
The White House announced a policy fix for the mortgage and lending industries in December. But the plan was voluntary, and did not include a bailout for lenders or borrowers.
More importantly, a growing number of economists and lawmakers say, the administration has failed to heed calls for raising the loan limits for Fannie Mae and Freddie Mac, which would temporarily invigorate the housing market.
Earlier this week, Fannie Mae CEO Daniel Mudd said he agreed Fannie and Freddie should be allowed to purchase jumbo loans, or loans exceeding $417,000. Treasury Secretary Henry Paulson said the same in December, though Bush cautioned Congress would have to enact regulatory reforms before giving Fannie and Freddie the green light. Expect him to announce he's sending/approving legislation that does just that at the SOTU -- depending on whether returning lawmakers beat him to the punch.
The Wall Street Journal reported on Wednesday (subscription) that Bush will likely repeat the tax rebates of the post-9/11 recession package.
The point of the rebates, which could be as high as $500 this time, is to encourage spending and lend a hand to those struggling to pay bills, etc. As with the post-9/11 package, the tax rebates stand to be mocked as a tissue-paper fix to the problem. They will also be criticized for not going to the lower class or working poor, who are suffering the most but wouldn't be eligible for the rebate if they don't pay taxes.
Shares of Countrywide and BOA briefly rose on the merger news before slipping today. Stocks have fallen sharply today on word that Merrill Lynch is taking a $15 billion write-down when it reports earnings next week. The gigantic sticker took investors by surprise, after analysts had previously predicted the brokerage would report $12 billion in losses.
The disconnect between Wall Street and average, middle-class Americans is well-documented, but there is reason for both sides to pay attention to each other.
Bankers are trying to hang in there, doing so mainly on the strength of cash injections. To some that's an indication that the big banks are in an even more precarious position than they seem. (Hard-hit UBS is now jokingly referred to as the United Bank of Singapore, after selling off $9.99 billion in mandatory convertible notes to the Government of Singapore Investment Corporation. UBS is also appealing to angry shareholders for approval of a 9-percent stake sell to Singapore.)
If a major bank were to fail, it could have a devastating domino affect across the economy. Expect yet more jaw-dropping write-downs in the future. According to this week's Economist, "Although banks have already written off whopping sums over subprime mortgages, they are vulnerable to yet more hits. Their worldwide remaining exposure to subprime loans (excluding off-balance-sheet vehicles) is put at $380 billion; analysts think they are still only roughly two-thirds of the way through tallying their mortgage losses."
The bad news will continue to rock the Dow, which in turn will crank up anxiety about the economy. Unfortunately, this being an election year, we're bound to hear lots of good-in-theory/bad-in-practice proposals for turning the economy around. After a lackluster 2007, one hopes congressional leaders will return knowing it is in their interest to work with the White House on a stimulus package (as opposed to fighting Bush every step of the way). Squabbles over who should get credit for calming nervous taxpayers may stall the process, though.
At a Brookings Institution roundtable yesterday, economists recommended a $100 billion stimulus package that includes expanding unemployment and food stamp benefits. (Read the report here [PDF].) Three University of Michigan economists who've studied the post-9/11 stimulus package say the proposal under construction at the White House will have a negligible effect on the economy. MarketWatch writes that panicky investors flocking to gold will be facing risks there as well.
Posted at 4:18 PM
Posted to:
Bush Administration, Economy, President Bush, Taxes
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