Can't Buy Salvation for 9-9-9

10/18/2011 10:49 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The dangerous gridlock blocking action on the economy might be preferable to one of the kookier reform plans gaining traction, writes senior editor Igor Greenwald.

The American Jobs Act, rolled out by President Obama in a prime-time address to Congress last month, was finally put out of its misery a week ago by the Senate. It didn’t even get an up-or-down vote on the merits—the Senate’s Republican minority used its filibustering prerogative to prevent that.

The stillborn stimulus now lives on as campaign prop, a purpose for which it appears to have been tailored. And good luck with those missing jobs if the payroll taxes go up next year in the absence of a bipartisan budget deal.

Having shown Mitch McConnell and John Boehner who’s boss, Obama now faces the equally tricky task of appeasing Edward DeMarco. He’s one of many people in Washington more powerful than the president, it seems, but one of the few still willing to hear him out.

DeMarco is acting director of the Federal Housing Finance Agency, because the guy who was named to replace him last year failed to pass muster with Republicans. In his capacity as the independent regulator of Freddie Mac and Fannie Mae, DeMarco has turned himself into a one-man roadblock to refinancing for millions of struggling American homeowners.

Anywhere from 11 million to 15 million mortgages are now underwater, the outstanding debt exceeding the diminished home value. Perhaps as many as 7 million owe too much to qualify for the main federal foreclosure prevention program, which is currently limited to refinancing mortgages within 25% of the home’s value.

So far, just 850,000 homeowners have realized the benefits of lower rates, even as Obama administration has pushed the FHFA to do more, and studies have shown that doing so would actually save the taxpayers billions of dollars in the long run. The president made his latest plea for additional homeowner assistance last month, and is still waiting for DeMarco to oblige.

So the administration’s housing policy is being held hostage by an “acting” bureaucrat, while its fiscal plans have been stymied by Congressional opponents. Without a grand bipartisan bargain, taxes are going up in under three months. Discretionary spending cuts await as well.

But for all his hesitations and missed opportunities, Obama has been positively an action hero and a giant of economic thought in comparison to the Republican presidential candidates.

The corporate favorite in the field, Mitt Romney, has entrusted economic policy to the men who headed the Council of Economic Advisors under George W. Bush and designed the tax cuts of 2001 and 2004. Their answer to the economic ills those budget-busters didn’t cure is to make them permanent, and to offer corporations and investors further inducements.

“Businesses need a shock to ‘animal spirits’ to promote investment, and the incentives to investment should be substantial.” That’s not chief Bush economist Glenn Hubbard on the wisdom of the tax cuts in 2001. That’s Romney econ guru Hubbard proposing to double down on the cuts of ’01 and ‘04 in the Financial Times, yesterday.

So Romney rejects all the Obama policies that haven’t succeeded in the three years since debt hit the fan, but would extend those of the previous administration, which parked the fertilizer-laden van beneath the economy and the federal budget. His advisors seem have learned nothing from their previous stints in government.

Like most Republicans, Romney moans about the relatively high nominal corporate tax rate in the US, but neglects to mention all the loopholes that leave the effective rate below those in most other countries. Corporations contribute less to federal revenue and US GDP than in almost any other developed country. And they pay much less than was the norm when the US was at the height of prosperity and economic power.

And Romney is the designated economic literate among the Republican front-runners.

Herman Cain’s 9-9-9 plan has been dismissed by tax experts as wildly impractical. It would transfer a huge slice of the tax burden from businesses and the wealthiest Americans onto the poor and the middle class. Rick Perry’s pledge to create 1.2 million energy jobs is even more of a fantasy, on loan from the American Petroleum Institute.

There’s a reason influential businessmen like David Koch and Ken Langone begged Chris Christie to run. Without him, it’s the distrusted Romney vs. the tongue-tied Perry vs. Cain’s pizza pie in the sky.

The old conventional wisdom was that Wall Street loved Washington gridlock, because at least then politicians would get nothing done. But getting nothing done for the next year seems especially costly, because the economy is not coasting toward some launch pad that will propel it toward prosperity.

Rather, it’s groaning under the accumulated stresses of the past four years, with the army of the unemployed and the discouraged growing less employable day by day, and a growing proportion of prime borrowers falling behind on their mortgage payments because they no longer wish to invest in a depreciating asset.

There are serious economic prescriptions out there, action programs worth reading like The Way Forward plan devised by investment manager Daniel Alpert, economist Nouriel Roubini, and law professor Robert Hockett. It proposes new infrastructure spending, a sensible debt restructuring for troubled homeowners, and changes in the international finance system that might nurse the economy back to health over the medium term.

But the proposal lacks a catchy name or a fresh face, and so has been relegated to the back pages while we try to figure out whether 9-9-9 borrowed its magic formula from a computer game or a pizza menu.

In the meantime, the public spending cuts straight out of the Great Depression playbook pile up, shoving the economy toward a dead end.

Gridlock is a luxury we can no longer afford. But, like an underwater McMansion, it looks inescapable.

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