Thursday, 9 December 2010

Exceptionally Strange Bedfellows; More Cookies! Oh Boy!

Barney Frank has now come out against the tax compromise of president Obama and so has the Democratic budget caucus.

Nonetheless, Barney Frank predicts the measure will pass as enough Republicans will back the measure. This puts the onus of stopping the compromise on Nancy Pelosi. I highly doubt she has the nerve, no matter how much she hates the bill.

Thus it will be Obama and the Republican who ram this bill through.

Please consider House Democrats reject tax plan unless changed
By voice vote in a closed caucus meeting, Democrats passed a resolution saying the tax package should not come to the House floor for consideration as written, even though no formal House bill has been drafted. Rep. Peter DeFazio, D-Ore., introduced the resolution.

Said Rep. Lloyd Doggett, D-Texas: "If it's take it or leave it, we'll leave it."
The president again pressed Congress to pass the agreement, saying it has the potential to create millions of jobs. He said if it fails, Americans would see smaller paychecks and fewer jobs.

Rep. Barney Frank, D-Mass., predicted the tax cut compromise "will be passed by virtually all the Republicans and a minority of Democrats." He said he would vote against it.

Larry Summers, Obama's chief economic adviser, told reporters that if the measure isn't passed soon, it will "materially increase the risk the economy would stall out and we would have a double-dip" recession. That put the White House in the unusual position of warning its own party's lawmakers they could be to blame for calamitous consequences if they go against the president.

House Democrats, who will lose their majority in January, still hold a 255-179 edge in the current Congress. To pass a big bill with mostly Republican votes would mark a dramatic departure from recent battles, such as the health care overhaul, which was enacted with virtually no GOP support in either chamber.

Passage of Obama's plan seems more assured in the Senate, where numerous Democrats have agreed that the president had little choice in making the compromises with Republicans. Still, Majority Leader Harry Reid, D-Nev., said he and colleagues are considering possible changes, and action could come within days.
More Changes Cookies! Oh Boy!

More changes mean more cookies. Net-net cookies are seldom removed from the plate. Look for a big push to add BABs to the plate even though We�re Better Off Without �Build America Bonds�
As a part of Obama�s Recovery and Reinvestment Act, BABs allow state and local governments to issue debt to fund basic infrastructure projects at a 35 percent discount on the bond�s interest costs, handing that bill to the federal government.

CNBC reports that the BAB program accounts for nearly 26 percent of today�s municipal bond market- with October being reported as the biggest month for the program, as issuers increasingly position themselves to reap the benefits of the program which is set to expire on the 1st of January next year.

What will happen when municipal bond issuers are not able to borrow more cheaply? Well, heaven forbid, they would be forced to pay market rates for debt. If they can�t afford these rates, then they�ll have to cut spending and re-gear their budgets to enter the credit market. The 2010 election results at the state level may indeed have changed things. With a sweeping conservative, Republican wave in state and local governments this past election (the GOP took over a dozen state legislatures), it is almost certain that such cuts will now be possible.

It�s no surprise that our most fiscally irresponsible state and local governments are heavily exposed to BABs to fund basic operations. According to Thompson Reuters, the top issuer of BABs is the state of California at over $13 billion dollars, followed by New York City at a significantly lower $3.5 billion. In June of this year, according to the Wall Street Journal, the state of Illinois was at greater risk of default than Iraq. In large part, the BAB subsidy was able to keep the state afloat. Will these governments default without this program?

On CNBC�s Strategy Sessions, Jonathan Beinner, CIO and co-head of the Global Fixed Income and Liquidity Management team, Goldman Sachs Asset Management, predicted that there will not be a large number of municipal defaults. Let�s hope he�s right. Considering their initial QE2 estimates, Goldman has recently had a habit of taking politics as the crow flies.

BABs are unhealthy for America�s free market. It is unfair for the American taxpayer to subsidize state and local borrowing costs. Why should they be at the front of the line? The federal government is giving an unfair advantage to issuers of this irresponsible debt by using the American taxpayer to prop up negligent states and municipalities that are reckless and largely ineffective spenders. If we could repeat 1986 and allow Donald Trump to come in and rebuild public projects like Wollman Rink in three months, $750,000 below budget, we would be much better off, albeit the flashy gold lettering.

Though the fragility of circumstances will only intensify for issuers once BABs expire, we can all agree that there is too much debt creation at the government level.

BABs are another form of Obama Era bailouts that we must do without.
Anything we "must do without" is a sure candidate for something that someone wants to add to the plate.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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