Tag Archive | "Treasury Secretary"

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Federal Reserve Uneasiness Weighing On Markets


Uneasiness about Federal Reserve policy and about the succession plan have sent equity markets into a tailspin and currency markets into a state of high volatility. On Monday, US equities posted their fourth consecutive losing day. In overnight trading, global shares again lost ground as concerns about the Fed weighed heavily on the global marketplace.

And, not to be overlooked is concern about who will replace current Fed Chair Ben Bernanke. President Obama has apparently narrowed the field to the two most popular candidates, former Treasury Secretary and former President of Harvard, Lawrence Summers, and current Fed Vice Chair, Janet Yellen.

As Obama considers his options and refines his choice, he seems to be adding additional weight to the job description. On Monday, the President addressed the lingering need for more legislation in line with the controversial 2010 Dodd Frank law. The President called upon regulators to move forward with much of the regulatory reform cited in the law that has been slow to develop. Only 40 percent of the new Dodd-Frank regulations have been implemented and some of the bill’s most protective regulations remain in flux, tied up between five groups of regulators who cannot agree on policy.

On Monday, the President called upon the Federal Reserve, the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau to more aggressively overhaul regulations and ensure protection against another meltdown similar to 2008.

The beleaguered Consumer Protection Agency has been leaderless since its inception. In July, the Senate finally confirmed long-time candidate Richard Cordray to lead the agency, which is charged with reforming a host of consumer credit products, including mortgages.

However, the new Fed czar will have to add tighter regulation to its list of primary responsibilities. For the past 5 years, Chairman Bernanke has concentrated upon jobs and inflation. With Obama’s new mandate, regulation will be a top priority. This announcement may give some insight into who the President favors to replace Bernanke.

Summers vs. Yellen

As the world watches this drama play out, the minutes from the last meeting are due out tomorrow. The Federal Reserve is also meeting this week at Jackson Hole. What markets want to know is when tapering will commence and to what extent. The lack of definition has created shifts in emerging economy currency markets and propped up British sterling and the euro.

However, global equity markets are uneasy fearing that money will become tighter in the world’s largest economy. Fiscal conservatives say a pullback from current stimulus spending is overdue. Less conservative economists believe there is nothing to fear and the Fed should continue its aggressive buying policy.

Conservatives are at peace with inflation and are content with the slow job growth. More liberal economists believe inflation is under control and there is no reason to halt bond buying until employment shows significant progress.

In the backdrop to the Summers – Yellen selection, the Federal Reserve will be closely watching the September bank stress tests. A spokesperson for the Fed said on Monday; “Large bank holding companies have considerably improved their capital planning processes in recent years, but have more work to do.” When the stress tests were applied in 2013, 18 banks were scrutinized. Beginning in September, 12 additional banks with assets of more than $50 billion will be added. In the round of testing concluded in March, JPMorgan Chase and Goldman Sachs were reprimanded. The spokesperson said that although 14 banks met Federal Reserve expectations, there were consistent issues with modeling techniques.

As the President considers the two possible new Fed leaders, Summers clearly has a higher profile than Yellen. However, many of Summers’ decisions and policies have been controversial and he has pulled back from many of his positions prior to the recession. Obama’s Monday declaration that regulation is an important part of the Federal Reserve may well shift the momentum to Yellen.

Summers, who served as Treasury Secretary under President Clinton, played an important role in overturning Glass-Seagall, which had restrictions between commercial and investment banking. This lack of regulation gave birth to the aggressive investment banking policies that helped create the financial meltdown and allowed for the creation of “Too Big To Fail “ banks.

Summers also supported a lack of regulation of the swaps market. The opposition allowed for the explosion of derivatives that were major causes in the collapse of the country’s financial institutions. Summers resisted and in fact is on record as scoffing at concerns that abuses in derivatives were putting the nation’s investment banks at risk.

Since 2009, Summers has reversed direction in keeping with Obama’s response to the challenges. As a trusted Obama adviser, Summers may have an inside track but his political history is muddled and unclear. Obama has consistently stated that regulators should not be politically connected. It would be difficult to distance Summers from politics.

During her tenure as President of the San Francisco Federal Reserve, Yellen saw the housing collapse coming before the actual meltdown. She spoke publicly about the risks and the exposure of the nation’s banks. Yellen warned that banks should be required to raise their capital requirements. As Vice Chair, Yellen has continued to call for higher standards.

If Obama can separate the politics from the mission at hand, Yellen appears the highly qualified choice. From a consistent policy standpoint and as an early advocate of tighter financial regulation, Yellen should be the candidate to take the reins from Bernanke. The possibility of her appointment and the undefined tapering policy are adding edge to the markets.

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Good News From China And Spain


Equity and currency markets reacted swiftly to a solid bond auction in Spain and to the Central Bank of China’s aggressive pro-growth actions. China’s moves to reverse faltering growth included a lowering of the interest rate and allowing lenders more flexibility than in the past. China is expected to introduce a stimulus package in the near future. These moves stabilized volatile markets throughout Asia and paved the way for currency shifts.

The success of the Spanish auction can only be based upon a belief that the euro zone and the European Union will take action to structure a long-term solution to the lingering debt crisis plaguing the continent. There is also the possibility that the US will come to the aid of its biggest export customer.  This possibility has been previously dashed by President Obama and Treasury Secretary Geithner but gained some momentum after German Chancellor Merkel and President Obama spoke Wednesday.

Adding to this formula, good news from the US Department of Labor showing that jobless claims fell by 12,000 last week sparked confidence in US equities. Speculation was that the gains were short-term but it marks the first time in four weeks that claims have fallen. The number of Americans receiving emergency unemployment benefits fell by 45,808 for the week ending May 19.  The number of Americans receiving extended benefits fell by 58,829 in May. Last week, the Labor Department reported that growth had slowed in May for the fourth successive month.

In mid-morning, Fed Chairman Ben Bernanke testified that the economic recovery was fragile. He encouraged Congress to address the nation’s debt carefully and implement no anti-growth strategies at this time.

The euro posted a strong gain against the dollar topping the $1.26 mark before settling at $1.255. The GBP rose 0.42 percent to $1.555USD. The dollar gained 0.5 percent against Japan’s currency to 79.61 yen.

IMF Report

The IMF released basic points of a report to be released on Monday indicating that the Spanish banks needed a minimum of 40 billion euros to stabilize the troubled sector.  Spain has resisted international assistance but clearly underestimated the gravity of the real estate crisis that has endangered the entire euro zone. Only recently has Mariano Rajoy, Spain’s President, tested international waters. This tactic was necessary because investors were not responding to auctions even at rates above 6 percent.

The IMF report cites information from an audit performed by accounting firms Oliver Wyman and Roland Berger. Despite the report, Spain’s Minister of Economy, Luis de Guindos, was hesitant to say that the country would apply for bailout funding. Based on yesterday’s pullback by the ECB, there would appear to be no other option for the country.  The success of today’s auction is based on the belief that Spain will apply and receive the necessary capital to avoid a collapse and open up credit windows.

Spain has asserted that the IMF report would prove that 70 percent of the banking sector is solid. The government has aggressively merged the smaller, failing banks with larger banks.  Bankia has absorbed seven banks and now needs 19 billion euros to continue operations.

Merkel     

German Chancellor Merkel, whose political clout is greatly diminished, has been forced to deal with the reality of shifting from a strict austerity approach to debt resolution to a combination of austerity and growth. The Chancellor said that Germany is prepared to unleash any tools within its grasp to stabilize the euro zone.  This is a dramatic shift from policy and may encourage Spain to formally apply for assistance.     

Spain’s resistance is based upon national pride and fear of the German austerity programs.  With 24 percent unemployment, further austerity would be disastrous to Spain’s social and political structure. If Spain does apply for capital, it would reach out to the European Financial Stability Facility.

On June 18th, the day after Greece’s second round of elections, the G20 will meet with the European debt crisis expected to dominate the talks. The European Union summit is scheduled for June 28-29.

On the table will be the possibility of a new, more expansive central bank, deposit insurance and a long-term structured debt program that would lessen certain austerity measures. With 11 new political leaders in the 17-member euro zone, the shift is away from austerity toward growth initiatives.

Now that Merkel has apparently softened, the biggest obstacle to a reconfiguration of the European Union’s banking facilities will be Great Britain. On Thursday. Chancellor of the Exchequer, George Osborne told the BBC that, “There is no way that Britain is going to be part of any euro zone banking union. I think Britain will require certain safeguards if there is a full-blown banking union.”

Britain’s independence from the euro has permitted the country to implement two rounds of quantitative easing with another expected shortly.  The country has just posted its worst manufacturing figures in three years and unemployment is 20 percent. While there appears an easing of tensions on the continent, the rift with Britain continues to add drama.

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Tracking the USD


The future of the dollar looks to be improving.  Improving employment numbers and a vote of confidence from consumers is paving the way for a careful escape from the recession.  The national debt is atrocious but most analysts feel that after the 2013 elections, the powers that be will present a balanced but painful strategy to debt reduction.  Anything else would be irresponsible.

Unlike other countries or regions, the 4th quarter 3 percent increase in GDP can only be viewed as a compelling and surprising number.  In Europe, the forecast for GDP growth is negative. Enthusiasm is somewhat tempered by the bitter reality of oil at $123 per barrel. This number could have bad repercussions for the Obama Administration as well as for the recovery.  The good news is that it is an election year and as Treasury Secretary Geithner said in a CNBC interview the country may have to tap into its oil reservoir.  Obama will do everything he can to control the pump price of gasoline.

Fuel prices are a critical part of the economy.  But, there is another marketplace that can lower unemployment and add to the GDP.  That market is the residential and commercial real estate marketplace.  Last week, Warren Buffet told CNBC that if he had the management capabilities he would purchase thousands of distressed homes.  In reality, that is exactly what is happening across the country.

Buyers with real estate management and repair abilities are exercising bulk purchases of homes at foreclosure sales.  These investors are not looking for one or two properties.  They are looking at clusters of properties in the same geographical areas where a management team can do everything to manage the property.  That includes rent collection.

Why is this important to the dollar?  Well, the housing crash and unregulated lending practices got us into this mess and while it is usually a lagging indicator, it is the housing market that will signal the end of the recession. 

In the past, investors looked at residential housing as a short-term “flip,” or buy low, sell high strategy.  That was great when there was an undersupply of inventory.  That is not the case now. In fact, quite the opposite.  Most analysts feel supply will outweigh demand for three years.  It could be longer.

But, there are positive signs that supply is moving.  Not by one property at a time but by 20, 30 or 40 units at a time.  These investors do not expect to turn the properties quickly. In fact most are repairing the properties and leasing them in a robust rental market.

The rental market is cluttered with displaced former homeowners. These families and individuals are desperate to keep their family and home life in act.  In many cases, they become tenants in the same home they lost to foreclosure.

Because there is an abundance of renters, there is demand.  Investors are purchasing “fix ups” in the $10,000 range or slightly more or less.  They are bringing the houses up to code. They are painting and doing only the necessary repairs.  Instead of selling, they are renting.

Part of the mortgage interest and real property taxes are deductible and rentals are yielding excellent monthly returns.  A typical scenario is an investor purchases a one-family or multi-family home and with the help of the management team brings the building up to snuff.  Let’s assume the purchase price is $10,000.  Let’s assume the repairs come to $20,000.  Let’s assume the investor finances the renovated property at 80 percent for ten years at 4.5 percent.  The monthly payment would be $248.00. The longer the term is, the less the monthly payment will be. 

If the property is in a good school district, this is a homerun scenario.  The investor puts out about $6,000 and about $1,500.00 to cover closing costs and rents the property for a modest $750 or $800 per month.  There is income every month.  Maintenance is covered.  In ten years the property is owned outright.  In the meantime, the investor is taking good deductions.  In ten years, the owner has no mortgage and the market price should increase.

This is based on a few assumptions. The first is that the economy and market come back.  The second is that the rental market stays strong.  But, if it does not, that means the housing market is up. If the investor has no tenants, the property should be saleable.

The biggest assumption is that the market is at or near bottom.  Here are some data that should be considered. 

  • Mortgage rates are low, low, low.
  • Existing home sales fell in January, but revised data for the fourth quarter was strong.
  • Despite lower volume overall, sales were improved in the Northeast and South.
  • Consumer confidence in February rose to 75.3, the highest score since February 2011.
  • Indications are that February existing unit sales rode to a 1.5-year high.
  • Waypoint Homes in California purchased 1,000 homes and received $250 million in funding from a venture capital firm.

 As with Ben Bernanke, when Warren Buffet speaks we should listen.

 Commercial Real Estate

 The Administration has taken plenty of criticism for its handling of the disastrous Bush presidency.  Some of it is deserved, but the complaints are slowing now that there is an upwards tick in the economy.

One of the wisest decisions of the Treasury Department and the FDIC was to permit commercial lenders to modify the terms of their commercial mortgages.  Had that action not taken place, the commercial real estate market would have copied the overwhelmed marketplace cluttered with foreclosures and defaults.

In the 4th quarter 2011, commercial lenders expanded their portfolios by $5 billion.  Large banks led the way but some regional lenders were also active.  The 4rh quarter 2011 marked the first quarterly increase in commercial paper since the first quarter of 2010.

The default rate on commercial mortgages fell to 3.78 percent, the lowest since the third quarter o 2009.  The default rate for multi-family real estate plummeted to 2.5 percent, the lowest default rate since the first quarter 2009.

As businesses have trimmed expenses, they have consolidated space and taken tighter control over operational costs.  Vacancy rates were at their peak at the end of 2009.  That trend is reversing and the commercial real estate market has definitely bottomed.  Combining an appetite for space with low prices for natural gas and favorable interest rates has treated commercial real estate developers very well.  The US is not out of the woods yet, but we are getting there.

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The Chairman Speaks!


My theory about Chairman of The Federal Reserve, Ben Bernanke, is pretty simple.  When Ben speaks, it is a good idea to listen.  There is no doubting Bernanke’s intellect, which of course sets him apart from Congress.  The Chairman and Treasury Secretary Timothy Geithner have taken their lumps on Capitol Hill, but it is their tenacity and conviction that allowed the US to keep the ship afloat.  After a long sail into the wind, the economy looks to be completing a turn to pickup some tailwinds.

But, it is never quite that easy.  Every now an then, Bernanke and Geithner need to explain themselves the same members of Congress who are infatuated with themselves and are really out to grab some airtime.  While Geithner and Bernanke have their critics, their approval rating far exceeds the approval rating of Congress; a dismal 10 percent.

What members of Congress will not tell you is that the hardcore conservatives that are currently in the House and Senate and who have signed the Norquist pledge without consulting their constituents have caused the US credit rating to take a hit.  The have also thrown obstacle after obstacle at the economy and at the very vulnerable constituents.

Despite this political theater, the US economy will not be denied.  We are dealing with very complex issues across the globe.  But, if the US is anything, it is resilient and proud.  Imagine what could be done with a responsible Congress?

Bernanke finished two days of testimony before the Senate Banking Committee.  As the Senate groped for more airtime, Bernanke stood tall.  He patiently answered questions.  He offered a glimpse into the future and made it clear that there are some positive signs in the economy, but that there is a long way to go.

Bernanke and Quantitative Easing (QE3)

The chairman backed off his position on a new round of money printing known as QE3.  The result sent a quiver into the equity markets, a tumble in precious metals and an increase in the value of the dollar.  The Chairman asserted that rising fuel prices and higher rental prices would play a large role in the Fed’s decision to put the money printers in motion. If inflation rises, the chances of QE3 diminish proportionately.

Bernanke also reported that the swell in equity markets could well be linked to favorable economic data and to the belief that many analysts have that QE3 was a forgone conclusion.  This statement led to a slight downturn in equities.

Personal income in the 4th quarter 2011 was originally reported to increase by 0.7 percent.  After adjustments, personal income for the quarter actually rose twice that amount to 1.4 percent.  Another impressive fact is that GDP revisions to the fourth quarter accounted for 3 percent growth rather than the 2.7 originally stated.  During January, personal income rose 0.3 percent in January and 0.2 percent in February, slightly below expectations.

Two factors that could necessitate QE3 are a rise in unemployment and tight credit markets. 

Bernanke on Employment

On Thursday, the Fed Chair fielded questions after the new unemployment numbers were reported.  First time claims were within the 350,000 range.  The employment market has exceeded Bernanke’s expectations.  This trend is expected to positively impact non-farm employment.  If so, this would translate to more than 200,000 new non-farm jobs in February.

There are 5.2 million more people receiving unemployment benefits than there were at the onset of the recession.  This figure would keep the unemployment rate at 8.3 percent.  In the week ending 02-18-12, the number of persons claiming unemployment after the first week of benefits fell by 2,000 to 3.4 million.  The number of Americans filing for extended benefits increased by 1,347 to 2.9 million.

Bernanke and Other Data

This is a summary of new data presented by the Chairman. 

  • Consumer spending has maintained the same level for 3 months. 
  • Prices for consumer consumption roe 0.2 percent in January. 
  • US manufacturing fell to 52.4 in February compared to 54.1 in February.  This decline could well be attributed to the chaos in Europe. 
  • There was a sharp decline for durable US factory goods. 
  • Construction fell 0.1 percent in January after an encouraging 1.4 percent increase in December and a 1.9 percent rise in November.

 The Chairman responded to a question about US exposure to the European crisis.  Bernanke answered that he believes US banks have covered their exposure.

In digesting the two-day testimony, the very politicians who have not hampered the job market and who have tied the hands of the President expressed concern that the GDP growth is too slow.  Although politicians do not approve of quantitative easing, they want GDP growth.  In today’s economy the Congress should understand that if you want to play, you still have to pay.  Here’s to a balanced approach to reducing the debt and to the consolidation of federal agencies.

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Euro On Rise?


Despite the Obama Administration’s resistance to contributing funds to the IMF in support of the euro zone, the euro has gained some traction.  The currency has climbed well above the $1.26 trough and is flirting to move past the current the $1.2867 level.  Traders suggested that the euro remains volatile and the currency may not have bottomed yet.

In October, the euro rose to $1.3145 against the dollar.  Analysts believe that until the currency crosses that threshold the bottom has not been found. 

The Thursday bond sales in France and Spain will serve as a good barometer for how much the S&P downgrades have hurt the euro zone.  Investors are cautiously optimistic in the wake of a bond sale in Portugal that sold 2.5 billion euros in debt and was fully subscribed.  Germany’s Wednesday auction also had more demand than anticipated.

Since last Friday, the dollar index has fallen from 81.784 to a two-week low of 80.473.  The Australian dollar gained strength climbing to an 11-week high of $1.0419. The Australian dollar is holding well above its 200-day moving average.  Australia is believed to have added 10,000 in December.

The Dow Jones equities continue to holdover 12,500.  Much of that support is the result of better banking news than expected.  The major financials appear to have fared better in the 4th quarter and will not require additional capital.

The positive euro zone activity seems foolhardy.  Greece is meting with private investors on Thursday in a last gasp effort to gain approval for their debt swap program, which is little more than a restructured default.

The structured default must occur by week’s end to avoid a breech in the 13.4 billion euro call in March.  Another major problem looms.  There is doubt that investors and hedge funds burned by Greece will stay out of the European bond sale market.  U.S. equities are strong and the dividends are especially appealing.

Treasury Secretary, Tim Geithner, informed the IMF that Europe would have to solve their own problems. U.S. taxpayers cannot come to the aid of countries like Greece, Italy and Spain.  The people lack the will and are clearly supportive of more aggressive jobs legislation.  The political fallout from a bailout of Europe would be devastating to President Obama. 

On the other hand, the European banking sector fell 32 percent in 2011.  Even with a temporary rescue plan, Greece will continue to need funding and Euro Zone members will face this same crisis sooner rather than later.  It is time for private investors to take what little money they can and let Greece go its own way. The negotiations with private investors are tense and it is difficult to see why hedge funds and other investors would throw good money after bad.  That is a business model that is fine with Greece but has no appeal to larger markets.

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EU Take Make Progress


The European Union (EU) reached agreement on a plan to capitalize Europe’s struggling banks and show a united front to the rest of the world.  26 of the 27 EU members agreed to treaty changes that would create more responsible guidelines for budget discipline. 

Britain was the sole dissenting member. The UK refused to agree to treaty modifications.  After two days of tense negotiations, Britain was unable to receive the concessions necessary to participate in proposed changes to the existing EU treaty.

All 17 members of the Euro Zone agreed to the new terms for a stronger, more harmonious and more disciplined treaty. Nine states that are not members of the Euro Zone but are members of the EU supported the move to a new treaty with tighter debt standards that are designed to prevent future collapses. 

Europe has re-entered the treacherous waters of a second recession. As the largest importer of American goods, Europe’s never-ending woes continue to haunt US markets as well as markets around the world.  Originally, it was believed that a failure in the Euro Zone would have a minimal impact on the US economy.  That theory has been dashed.

The US needs a strong Europe.  Both President Obama and Treasury Secretary Timothy Geithner have offered encouragement to EU members.  However, President Obama has made it clear that the US could not participate in EU loans or larger contributions to the IMF.

European Central Bank President (ECB), Mario Draghi, expressed approval for the tighter budget restraints that the 26 EU members.  One day earlier, Draghi dashed hopes for broader ECB investment.  Draghi maintains that the ECB can continue to purchase sovereign debt but was not chartered to loan money to regional banks.

Instead, Draghi suggested that the European Financial Stability Fund (EFSF) was the correct vehicle to assist Euro Zone banks.  France had proposed that the ECB could lend money to the IMF so that the IMF would have the resources to help banks. 

Draghi’s clarification necessitated a shift for EU members.  On Thursday the ECB’s governing council agreed to continue purchasing member nation bonds in the amount of 25 billion euros per week.

Germany Chancellor, Angela Merkel, threw her support behind the proposed treaty changes.  As Germany is the largest economy in the region, German endorsement carries weight.  If Merkel were not in agreement, no plan could proceed.

However, Merkel is walking a fine line in her homeland.  Her party holds a one-member majority in the Parliament.  Some party members reject Merkel’s commitment to other EU members.  To get approval, Merkel needs help from outside her party.

Herein lies a large part of the Euro Zone and EU problem. First the members must agree upon policies to avert collapse and then they must secure approval from their national parliaments.  This is no easy feat.

With Friday’s announcement, the 17 Euro Zone members and the 9 members in the EU but not in the Euro Zone must submit the bill to their own legislative bodies.  This process would take a minimum of three months.  Countries like Ireland, Portugal, Spain, Italy and Greece need help now.  Despite aggressive participation in the bond markets, Italian bonds are yielding 6.5 percent, which is unsustainable.

The interactions between media releases and actual decisions never seem to happen.  One day’s good news is followed by three days of bad news.  There are endless meetings but no action plan. By the time various parliaments consider solutions, the situation has already intensified.

Banking Nightmare

The plight of Euro Zone banks is alarming. Earlier this year, the European Banking Authority (EBA) insisted upon new stress tests.  In this second round of testing, the EBA increased the requirements.  Observers agreed that the stress test formulas were far inferior to standards used by the US.

These flimsy tests have been challenged by the recession on the Continent.  The banks have come up far short of stated representations.

The banks will now need to raise capital, cut staff, reduce dividends, liquidate assets and lower employee pay. In October, the capital shortfall was 106.4 billion euros. On Thursday, the EBA cited the shortfall as 115 billion euros.

The EBA has set a Tier I capital requirement limit at 9 percent, which is higher than the 7 percent minimum.  Below are the capital needs of Germany and Spain and represent the donward spiral EU members are suffering.

Germany – 13.1 billion euros (5.2 billion in October)

Spain – 26.2 billion euros (from 6.3 billion in October)

This reflects the effects of the recession and the flawed stress tests.  To make matters worse, the Moody’s ratings agency announced a downgrade of three of France’s largest banks.  Societe Generale, BNP Paribas and Credit Agricole were downgraded because of their failed efforts to raise capital and their exposure to southern ties countries.

On Friday afternoon, British Prime Minister voiced his frustration by declaring that the EU would stand by its own currency and would never use the euro.  The lone dissident in the EU, Britain opts to stand alone.  There are several countries in Europe that wish that option was available.

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Moody’s Downs French Banks


Just before a video meeting between Germany’s Merkel, France’s Sarkozy and Greece’s Papandreou, Moody’s lowered the credit rating boom on Societe Generale and Credit Agricole, two of France’s largest banks.  The rating drop of one notch boldly questions the validity of the recent bank stress tests and the integral ramifications a default by Greece would have throughout the euro zone and global banking sector where much Greek debt is held.

After the three-way conference call, Germany, France and Greece issued a joint statement that Greece was an integral part of the European Union and would remain that way.  A popular theory was that Greece should default and/or leave the European Union.  The fate of Greece is still bleak.

Greece is in an angry mood as the population is rebelling against the heavy austerity cuts that the government has been forced to implement and enforce.  The trio of state leaders tried to allay the fear rumors.  The announcement combined with an MSNBC interview with Treasury Secretary Tim Geithner that revealed that Angela Merkel has told the European Union and the world that there would be no Lehman Brothers type collapse in the EU. 

However, the 17-member EU is greatly divided about how to proceed and bring stability to the tumultuous currency.  Every nation is invested in Europe and every global corner has been heard from.

On Wednesday, China’s Premier Wen Jiabao offered conditional assistance and further investment but before any action could be taken, the region must get its house in order.  That will not be easy.

An Indian official came forward to confirm that that finance ministers form Russia, Brazil, India, and South Africa would entertain Brazil’s proposal to increase investment in the Euro Zone.  This is expected to be a hot topic when the finance ministers meets in Washington on September 22nd.

France’s Sarkozy’s popularity is waning, Germany’s Merkel reign is seriously in question and Papandreou is in a no-win situation attempting to comply with the Euro Zone stipulations against an unwilling population.  Real estate taxes are now being linked to power bills in Greece. The message is ironic.  Either pay up or the lights will go off, much like Greece itself.

Italy began issuing sovereign debt five years ago.  On Tuesday, Italy was forced to pay the highest interest in the five years they have issued bonds.  Prime Minister Silvio tabled a confidence motion as Rome’s Parliament prepares to approve a 54-billion austerity package.  The Euro Zone’s third biggest economy has not displayed the ability to manage its debt.

Other euro developments included a statement by An announcement by the European Commission’s Jose Manuel Barroso that he will soon there is no “simple solution” to the European political and financial theater.  Global markets move dramatically on every piece of news emerging from the zone.

Barroso said, “This is a fight for the jobs and prosperity of families in all our states.  This is a fight for the economic and political future of Europe.  This is a fight for what Europe represents in the world.”  Barroso pushed for the 17-member European Union to coordinate its political energy toward a common goal.  Sounds good, but the bitter reality is that politicians are torn between national interests and regional problems and a general resistance that the region’s haves should share the burden for the reckless economies.

Barros was firm in declaring that the long awaited euro bond would not solve all the region’s problems.  The only thing that will is to arrive at and achieve a common goal.

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Boehner’s Republicans Disrespectful


When Republican Eric Cantor rudely interrupted President Obama three times in a crucial June summit, the posture of the Republican Party was evident.  Urged on by a freshmen class of 60 new Congressional members, these inexperienced politicians have pushed the United States to the brink of default.  In the midst of this activity, a once highly regarded Speaker of The House, John Boehner, is not only damaged goods but is also incapable of controlling his own caucus and appears the villain in the debate.

The Tea Party’s stance has undermined the possibility of cooperation between the government’s three elements.  The Tea Party was widely supported by Wall Street and the Chamber of Commerce.  Those bodies may well regret their choices.

With five days left before the August 2nd deadline identified by Treasury Secretary Timothy Geithner as the day of default, the world is now paying closer attention to the normally easy process of raising the debt ceiling.  Due to unexpected revenue, the drop-dead date may be a bit later but that is not what is catching the eyes of the nation’s global investors.

From France to the IMF to Japan and even the Phillipines, nervous economies have been patient as reckless politicians have provided volatile bickering and downright untruthful statements.  The closest the country has come to resolving the debt ceiling and spending cut plan was a proposal crafted by Boehner and Obama that would have generated more than $4 trillion in deficit reduction plans and $800 billion in revenue increases.  Every citizen would give something in this plan.

The Boehner – Obama deal was set for release last Friday. The Speaker of the House Boehner avoided the President’s phone calls and then turned up the dialogue, claiming that Obama’s request for an additional $400 billion in tax changes for the wealthy made the plan unacceptable.  The truth is that Boehner could not sell the original deal to his caucus.

Just two months ago, Eric Cantor walked out of the Biden spending cut commission when the Republicans left the White House at the altar for the first time.  When Boehner backed out of talks for the second time last Friday, the President’s options were limited.  He is now waiting for a Boehner plan that would not have passed the House yesterday and is doomed for defeat at the Senate.  Obama has already said he will veto the Boehner plan.  The major problem with the Boehner plan is that it is a two-step process that will require more negotiation is six months, coincidentally at the same time the President will be on the campaign trail.

Boehner used Wednesday to refine his proposal but no matter what he suggests, it will not pass.  Majority Speaker of the Senate, Harry Reid, has a plan on the table that the President would approve.  This plan would increase the debt ceiling through 2012,and has about $2.7 trillion in cuts.  It is a compromise plan that not all Democrats embrace.

Though Obama will accept this plan, it is far from what the Democrats really want.  The Obama-Boehner plan that fell through was a far-reaching bill that addressed improvement to the entitlements programs and included certain revenue raising changes to the tax code.

Reid’s bill may pass the Senate and will most likely be rejected by the House.  At that point, Obama can veto the House and would only need one third of the House to overturn the House’s original vote. 

Another option is that the President can invoke the 14th Amendment. The country is so discouraged by the Washington malaise, that this possibility has larger than expected support.  What the President might consider is submitting a straight debt ceiling increase bill to the House and Senate.  This option separates the spending debate from the debt ceiling increase.  This bill would certainly fail in the House but might pass in the Senate. 

If all else fails, the President should not wait.  He should invoke powers in the 14th Amendment and increase the debt ceiling thus avoiding default.  In a CNBC poll, 96 percent of Americans supported the President’s use of the 14th Amendment.

While Boehner is being bullied by the Tea Party, the President has been busy behind the scenes.  On Wednesday, Republican Senator John McCain addressed the House and tried to educate the freshman members and Tea Party members. He may have made a dent in the unwillingness to compromise but tomorrow will tell.

Lingering on the sidelines, the Credit Rating Agencies are pushing for a long-term solution that includes the debt ceiling increase and the spending cuts.  It is remarkable that the Tea Party is driving Boehner and the nation. 

Invoking the 14th Amendment may cause a series of lawsuits but when the other options are exhausted, this may be the cleanest and only option.  The weight of this debate has mesmerized the taxpayers and financiers from around the globe.  The result is a tremendous slowdown with businesses and citizens wondering what will happen next.

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Debt Ceiling Tensions Rise


On a day when Greece approved its austerity cuts, the United States may have taken a step backwards in approving the needed extension of the debt ceiling.  President Obama held his first press conference since March on Wednesday.

After meeting with Democrats in the morning, the President was scheduled to meet with Republicans in the afternoon.  However, in the wake of warnings from the International Monetary Fund (IMF) and the Treasury Department, there was a hint of anger and a hint of frustration at the President’s news conference.  The President called for a resolution to the debt ceiling issue and instructed Congress that if a deal was not made by the end of the week, he would call Congress to session over the 4th of July holiday.

Obama painted several images of the Republican cause.  He compared the Republican opposition to tax breaks for high-income individuals while the country is facing a debt crisis.  He also drew the comparison of billionaires with tax breaks while assistance for college tuition are scheduled to be cut. 

Unlike the extension of the Bush Tax Cuts, Obama took a strong stance against the politics of the debt and budget negotiations.  Obama also pushed for economic stimulus to upgrade the country’s infrastructure and add jobs. 

Treasury Secretary Timothy Geithner weighed in saying that there was no way to stave off default unless Congress agreed to increase the debt ceiling.  “There is no credible budget plan under which a debt limit increase can be avoided.”  Republicans are pushing for Treasury to prioritize payments to cover the debt, thus putting millions of social security recipients at risk.

Bipartisan talks led by Vice President Joe Biden broke up last week when Democrats put tax increases for the wealthy on the table.  Republicans Cantor and Kyl walked out of the meetings that had laid groundwork for $1 and $2 trillion in tax cuts. 

The IMF sent word that a failure to reach a deal in the next two weeks would create “severe shock” in all global markets.  The Bipartisan Policy Center was quick to support the IMF’s position and rebuke the Republican stance that Treasury could prioritize payments closing down payments for Medicare, social security, disability and Medicaid in order to honor the national debt. 

“Are we really going to start paying interest to the Chinese who hold Treasuries and not pay folks their Social Security checks or not pay veterans their disability checks?”

Standard Poor’s Weighs In

Financial markets continue to ignore the debt ceiling crisis and on Wall Street it is business as usual.  Equity markets enjoyed their third straight day of gains. 

All this as Standard and Poor’s said inaction about the debt ceiling would be classified as “selective default” if the country misses an August 4 interest payment.  The situation is already awkward and causing concern around the globe.

John Chambers, the managing director of Standard and Poor’s said the U.S. Treasury bills maturing on August 4th would be classified as “D” if payments were not made.  Other bonds maturing later would also be significantly downgraded.

Last-minute debt ceiling talks have worked in the past.  Since 1960, last minute haggling has resulted in the necessary increase at the eleventh hour. Chambers said that default would cause all markets around the globe to collapse.

The other two credit rating agencies have already warned about the downgrade.  They have also expressed concern about the delay in approving the new ceiling.  There is another debt payment scheduled for August 15th

President Obama has threatened Congress that he would call them back in full session if legislation is not approved by the end of this week. 

About Federal Default

Reuter’s columnist Reynolds Holding reports that federal default is not an option according to the U.S. Constitution.  This document, which is highly valued by Tea Party members, prohibits the government from defaulting on its national indebtedness.

This adds clout to the stance of the White House.  According to the Constitution, public debt “shall not be questioned.”  This may give the President the leverage he needs to make certain the country meets its obligations.  According to Holding, the President can declare the default unconstitutional and make provisions to pay the debt.

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Obama Builds His Case


President Barrack Obama has been held hostage by the Republicans ever since the passage of the Bush Tax Cuts.  The Republicans leveraged the fate of millions of unemployed workers by standing firm against the critical unemployment insurance extension until the Bush Tax Cuts were continued.

Republicans now threaten to oppose increasing the country’s debt level unless they receive further reduction of government programs and government spending.  This time the country’s credit standing is at stake.  Failure to increase the debt ceiling will cause default of U.S. bonds.  Treasury Secretary Timothy Geithner has informed Congress that the deadline is May 15th but by robbing Peter to pay Paul he can probably survive until mid July.

Chairman of the House Budget Committee, Paul Ryan, has created his vision of how to reduce the deficit and cut spending.  The central theme is that the United States does not have a revenue problem but does have a spending problem.  Whenever Republicans offer an opinion, they begin with this statement.  Many economists disagree with that simplified assessment.

When it is time to approve the debt ceiling level, taxpayers can expect that Republicans will use the budget differences as leverage to gain concessions.

It has been reported that at least 235 Republicans have signed a pact that they would not vote for any legislation that included tax increases. The Ryan and Obama deficit cuts have borrowed portions of the bi-partisan Simpson-Bowles deficit reduction program.

Ryan and Obama Differences

The Ryan budget plan has sound points.  However, the 72 page document is so filled with political innuendo and rhetoric that it makes for a difficult read.  But, Ryan has courageously placed Medicare, Medicaid, Social Security and defense spending on the table.  The Big Three entitlement programs have previously been considered sacred ground for politicians.  Defense is always an issue.

As Obama pointed out these four budget items represent about 88% of the budget.  The Simpson-Bowles report endorsed significant reform of the big three.  No significant changes have been made to these items for fifty years.

The Obama-Ryan plans have similar goals but very different approaches to actually reducing the size of government.  Ryan’s plan calls for deficit reductions of $4.4 trillion over a ten-year period.  Ryan would call for $5.8 trillion in spending cuts and calls for tax decreases for individuals and businesses.

Obama projects $4 trillion in deficit reductions over a 12-year period.  The Obama plan would reduce the deficit to 2% of GDP by 2015.

Both programs have different methods for identifying spending cuts.  Obama reports that cuts to discretionary spending will result in $200 billion in savings over ten years. These would be in addition to the $400 billion in spending cuts already in Obama’s 2012 budget proposal put forth in February.  These cuts are projected to cut spending by $770 over ten years.

Obama would limit security spending at a rate below inflation and still have the capacity to meet national security issues.  This program would save more than $400 billion by 2023.  Obama has previously recommend reduction in farm subsidies and the federal pension insurance system.  His revised reduction plan includes another $360 billion in savings from mandatory spending programs by 2023.

Ryan’s plan calls for the repeal of the Obama health reform legislation and takes the $178 billion in defense reductions identified by Defense Secretary Robert Gates and reinvests $100 billion in military readiness and saves the remaining $78 billion.

Healthcare is a big topic in both deficit reductions.  Obama’s reductions to Medicare and Medicaid will save $340 billion in ten years and $480 billion by 2023 and $1 trillion by 2033.

Ryan’s healthcare program is entirely different.  The Medicare’s fee for service program would be converted to a subsidy program for needy seniors.  The amount of the stipend would depend on the income and health of the senior who would then negotiate coverage with healthcare providers.  This would be quite a challenge for seniors with pre-existing conditions.

Ryan would take Medicaid out of the hands of the federal government by giving states a sum of money to oversee the health benefits for the poor and needy.  States would oversee their own Medicaid programs.

Tax Reform

The two budgets reflect deep differences in the area of tax reform.  Obama calls for sweeping changes because the Bush Tax Cuts are too favorable for the wealthiest Americans and seem to penalize the middle class.  His reform would eliminate many of the loopholes enjoyed by wealthy individuals and corporations.  Obama points out that in the past, the wealthier Americans have borne more of the burden than the middle class.

Ryan’s plan would decrease taxes for individuals and corporations.  The Ryan theory suggests that these cuts will increase employment and raise the GDP.  Ryan takes dead aim at the Obama Health Care program by overturning the program and eliminating nearly $800 billion in additional taxes.   

One of Obama’s conditions calls for a triggering mechanism to force spending cuts if certain deficit reduction criteria are not met.  These “debt fail safe triggers” gave markets confidence that the U.S. is serious about reducing debt and meeting its obligations.

While Wall Street reacted positively to the Obama plan, Republicans have already nixed supporting any budget plan that included tax increases.  At least we have a starting point.

A bipartisan group known as the “gang of six” is hopeful to present their budget and spending cuts this week.  Alan Simpson suggested that the “gang of six” may be the country’s best hope for a workable budget.

In any case, the conversation about the budget can take place over the next few months.  The reality is that the increase in debt ceiling should be the next item on the table and now is the time.

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